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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 or
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended September 30,
    2002                                            
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file number 0-23084



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Integrated Silicon Solution, Inc.

(Exact name of Registrant as specified in its
charter)


|                                                                                          |  |                                         
|----------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                  |  | 77-0199971                              
|(State or other jurisdiction of
    incorporation or organization)                        |  | (I.R.S. Employer
    Identification No.)
|                                                                                         
|2231 Lawson Lane,
    Santa Clara, California(Address of principal executive
    offices) |  | 95054(zip code)                         

Registrants telephone number, including
area code:

(408) 588-0800


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

|                                          |  |                                          
|----------------------------------------- |  | -----------------------------------------
|Title of Each Class                       |  | Name of Each Exchange on Which Registered
|                                          |  |                                          
|Common Stock, par value $0.0001 per share |  | Nasdaq National Market                   

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

None


(Title of Class)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (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 þ          No o

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

The aggregate market value of the voting stock
held by non-affiliates of the registrant, based upon the closing
price of such stock on December 10, 2002, as reported by
the Nasdaq National Market, was approximately $95.8 million.
Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

The number of outstanding shares of the
registrants Common Stock on December 10, 2002 was
27,576,761.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the
Registrants 2003 Annual Meeting of Stockholders to be held
on February 7, 2003 are incorporated by reference in
Part III of this Form 10-K.



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|              |                                                                                                         |  |  |  |  |  |  | 
|------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                                       
|              | Item 2. Properties                                                                                     
|              | Item 3. Legal Proceedings                                                                              
|              | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II      
|              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|              | Item 6. Selected Consolidated Financial Data                                                           
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|              | Item 7a. Quantitative and Qualitative Disclosures about Market Risk                                    
|              | Item 8. Financial Statements and Supplementary Data                                                    
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                            
|              | Item 11. Executive Compensation                                                                        
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|              | Item 13. Certain Relationships and Related Transactions                                                
|              | Item 14. Controls and Procedures                                                                       
|              | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES   
|CERTIFICATION
|EXHIBIT 23.1 
|EXHIBIT 99.1 



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TABLE OF CONTENTS

|               |  |                                                                                                    |  |   
|-------------- |  | -------------------------------------------------------------------------------------------------- |  | --
|PART I        
|Item 1.        |  | Business                                                                                           |  | 2 
|Item 2.        |  | Properties                                                                                         |  | 10
|Item 3.        |  | Legal Proceedings                                                                                  |  | 10
|Item 4.        |  | Submission of Matters to a Vote of Security
    Holders                                            |  | 11
|PART II       
|Item 5.        |  | Market for the Registrants Common Equity
    and Related Stockholder Matters                      |  | 11
|Item 6.        |  | Selected Consolidated Financial Data                                                               |  | 12
|Item 7.        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  | 12
|Item 7a.       |  | Quantitative and Qualitative Disclosures about
    Market Risk                                     |  | 25
|Item 8.        |  | Financial Statements and Supplementary Data                                                        |  | 27
|Item 9.        |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |  | 56
|PART III      
|Item 10.       |  | Directors and Executive Officers of the Registrant                                                 |  | 56
|Item 11.       |  | Executive Compensation                                                                             |  | 56
|Item 12.       |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  | 56
|Item 13.       |  | Certain Relationships and Related Transactions                                                     |  | 57
|Item 14.       |  | Controls and Procedures                                                                            |  | 57
|Item 15.       |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                               |  | 58
|Signatures     |  | 60                                                                                                
|Certifications |  | 61                                                                                                

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When used in this Report, the words
expects, anticipates,
believes, estimates and similar
expressions are intended to identify forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking
statements, which include statements concerning the timing of
new product introductions; the functionality and availability of
products under development; trends in the Internet access
devices, networking, and telecommunications markets, in
particular as they may affect demand for or pricing of our
products; the percentage of export sales and sales to strategic
customers; the percentage of revenue by product line; the
availability and cost of products from our suppliers; and the
funding of the sales of investments, are subject to risks and
uncertainties, including those set forth in Item 1 of
Part I and in Item 7 of Part II hereof entitled
Certain Factors Which May Affect Our Business or Future
Operating Results and elsewhere in this Report, that could
cause actual results to differ materially from those projected
in the forward-looking statements. These forward-looking
statements speak only as of the date of this Report. We
expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in our
expectations with regard thereto or to reflect any change in
events, conditions or circumstances on which any such
forward-looking statement is based, in whole or in part.
References in this report on Form 10-K to we,
us, our, ISSI, and the
Company refer to Integrated Silicon Solution, Inc.
and our subsidiaries.




PART I




Item 1.     Business

General

Integrated Silicon Solution, Inc.
(ISSI) is a technology leader in high performance
memory semiconductors. We design, develop and market memory
products used in networking, Internet infrastructure,
telecommunications, wireless products, handheld devices,
computer peripherals, and automotive electronics. Our products
incorporate state-of-the-art circuit design and advanced process
technology. Our high speed and low power static random access
memories (SRAM), low to medium density dynamic
random access memories (DRAM), and our family of
electrically erasable programmable read only memories
(EEPROM) enable designers to meet the demanding
connectivity, portability, and bandwidth requirements of
todays leading edge electronic products. In addition, we
have multichip packages combining Flash and SRAM
(MCP), BluetoothTM wireless chipsets, and
parallel search processors or content addressable memories
(CAM) in development. Our objective is to capitalize
on major trends in electronic products and position ISSI as a
key supplier of memory and non-memory products to leading
companies in such markets.

The ever-expanding performance requirements in
electronic systems place increasing pressure on manufacturers to
use sophisticated semiconductor memory architecture within their
systems. Manufacturers of digital consumer products, such as DVD
players and printers, require memory to enhance product
performance. Manufacturers of leading-edge internet access
devices, ISP servers and networking routers and switches require
high speed memory architecture and devices within their systems
to meet demands for faster speed and response times. Similarly,
the advent of handheld wireless communications devices, such as
cellular phones and personal digital assistants, has
necessitated the development of high performance memories that
reduce power consumption, increase battery life, and reduce size
in order to maximize portability. Our goal is to be a focused
supplier of high performance memories targeting the mobile
communications, networking/broadband, digital consumer, and
automotive electronics markets.

Our customers include industry leaders such as
3Com, Alcatel, Cisco, Delphi, Ericsson, Lexmark, LG Electronics,
Motorola, NEC, Nokia, Panasonic, Seagate, and Sharp. Due to
their size and influence, these customers generally drive memory
volumes in their market segment and help define the direction of
future memory products. Our products offer our customers
numerous benefits, including:



| |   |                                    
| | - | -----------------------------------
| |  | high performance and functionality;
|
| |  | high quality and reliability;      

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| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | long-term supply;                                                                     
|
| |  | leading-edge designs that facilitate the
    development of new, advanced systems; and
|
| |  | advanced process technology.                                                          

We believe our close relationship with leading
silicon wafer foundries gives us access to the advanced wafer
process technology required to design and manufacture high
performance memories. We entered into our first development
program with Taiwan Semiconductor Manufacturing Corporation
(TSMC) in 1990 and with Chartered Semiconductor in
1994. We have also worked closely with United Microelectronics
Corporation (UMC) since 1995. We are also an equity
investor and have a seat on the board of directors of
Semiconductor Manufacturing International Corporation
(SMIC), the first eight-inch wafer foundry in China.
Through this strategy of technology collaboration, we have been
in the forefront in utilizing the most advanced process
technology for memories and in securing access to wafer capacity.

We believe that ISSI is a technology leader and
that our ability to design and develop high performance,
cost-effective products, and our collaborative development with
our manufacturing partners utilizing state-of-the-art process
technology gives us a competitive advantage. Our strategy is to:



| |   |                                                                   
| | - | ------------------------------------------------------------------
| |  | target high growth markets and applications;                      
|
| |  | further penetrate industry leading customers;                     
|
| |  | build collaborative relationships with leading
    edge foundries;
|
| |  | continually develop high performance products; and                
|
| |  | commit to long-term supply of our products.                       

Background

ISSI was incorporated in California in October
1988 and changed its state of incorporation to Delaware in
August 1993. Our principal executive offices are located at
2231 Lawson Lane, Santa Clara, California 95054, and our
telephone number is (408) 588-0800.

We have a branch office in Taiwan that focuses on
manufacturing logistics, sales, marketing, and engineering. We
have a wholly owned subsidiary in the Peoples Republic of
China (Shanghai) that focuses on sales, marketing, manufacturing
logistics, and design; a subsidiary in Hong Kong that primarily
focuses on research, development, and material control; and a
subsidiary in Korea that focuses on design. We own approximately
29% of a public company in Taiwan (Integrated Circuit Solution,
Inc. ICSI, formerly known as ISSI-Taiwan). ICSI
became a public company in Taiwan in January 2001 and is listed
on the Taiwan Stock Exchange. We own approximately 14% of
NexFlash Technology, Inc. (NexFlash), a Flash memory
company. We own approximately 17% of GetSilicon Inc.
(GetSilicon), a provider of collaborative supply
chain management solutions. We also own approximately 26% of
E-CMOS Corporation (E-CMOS), a fabless semiconductor
company located in Taiwan.

Products

We are a focused supplier of a family of both
high speed and ultra low power SRAMs, complementary low and
medium density DRAMs, EEPROM and other complementary memory
products. We have three additional product lines under
development that did not contribute to revenue in fiscal 2002,
but which we believe may contribute to revenue in fiscal 2003.
These are MultiChip Packages (MCP), Network Search Processors,
and BlueToothTM wireless chip sets. In fiscal 2002,
we derived approximately 53% of our revenue from SRAMs, 40% from
DRAMs, and 7% from other products.

SRAMs

Our high performance SRAM products generally
focus on either very high speed or very low power. Our first
high speed SRAMs were shipped in 1990. More recently, driven by
increasing demand in the hand-held

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and mobile markets, such as cellular phones, we
have developed a low power family of 1.65-2.2 volt and 2.5-3.6
volt SRAM products for wireless applications. Densities include
2Mb (128Kx16, 256Kx8), 4Mb (256Kx16, 512Kx8), and 8Mb (1Mx8,
512Kx16). To date we have derived substantially all of our SRAM
revenues from the sale of high speed SRAM products.


Our objective is to be a complete SRAM supplier
and support all of a customers SRAM requirements. We make
long term supply commitments on older products and also offer
leading edge products. We offer both asynchronous and
synchronous high speed SRAMs. Our high speed asynchronous SRAMs
are used in applications such as LANs, telecommunication
equipment and base stations, bridges, routers, modems,
multimedia products, and industrial instrumentation. Current
asynchronous SRAM densities include 64Kb (8K x 8), 256Kb
(32K x 8), 512Kb (64K x 8 and 32K x 16), 1
megabit (128K x 8, 64K x 16), 2 megabit
(128K x 16 and 256K x 8), 3 megabit (128K x
24), 4 megabit (256K x 16 and 512K x 8), and
8 megabit (512K x 16). Our high speed synchronous
SRAMs are used in a variety of networking and telecommunications
applications. Current synchronous densities include
1 Megabit (32K x 32), 2 Megabit (64K x
32/36), 4 Megabit (256K x 16/18 and 128K x
32/36), 8 Megabit (256K x 32/36 and 512K x 18)
and 16 Megabit (512K x 32/36 and 1M x 18).
Additional SRAM products are under development and are expected
to include performance-leading features in speed, configuration,
power levels, density, and packaging. For example, we helped
form a consortium of leading SRAM suppliers to define the
configuration, performance, and package specifications for a new
18 megabit synchronous SRAM, named SigmaRAM. We are also
developing PseudoSRAMs, which are higher density devices that
utilize the SRAM architecture and DRAM cell structure.
PseudoSRAM products are expected to be available in fiscal 2003.

DRAMs

Our low and medium density DRAM products
complement our high performance SRAM products. They are
typically sold through the same channels, often to the same end
customers, and enhance ISSIs position as an experienced
memory supplier. Our DRAM products are not targeted at the main
memory DRAM market and we do not compete in those markets
requiring the highest density DRAMs, such as those used in PCs.
Applications for our low and medium density DRAMs include
digital consumer products, such as DVD players and set-top
boxes, automotive electronics, telecommunications base stations,
personal digital assistants (PDA), networking
equipment, disk drives, tape drives, and printers. We currently
offer 4 and 16 megabit Fast Page Mode (FPM),
Extended Data Out (EDO), plus 4, 16 and 64 megabit
SDRAM devices. Additional DRAM products, including low power
SDRAMs, are under development.

EEPROM and Other Memory Products

Our other memory products include high
performance serial EEPROMs (1Kb-128Kb), embedded EEPROM
products, and voice recording chips. Applications for these
products include cellular phones, pagers, networking systems,
modems, telephone sets, security systems, smart cards, video
games, automobiles, and other consumer products. To date,
revenue from these products is less than 10% of total revenue.

Product Lines Under Development

We have three new product lines under development
as of September 30, 2002. Our MultiChip Package
(MCP) product combines two chips  an SRAM
and a Flash  in one package. MCPs are used to
conserve space in an electronic design. Many cell phones and
PDAs use MCPs. In fiscal 2001, we announced a cooperative
program with Fujitsu to provide MCPs using Fujitsu Flash and
ISSI SRAM. We now have several customer qualifications of our
MCP approved and expect to begin revenue shipments in the first
half of fiscal 2003.

Our Network Search Processors (NSP),
also known as Content Addressable Memories (CAM),
can be used for flexible, simultaneous addressing in network and
telecom applications. They can also be embedded in other logic
chips. We may license the NSP design architecture or produce our
own ISSI NSPs. However, the NSP market as of September 30,
2002 is depressed. Our development efforts continue but it is
uncertain when or if actual revenue will be achieved.

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Our BlueToothTM wireless chip sets can
be used for short distance wireless communication for
applications such as cell phones, PDAs, PC peripherals,
headsets, and other consumer products. This product line is a
non-memory product line, reflecting our diversification
strategy. We acquired certain BlueToothTM rights and
BlueToothTM technology in connection with an equity
investment in a development-stage company and have formed a
joint development program with them. We expect to begin revenue
generation from these products in mid calendar 2003.

Design and Process Technology

We believe that ISSI is a technology leader. In
the semiconductor industry, wafer fabrication facilities often
use memories in the development of advanced process technology
because memory products are particularly well suited for process
research and development. Our process development partnerships
with TSMC and Chartered Semiconductor enable us to design
memories at leading edge geometries. Our technology development
engineers work closely with our manufacturing partners in this
effort. The result is that we continue to produce SRAM products
at the leading edge of worldwide semiconductor capabilities and
we believe that our partnership development strategy gives us a
competitive strength.

Our design efforts focus on product
specification, memory cell and array structure, circuit design,
simulation, and layout. We invest in advanced computer aided
design (CAD) systems to ensure that the design team
has state-of-the-art design tools and employs innovative and
rigorous design methodologies. We utilize focused design teams
for new product development and can efficiently migrate
proprietary design features to new generation products. We
currently have design organizations in Santa Clara, Taiwan,
China, Hong Kong, and Korea.

Manufacturing

We combine our process technology expertise,
foundry partnership strategy, and equity investment arrangements
to form a hybrid of the fab and fabless business models which we
call Fab-Lite. We do not own or operate our own wafer foundry
but, because memory products are particularly well suited for
the development of advanced process technology, we actively
participate in developing and refining the process technology
used to manufacture many of our products. We believe that this
strategy enables us to achieve the early introduction of
advanced geometries for our high performance memory products,
which results in increased performance and lower manufacturing
costs. To date, our principal manufacturing relationships have
been with TSMC in Taiwan and with Chartered Semiconductor in
Singapore. In fiscal 2002, we also began production at SMIC in
China.

In 2000, ISSI made a commitment for an equity
investment in SMIC, the first 8-inch wafer foundry in the
Peoples Republic of China. SMIC is located in the
Shanghai/ Pudong area, very near ISSIs China headquarters.
As of September 30, 2002, ISSI had invested
$40 million in SMIC. We have no further commitments to SMIC
for additional equity investments at this time. ISSI has a seat
on the SMIC board of directors.

Previously, we had an equity investment with
TSMC, along with Altera and Analog Devices, in TSMCs
Washington State wafer foundry named WaferTech. We also had an
equity investment in a UMC wafer foundry. Both of these
investments have been sold back to TSMC and UMC respectively,
but we believe our participation has deepened our business
relationships with these two companies.

ISSI outsources its manufacturing process. The
manufacturing of our products begins at our independent wafer
foundry partners, principally TSMC, Chartered Semiconductor, and
SMIC. Once the foundry has completed wafer processing, the
wafers are then shipped to subcontractors for wafer testing. The
wafers are then sawed or cut into individual memory chips and
those that passed at wafer test are assembled into final
packages. The completed memory device is then tested again at
final test. Our U.S. headquarters develops and debugs test
programs and test procedures. Third party subcontractors in
Taiwan and Singapore perform the wafer sort, assembly and test
operations. We expect to include subcontractors in China,
beginning in fiscal 2003. Our operations groups in the US,
Taiwan, and China perform subcontractor management. A
comprehensive quality control program is in place. We are
certified under ISO 9001/2000 standards and our

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quality system is periodically reviewed and
approved by both ISO certifiers and our customers. We plan to
achieve certification for IS/TS 16949, the new automotive
standard, and ISO 14000, the environmental standard, in
2003 or 2004.


Each of our wafer suppliers also fabricates for
other integrated circuit companies, including certain of our
competitors. In addition, UMC subsidiaries manufacture
integrated circuits, including SRAMs, for their own account.
Although we have written commitments specifying wafer capacities
from some suppliers, if any suppliers experience manufacturing
failures or yield shortfalls, choose to prioritize capacity for
other use or reduce or eliminate deliveries to us, there can be
no assurance that we could enforce fulfillment of any delivery
commitments. We believe our technology development partnerships
and history of equity investments mitigate such risk.

There can be no assurance that the foundries we
use will not encounter construction or production difficulties
or that they will allocate sufficient wafer capacity to satisfy
our wafer requirements, especially in times of wafer capacity
shortages. Moreover, there can be no assurance that we would be
able to qualify additional manufacturing sources for existing or
new products in a timely manner or that such additional
manufacturing sources would be able to produce an adequate
supply of wafers. If we were unable to obtain an adequate supply
of wafers from our current or any alternative sources in a
timely manner, our business and operating results would be
materially and adversely affected.

Although our policy is to work closely with our
manufacturing sources, there are certain risks associated with
the use of independent foundries, including the absence of a
controlled source of supply or delays in obtaining adequate
wafer supplies. In addition, the manufacture of integrated
circuits is a highly complex and technically demanding process.
Production yields and device reliability can be affected by a
large number of factors. As is typical in the semiconductor
industry, our outside foundries have from time to time
experienced lower than anticipated manufacturing yields and
device reliability problems, particularly in connection with the
introduction of new products and changes in such foundrys
processing steps. There can be no assurance that our foundries
will not experience lower than expected manufacturing yields or
device reliability problems in the future, which could
materially and adversely affect our business and operating
results.

Customers and Marketing

We have focused our marketing efforts on four
major market segments: mobile communications, networking/
broadband, digital consumer, and automotive electronics. We
market our products through a direct sales force, independent
sales representatives, and distributors. We have four
distributors in North America and distributors in most of the
countries of Western Europe, Japan, targeted countries in Asia,
and India. We continue to expand our marketing and sales
activity. We have sales offices in the United States, Europe,
Hong Kong, Taiwan, and the Peoples Republic of China. Our
customers include a broad range of electronic system
manufacturers such as 3Com, Alcatel, Cisco, Delphi, Ericsson,
Lexmark, LG Electronics, Motorola, NEC, Nokia, Panasonic,
Seagate, and Sharp. In fiscal 2002, no single customer accounted
for over 10% of net sales. Sales to Flextronics International
accounted for approximately 15% of net sales for fiscal 2001.
Substantially all of our sales to Flextronics were for products
to be delivered to Cisco Systems, Inc. Shipments for Cisco
directly, or indirectly through subcontractors, accounted for
approximately 18% of net sales for fiscal 2001. Sales to 3Com
accounted for approximately 7% of net sales for fiscal 2001.
Shipments for 3Com directly, or indirectly through
subcontractors, accounted for approximately 11% of net sales for
fiscal 2001. In fiscal 2000, no single customer accounted for
over 10% of net sales. However, in fiscal 2000, shipments for
Cisco directly, or indirectly through subcontractors, accounted
for approximately 13% of net revenue.

Our sales and marketing efforts are directed from
our Santa Clara headquarters. In fiscal 2002, approximately 29%
of our net sales was attributable to customers located in the
United States, 14% was attributable to customers located in
Europe and 56% was attributable to customers located in Asia. In
fiscal 2001, approximately 51% of our net sales was attributable
to customers located in the United States, 25% was attributable
to customers located in Europe and 23% was attributable to
customers located in Asia. In fiscal 2000, approximately 51% of
our net sales was attributable to customers located in the
United States, 22% was

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attributable to customers located in Europe and
24% was attributable to customers located in Asia. See
Note 13 of Notes to Consolidated Financial Statements.


We are subject to the risks of conducting
business internationally, including economic conditions in Asia,
particularly Taiwan and the Peoples Republic of China,
changes in trade policy and regulatory requirements, duties,
tariffs and other trade barriers and restrictions, the burdens
of complying with foreign laws and, possibly, political
instability. We anticipate that sales to international customers
will continue to represent a significant percentage of net
sales. Substantially all of our foundries and assembly and test
operations are located in Asia. Although we transact business
predominately in U.S. dollars, we do have some transactions in
New Taiwan (NT) dollars, in Hong Kong
(HK) dollars and in China Renminbi
(RMB). Such transactions expose us to the risk of
exchange rate fluctuations. We monitor our exposure to foreign
currency fluctuations, and from time to time have taken action
to hedge against such exposure, but have not to date adopted any
formal hedging strategy. There can be no assurance that exchange
rate fluctuations will not materially and adversely affect our
business and operating results in the future.

Our sales are generally made pursuant to standard
purchase orders, which can be revised to reflect changes in the
customers requirements. Generally, purchase orders and OEM
agreements allow customers to reschedule delivery dates and
cancel purchase orders without significant penalties. For these
reasons, we believe that our backlog, while useful for
scheduling production, is not necessarily a reliable indicator
of future revenues.

Competition

The semiconductor memory market is intensely
competitive and has been characterized by cyclical market
conditions, an oversupply of product, price erosion, rapid
technological change, short product life cycles, and foreign and
domestic competition. Our ability to compete successfully in the
high performance memory market depends on factors both within
and outside of our control, including:



| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | wafer manufacturing over or under capacity and
    the resultant imbalances in supply and demand;
|
| |  | product pricing;                                                                                 
|
| |  | the rate at which OEM customers incorporate our
    products into their systems;                 
|
| |  | the success of the OEMs products and
    end-user demand;                                       
|
| |  | access to advanced process technologies at
    competitive prices;                               
|
| |  | product functionality, performance, and
    reliability;                                         
|
| |  | successful and timely product development;                                                       
|
| |  | wafer supply;                                                                                    
|
| |  | wafer costs;                                                                                     
|
| |  | achievement of acceptable yields of functional
    die;                                          
|
| |  | the gain or loss of significant customers;                                                       
|
| |  | the performance of our competitors and their
    pricing policies; and                           
|
| |  | general economic conditions.                                                                     

We may not be able to compete successfully in the
future as to any of these factors. Our failure to compete
successfully in these or other areas could materially and
adversely affect our business and operating results.

The SRAM market is generally a fragmented market
and specific competitors and competitive factors vary based on
geographic regions and market segments. In the SRAM market, we
compete with several major domestic and international
semiconductor companies including Alliance Semiconductor,
Cypress Semiconductor, Etron, Integrated Device Technology
(IDT), Mitsubishi, Samsung, and Sony. We also
compete with new and emerging companies such as Giga
Semiconductor. We also may face significant competition

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from other domestic and foreign integrated
circuit manufacturers which have advanced technological
capabilities, but have not previously participated in the SRAM
market sector. We may not be able to compete successfully
against any of these competitors.


In the low to medium density DRAM area, we
generally compete with Alliance, Mosel-Vitelic, HyNEX, Vanguard,
and Oki. Samsung and Micron re-entered the medium density market
in the recent down cycle and other main memory DRAM companies
could address this market in the future. There can be no
assurance that we will be able to compete successfully against
any of these competitors. In the EEPROM market, our primary
competitors include Atmel, Catalyst, and SGS-Thomson
Microelectronics. We also compete with many small to
medium-sized companies in one or more segments of the market.

Certain of our competitors offer broader product
lines and have greater financial, technical, marketing,
distribution and other resources than us. In down cycles, they
may be willing to sell below fully absorbed costs at prices we
cannot match. We may not be able to compete successfully against
any of these competitors.

The process technology used by our manufacturing
sources, including process technology that we have developed
with our foundries, can be used by such manufacturers to produce
products for other companies, including our competitors.
Although we believe that our participation in the development of
the processes provides us the advantage of early access to such
processes, the knowledge of the wafer manufacturer may be used
to benefit our competitors.

Product Warranty

Consistent with semiconductor memory industry
practice, we generally provide a limited warranty that our
semiconductor memory devices are in compliance with
specifications existing at the time of delivery. Liability for a
stated warranty period is limited to replacement of defective
items or return of amounts paid.

Research and Development

Rapid technological change and continuing price
competition require research and development efforts on both new
products and advanced processes employing smaller geometries.
Our research and development activities are focused primarily on
the development of advanced process technologies and new memory
circuit designs. We currently design most of our high
performance memory products and jointly develop advanced process
technology with our manufacturing partners from our headquarters
in Santa Clara, California and our design centers in Asia.

New SRAM products in design include wide voltage
(1.8v  3.6v) low power 2 meg, 4 meg
and 8 meg asynchronous SRAMs, in addition to high speed
18 meg, 32 meg and 36 meg synchronous devices.
These new synchronous SRAMs include the new industry-standard
Sigma RAMs. We have several 64 meg DRAM devices under design. We
are developing our new SRAM and DRAM products on industry
leading 0.13, 0.15, and 0.18 micron process technologies. We are
presently evaluating 0.10 micron process technology for our next
generation products. In nonvolatile memory, our future products
are expected to include 256K and 512K density serial EEPROM
devices. Our research and development expenditures in fiscal
2002, 2001, and 2000 were $29.8 million,
$25.3 million, and $18.3 million, respectively.

Patents

As of September 30, 2002, we held 70
U.S. patents. These patents expire between 2010 and 2022.
We have 14 additional patent applications pending and expect to
continue to file patent applications where appropriate to
protect our proprietary technologies. Although patents are an
important element of our intellectual property, we believe that
our continued success depends primarily on factors such as the
technological skills and innovation of our personnel rather than
on our patents. The process of seeking patent protection can be
expensive and time consuming. There can be no assurance that
patents will be issued from pending or future applications or
that, if patents are issued, they will not be challenged,
invalidated or circumvented, or that any rights granted
thereunder will provide meaningful protection or other commercial

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advantage to us. Moreover, there can be no
assurance that any patent rights will be upheld in the future or
that we will be able to preserve any of our other intellectual
property rights.


In the semiconductor industry, it is not unusual
for companies to receive notices alleging infringement of
patents or other intellectual property rights of others. We have
been, and from time-to-time expect to be, notified of claims
that we may be infringing patents, maskwork rights or copyrights
owned by third parties. If it appears necessary or desirable, we
may seek licenses under patents that we are alleged to be
infringing. Although patent holders commonly offer such
licenses, licenses may not be offered and the terms of any
offered licenses may not be acceptable to us.

The failure to obtain a license under a key
patent or intellectual property right from a third party for
technology used by us could cause us to incur substantial
liabilities and to suspend the manufacture of the products
utilizing the invention or to attempt to develop non-infringing
products, any of which could materially and adversely affect our
business and operating results. Furthermore, we may become
involved in protracted litigation regarding the alleged
infringement by us of third party intellectual property rights
or litigation to assert and protect our patents or other
intellectual property rights. Any litigation relating to patent
infringement or other intellectual property matters could result
in substantial cost and diversion of our resources which could
harm our business.

Employees

As of September 30, 2002, we had
approximately 172 employees in the U.S., 39 in Taiwan, 57
in the Peoples Republic of China, 17 in Hong Kong, and 16
in Korea. Total employment, including subsidiaries, is
approximately 301 people. On October 29, 2002, we announced
a reduction that will result in approximately a 17% decrease in
our U.S. workforce. Our future success will largely be
dependent on our ability to attract, retain and motivate highly
qualified technical and management personnel. The employment
market for such personnel is extremely competitive and there can
be no assurance that we will successfully staff all necessary
positions. Our employees are not represented by any collective
bargaining agreements and we have never experienced a work
stoppage.

EXECUTIVE OFFICERS

Our executive officers and their ages as of
September 30, 2002 are as follows:

|                    |  |     |    |          |  |                                                           
|------------------- |  | --- | -- | -------- |  | ----------------------------------------------------------
|Name                |  | Age |    | Position
|                    |  |     |    |         
|Jimmy S.M. Lee      |  |     | 47 |          |  | Chairman, Chief Executive Officer, and Director           
|Gary L. Fischer     |  |     | 51 |          |  | President, Chief Operating Officer, and Director          
|Michael McDonald(1) |  |     | 49 |          |  | Vice President, Chief Financial Officer, and
    Secretary
|Paul Song           |  |     | 47 |          |  | Senior Vice President, Engineering                        



---



|    |                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------
|(1) | Employment ended October 28, 2002, at which
    time Mr. Fischer became Chief Financial Officer, in
    addition to his other duties.

Background of Executive Officers

Jimmy S.M. Lee has served as ISSIs Chief
Executive Officer and a director since he co-founded the Company
in October 1988. He also served as ISSIs president until
May 2000. From 1985 to 1988, Mr. Lee was engineering
manager at International CMOS Technology, Inc., a semiconductor
company, and from 1983 to 1985, he was a design manager at
Signetics Corporation, a semiconductor company. Prior thereto,
Mr. Lee was a project manager at Toshiba Semiconductor
Corporation and a design engineer at National Semiconductor
Corporation. Mr. Lee has served as a director of ICSI since
September 1990, as a director of NexFlash since October 1998, as
chairman of the board of GetSilicon since July 2000, and as
chairman of the board of E-CMOS since September 2001.
Mr. Lee holds a M.S. degree in electrical engineering
from Texas Tech University and a B.S. degree in electrical
engineering from National Taiwan University.

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Gary L. Fischer has served as ISSIs
President and Chief Operating Officer since April 2001. He
served as Executive Vice President and Chief Financial Officer
from April 1995 to March 2001, and as Vice President and Chief
Financial Officer from June 1993 to March 1995. From January
1989 to December 1992, Mr. Fischer was Chief Financial
Officer of Synergy Semiconductor Corporation, a manufacturer of
high performance SRAM and logic integrated circuits. He has also
been a director of E-CMOS since November 2001. Mr. Fischer
holds an M.B.A. degree from the University of Santa Clara and a
B.A. degree from the University of California, Santa
Barbara.

Michael McDonald served as Vice President and
Chief Financial Officer from June 2001 through October 2002. He
was Senior Vice President, Chief Financial Officer, and
Secretary at REMEC, Inc., a manufacturer of wireless
communications hardware, from 1997 to May 2001. From February
1984 to September 1997, Mr. McDonald was Chief Financial
Officer at Magnum Microwave Corporation, a manufacturer of
wireless communications hardware. Mr. McDonald holds an MBA
degree from California Polytechnic State University, San Luis
Obispo and a B.S. degree in mathematics from the University of
San Francisco.

Paul Song has served as Senior Vice President,
Engineering since April 2000. He served as Vice President,
Engineering from April 1999 to April 2000. He also served as
Vice President, Design Engineering from July 1996 to April 1999.
He joined ISSI in July 1990 as Director, Nonvolatile Memory
Design Engineering. Previously he held design engineering
positions at ICT, Exel Microelectronics, Inc. and AMD.
Dr. Song holds a Ph.D. degree in electrical
engineering from Stanford University, a M.S. degree in
electrical engineering from the University of California, Santa
Barbara, and a B.S. degree in electrical engineering from
National Taiwan University.

Officers serve at the discretion of the Board and
are appointed annually. There are no family relationships
between the directors or officers of ISSI.




Item 2.     Properties

Our U.S. headquarters occupy a two story
building, totaling approximately 93,400 square feet, in Santa
Clara, California in which our executive offices, marketing,
technology, product development groups and some research and
development (R&D) testing facilities are
located. The lease on this building expires in February 2007. We
sublease approximately 24,000 square feet and 9,000 square feet
to third parties whose subleases expire in March 2003 and
September 2003, respectively. We lease additional field sales
offices in the U.S. and Europe and sales and engineering offices
in Asia.




Item 3.     Legal
Proceedings

On September 21, 2001, the U.S. Court of
Appeals for the Federal Circuit issued a ruling favorable to
ISSI regarding an April 1998 antidumping duty order on imports
of SRAMs from Taiwan. Subsequently, the antidumping case was
terminated, the antidumping order revoked, and our cash deposits
were returned during fiscal 2002. As a result of the termination
of the antidumping case, we reversed amounts previously expensed
to cost of goods sold of approximately $5.2 million of
which approximately $3.6 million had been cash payments and
$1.6 million was in accrued liabilities. At
September 30, 2002, all refunds due to us had been received.

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

There were no matters submitted to a vote of
security holders during the fourth quarter of fiscal 2002.




PART II




Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters

Market for Common Stock

Our common stock has been quoted on the Nasdaq
National Market under the symbol ISSI since our initial public
offering in February 1995. Prior to such date, there was no
public market for our common stock. The following table sets
forth, for the fiscal quarters indicated, the high and low sale
prices per share for our common stock as reported on the Nasdaq
National Market. These prices are over-the-counter market
quotations which reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily
represent actual transactions.

|                                      |  |      |       |     |  |   |       | 
|------------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|Fiscal Year ending September 30, 2002 |  | High |       | Low
|                                      |  |      |       |    
|Fourth quarter                        |  | $    | 9.12  |     |  | $ | 2.94  | 
|Third quarter                         |  |      | 14.88 |     |  |   | 6.77  | 
|Second quarter                        |  |      | 14.84 |     |  |   | 10.28 | 
|First quarter                         |  |      | 13.85 |     |  |   | 6.40  | 

|                                      |  |      |       |     |  |   |       | 
|------------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|Fiscal Year ending September 30, 2001 |  | High |       | Low
|                                      |  |      |       |    
|Fourth quarter                        |  | $    | 16.25 |     |  | $ | 8.55  | 
|Third quarter                         |  |      | 16.65 |     |  |   | 11.13 | 
|Second quarter                        |  |      | 21.25 |     |  |   | 11.75 | 
|First quarter                         |  |      | 17.31 |     |  |   | 7.69  | 

Holders of Record

As of December 10, 2002, there were
approximately 9,500 beneficial holders of our common stock.

Dividends

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

Recent Sales of Unregistered
Securities

On January 23, 2002, in connection with our
acquisition of Purple Ray, we issued an aggregate of 438,281
shares of our common stock to the stockholders of Purple Ray.
Such shares were issued in consideration for the shares of
Purple Ray held by the Purple Ray stockholders. The shares were
issued pursuant to Section 4(2) and/or Rule 506 of
Regulation D promulgated under the Securities Act of 1933,
as amended. The shares were subsequently registered for resale
on a Registration Statement on Form S-3 filed with the SEC
on March 15, 2002.

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Item 6.     Selected
Consolidated Financial Data

|                                                                             |  |                                       |         |      |  |      |         |      |  |      |         |  |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | - |  | - | ------- | -
|                                                                             |  |                                      
|                                                                             |  | Fiscal Year Ended September 30,      
|                                                                             |  |                                      
|                                                                             |  | 2002                                  |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                                                             |  |                                       |         |      |  |      |         |      |  |     
|                                                                             |  |                                      
|                                                                             |  | (in thousands, except per share data)
|Net sales                                                                    |  | $                                     | 70,448  |      |  | $    | 152,048 |      |  | $    | 141,923 |  |  | $ | 83,309  |   |  | $ | 131,132 |  
|Gross profit (loss)                                                          |  |                                       | (15,765 | )    |  |      | 7,179   |      |  |      | 44,164  |  |  |   | 16,493  |   |  |   | 4,338   |  
|Operating income (loss)                                                      |  |                                       | (66,257 | )    |  |      | (38,845 | )    |  |      | 10,250  |  |  |   | (14,184 | ) |  |   | (53,053 | )
|Net income (loss)                                                            |  |                                       | (67,540 | )    |  |      | 1,115   |      |  |      | 25,026  |  |  |   | (9,511  | ) |  |   | (50,607 | )
|Basic net income (loss) per share(1)                                         |  |                                       | (2.49   | )    |  |      | 0.04    |      |  |      | 1.07    |  |  |   | (0.48   | ) |  |   | (2.67   | )
|Diluted net income (loss) per share(1)                                       |  |                                       | (2.49   | )    |  |      | 0.04    |      |  |      | 0.96    |  |  |   | (0.48   | ) |  |   | (2.67   | )
|Working capital                                                              |  |                                       | 79,168  |      |  |      | 159,810 |      |  |      | 145,938 |  |  |   | 42,064  |   |  |   | 32,549  |  
|Total assets                                                                 |  |                                       | 184,676 |      |  |      | 237,852 |      |  |      | 260,724 |  |  |   | 121,831 |   |  |   | 202,168 |  
|Total long-term obligations and current portion
    of long-term obligations |  |                                       | 158     |      |  |      | 314     |      |  |      | 454     |  |  |   |        |   |  |   | 15,466  |  
|Stockholders equity                                                         |  |                                       | 155,423 |      |  |      | 214,437 |      |  |      | 211,235 |  |  |   | 88,778  |   |  |   | 90,920  |  
|Dividends paid                                                               |  |                                       |        |      |  |      |        |      |  |      |        |  |  |   |        |   |  |   |        |  



---



|    |                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See Note 1 of Notes to Consolidated Financial
    Statements for an explanation of the basis used to calculate net
    income (loss) per share.




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

Results of Operations

Our financial results for fiscal 2002 and fiscal
2001 reflect accounting for ICSI on the equity basis and include
our percentage share of the results of their operations. Our
financial results for fiscal 2002 and fiscal 2001 reflect
accounting for E-CMOS on the equity basis and include our share
of their results of operations on a one quarter lag. Effective
October 2001, we account for GetSilicon on the cost basis as our
ownership became less than 20%. Our financial results for fiscal
2001 reflect accounting for GetSilicon on the equity basis and
include our percentage share of the results of their operations.
Our financial results for fiscal 2001 through the period ended
January 31, 2001 reflect accounting for NexFlash on the
equity basis and include our percentage share of the results of
NexFlashs operations. Effective February 2001, our
ownership of NexFlash became less than 20%, and we began
accounting for NexFlash on the cost basis. At September 30,
2002, we owned approximately 29% of ICSI, approximately 14% of
NexFlash, approximately 26% of E-CMOS and approximately 17% of
GetSilicon.

Critical Accounting Policies

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make difficult and
subjective estimates, judgments and assumptions. These
estimates, judgments and assumptions affect the reported amounts
of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, as well
as the reported amounts of revenue and expenses during the
reporting period. The estimates and judgments that we use in
applying our accounting policies have a significant impact on
the results we report in our financial statements. We base our
estimates and judgments on our historical experience combined
with knowledge of current conditions and our beliefs of what
could occur in the future considering the information available
at the time. Actual results could differ from those estimates
and such differences may be material to our financial
statements. We reevaluate our estimates and judgments on an
ongoing basis.

Our critical accounting policies which are
impacted by estimates are: (i) the valuation of our
inventory, which impacts cost of goods sold and gross profit;
(ii) the valuation of our allowance for sales returns and
allowances (iii) the valuation of our allowance for
doubtful accounts, which impacts general and administrative
expense; and (iv) the valuation of our non-marketable
equity securities, which impacts gains and losses on

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equity securities when we record impairments.
Each of these policies is described in more detail below. We
also have other key accounting policies that may not require us
to make estimates and judgments that are as subjective or
difficult, for instance, our policies with regard to revenue
recognition, including the deferral of revenues on sales to
distributors. These policies are described in the notes to our
financial statements contained in this Annual Report on Form
10-K for the year ended September 30, 2002.


Valuation of
inventory

Our inventories are stated at the lower of cost
or market value. Determining market value requires us to project
unit prices and volumes for future periods in which we expect to
sell inventory on hand as of the balance sheet date. As a result
of these estimates, we may record a charge to cost of goods
sold, which decreases our gross profit, in advance of when the
inventory is actually sold to reflect market values that are
below our manufacturing and sales commission costs. Conversely,
if we sell inventory that has previously been written down to
the lower of cost or market at more favorable prices than we had
forecasted at the time of the write-down, our gross profit may
be higher. In addition to lower of cost or market write-downs,
we also analyze inventory to determine whether any of it is
excess or obsolete. We write down to zero dollars (which is a
charge to cost of goods sold) the carrying value of inventory on
hand in excess of six months estimated sales volumes to
cover estimated excess and obsolete exposures, unless
adjustments are made to the forecast based on our judgments for
newer products, end of life products or planned inventory
increases. In making such judgments to write down inventory, we
take into account the product life cycles which can range from 6
to 30 months, the stage in the life cycle of the product, the
impact of competitors announcements and product
introductions on our products.

Valuation of
allowance for sales returns and allowances

Net sales consist principally of total product
sales less estimated sales returns. To estimate sales returns
and allowances, we analyze potential customer specific product
application issues, potential quality and reliability issues and
historical returns. We evaluate quarterly the adequacy of the
reserve for sales returns and allowances. This reserve is
reflected as a reduction to accounts receivable in our
consolidated balance sheets. Increases to the reserve are
recorded as a reduction to net sales. Because the reserve for
sales returns and allowances is based on our judgments and
estimates, particularly as to product application, quality and
reliability issues, our reserves may not be adequate to cover
actual sales returns and other allowances. If our reserves are
not adequate, our net sales could be adversely affected.

Valuation of
allowance for doubtful accounts

We maintain an allowance for doubtful accounts
for losses that we estimate will arise from our customers
inability to make required payments for goods and services
purchased from us. We make our estimates of the uncollectibility
of our accounts receivable by analyzing historical bad debts,
specific customer creditworthiness and current economic trends.
Once an account is deemed unlikely to be fully collected, we
write down the carrying value of the receivable to the estimated
recoverable value, which results in a charge to general and
administrative expense, which decreases our profitability.

Valuation of
non-marketable securities

Our ability to recover our investments in equity
securities that are non-marketable and to earn a return on these
investments is largely dependent on financial market conditions
and the occurrence of liquidity events, such as initial public
offerings, mergers or acquisitions and private party
transactions. All of these events are difficult to predict,
particularly in the current economic environment. In addition,
under our accounting policy, we are required to periodically
review all of our investments for impairment. In the case of
non-marketable equity securities, this requires significant
judgment on our part, including an assessment of the
investees financial condition, the existence of subsequent
rounds of financing and the impact of any relevant contractual
equity preferences, as well as the investees historical
results of operations, and projected results and cash flows. If
the actual outcomes for the investees are significantly
different from their forecasts, the carrying value of our
non-marketable equity securities may be overstated, and we may
incur additional charges in

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future periods, which will decrease our
profitability. At September 30, 2002, our strategic
investments in non-marketable securities totaled
$46.6 million of which $40.0 million was invested in
SMIC.




| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | Fiscal Year Ended September 30, 2002
    Compared to Fiscal Year Ended September 30,
    2001

Net Sales.Net sales
consist principally of total product sales less estimated sales
returns. Net sales decreased by 54% to $70.4 million in
fiscal 2002 from $152.0 million in fiscal 2001. The
decrease in sales was principally due to a significant decline
in the average selling prices of our products in fiscal 2002
compared to fiscal 2001. In addition, in fiscal 2002, we
experienced a decrease in unit shipments for our SRAM products,
specifically our 32K x 32, 256K, 1024K and 32K x 16 SRAM
products. We were able to partially offset the decline in our
DRAM revenue resulting from the decline in average selling
prices with an increase in DRAM units shipped. We anticipate
that the average selling prices of our existing products will
generally decline over time, although the rate of decline may
fluctuate for certain products. In this regard, we experienced a
decline in the average selling prices for certain of our SRAM
and DRAM products in the three months ended September 30,
2002 compared to the three months ended June 30, 2002. We
anticipate further price declines for certain of our SRAM and
DRAM products in the December 2002 quarter. There can be no
assurance that such declines will be offset by higher volumes or
by higher prices on newer products.

In fiscal 2002, no single customer accounted for
over 10% of net sales. Sales to Flextronics International
accounted for approximately 15% of net sales for fiscal 2001.
Substantially all of our sales to Flextronics were for products
to be delivered to Cisco Systems, Inc. Shipments for Cisco
directly, or indirectly through subcontractors, accounted for
approximately 18% of net sales for fiscal 2001. Sales to 3Com
accounted for approximately 7% of net sales for fiscal 2001.
Shipments for 3Com directly, or indirectly through
subcontractors, accounted for approximately 11% of net sales for
fiscal 2001. As sales to these customers are executed pursuant
to purchase orders and no purchasing contract exists, these
customers can cease doing business with us at any time.

Gross profit (loss).Cost of sales includes die cost from the wafers acquired from
foundries, subcontracted package, assembly costs and test costs,
costs associated with in-house product testing, quality
assurance and import duties. Gross profit decreased 320% to a
loss of $15.8 million in fiscal 2002 from a profit of
$7.2 million in fiscal 2001. As a percentage of net sales,
gross profit decreased to (22.4)% in fiscal 2002 from 4.7% in
fiscal 2001. In fiscal 2002, we recorded inventory write-downs
of $28.6 million, predominately for lower of cost or market
accounting on our DRAM and SRAM products and, to a lesser
extent, excess inventory. We recorded inventory write-downs of
$38.3 million in fiscal 2001. These write-downs were
predominately for lower of cost or market accounting on certain
of our products, primarily DRAMs and low power SRAMs. In fiscal
2002, we charged $1.2 million to cost of sales for the
write-off of a prepaid license fee as the average selling price
for the impacted parts were less than the cost of the parts.
Additionally, the technology included in the license had no
alternative use to us beyond its application in the impacted
parts. As a result of the termination of the antidumping case,
our gross margin for fiscal 2002 benefited from the reversal of
approximately $5.2 million in antidumping duties previously
charged to cost of sales. Excluding the inventory write-downs,
the write-off of the prepaid license fee and the benefit of the
reversal of antidumping duties, the decrease in gross profit was
principally due to a significant decline in the average selling
prices of our products in fiscal 2002 compared to fiscal 2001.
Further, as we sell products that had previously been
written-down to lower of cost or market, we recognize minimal
gross profit. The decline in our gross margin in fiscal 2002 was
more significant for our SRAM products than for our DRAM
products. In addition, we were able to offset some of the
decline in average selling prices of our DRAM products with an
increase in DRAM units shipped. We believe that the average
selling price of our products will generally decline over time
and, unless we are able to reduce our cost per unit to the
extent necessary to offset such declines, the decline in average
selling prices will result in a material decline in our gross
margin. In this regard, we experienced a significant decline in
the average selling prices for certain of our SRAM and DRAM
products in the three months ended September 30, 2002
compared to the three months ended June 30, 2002. We
anticipate a further decline in the average selling prices for
certain of our SRAM and DRAM products in the three months ending
December 31, 2002. In addition, product unit costs could
increase if our suppliers raise prices, which could result in a
material decline in our gross margin. Although we have product
cost reduction programs in

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place for certain products that involve efforts
to reduce internal costs and supplier costs, there can be no
assurance that product costs will be reduced or that such
reductions will be sufficient to offset the expected declines in
average selling prices. We do not believe that such cost
reduction efforts are likely to have a material adverse impact
on the quality of our products or the level of service provided
by us.


Research and
Development.Research and development
expenses increased by 18% to $29.8 million in fiscal 2002
from $25.3 million in fiscal 2001. As a percentage of net
sales, research and development expenses increased to 42.4% in
fiscal 2002 from 16.6% in fiscal 2001. The increase in absolute
dollars was the result our acquisition of Purple Ray, the
expansion of our research and development activities in Asia,
and increased expenses for engineering wafers related to the
development of new products. In the three months ended September
2002, we wrote-off the unamortized balance of the Purple Ray
patent applications of approximately $0.8 million. The
write-off was made as it became evident, based on anticipated
cash flows, that the product line had not and would not meet the
goals that we had at the time the acquisition was made and that
we would not recover any value for the patent applications.
While we have made efforts to reduce research and development
expenses through salary reductions, lay-offs and the transfer of
some design and engineering efforts to Asia, these reductions
may be offset by increased costs for the development of new
products, which could result in our research and development
expenses increasing in absolute dollars in future periods.

Selling, General and
Administrative.Selling, general and
administrative expenses decreased by 23% to $16.0 million
in fiscal 2002 from $20.7 million in fiscal 2001. As a
percentage of net sales, selling, general and administrative
expenses increased to 22.7% in fiscal 2002 from 13.6% in fiscal
2001. The decrease in absolute dollars was primarily the result
of decreased selling commissions associated with lower revenues
in fiscal 2002 compared to fiscal 2001. In addition, payroll
related expenses decreased in fiscal 2002 compared to fiscal
2001 as a result of salary reductions and reductions in
headcount. As a result of expense controls, such as salary and
headcount reductions, we expect our selling, general and
administrative expenses may decrease in future quarters although
such expenses may fluctuate as a percentage of net sales.

Acquired In-process
Technology.On February 13, 2002,
we acquired Purple Ray, Inc., a development stage company. The
assets of Purple Ray consisted primarily of intellectual
property. The transaction was accounted for using the purchase
method of accounting. The total estimated purchase price of $7.1
million consisted of the fair market value of ISSIs common
stock issued of $5.2 million, the fair value of options to
purchase Purple Ray common stock assumed by ISSI of
$1.7 million, and estimated transaction costs of $0.2
million. Approximately 50,000 additional shares of ISSI common
stock may be issued contingent upon meeting certain milestones
in relation to one of the products under development.

In connection with the acquisition of Purple Ray
in fiscal 2002, we allocated $4.7 million of the total
purchase price of $7.1 million to in-process technology.
This allocation represented the estimated fair value based on
discounted cash flows related to the in-process projects. At the
date of the acquisition, the development of these projects had
not yet reached technological feasibility. Accordingly, these
costs were expensed as of the acquisition date. Management is
primarily responsible for estimating the fair value of the
in-process technology, which was determined with the assistance
of an independent appraiser.

At the acquisition date, Purple Ray was
developing four CAM and NSP products that were expected to
feature sophisticated parallel search architecture to enhance
lookup performance for OC48 and advanced data communication
equipment. The products under development ranged from 5% to 40%
complete.

We allocated values to in-process technology
based on the stage of development of each product, the time and
resources needed to complete each product, and the expected
income and associated risks. The value assigned to acquired
in-process technology was determined by estimating the costs to
develop the purchased in-process technology into commercially
viable products, estimating the resulting net cash flows from
the products, and discounting the net cash flows to their
present value. The revenue projection used to value the
in-process technology was based on estimates of relevant market
sizes and growth factors, expected trends in technology, and the
expected timing of new product introductions. The resulting net
cash flows from such products are based on managements
estimates of cost of sales, operating expenses, and income taxes
from such product offerings.

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Revenues for the products under development were
estimated to grow based on forecasted sales for the three years
following introduction, assuming successful completion and
market acceptance of the products under development. The
estimated revenues for the in-process products were expected to
peak within four years of acquisition and then decline as other
new products and technologies are expected to enter the market.

The rate utilized to discount the net cash flows
to their present value was based on an estimated cost of capital
calculation. We utilized a discount rate of 35% for the
in-process technology, which we believe is commensurate with the
inherent risk and the expected growth of the in-process products.

The estimates we used in valuing in-process
technology were based upon assumptions we believe to be
reasonable but which are inherently uncertain and unpredictable.
Our assumptions may be incomplete or inaccurate, and no
assurance can be given that unanticipated events and
circumstances will not occur. Accordingly, actual results may
vary from the projected results.

Interest and other income (expense),
net.Interest and other income, net
decreased by $5.4 million to $2.4 million in the year
ended September 30, 2002 from $7.8 million in the year
ended September 30, 2001. The decrease was primarily the
result of decreased interest income as the result of the decline
in interest rates and lower cash balances. In addition, fiscal
2002 includes a write-off of approximately $0.4 million for
the impairment of certain of our equity investments.

Gain on sale of investment.The gain on sale of investments
decreased by $30.7 million to $35,000 in fiscal 2002 from
$30.7 million in fiscal 2001. In the year ended
September 30, 2002, we sold shares of ICSI for
approximately $64,000 resulting in a pre-tax gain of $35,000. In
the year ended September 30, 2001 we sold our interest in
WaferTech to TSMC for approximately $40.7 million, which
resulted in a pre-tax gain of $17.2 million. During the
year ended September 30, 2001, we also recorded gross
proceeds of approximately $10.7 million and a pre-tax gain
of approximately $8.2 million in connection with our sale
of shares of ICSI, and gross proceeds of approximately
$6.2 million and a pre-tax gain of approximately
$5.3 million in connection with our sale of shares of
NexFlash.

Provision (benefit) for Income Taxes.We recorded a tax benefit of
approximately $3.2 million for the year ended
September 30, 2002 compared to a tax expense of $150,000
for the year ended September 30, 2001. We recorded a tax
benefit of approximately $3.2 million for the year ended
September 30, 2002, that principally reflects our ability
to recover alternative minimum taxes previously incurred as a
result of changes in tax law in 2002. We recorded a tax expense
of $150,000 for the year ended September 30, 2001,
primarily due to the inability to realize deferred tax assets
related to our net operating loss and tax credit carryforwards,
partially offset by the reversal of taxes previously provided
for foreign operations no longer deemed necessary as the statute
of limitations had expired.

Minority interest in net loss of consolidated
subsidiary.In October 2001, we
invested $3.0 million for a 95% interest in D2Code Co. Inc.
(D2Code), a subsidiary that we established in Korea
to focus on semiconductor design activities. The results of
their operations are included in our consolidated financial
statements. The $50,000 minority interest in net loss of
consolidated subsidiary, represents the minority
shareholders proportionate share of the net loss of D2Code.

Equity in net income (loss) of affiliated
companies.Equity in net income (loss)
of affiliated companies decreased by $8.6 million to
$(6.9) million in fiscal 2002 from $1.7 million in
fiscal 2001. This primarily reflects a decrease in income from
our percentage share of ICSIs financial results in fiscal
2002 from fiscal 2001.



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | Fiscal Year Ended September 30, 2001
    Compared to Fiscal Year Ended September 30,
    2000

Net Sales.Net sales
increased by 7% to $152.0 million in fiscal 2001 from
$141.9 million in fiscal 2000. The increase in sales was
principally due to an increase in unit shipments, partially
offset by a decrease in the average selling price, of our
16 megabit DRAM products, as well as increased unit
shipments of certain SRAM products, specifically our
32K × 32, 128K × 16, 256K × 16,
and 64K × 16 SRAM products. In addition, the average
selling prices of our SRAM products generally increased in
fiscal 2001 compared to fiscal 2000.

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Sales to Flextronics International accounted for
approximately 15% of net sales for fiscal 2001. Substantially
all of our sales to Flextronics were for products to be
delivered to Cisco Systems, Inc. Shipments for Cisco directly,
or indirectly through subcontractors, accounted for
approximately 18% of net sales for fiscal 2001. Sales to 3Com
accounted for approximately 7% of net sales for fiscal 2001.
Shipments for 3Com directly, or indirectly through
subcontractors, accounted for approximately 11% of net sales for
fiscal 2001. In fiscal 2000, no single customer accounted for
over 10% of net sales. However, in fiscal 2000, shipments for
Cisco directly, or indirectly through subcontractors, accounted
for approximately 13% of net revenue.

Gross Profit.Gross
profit decreased 84% to $7.2 million in fiscal 2001 from
$44.2 million in fiscal 2000. As a percentage of net sales,
gross profit decreased to 4.7% in fiscal 2001 from 31.1% in
fiscal 2000. In fiscal 2001, we recorded inventory write-downs
of $38.3 million, including $17.6 million in the three
months ended September 30, 2001. The inventory write-downs
were predominately for lower of cost or market accounting on
certain of our products, primarily DRAMs and low power SRAMs,
and to a lesser extent, excess inventory. Excluding the
inventory write-downs in fiscal 2001, gross profit for the
period was $45.4 million or 29.9% of net sales. Excluding
the inventory write-downs in fiscal 2001, the increase in gross
profit dollars was principally due to an increase in unit
shipments of our SRAM products, specifically our 32K ×
32, 128K × 16, 256K × 16, and
64K × 16 SRAM products. In addition, increases in the
average selling prices of our SRAM products in fiscal 2001
compared to fiscal 2000 more than offset any increases in
product costs resulting in higher gross margins. The decrease in
gross margin percentage in fiscal 2001 is due to a significant
decline in the gross margin for our DRAM products as a result of
declining average selling prices.

Research and
Development.Research and development
expenses increased by 38% to $25.3 million in fiscal 2001
from $18.3 million in fiscal 2000. As a percentage of net
sales, research and development expenses increased to 16.6% in
fiscal 2001 from 12.9% in fiscal 2000. The increase in absolute
dollars was primarily the result of increased expenses related
to the development of new products and an increase in
engineering personnel and payroll related expenses.

Selling, General and
Administrative.Selling, general and
administrative expenses increased by 33% to $20.7 million
in fiscal 2001 from $15.6 million in fiscal 2000. As a
percentage of net sales, selling, general and administrative
expenses increased to 13.6% in fiscal 2001 from 11.0% in fiscal
2000. The increase in absolute dollars was primarily the result
of increased payroll related expenses as a result of the
addition, prior to the economic slow-down, of marketing, sales
and administrative personnel. In addition, selling commissions
increased as a result of higher revenues in fiscal 2001 compared
to fiscal 2000.

Interest and other income (expense),
net.Interest and other income, net
increased by $3.9 million to $7.7 million in fiscal
2001 from $3.8 million in fiscal 2000. The increase was
primarily the result of increased interest income as a result of
higher cash balances from the sale of investments and our
follow-on public stock offering in February 2000.

Gain on sale of investment.The gain on sale of investment
increased to $30.7 million in fiscal 2001 from
$0.8 million in fiscal 2000. In the three months ended
December 31, 2000, we sold our interest in WaferTech to
TSMC for approximately $40.7 million, which resulted in a
pre-tax gain of $17.2 million. On January 16, 2001,
ICSI completed an initial public offering in Taiwan. As a result
of shares of ICSI sold by the Company in the initial public
offering and subsequently, we received gross proceeds of
approximately $10.7 million in fiscal 2001 resulting in a
pre-tax gain of $8.2 million. In February 2001, we, along
with other shareholders, sold a portion of our ownership in
NexFlash to Winbond International Corporation for
$6.2 million resulting in a pre-tax gain of
$5.3 million. Fiscal 2000 includes a pre-tax gain of
approximately $0.8 million in the June 2000 quarter related to
the sale of shares of ICSI.

Provision (benefit) for Income Taxes.The tax provision for the year ended
September 30, 2001 of $150,000 includes a benefit of
approximately $5.0 million for the reversal of taxes
previously provided for foreign operations no longer deemed
necessary as the statute has now expired and utilization of net
operating losses and tax credits of approximately
$11.0 million reduced by a valuation allowance. The tax
provision for fiscal 2001 is primarily comprised of U.S. federal
income taxes.

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Equity in net income of affiliated companies.Equity in net income of affiliated
companies decreased by $9.1 million to $1.7 million in
fiscal 2001 from $10.8 million in fiscal 2000. This
primarily reflects a decrease in income from our percentage
share of ICSIs financial results in fiscal 2001 from
fiscal 2000.

Liquidity and Capital Resources

As of September 30, 2002, our principal
sources of liquidity included cash, cash equivalents and
short-term investments of approximately $78.8 million. During
fiscal 2002, operating activities used cash of approximately
$13.6 million compared to $19.5 million in fiscal
2001. Cash used by operations was primarily due to a net loss of
$67.5 million adjusted for an in-process technology charge
of $4.7 million, equity in net loss of affiliated companies
of $6.9 million, depreciation of $4.2 million, other
non-cash items of $1.5 million and decreases in accrued
expenses of $7.8 million. This was partially offset by
decreases in inventories of $27.5 million primarily driven
by inventory write-downs, increases in accounts payable of
$13.2 million, decreases in accounts receivable of
$1.9 million and decreases in other assets of
$1.8 million.

In fiscal 2002, we generated $3.3 million
from investing activities compared to $3.5 million used in
fiscal 2001. In fiscal 2002, we had net sales of
available-for-sale securities of $36.4 million. In fiscal
2002, we made additional investments totaling $21.2 million
in SMIC, a foundry in Shanghai, China, and other investments of
$5.6 million, including $3.2 million in ICSI
convertible debentures and $0.6 million in E-CMOS. The cash
used for investing activities in fiscal 2001 was primarily the
result of net purchases of available-for-sale securities of
$44.8 million. In addition, during fiscal 2001 we made
investments of $14.3 million in SMIC and other investments
of $3.5 million, including $3.0 million in E-CMOS. In
fiscal 2001, we generated $40.7 million from the sale of our
investment in WaferTech, $15.8 million from the sale of
shares of ICSI stock and $6.2 million from the sale of
NexFlash shares and received $2.0 million in dividends from
our equity investments.

In fiscal 2002, we made capital expenditures of
approximately $6.5 million for test equipment, engineering
tools and computer software. In addition, we acquired
approximately $0.7 million in fixed assets with the
acquisition of Purple Ray. We expect to spend approximately
$4.0 million to $5.0 million to purchase capital
equipment during the next twelve months, principally for the
purchase of design and engineering tools, additional test
equipment and computer software and hardware.

We generated $2.5 million from financing
activities during fiscal 2002 compared to $3.5 million in
fiscal 2001. Cash generated from financing activities for fiscal
2002 was primarily the result of proceeds from the issuance of
common stock of $2.7 million from option exercises and
sales under our employee stock purchase plan. The primary source
of financing for fiscal 2001 was proceeds from the issuance of
our common stock of $3.7 million from option exercises and
sales under our employee stock purchase plan.

In August 2000, we made a commitment for an
equity investment in SMIC. In fiscal 2002, we made investments
totaling $21.2 million in SMIC, bringing our total
investment in this foundry as of September 30, 2002, to
$40.0 million. We have no further commitments to SMIC for
additional equity investments at this time. We have received
certain capacity commitments from SMIC. In addition, we have
remaining non-cancelable purchase commitments to another wafer
foundry for approximately $1.3 million over the next
6 months.

In July 2002, we made a commitment for an equity
investment in Signia Technologies, Inc. (Signia), a
development stage company focusing on BlueTooth design. At
September 30, 2002, our investment in Signia was
$1.5 million. We have committed to invest an additional
$1.5 million in Signia, if Signia achieves certain
milestones with respect to its BlueTooth product by
January 19, 2003.

We lease our facilities including our
headquarters in Santa Clara, California, our field sales offices
in the U.S. and Europe and sales and engineering offices in
Asia. Our leases expire at various dates through 2007. Our
outstanding commitments under these leases are approximately
$6.8 million.

On September 21, 2001, the U.S. Court of
Appeals for the Federal Circuit issued a ruling favorable to
ISSI regarding an April 1998 antidumping duty order on imports
of SRAMs from Taiwan. Subsequently, the antidumping case was
terminated, the antidumping order revoked, and our cash deposits
were returned during

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fiscal 2002. As a result of the termination of
the antidumping case, we reversed amounts previously expensed to
cost of goods sold of approximately $5.2 million of which
approximately $3.6 million had been cash payments and
$1.6 million was in accrued liabilities. At
September 30, 2002, all refunds due to us had been received.


Our contractual cash obligations at
September 30, 2002 are outlined in the table below:

|                                                            |  |                        |       |                  |  |           |       |           |  |   |       |  |  |   |       | 
|----------------------------------------------------------- |  | ---------------------- | ----- | ---------------- |  | --------- | ----- | --------- |  | - | ----- |  |  | - | ----- | 
|                                                            |  |                       
|                                                            |  | Payments Due by Period
|                                                            |  |                       
|Contractual Obligations                                     |  | Total                  |       | Less than 1 year |  | 1-3 years |       | 4-5 years
|                                                            |  |                        |       |                  |  |           |       |          
|                                                            |  |                       
|                                                            |  | (in thousands)        
|Equipment lease debt                                        |  | $                      | 158   |                  |  | $         | 158   |           |  | $ |      |  |  | $ |      | 
|Operating leases                                            |  |                        | 6,787 |                  |  |           | 1,358 |           |  |   | 3,216 |  |  |   | 2,213 | 
|Unconditional purchase obligations with wafer
    foundries |  |                        | 1,293 |                  |  |           | 1,293 |           |  |   |      |  |  |   |      | 
|                                                            |  |                        |       |                  |  |           |       |           |  |   |       |  |  |   |       | 
|Total contractual cash obligations                          |  | $                      | 8,238 |                  |  | $         | 2,809 |           |  | $ | 3,216 |  |  | $ | 2,213 | 
|                                                            |  |                        |       |                  |  |           |       |           |  |   |       |  |  |   |       | 

We believe our existing funds and available
financing will satisfy our anticipated working capital and other
cash requirements through at least the next 12 months. We
may from time to time take actions to further increase our cash
position through bank borrowings, equity or debt financings,
sales of additional shares of ICSI, or the disposition of
certain assets. From time to time, we may also evaluate
potential acquisitions and equity investments complementary to
our memory expertise and market strategy, including investments
in wafer fabrication foundries. To the extent we pursue such
transactions, any such transaction could require us to seek
additional equity or debt financing to fund such activities.
There can be no assurance that any such additional financing
could be obtained on terms acceptable to us, if at all.

Certain Factors Which May Affect Our Business
or Future Operating Results

Our operating results are expected to
continue to fluctuate and may not meet published analyst
forecasts. This may cause the price of our common stock to
decline.

Our future quarterly and annual operating results
are subject to fluctuations due to a wide variety of factors,
including:



| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | the cyclicality of the semiconductor industry;                                            
|
| |  | decreases in the demand for our products;                                                 
|
| |  | excess inventory levels at our customers;                                                 
|
| |  | declines in average selling prices of our
    products;                                   
|
| |  | cancellation of existing orders or the failure to
    secure new orders;                  
|
| |  | oversupply of memory products in the market;                                              
|
| |  | our failure to introduce new products and to
    implement technologies on a timely basis;
|
| |  | market acceptance of ours and our customers
    products;                                
|
| |  | economic slowness and low end-user demand;                                                
|
| |  | our failure to anticipate changing customer
    product requirements;                     
|
| |  | fluctuations in manufacturing yields;                                                     
|
| |  | our failure to deliver products to customers on a
    timely basis;                       
|
| |  | disruption in the supply of wafers or assembly
    services;                              
|
| |  | changes in product mix;                                                                   
|
| |  | the timing of significant orders;                                                         

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| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | increased expenses associated with new product
    introductions, masks, or process changes; 
|
| |  | the ability of customers to make payments to us;
    and                                     
|
| |  | the commencement of, or developments with respect
    to, any future antidumping proceedings.

We have incurred significant losses in
certain recent periods, and there can be no assurance that we
will be able to achieve or sustain profitability in the
future.

We have incurred losses in the six consecutive
quarters ended September 30, 2002 totaling
$96.0 million. We expect to incur a loss in the December
2002 quarter and may incur losses in subsequent quarters. We
were profitable for fiscal 2001 and fiscal 2000. Our ability to
achieve or maintain profitability on a quarterly basis in the
future will depend on a variety of factors, including our
ability to increase our net sales, introduce new products on a
timely basis, secure sufficient wafer fabrication capacity and
control our operating expenses. Adverse developments with
respect to these or other factors could result in quarterly or
annual operating losses in the future.

Any continued downturn in the markets we
serve would harm our business.

Substantially all of our products are
incorporated into products such as internet access devices,
networking equipment, digital consumer products, telecom/mobile
communications devices, and automotive electronics.
Historically, these markets have from time to time experienced
cyclical, depressed business conditions, often in connection
with, or in anticipation of, a decline in general economic
conditions. Such industry downturns have resulted in reduced
product demand and declining average selling prices. These
markets are currently experiencing severely depressed business
conditions which are adversely affecting our business. We are
unable to predict how long this current downturn will continue
or whether current conditions will worsen.

Our sales depend on SRAM and DRAM products,
and a decline in average selling prices or reduced demand for
these products could harm our business.

A majority of our net sales are derived from the
sale of SRAM products, which are subject to unit volume
fluctuations and declines in average selling prices which could
harm our business. For example, in the three months ended
September 30, 2001, our net sales decreased by 26% to
$14.8 million from $20.0 million in the three months ended
June 30, 2001, principally due to a decline in average
selling prices for our products including our SRAM products. In
addition, in the three months ended June 30, 2001, our net
sales decreased by 62% to $20.0 million from
$52.0 million in the three months ended March 31,
2001, and decreased 20% in the three months ended March 31,
2001 from $65.2 million in the three months ended
December 31, 2000, principally due to a decrease in unit
shipments of our SRAM products as a result of lower demand for
electronic products. While unit shipments of certain SRAM
products increased in the three months ended September 30,
2002 compared to the three months ended June 30, 2002,
declines in the average selling prices for SRAM products
resulted in an overall decline in SRAM revenue. We anticipate
further price declines for certain of our SRAM and DRAM products
in the December 2002 quarter. There can be no assurance that
such declines will be offset by higher volumes or by higher
prices on newer products.

We may not be able to compensate for price
decreases in our products.

Competitive pricing pressures due to an
industry-wide oversupply of wafer capacity as well as product
inventory resulted in significant price decreases for our
products during fiscal 1996 through fiscal 1999. While we
experienced increases in average selling prices in fiscal 2000,
historically, average selling prices for semiconductor memory
products have declined, and we expect that average selling
prices will decline in the future. In this regard, we
experienced a decline in the average selling prices for most of
our products during fiscal 2002, including the most recent
quarter ended September 30, 2002. We anticipate a further
decline in the average selling prices for certain of our SRAM
and DRAM products in the December 2002 quarter. Our ability to
maintain or increase revenues will depend upon our ability to
increase unit sales volume of existing

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products and introduce and sell new products
which compensate for the anticipated declines in the average
selling prices of our existing products.


Declining average selling prices will also
adversely affect our gross margins and profits unless we are
able to introduce new products with higher margins or reduce our
cost per unit. We may not be able to increase unit sales
volumes, introduce and sell new products or reduce our cost per
unit.

Shifts in industry-wide capacity may cause
our results to fluctuate. In the past, such shifts have resulted
in significant inventory write-downs.

Shifts in industry-wide capacity from shortages
to oversupply or from oversupply to shortages may result in
significant fluctuations in our quarterly or annual operating
results. The semiconductor industry is highly cyclical and is
subject to significant downturns resulting from excess capacity,
overproduction, reduced demand or technological obsolescence.
These factors can result in a decline in average selling prices
and the stated value of inventory. In fiscal 2002 and in fiscal
2001, we recorded inventory write-downs of $28.6 million
and $38.3 million, respectively. The inventory write-downs
were predominately for lower of cost or market accounting on our
products, and to a lesser extent, excess inventory.

We write down to zero carrying value inventory on
hand in excess of six months estimated sales volumes to
cover estimated excess and obsolete exposures, unless
adjustments are made to the forecast based on managements
judgments for newer products, end of life products or planned
inventory increases. In making such judgments to write down
inventory, management takes into account the product life cycles
which can range from 6 to 30 months, the stage in the life
cycle of the product, the impact of competitors
announcements and product introductions on our products.

We believe that six months is an appropriate
period because it is difficult to accurately forecast for a
specific product beyond this time frame due to the potential
introduction of products by competitors, technology obsolescence
or fluctuations in demand. Our policy regarding excess inventory
resulted in inventory write-downs for excess inventory of
approximately $10.4 million for fiscal 2002 and
$5.7 million for fiscal year 2001. Future additional
inventory write-downs may occur due to lower of cost or market
accounting, excess inventory or inventory obsolescence.

If we are unable to obtain an adequate
supply of wafers, our business will be harmed.

If we are unable to obtain an adequate supply of
wafers from our current or any alternative sources in a timely
manner, our business will be harmed. To date, our principal
manufacturing relationship has been with TSMC, from which we
have obtained a majority of our wafers. We also receive wafers
from Chartered Semiconductor, SMIC, and UMC. Each of our wafer
foundries also supplies wafers to other integrated circuit
companies, including certain of our competitors. Although we
have written commitments specifying wafer capacities from some
suppliers, if any suppliers experience manufacturing failures or
yield shortfalls, choose to prioritize capacity for other uses,
or reduce or eliminate deliveries to us, we may not be able to
enforce fulfillment of any delivery commitments. Additionally,
we may not be able to qualify additional manufacturing sources
for existing or new products in a timely manner and we cannot be
certain that other manufacturing sources would agree to deliver
an adequate supply of wafers to us.

Foundry capacity can be limited and we may
be required to enter into costly long-term supply arrangements
to secure foundry capacity.

If we are not able to obtain additional foundry
capacity as required, our relationships with our customers would
be harmed and our future sales would be adversely impacted. In
order to secure additional foundry capacity, we have entered
into and may enter into various arrangements with suppliers,
which could include:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | contracts that commit us to purchase specified
    quantities of silicon wafers over extended periods;
|
| |  | investments in foundries;                                                                             
|
| |  | joint ventures;                                                                                       

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| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | other partnership relationships with foundries;                                            
|
| |  | option payments or other prepayments to
    foundries; or                                  
|
| |  | nonrefundable deposits with or loans to foundries
    in exchange for capacity commitments.

We may not be able to make any such arrangements
in a timely fashion or at all, and such arrangements, if any,
may not be on terms favorable to us. Moreover, if we are able to
secure foundry capacity, we may be obligated to utilize all of
that capacity or incur penalties. Such penalties may be
expensive and could harm our financial results.

We depend on a small number of customers
for a high percentage of our sales, and the loss of a
significant customer could cause a decline in our
profits.

In fiscal 2002, no single customer accounted for
over 10% of net sales. However, in fiscal 2001, sales to
Flextronics International accounted for approximately 15% of net
sales. Substantially all of our sales to Flextronics were for
products to be delivered to Cisco. Shipments for Cisco directly,
or indirectly through subcontractors, accounted for
approximately 18% of our net sales for fiscal 2001. Shipments
for 3Com directly, or indirectly through subcontractors,
accounted for approximately 11% of net sales for fiscal 2001. In
fiscal 2000, no single customer accounted for over 10% of net
sales. However, in fiscal 2000, shipments for Cisco directly, or
indirectly through subcontractors, accounted for approximately
13% of net sales. As sales to these customers are executed
pursuant to purchase orders and no purchasing contract exists,
these customers can cease doing business with us at any time. In
this regard, we experienced order cancellations from these
customers in the March 2001 quarter which adversely impacted our
operating results in subsequent quarters. We expect a
significant portion of our future sales to remain concentrated
within a limited number of strategic customers. We may not be
able to retain our strategic customers, such customers may
cancel or reschedule orders, or in the event of canceled orders,
such orders may not be replaced by other sales. In addition,
sales to any particular customer may fluctuate significantly
from quarter to quarter, and such fluctuating sales could harm
our business.

Our products are complex and could contain
defects, which could reduce sales of those products or result in
claims against us.

We develop complex and evolving products. Despite
testing by us and our customers, errors may be found in existing
or new products. This could result in a delay in recognition or
loss of revenues, loss of market share or failure to achieve
market acceptance. These defects also may cause us to incur
significant warranty, support and repair costs, may divert the
attention of our engineering personnel from our product
development efforts and could harm our relationships with our
customers. The occurrence of these problems could result in the
delay or loss of market acceptance of our products and would
likely harm our business. Defects, integration issues or other
performance problems in our products could result in financial
or other damages to our customers or could lessen market
acceptance of our products. Our customers could also seek and
obtain damages from us for their losses. Although we
specifically limit our liability to replacement of defective
items or return of amounts paid, a product liability claim
brought against us, even if unsuccessful, would likely be time
consuming and costly to defend.

Strong competition in the semiconductor
memory market may harm our business.

The semiconductor memory market is intensely
competitive and has been characterized by an oversupply of
product, price erosion, rapid technological change, short
product life cycles, cyclical market patterns and heightened
foreign and domestic competition. Certain of our competitors
offer broader product lines and have greater financial,
technical, marketing, distribution and other resources than us.
We may not be able to compete successfully against any of these
competitors. Our ability to compete successfully in the high
performance memory market depends on factors both within and
outside of our control, including:



| |   |                                                   
| | - | --------------------------------------------------
| |  | real or perceived imbalances in supply and demand;
|
| |  | product pricing;                                  

22



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| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | the rate at which OEM customers incorporate our
    products into their systems;
|
| |  | the success of our customers products and
    end-user demand;                 
|
| |  | access to advanced process technologies at
    competitive prices;              
|
| |  | product functionality, performance and
    reliability;                         
|
| |  | successful and timely product development;                                      
|
| |  | the supply and cost of wafers;                                                  
|
| |  | achievement of acceptable yields of functional
    die;                         
|
| |  | the gain or loss of significant customers; and                                  
|
| |  | the nature of our competitors and general
    economic conditions.              

In addition, we are vulnerable to technology
advances utilized by competitors to manufacture higher
performance or lower cost products. We may not be able to
compete successfully in the future as to any of these factors.
Our failure to compete successfully in these or other areas
could harm our business.

Potential intellectual property claims and
litigation could subject us to significant liability for damages
and could invalidate our proprietary rights.

In the semiconductor industry, it is not unusual
for companies to receive notices alleging infringement of
patents or other intellectual property rights of others. We have
been, and from time-to-time expect to be, notified of claims
that we may be infringing patents, maskwork rights or copyrights
owned by third parties. If it appears necessary or desirable, we
may seek licenses under patents that we are alleged to be
infringing. Although patent holders commonly offer such
licenses, licenses may not be offered and the terms of any
offered licenses may not be acceptable to us.

The failure to obtain a license under a key
patent or intellectual property right from a third party for
technology used by us could cause us to incur substantial
liabilities and to suspend the manufacture of the products
utilizing the invention or to attempt to develop non-infringing
products, any of which could materially and adversely affect our
business and operating results. Furthermore, we may become
involved in protracted litigation regarding the alleged
infringement by us of third party intellectual property rights
or litigation to assert and protect our patents or other
intellectual property rights. Any litigation relating to patent
infringement or other intellectual property matters could result
in substantial cost and diversion of our resources which could
harm our business.

We have significant international sales and
risks related to our international operations could harm our
operating results.

In fiscal 2002, approximately 30% of our net
sales was attributable to customers located in the United
States, 15% was attributable to customers located in Europe and
55% was attributable to customers located in Asia. In fiscal
2001, approximately 52% of our net sales was attributable to
customers located in the United States, 25% was attributable to
customers located in Europe and 23% was attributable to
customers located in Asia. Accordingly, our future operating
results will depend on general economic conditions in Asia,
Europe, and the United States. In addition, the markets for our
products, which are highly cyclical, may not continue to grow.
We anticipate that sales to international customers will
continue to represent a significant percentage of net sales.

We are subject to the risks of conducting
business internationally, including:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | economic conditions in Europe and Asia,
    particularly in Taiwan and the Peoples Republic of China;
|
| |  | changes in trade policy and regulatory
    requirements;                                              
|
| |  | duties, tariffs and other trade barriers and
    restrictions;                                        

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| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | the burdens of complying with foreign laws;                    
|
| |  | foreign currency fluctuations;                                 
|
| |  | difficulties in collecting foreign accounts
    receivable; and
|
| |  | political instability.                                         

We have made strategic equity investments
in other companies with no assurance that they will increase in
value.

Over the last few years, we have made several
strategic equity investments in other technology companies. At
September 30, 2002, we had investments in equity securities
of privately held companies of approximately $46.4 million,
$40 million of which is in SMIC. There can be no assurance
that these investments will increase in value and there is the
possibility that they could decrease in value over time, even to
the point of becoming completely worthless. These investments
are tested for impairment on a recurring basis and any
reductions in the carrying value would lower our profitability.
In this regard, we recorded approximately $397,000 in impairment
losses during fiscal 2002.

We may encounter difficulties in
effectively integrating acquired businesses.

From time to time, we may acquire other companies
that would be complementary to our business. Acquisitions may
result in potentially dilutive issuances of equity securities,
incurrence of debt and contingent liabilities, amortization
expenses related to intangible assets and the possible
impairment of goodwill, which could harm our profitability. In
addition, acquisitions involve numerous risks, including, among
other things: higher than estimated acquisition expenses;
difficulties in successfully assimilating the operations,
technologies and personnel of the acquired company; diversion of
managements attention from other business concerns; risks
of entering markets in which we have no or limited direct prior
experience; and the potential loss of key employees and
customers as a result of the acquisition. In this regard, in
February 2002, we acquired Purple Ray, Inc., a privately held
research and development stage company developing network search
engine and content addressable memory integrated circuits.
Pursuant to this transaction, we issued 438,000 shares of
our common stock in exchange for all outstanding shares of
Purple Ray and may issue up to an additional 163,000 shares
upon exercise of warrants and options of Purple Ray.
Approximately 50,000 additional shares of our common stock may
be issued contingent upon meeting certain milestones. There can
be no assurance as to the effect of the Purple Ray acquisition
or future acquisitions on our business or operating results.

We depend on our ability to attract and
retain our key technical and management personnel.

Our success depends upon the continued service of
our key technical and management personnel, including
Jimmy S.M. Lee, our Chairman and Chief Executive Officer,
and Gary L. Fischer, our President, Chief Operating
Officer, and Chief Financial Officer, as well as on our ability
to continue to attract, retain and motivate qualified personnel,
particularly experienced circuit designers and process
engineers. The competition for such employees is intense. We
have no employment contracts or key person life insurance
policies with or for any of our executive officers. The loss of
the service of one or more of our key personnel could materially
and adversely affect our business and operating results.

Terrorist attacks, threats of further
attacks, threats of war, and acts of war may negatively impact
all aspects of our operations, revenues, costs and stock
price.

The September 2001 terrorist attacks in the
United States, as well as future events occurring in response or
connection to them, including, future terrorist attacks against
United States targets, rumors or threats of war, actual
conflicts involving the United States or its allies, or trade
disruptions impacting our domestic or foreign suppliers or our
customers, may impact our operations and may, among other
things, cause delays or losses in the delivery of wafers or
other products to us and decreased sales of our products. More
generally, these events have affected, and are expected to
continue to affect, the general economy and customer demand for
products sold by our customers. Any of these occurrences could
have a significant impact on our operating

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results, revenues, and costs, which in turn may
result in increased volatility in our common stock price and a
decline in the price of our common stock.


Our stock price is expected to be
volatile.

The trading price of our common stock has been
and is expected to be subject to wide fluctuations in response
to:



| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | quarter-to-quarter variations in our operating
    results;                                                                                     
|
| |  | new or revised earnings estimates;                                                                                                              
|
| |  | comments or recommendations issued by analysts
    who follow us, our competitors or the semiconductor industry and
    other events or factors;
|
| |  | aggregate valuations and movement of stocks in
    the broader semiconductor industry;                                                          
|
| |  | announcements of new products, strategic
    relationships or acquisitions by us or our competitors;                                            
|
| |  | increases or decreases in wafer capacity;                                                                                                       
|
| |  | general conditions or cyclicality in the
    semiconductor industry or the end markets that we serve;                                           
|
| |  | governmental regulations, trade laws and import
    duties;                                                                                     
|
| |  | announcements related to future or existing
    litigation involving us or any of our competitors;                                              
|
| |  | announcements of technological innovations by us
    or our competitors;                                                                        
|
| |  | additions or departures of senior management; and                                                                                               
|
| |  | other events or factors many of which are beyond
    our control.                                                                               

In addition, stock markets have experienced
extreme price and trading volume volatility in recent years.
This volatility has had a substantial effect on the market
prices of securities of many high technology companies for
reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations may
adversely affect the market price of our common stock.




Item 7a.     Quantitative
and Qualitative Disclosures about Market Risk

Our financial market risk includes risks
associated with international operations and related foreign
currencies. We anticipate that international sales will continue
to account for a significant portion of our consolidated
revenue. Our international sales are largely denominated in
U.S. dollars and therefore are not subject to material
foreign currency exchange risk. We have operations in China,
Europe, Taiwan, Hong Kong, and Korea. Expenses of our
international operations are denominated in each countrys
local currency and therefore are subject to foreign currency
exchange risk; however, through September 30, 2002 we have
not experienced any significant negative impact on our
operations as a result of fluctuations in foreign currency
exchange rates. We do not currently engage in any hedging
activities and our derivative financial instruments were
immaterial at September 30, 2002.

We had short-term investments of
$67.2 million at September 30, 2002. The primary
objective of our investment activities is to preserve principal
while at the same time maximizing yields without increasing
risk. We invest primarily in high-quality, short-term debt
instruments such as municipal auction rate certificates and
instruments issued by high quality financial institutions and
companies, including money market instruments. A hypothetical
one percentage point decrease in interest rates would result in
approximately a $0.8 million decrease in interest income.

We own approximately 29% of ICSI, a public
company listed on the Taiwan Stock Exchange. We account for this
investment on the equity basis and our investment balance as of
September 30, 2002 was approximately $15.7 million.
The market value of our investment in the common stock of ICSI
at September 30, 2002 was approximately $26.9 million,
based on quoted market prices. The share price of ICSI

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is subject to fluctuations. A significant decline
in the stock price of ICSI may require us to record a loss
related to this investment. In addition, we own approximately
$2.9 million of ICSI convertible debentures. As a result of
a decline in the ICSIs convertible bond price we recorded
an unrealized loss of $0.2 million related to this
investment in the September 2002 quarter. This loss was included
in other comprehensive loss in the equity portion of our balance
sheet. Further deterioration in ICSIs bond price would
result in additional losses.


We have investments in equity securities of
privately held companies for the promotion of business and
strategic objectives of approximately $42.9 million at
September 30, 2002, of which $40.0 million is invested
in SMIC. These investments are generally in companies in the
semiconductor industry. These investments are included in other
assets and are accounted for using the cost method. In addition,
we have an investment of $3.7 million that is accounted for
on the equity method. For investments in which no public market
exists, our policy is to review the operating performance,
recent financing transactions and cash flow forecasts for such
companies in assessing the net realizable values of the
securities of these companies. Impairment losses on equity
investments are recorded when events and circumstances indicate
that such assets are impaired and the decline in value is other
than temporary. We recorded $397,000 in impairment losses during
fiscal 2002.

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Item 8.     Financial
Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                               |                                                            |                                                                                           |    |   
|------------------------------ | ---------------------------------------------------------- | ----------------------------------------------------------------------------------------- | -- | --
|Report of Independent Auditors |                                                            | 28                                                                                       
|Financial Statements:          |                                                            |                                                                                          
|                               | Consolidated Statements of Operations                      |                                                                                           |   
|                               |                                                            | For Fiscal Years Ended September 30, 2002,
    September 30, 2001, and September 30, 2000 |    | 29
|                               | Consolidated Statements of Comprehensive Income
    (Loss) |                                                                                           |   
|                               |                                                            | For Fiscal Years Ended September 30, 2002,
    September 30, 2001, and September 30, 2000 |    | 30
|                               | Consolidated Balance Sheets                                |                                                                                           |   
|                               |                                                            | As of September 30, 2002 and
    September 30, 2001                                       |    | 31
|                               | Consolidated Statements of Stockholders
    Equity        |                                                                                           |   
|                               |                                                            | For Fiscal Years Ended September 30, 2002,
    September 30, 2001, and September 30, 2000 |    | 32
|                               | Consolidated Statements of Cash Flows                      |                                                                                           |   
|                               |                                                            | For Fiscal Years Ended September 30, 2002,
    September 30, 2001, and September 30, 2000 |    | 33
|                               | Notes to Consolidated Financial Statements                 |                                                                                           | 34

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

The Board of Directors and Stockholders

Integrated Silicon Solution, Inc.


We have audited the accompanying consolidated
balance sheets of Integrated Silicon Solution, Inc. as of
September 30, 2002 and 2001, and the related consolidated
statements of operations, comprehensive income,
stockholders equity, and cash flows for each of the three
years in the period ended September 30, 2002. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Integrated
Silicon Solution, Inc. at September 30, 2002 and 2001, and
the consolidated results of its operations and its cash flows
for each of the three years in the period ended
September 30, 2002, in conformity with accounting
principles generally accepted in the United States.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

San Jose, California

October 25, 2002


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INTEGRATED SILICON SOLUTION, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                                     |                                       |                                       |         |        |        |      |         |        |        |   |         |        |        | 
|-------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                                                     |                                       |                                      
|                                                                                                                     |                                       | Years Ended September 30,            
|                                                                                                                     |                                       |                                      
|                                                                                                                     |                                       | 2002                                  |         | 2001   |        | 2000
|                                                                                                                     |                                       |                                       |         |        |        |     
|                                                                                                                     |                                       |                                      
|                                                                                                                     |                                       | (In thousands, except per share data)
|Net sales (See Note 18)                                                                                              |                                       | $                                     | 70,448  |        |        | $    | 152,048 |        |        | $ | 141,923 |       
|Cost of sales (See Note 18)                                                                                          |                                       |                                       | 86,213  |        |        |      | 144,869 |        |        |   | 97,759  |       
|                                                                                                                     |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Gross profit (loss)                                                                                                  |                                       |                                       | (15,765 | )      |        |      | 7,179   |        |        |   | 44,164  |       
|                                                                                                                     |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Operating expenses                                                                                                   |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                                                     | Research and development              |                                       |         | 29,841 |        |      |         | 25,303 |        |   |         | 18,287 |       
|                                                                                                                     | Selling, general and administrative   |                                       |         | 15,962 |        |      |         | 20,721 |        |   |         | 15,627 |       
|                                                                                                                     | Acquired in-process technology charge |                                       |         | 4,689  |        |      |         |       |        |   |         |       |       
|                                                                                                                     |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                                                     |                                       | Total operating expenses              |         |        | 50,492 |      |         |        | 46,024 |   |         |        | 33,914 | 
|                                                                                                                     |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Operating income (loss)                                                                                              |                                       |                                       | (66,257 | )      |        |      | (38,845 | )      |        |   | 10,250  |       
|Interest and other income (expense), net                                                                             |                                       |                                       | 2,420   |        |        |      | 7,778   |        |        |   | 3,912   |       
|Interest expense                                                                                                     |                                       |                                       | (63     | )      |        |      | (98     | )      |        |   | (133    | )     
|Gain on sales of investments, net                                                                                    |                                       |                                       | 35      |        |        |      | 30,732  |        |        |   | 847     |       
|                                                                                                                     |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Income (loss) before income taxes, minority
    interest and equity in net income (loss) of affiliated
    companies |                                       |                                       | (63,865 | )      |        |      | (433    | )      |        |   | 14,876  |       
|Provision (benefit) for income taxes                                                                                 |                                       |                                       | (3,220  | )      |        |      | 150     |        |        |   | 680     |       
|                                                                                                                     |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Income (loss) before minority interest and
    equity in net income (loss) of affiliated companies                   |                                       |                                       | (60,645 | )      |        |      | (583    | )      |        |   | 14,196  |       
|Minority interest in net loss of consolidated
    subsidiary                                                         |                                       |                                       | 50      |        |        |      |        |        |        |   |        |       
|Equity in net income (loss) of affiliated
    companies                                                              |                                       |                                       | (6,945  | )      |        |      | 1,698   |        |        |   | 10,830  |       
|                                                                                                                     |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Net income (loss)                                                                                                    |                                       | $                                     | (67,540 | )      |        | $    | 1,115   |        |        | $ | 25,026  |       
|                                                                                                                     |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Basic net income (loss) per share                                                                                    |                                       | $                                     | (2.49   | )      |        | $    | 0.04    |        |        | $ | 1.07    |       
|                                                                                                                     |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Shares used in basic per share calculation                                                                           |                                       |                                       | 27,084  |        |        |      | 26,183  |        |        |   | 23,357  |       
|                                                                                                                     |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Diluted net income (loss) per share                                                                                  |                                       | $                                     | (2.49   | )      |        | $    | 0.04    |        |        | $ | 0.96    |       
|                                                                                                                     |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Shares used in diluted per share calculation                                                                         |                                       |                                       | 27,084  |        |        |      | 27,788  |        |        |   | 26,056  |       
|                                                                                                                     |                                       |                                       |         |        |        |      |         |        |        |   |         |       

See the accompanying notes to consolidated
financial statements

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INTEGRATED SILICON SOLUTION, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)

|                                               |                                             |                           |         |      |   |      |       |        |   |   |        |     | 
|---------------------------------------------- | ------------------------------------------- | ------------------------- | ------- | ---- | - | ---- | ----- | ------ | - | - | ------ | --- | 
|                                               |                                             |                          
|                                               |                                             | Years Ended September 30,
|                                               |                                             |                          
|                                               |                                             | 2002                      |         | 2001 |   | 2000
|                                               |                                             |                           |         |      |   |     
|                                               |                                             |                          
|                                               |                                             | (In thousands)           
|Net income (loss)                              |                                             | $                         | (67,540 | )    |   | $    | 1,115 |        |   | $ | 25,026 |    
|Other comprehensive income (loss), net of tax: |                                             |                           |         |      |   |      |       |        |   |   |        |    
|                                               | Change in cumulative translation adjustment |                           |         | 12   |   |      |       | (1,588 | ) |   |        | 419 | 
|                                               | Unrealized loss on investments              |                           |         | (238 | ) |      |       |       |   |   |        |    | 
|                                               |                                             |                           |         |      |   |      |       |        |   |   |        |    
|Comprehensive income (loss)                    |                                             | $                         | (67,766 | )    |   | $    | (473  | )      |   | $ | 25,445 |    
|                                               |                                             |                           |         |      |   |      |       |        |   |   |        |    

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INTEGRATED SILICON SOLUTION, INC.

CONSOLIDATED BALANCE SHEETS

|                                                         |                                                                                                                                                          |                       |         |         |   |   |         |         |  
|-------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------- | ------- | - | - | ------- | ------- | -
|                                                         |                                                                                                                                                          |                      
|                                                         |                                                                                                                                                          | September 30,        
|                                                         |                                                                                                                                                          |                      
|                                                         |                                                                                                                                                          | 2002                  |         | 2001   
|                                                         |                                                                                                                                                          |                       |         |        
|                                                         |                                                                                                                                                          |                      
|                                                         |                                                                                                                                                          | (In thousands, except
|                                                         |                                                                                                                                                          | per share data)      
|ASSETS                                                  
|Current assets:                                          |                                                                                                                                                          |                       |         |         |   |   |         |        
|                                                         | Cash and cash equivalents                                                                                                                                |                       | $       | 11,622  |   |   | $       | 19,309  |  
|                                                         | Short-term investments                                                                                                                                   |                       |         | 67,200  |   |   |         | 103,550 |  
|                                                         | Accounts receivable, net of allowance for
    doubtful accounts of $958 in 2002 and $1,352 in 2001.                                                      |                       |         | 7,445   |   |   |         | 9,743   |  
|                                                         | Accounts receivable from related parties (See
    Note 18)                                                                                               |                       |         | 946     |   |   |         | 597     |  
|                                                         | Inventories                                                                                                                                              |                       |         | 17,665  |   |   |         | 45,179  |  
|                                                         | Other current assets                                                                                                                                     |                       |         | 3,448   |   |   |         | 4,689   |  
|                                                         |                                                                                                                                                          |                       |         |         |   |   |         |        
|Total current assets                                     |                                                                                                                                                          |                       | 108,326 |         |   |   | 183,067 |        
|Property, equipment, and leasehold improvements,
    net |                                                                                                                                                          |                       | 10,673  |         |   |   | 7,663   |        
|Other assets                                             |                                                                                                                                                          |                       | 65,677  |         |   |   | 47,122  |        
|                                                         |                                                                                                                                                          |                       |         |         |   |   |         |        
|Total assets                                             |                                                                                                                                                          | $                     | 184,676 |         |   | $ | 237,852 |        
|                                                         |                                                                                                                                                          |                       |         |         |   |   |         |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                
|Current liabilities:                                     |                                                                                                                                                          |                       |         |         |   |   |         |        
|                                                         | Accounts payable                                                                                                                                         |                       | $       | 17,871  |   |   | $       | 7,285   |  
|                                                         | Accounts payable to related parties (See Note 18)                                                                                                        |                       |         | 3,905   |   |   |         | 854     |  
|                                                         | Accrued compensation and benefits                                                                                                                        |                       |         | 3,394   |   |   |         | 3,510   |  
|                                                         | Accrued expenses                                                                                                                                         |                       |         | 3,830   |   |   |         | 7,801   |  
|                                                         | Income tax payable                                                                                                                                       |                       |         |        |   |   |         | 3,651   |  
|                                                         | Current portion of long-term obligations                                                                                                                 |                       |         | 158     |   |   |         | 156     |  
|                                                         |                                                                                                                                                          |                       |         |         |   |   |         |        
|Total current liabilities                                |                                                                                                                                                          |                       | 29,158  |         |   |   | 23,257  |        
|Long-term obligations                                    |                                                                                                                                                          |                       |        |         |   |   | 158     |        
|Commitments and contingencies                            |                                                                                                                                                          |                       |         |         |   |   |         |        
|Minority interest                                        |                                                                                                                                                          |                       | 95      |         |   |   |        |        
|Stockholders equity:                                    |                                                                                                                                                          |                       |         |         |   |   |         |        
|                                                         | Preferred stock, $0.0001 par value: Authorized
    shares  5,000 in 2002 and 2001. No shares outstanding                                                |                       |         |        |   |   |         |        |  
|                                                         | Common stock, $0.0001 par value: Authorized
    shares  70,000 in 2002 and 2001. Issued and
    outstanding shares  27,526 in 2002 and 26,539 in 2001. |                       |         | 3       |   |   |         | 3       |  
|                                                         | Additional paid-in capital                                                                                                                               |                       |         | 231,032 |   |   |         | 221,502 |  
|                                                         | Accumulated deficit                                                                                                                                      |                       |         | (69,251 | ) |   |         | (1,711  | )
|                                                         | Accumulated comprehensive loss                                                                                                                           |                       |         | (5,583  | ) |   |         | (5,357  | )
|                                                         | Unearned compensation                                                                                                                                    |                       |         | (778    | ) |   |         |        |  
|                                                         |                                                                                                                                                          |                       |         |         |   |   |         |        
|Total stockholders equity                               |                                                                                                                                                          |                       | 155,423 |         |   |   | 214,437 |        
|                                                         |                                                                                                                                                          |                       |         |         |   |   |         |        
|Total liabilities and stockholders equity               |                                                                                                                                                          | $                     | 184,676 |         |   | $ | 237,852 |        
|                                                         |                                                                                                                                                          |                       |         |         |   |   |         |        

See the accompanying notes to consolidated
financial statements

31



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##### Table of Contents



INTEGRATED SILICON SOLUTION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                              |                                                                                     |                |        |            |  |              |   |               |  |               |         |               |  |        |         |         |   |   |        |        |   |   |      |      |   |   |         |         |  
|----------------------------- | ----------------------------------------------------------------------------------- | -------------- | ------ | ---------- |  | ------------ | - | ------------- |  | ------------- | ------- | ------------- |  | ------ | ------- | ------- | - | - | ------ | ------ | - | - | ---- | ---- | - | - | ------- | ------- | -
|                              |                                                                                     |                |        |            |  | Retained     |   |               |  |               |         |              
|                              |                                                                                     | Common Stock   |        | Additional |  | Earnings     |   | Accumulated   |  |               |         | Total        
|                              |                                                                                     |                |        | Paid-In    |  | (Accumulated |   | Comprehensive |  | Unearned      |         | Stockholders
|                              |                                                                                     | Shares         |        | Amount     |  | Capital      |   | Deficit)      |  | Income (loss) |         | Compensation  |  | Equity
|                              |                                                                                     |                |        |            |  |              |   |               |  |               |         |               |  |       
|                              |                                                                                     |               
|                              |                                                                                     | (In thousands)
|Balance at September 30, 1999 |                                                                                     |                | 20,294 |            |  | $            | 2 |               |  | $             | 120,852 |               |  | $      | (27,852 | )       |   | $ | (4,188 | )      |   | $ | (36  | )    |   | $ | 88,778  |        
|                              | Stock options exercised                                                             |                |        | 1,006      |  |              |   |              |  |               |         | 5,461         |  |        |         |        |   |   |        |       |   |   |      |     |   |   |         | 5,461   |  
|                              | Shares issued under stock purchase plan                                             |                |        | 235        |  |              |   |              |  |               |         | 859           |  |        |         |        |   |   |        |       |   |   |      |     |   |   |         | 859     |  
|                              | Amortization of unearned compensation                                               |                |        |           |  |              |   |              |  |               |         |              |  |        |         |        |   |   |        |       |   |   |      | 18   |   |   |         | 18      |  
|                              | Shares issued in connection with follow-on public
    stock offering                |                |        | 3,795      |  |              |   | 1             |  |               |         | 90,673        |  |        |         |        |   |   |        |       |   |   |      |     |   |   |         | 90,674  |  
|                              | Shares issued for exercise of warrants                                              |                |        | 458        |  |              |   |              |  |               |         |              |  |        |         |        |   |   |        |       |   |   |      |     |   |   |         |        |  
|                              | Change in accumulated comprehensive loss                                            |                |        |           |  |              |   |              |  |               |         |              |  |        |         |        |   |   |        | 419    |   |   |      |     |   |   |         | 419     |  
|                              | Net income                                                                          |                |        |           |  |              |   |              |  |               |         |              |  |        |         | 25,026  |   |   |        |       |   |   |      |     |   |   |         | 25,026  |  
|                              |                                                                                     |                |        |            |  |              |   |               |  |               |         |               |  |        |         |         |   |   |        |        |   |   |      |      |   |   |         |        
|Balance at September 30, 2000 |                                                                                     |                | 25,788 |            |  |              | 3 |               |  |               | 217,845 |               |  |        | (2,826  | )       |   |   | (3,769 | )      |   |   | (18  | )    |   |   | 211,235 |        
|                              | Stock options exercised                                                             |                |        | 556        |  |              |   |              |  |               |         | 2,532         |  |        |         |        |   |   |        |       |   |   |      |     |   |   |         | 2,532   |  
|                              | Shares issued under stock purchase plan                                             |                |        | 195        |  |              |   |              |  |               |         | 1,125         |  |        |         |        |   |   |        |       |   |   |      |     |   |   |         | 1,125   |  
|                              | Amortization of unearned compensation                                               |                |        |           |  |              |   |              |  |               |         |              |  |        |         |        |   |   |        |       |   |   |      | 18   |   |   |         | 18      |  
|                              | Change in accumulated comprehensive loss                                            |                |        |           |  |              |   |              |  |               |         |              |  |        |         |        |   |   |        | (1,588 | ) |   |      |     |   |   |         | (1,588  | )
|                              | Net income                                                                          |                |        |           |  |              |   |              |  |               |         |              |  |        |         | 1,115   |   |   |        |       |   |   |      |     |   |   |         | 1,115   |  
|                              |                                                                                     |                |        |            |  |              |   |               |  |               |         |               |  |        |         |         |   |   |        |        |   |   |      |      |   |   |         |        
|Balance at September 30, 2001 |                                                                                     |                | 26,539 |            |  |              | 3 |               |  |               | 221,502 |               |  |        | (1,711  | )       |   |   | (5,357 | )      |   |   |     |      |   |   | 214,437 |        
|                              | Stock options exercised                                                             |                |        | 394        |  |              |   |              |  |               |         | 1,659         |  |        |         |        |   |   |        |       |   |   |      |     |   |   |         | 1,659   |  
|                              | Shares issued under stock purchase plan                                             |                |        | 155        |  |              |   |              |  |               |         | 992           |  |        |         |        |   |   |        |       |   |   |      |     |   |   |         | 992     |  
|                              | Shares issued in conjunction with the acquisition
    of Purple Ray                 |                |        | 438        |  |              |   |              |  |               |         | 5,233         |  |        |         |        |   |   |        |       |   |   |      |     |   |   |         | 5,233   |  
|                              | Fair value of options assumed in conjunction with
    the acquisition of Purple Ray |                |        |           |  |              |   |              |  |               |         | 1,646         |  |        |         |        |   |   |        |       |   |   |      | (889 | ) |   |         | 757     |  
|                              | Amortization of unearned compensation                                               |                |        |           |  |              |   |              |  |               |         |              |  |        |         |        |   |   |        |       |   |   |      | 111  |   |   |         | 111     |  
|                              | Change in accumulated comprehensive loss                                            |                |        |           |  |              |   |              |  |               |         |              |  |        |         |        |   |   |        | (226   | ) |   |      |     |   |   |         | (226    | )
|                              | Net loss                                                                            |                |        |           |  |              |   |              |  |               |         |              |  |        |         | (67,540 | ) |   |        |       |   |   |      |     |   |   |         | (67,540 | )
|                              |                                                                                     |                |        |            |  |              |   |               |  |               |         |               |  |        |         |         |   |   |        |        |   |   |      |      |   |   |         |        
|Balance at September 30, 2002 |                                                                                     |                | 27,526 |            |  | $            | 3 |               |  | $             | 231,032 |               |  | $      | (69,251 | )       |   | $ | (5,583 | )      |   | $ | (778 | )    |   | $ | 155,423 |        
|                              |                                                                                     |                |        |            |  |              |   |               |  |               |         |               |  |        |         |         |   |   |        |        |   |   |      |      |   |   |         |        

See the accompanying notes to consolidated
financial statements

32



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##### Table of Contents



INTEGRATED SILICON SOLUTION, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                 |                                                                                        |                                                                                          |                                                              |                                                                                    |                                                         |       |         |         |   |         |         |         |   |         |         |         |  
|---------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ---------------------------------------------------------------------------------- | ------------------------------------------------------- | ----- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                                 |                                                                                        |                                                                                         
|                                                                 |                                                                                        | Years Ended September 30,                                                               
|                                                                 |                                                                                        |                                                                                         
|                                                                 |                                                                                        | 2002                                                                                     |                                                              | 2001                                                                               |                                                         | 2000 
|                                                                 |                                                                                        |                                                                                          |                                                              |                                                                                    |                                                         |      
|                                                                 |                                                                                        |                                                                                         
|                                                                 |                                                                                        | (In thousands)                                                                          
|Cash flows from operating activities:                            |                                                                                        |                                                                                          |                                                              |                                                                                    |                                                         |       |         |         |   |         |         |        
|                                                                 | Net income (loss)                                                                      |                                                                                          | $                                                            | (67,540                                                                            | )                                                       |       | $       | 1,115   |   |         | $       | 25,026  |  
|                                                                 |                                                                                        | Adjustments to reconcile net income
    (loss) to net cash used in operating activities: |                                                              |                                                                                    |                                                         |       |         |         |   |         |         |         |   |        
|                                                                 |                                                                                        |                                                                                          | Depreciation and amortization                                |                                                                                    |                                                         | 4,243 |         |         |   | 3,359   |         |         |   | 3,223   |        
|                                                                 |                                                                                        |                                                                                          | Amortization of intangibles and unearned
    compensation    |                                                                                    |                                                         | 283   |         |         |   |        |         |         |   |        |        
|                                                                 |                                                                                        |                                                                                          | Acquired in-process technology charge                        |                                                                                    |                                                         | 4,689 |         |         |   |        |         |         |   |        |        
|                                                                 |                                                                                        |                                                                                          | Net gain on sale of investments                              |                                                                                    |                                                         | (35   | )       |         |   | (30,732 | )       |         |   | (847    | )      
|                                                                 |                                                                                        |                                                                                          | Loss on impairment of assets                                 |                                                                                    |                                                         | 1,240 |         |         |   | 150     |         |         |   | 200     |        
|                                                                 |                                                                                        |                                                                                          | Net foreign currency transaction
    (gains) losses          |                                                                                    |                                                         | 47    |         |         |   |        |         |         |   |        |        
|                                                                 |                                                                                        |                                                                                          | Equity in net (income) loss of affiliated
    companies      |                                                                                    |                                                         | 6,945 |         |         |   | (1,698  | )       |         |   | (10,830 | )      
|                                                                 |                                                                                        |                                                                                          | Minority interest in net loss of consolidated
    subsidiary |                                                                                    |                                                         | (50   | )       |         |   |        |         |         |   |        |        
|                                                                 |                                                                                        |                                                                                          | Changes in operating assets and liabilities:                 |                                                                                    |                                                         |       |         |         |   |         |         |         |   |         |        
|                                                                 |                                                                                        |                                                                                          |                                                              | Accounts receivable and accounts receivable from
    related parties (See Note 18) |                                                         |       | 1,949   |         |   |         | 17,711  |         |   |         | (12,875 | )      
|                                                                 |                                                                                        |                                                                                          |                                                              | Inventories                                                                        |                                                         |       | 27,514  |         |   |         | 18,038  |         |   |         | (33,545 | )      
|                                                                 |                                                                                        |                                                                                          |                                                              | Other assets                                                                       |                                                         |       | 1,753   |         |   |         | (1,473  | )       |   |         | 99      |        
|                                                                 |                                                                                        |                                                                                          |                                                              | Accounts payable and accounts payable to related
    parties (See Note 18)         |                                                         |       | 13,233  |         |   |         | (25,315 | )       |   |         | 13,853  |        
|                                                                 |                                                                                        |                                                                                          |                                                              | Accrued expenses                                                                   |                                                         |       | (7,835  | )       |   |         | (619    | )       |   |         | 2,129   |        
|                                                                 |                                                                                        |                                                                                          |                                                              |                                                                                    |                                                         |       |         |         |   |         |         |        
|                                                                 |                                                                                        |                                                                                          |                                                              |                                                                                    | Net cash used in operating activities                   |       |         | (13,564 | ) |         |         | (19,464 | ) |         |         | (13,567 | )
|Cash flows from investing activities:                            |                                                                                        |                                                                                          |                                                              |                                                                                    |                                                         |       |         |         |   |         |         |        
|                                                                 | Acquisition of property, equipment, and leasehold
    improvements                     |                                                                                          |                                                              | (6,493                                                                             | )                                                       |       |         | (5,593  | ) |         |         | (3,489  | )
|                                                                 | Purchases of available-for-sale securities                                             |                                                                                          |                                                              | (24,000                                                                            | )                                                       |       |         | (82,150 | ) |         |         | (67,350 | )
|                                                                 | Sales of available-for-sale securities                                                 |                                                                                          |                                                              | 60,350                                                                             |                                                         |       |         | 37,400  |   |         |         | 16,200  |  
|                                                                 | Dividends received from equity investee                                                |                                                                                          |                                                              |                                                                                   |                                                         |       |         | 1,961   |   |         |         |        |  
|                                                                 | Investment in Purple Ray                                                               |                                                                                          |                                                              | (192                                                                               | )                                                       |       |         |        |   |         |         |        |  
|                                                                 | Proceeds from sale of Integrated Circuit
    Solution, Inc. (ICSI) equity securities |                                                                                          |                                                              | 64                                                                                 |                                                         |       |         | 15,779  |   |         |         | 3,324   |  
|                                                                 | Investment in ICSI convertible debenture                                               |                                                                                          |                                                              | (3,180                                                                             | )                                                       |       |         |        |   |         |         |        |  
|                                                                 | Investment in WaferTech, LLC                                                           |                                                                                          |                                                              |                                                                                   |                                                         |       |         |        |   |         |         | (2,667  | )
|                                                                 | Proceeds from sale of WaferTech, LLC                                                   |                                                                                          |                                                              |                                                                                   |                                                         |       |         | 40,669  |   |         |         |        |  
|                                                                 | Proceeds from minority shareholders of D2Code                                          |                                                                                          |                                                              | 145                                                                                |                                                         |       |         |        |   |         |         |        |  
|                                                                 | Investment in NexFlash Technologies,
    Inc.                                          |                                                                                          |                                                              |                                                                                   |                                                         |       |         |        |   |         |         | (1,361  | )
|                                                                 | Proceeds from sale of NexFlash Technologies, Inc.
    equity securities                |                                                                                          |                                                              |                                                                                   |                                                         |       |         | 6,167   |   |         |         |        |  
|                                                                 | Investment in Semiconductor Manufacturing
    International Corp. (SMIC)             |                                                                                          |                                                              | (21,150                                                                            | )                                                       |       |         | (14,250 | ) |         |         | (4,600  | )
|                                                                 | Investment in E-CMOS Technology Corporation                                            |                                                                                          |                                                              | (599                                                                               | )                                                       |       |         | (3,023  | ) |         |         |        |  
|                                                                 | Other investments                                                                      |                                                                                          |                                                              | (1,620                                                                             | )                                                       |       |         | (500    | ) |         |         | (553    | )
|                                                                 |                                                                                        |                                                                                          |                                                              |                                                                                    |                                                         |       |         |         |   |         |         |        
|                                                                 |                                                                                        |                                                                                          |                                                              |                                                                                    | Net cash provided by (used in) investing
    activities |       |         | 3,325   |   |         |         | (3,540  | ) |         |         | (60,496 | )
|Cash flows from financing activities:                            |                                                                                        |                                                                                          |                                                              |                                                                                    |                                                         |       |         |         |   |         |         |        
|                                                                 | Proceeds from issuance of stock                                                        |                                                                                          |                                                              | 2,651                                                                              |                                                         |       |         | 3,675   |   |         |         | 97,012  |  
|                                                                 | Principal payments of notes payable and long-term
    obligations                      |                                                                                          |                                                              | (156                                                                               | )                                                       |       |         | (140    | ) |         |         | (146    | )
|                                                                 |                                                                                        |                                                                                          |                                                              |                                                                                    |                                                         |       |         |         |   |         |         |        
|                                                                 |                                                                                        |                                                                                          |                                                              |                                                                                    | Net cash provided by financing activities               |       |         | 2,495   |   |         |         | 3,535   |   |         |         | 96,866  |  
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                        |                                                                                          | 57                                                           |                                                                                    |                                                         |       |        |         |   |         |        |        
|                                                                 |                                                                                        |                                                                                          |                                                              |                                                                                    |                                                         |       |         |         |   |         |         |        
|Net increase (decrease) in cash and cash
    equivalents         |                                                                                        |                                                                                          | (7,687                                                       | )                                                                                  |                                                         |       | (19,469 | )       |   |         | 22,803  |        
|Cash and cash equivalents at beginning of year                   |                                                                                        |                                                                                          | 19,309                                                       |                                                                                    |                                                         |       | 38,778  |         |   |         | 15,975  |        
|                                                                 |                                                                                        |                                                                                          |                                                              |                                                                                    |                                                         |       |         |         |   |         |         |        
|Cash and cash equivalents at end of year                         |                                                                                        | $                                                                                        | 11,622                                                       |                                                                                    |                                                         | $     | 19,309  |         |   | $       | 38,778  |        
|                                                                 |                                                                                        |                                                                                          |                                                              |                                                                                    |                                                         |       |         |         |   |         |         |        

See the accompanying notes to consolidated
financial statements

33



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##### Table of Contents



INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|        |                                                     
|------- | ----------------------------------------------------
|Note 1. | Organization and Significant Accounting
    Policies

Organization

Integrated Silicon Solution, Inc. (the
Company) was incorporated in California on
October 27, 1988 and reincorporated in Delaware on
August 9, 1993. The Company designs, develops and markets
memory products used in networking, Internet infrastructure,
telecommunications, wireless products, handheld devices,
computer peripherals, and automotive electronics. The
Companys products incorporate state-of-the-art circuit
design and advanced process technology. The Companys high
speed and low power static random access memories
(SRAM), low to medium density dynamic random access
memories (DRAM), and family of electrically erasable
programmable read only memories (EEPROM) enable
designers to meet the demanding connectivity, portability, and
bandwidth requirements of todays leading edge electronic
products. In addition, the Company has multichip packages
combining Flash and SRAM (MCP),
BluetoothTM wireless chipsets, and parallel search
processors or content addressable memories (CAM) in
development.

Basis of Presentation

The accompanying consolidated financial
statements include the accounts of Integrated Silicon Solution,
Inc. and its majority owned subsidiaries, after elimination of
all significant intercompany accounts and transactions.

The Companys financial results for fiscal
2002 and fiscal 2001 reflect accounting for Integrated Circuit
Solution, Inc. (ICSI) on the equity basis and
include our percentage share of the results of their operations.
Our financial results for fiscal 2002 and fiscal 2001 reflect
accounting for E-CMOS Technology Corporation
(E-CMOS) on the equity basis and include our share
of their results of operations on a one quarter lag. Effective
October 2001, we account for GetSilicon, Inc.
(GetSilicon) on the cost basis as our ownership
became less than 20%. Our financial results for fiscal 2001
reflect accounting for GetSilicon on the equity basis and
include our percentage share of the results of their operations.
Our financial results for fiscal 2001 through the period ended
January 31, 2001 reflect accounting for NexFlash
Technologies, Inc. (NexFlash) on the equity basis
and include our percentage share of the results of
NexFlashs operations. Effective February 2001, our
ownership of NexFlash became less than 20%, and we began
accounting for NexFlash on the cost basis. At September 30,
2002, we owned approximately 29% of ICSI, approximately 14% of
NexFlash, approximately 26% of E-CMOS and approximately 17% of
GetSilicon. Minority interest represents the minority
stockholders proportionate share of the equity interest of
interest held by employees of an overseas company that ISSI
established.

In October 2001, the Company invested
$3.0 million for a 95% interest in D2Code Co. Inc.
(D2Code), a subsidiary that we established in Korea
to focus on semiconductor design activities. Minority interest
represents the minority stockholders proportionate share
of the equity of D2Code.

Cash Equivalents and Short-Term
Investments

The Company considers all highly liquid
investments with an original maturity of 90 days or less at
the date of purchase to be cash equivalents. Cash equivalents
consist of money market funds and government securities.

Under Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt
and Equity Securities all affected debt securities must be
classified as held-to-maturity, trading, or available-for-sale
and equity securities must be classified as trading or
available-for-sale. Management determines the appropriate
classification of debt and equity securities at the time of
purchase and reevaluates such designation as of each balance
sheet date.

34



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##### Table of Contents



INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

At September 30, 2002 and 2001, all
marketable debt and equity securities were designated as
available-for-sale. Available-for-sale securities are reported
at fair value, with unrealized gains or losses, net of tax,
reported in a separate component of stockholders equity.
The amortized cost for available-for-sale debt securities is
adjusted for the amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest
and other income. Realized gains and losses and declines in
value judged to be other-than-temporary on available-for-sale
securities are included in loss on investments. The cost of
securities sold is based on the specific identification method.
Interest and dividends on securities classified as
available-for-sale are included in interest and other income. At
September 30, 2002 and 2001,the cost of these
securities approximated the fair value (quoted market price).
Except for the gains (losses) recognized on the sales of
securities of ICSI, WaferTech and NexFlash (see Note 17), there
were no gains or losses on the sale of securities for the years
ended September 30, 2002, 2001 and 2000.

Accounts Receivable

The following describes activity in the accounts
receivable allowance for doubtful accounts for the years ended
September 30, 2002, 2001, and 2000.

|                                 |      |            |   |            |  |            |   |           |  |  |   |      |      |  |   |       | 
|-------------------------------- | ---- | ---------- | - | ---------- |  | ---------- | - | --------- |  |  | - | ---- | ---- |  | - | ----- | 
|                                 |      |            |   | Addition   |  |            |   |          
|                                 |      | Balance at |   | Charged to |  |            |   | Balance  
|                                 |      | Beginning  |   | Costs and  |  |            |   | at End   
|Description                      |      | of Period  |   | Expenses   |  | Deductions |   | of Period
|                                 |      |            |   |            |  |            |   |          
|Accounts receivable             |      |            |   |            |  |            |   |           |  |  |   |      |      |  |   |      
|Allowance for doubtful accounts: |      |            |   |            |  |            |   |           |  |  |   |      |      |  |   |      
|                                 | 2002 |            | $ | 1,352      |  |            | $ |          |  |  | $ | (394 | )(1) |  | $ | 958   | 
|                                 | 2001 |            | $ | 1,499      |  |            | $ |          |  |  | $ | (147 | )(1) |  | $ | 1,352 | 
|                                 | 2000 |            | $ | 1,496      |  |            | $ | 3         |  |  | $ |     |      |  | $ | 1,499 | 



---



|    |                                                          
|--- | ---------------------------------------------------------
|(1) | Uncollectible accounts written off, net of
    recoveries

Inventories

Inventories are stated at the lower of cost
(first-in, first-out) or market. The Companys inventory
valuation process is done on a part-by-part basis. Lower of cost
or market adjustments, specifically identified on a part-by-part
basis, reduce the carrying value of the related inventory and
takes into consideration reductions in sales prices. The Company
regularly monitors inventory quantities on hand and records a
write-down for excess and obsolete inventories based primarily
on the Companys estimated forecast of product demand and
production requirements. Once established, these adjustments are
considered permanent.

Property, Equipment, and Leasehold
Improvements

Property, equipment, and leasehold improvements
are stated at cost. Equipment under capital leases is stated at
the present value of minimum lease payments at the beginning of
the lease term. Capital lease amortization is included with
depreciation expense. Depreciation and amortization are computed
using the straight-line method, based upon the shorter of the
estimated useful lives ranging from three to seven years, or the
lease term of the respective assets, if applicable.

Acquisition Related Intangibles

Purchased in-process research and development
without alternative future use is expensed when acquired.

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INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Valuation of Long-Lived Assets and Certain
Identifiable Intangibles

In accordance with SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, the Company periodically evaluates the
carrying value of long-lived assets and certain identifiable
intangibles for impairment, when events and circumstances
indicate that the book value of an asset may not be recoverable.
If management determines the existence of impairment indicators,
the Company would use undiscounted cash flows to initially
determine whether impairment should be recognized. If necessary,
the Company would perform a subsequent calculation to measure
the amount of the impairment loss based on the excess of the
carrying value over the fair value of the impaired assets.

Accumulated Comprehensive Loss

The accumulated comprehensive loss component
within the stockholders equity section of the Balance
Sheet is comprised of foreign currency translation adjustments
and the unrealized loss on an investment.

The components of accumulated other comprehensive
loss, net of tax, were as follows at September 30:

|                                                                      |  |                |        |      |  |   |        |  
|--------------------------------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                                                      |  | 2002           |        | 2001
|                                                                      |  |                |        |     
|                                                                      |  |               
|                                                                      |  | (In thousands)
|Accumulated foreign currency translation
    adjustments              |  | $              | (5,345 | )    |  | $ | (5,357 | )
|Accumulated net unrealized loss on
    available-for-sale investments |  |                | (238   | )    |  |   |       |  
|                                                                      |  |                |        |      |  |   |        |  
|Total accumulated other comprehensive loss                            |  | $              | (5,583 | )    |  | $ | (5,357 | )
|                                                                      |  |                |        |      |  |   |        |  

Revenue Recognition

The Company recognizes revenue to non-distributor
customers when persuasive evidence of an arrangement exists
including a fixed price to the buyer, delivery has occurred and
collectability is reasonably assured. The Company provides for
estimated sales returns on sales to these customers. Sales made
to distributors, under terms allowing certain rights of return
and price protection on unsold merchandise held by the
distributor, are deferred until the merchandise is sold by the
distributor.

Shipping Costs

Shipping costs were immaterial for all periods
presented.

Research and Development

Research and development expenditures are charged
to operations as incurred.

Foreign Currency Translation

The Company uses the local currency as its
functional currency for all foreign subsidiaries. Translation
adjustments, which result from the process of translating
foreign currency financial statements into U.S. dollars,
are included in the accumulated comprehensive income (loss)
component of stockholders equity.

Advertising Costs

The Company expenses advertising costs as
incurred. Advertising costs totaled $446,000, $195,000 and
$85,000 for the fiscal years ended September 30, 2002, 2001
and 2000, respectively.

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INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Income Taxes

The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards
No. 109 (SFAS 109), Accounting for Income
Taxes. Under SFAS 109, deferred tax assets and liabilities
are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are
measured using enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Company
records a valuation allowance against deferred tax assets when
it is more likely than not that such assets will not be realized.

Stock-Based Compensation

The Company accounts for employee stock options
in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees (APB No. 25), and has adopted the
disclosure-only alternative described in Statement of Financial
Accounting Standards No. 123, Accounting for
Stock-Based Compensation (FAS 123).

Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements as well as
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates, and such difference, may be material to the financial
statements.

Concentration of Credit Risk

The Company operates in one business segment,
which is to design, develop, and market high performance SRAM,
DRAM, and other memory products. The Company markets and
distributes its products on a worldwide basis, primarily to
original equipment manufacturers, contract manufacturers, and
distributors. The Company performs ongoing credit evaluations of
its customers financial condition and generally requires
no collateral. In fiscal 2002 no single customer accounted for
over 10% of net sales. Sales to Flextronics International
accounted for approximately 15% of net sales for fiscal 2001.
Substantially all of the sales to Flextronics were for products
to be delivered to Cisco Systems, Inc. Shipments for Cisco
directly, or indirectly through subcontractors, accounted for
approximately 18% of net sales for fiscal 2001. Sales to 3Com
accounted for approximately 7% of net sales for fiscal 2001.
Shipments for 3Com directly, or indirectly through
subcontractors, accounted for approximately 11% of net sales for
fiscal 2001. In fiscal 2000 no single customer accounted for
over 10% of net sales. However, shipments for Cisco directly, or
indirectly through subcontractors, accounted for approximately
13% of net revenue.

The Company maintains cash, cash equivalents, and
short-term investments with various financial institutions. The
Companys investment policy is designed to limit exposure
to any one institution. The Company performs periodic
evaluations of the relative credit standing of those financial
institutions that are considered in its investment strategy. The
Company is exposed to credit risk in the event of default by the
financial institutions or issuers of investments to the extent
of the amount recorded on the balance sheet. To date, the
Company has not incurred losses related to these investments.

Semiconductor Industry Risks

To date the Company has derived a majority of its
revenues from the sale of SRAM products. The Company has
diversified into other product areas, such as low and medium
density DRAMs, serial EEPROMs, and voice recording chips.
However, a majority of the Companys revenue is still
derived from

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INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

SRAM products and, if the market for SRAM
products should continue to decline, such decline would have a
material adverse affect on the Companys financial
performance.

The semiconductor industry is characterized by
rapid technological change, intense competitive pressure and
cyclical market patterns. The Companys results of
operations are affected by a wide variety of factors, including
decreases in the demand for our products, excess inventory
levels at our customers, declines in average selling prices of
its products, cancellation of existing orders or the failure to
secure new orders, oversupply of memory products in the market,
failure to introduce new products and to implement technologies
on a timely basis, market acceptance of the Companys and
its customers products, economic slowness and low end-user
demand, the failure to anticipate changing customer product
requirements, fluctuations in manufacturing yields, disruption
in delivery and order fulfillment, and disruption in the supply
of wafers or assembly services. Other factors include changes in
product mix, the timing of significant orders, increased
expenses associated with new product introductions, masks or
process changes, the ability of customers to make payments to
the Company, increases in material costs, increases in costs
associated with the expansion of sales channels, increases in
general and administrative expenses, and certain production and
other risks associated with using independent manufacturers. As
a result, the Company may experience substantial
period-to-period fluctuations in future operating results due to
the factors mentioned above or other factors.

Net Income (Loss) Per Share

Basic and diluted net loss per share and basic
net income per share is computed using the weighted number of
common shares outstanding during the period. Diluted net income
per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding, if
applicable, during the period. Common equivalent shares consist
of the shares issuable upon the assumed exercise of stock
options and warrants under the treasury stock method.

Impact of Recently Issued Accounting
Standards

In July 2001, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards
(SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and
Other Intangible Assets. The new rules require business
combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting and goodwill
acquired after this date will no longer be amortized, but will
be subject to annual impairment tests. All other intangible
assets will continue to be amortized over their estimated useful
lives. The Company adopted these standards as of October 1,
2001. As the Company had no recorded intangible assets at that
date, the adoption of these standards did not have an impact on
its financial position or operating results.

In October 2001, the Financial Accounting
Standards Board issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which
addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. While SFAS No. 144
supersedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, it retains many of the fundamental provisions
of that Statement. SFAS No. 144 also supersedes the
accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business.
However, it retains the requirement in Opinion No. 30 to
report separately discontinued operations and extends that
reporting to a component of an entity that either has been
disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. SFAS No. 144 is
effective for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. The adoption
of SFAS No. 144 will not have a material effect on the
Companys financial position and results of operations.

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INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In July 2002, the Financial Accounting Standards
Board issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS
No. 146 addresses the financial accounting and reporting
for obligations associated with an exit activity, including
restructuring, or with a disposal of long-lived assets. Exit
activities include, but are not limited to, eliminating or
reducing product lines, terminating employees and contracts and
relocating plant facilities or personnel. SFAS No. 146
specifies that a company will record a liability for a cost
associated with an exit or disposal activity only when that
liability is incurred and can be measured at fair value.
Therefore, commitment to an exit plan or a plan of disposal
expresses only managements intended future actions and,
therefore, does not meet the requirement for recognizing a
liability and the related expense. SFAS No. 146 is
effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption
encouraged. The adoption of SFAS No. 146 will not have a
material effect on the Companys financial position or
results of operations.

Note 2.     Cash,
Cash Equivalents, and Short-term Investments

Cash, cash equivalents and short-term investments
consisted of the following at September 30:

|                         |       |                |        |        |  |   |         |         | 
|------------------------ | ----- | -------------- | ------ | ------ |  | - | ------- | ------- | 
|                         |       | 2002           |        | 2001  
|                         |       |                |        |       
|                         |       |               
|                         |       | (In thousands)
|Cash                     |       | $              | 6,327  |        |  | $ | 14,280  |        
|Money market instruments |       |                | 5,295  |        |  |   | 5,029   |        
|Municipal bonds          |       |                | 67,200 |        |  |   | 103,550 |        
|                         |       |                |        |        |  |   |         |        
|                         | Total |                | $      | 78,822 |  |   | $       | 122,859 | 
|                         |       |                |        |        |  |   |         |        

Note 3.     Inventories

Inventories consisted of the following at
September 30:

|                     |  |                |        |      |  |   |        | 
|-------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                     |  | 2002           |        | 2001
|                     |  |                |        |     
|                     |  |               
|                     |  | (In thousands)
|Purchased components |  | $              | 4,436  |      |  | $ | 12,350 | 
|Work-in-process      |  |                | 724    |      |  |   | 594    | 
|Finished goods       |  |                | 12,505 |      |  |   | 32,235 | 
|                     |  |                |        |      |  |   |        | 
|                     |  | $              | 17,665 |      |  | $ | 45,179 | 
|                     |  |                |        |      |  |   |        | 

In fiscal 2002 and fiscal 2001, the Company
recorded inventory write-downs of $28.6 million and
$38.3 million, respectively. The inventory write-downs were
predominately for lower of cost or market and excess and
obsolescence issues on certain of its products.

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##### Table of Contents



INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 4.     Other
Assets

Other assets consisted of the following at
September 30:

|                                                           |  |                |        |      |  |   |        | 
|---------------------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                                                           |  | 2002           |        | 2001
|                                                           |  |                |        |     
|                                                           |  |               
|                                                           |  | (In thousands)
|Investment in ICSI common stock (see Notes 1
    and 17)   |  | $              | 15,690 |      |  | $ | 22,805 | 
|Investment in ICSI convertible debenture (see
    Note 20) |  |                | 2,943  |      |  |   |       | 
|Investment in SMIC (see Notes 14 and 17)                   |  |                | 40,000 |      |  |   | 18,850 | 
|Other                                                      |  |                | 7,044  |      |  |   | 5,467  | 
|                                                           |  |                |        |      |  |   |        | 
|                                                           |  | $              | 65,677 |      |  | $ | 47,122 | 
|                                                           |  |                |        |      |  |   |        | 

The market value of our investment in the common
stock and convertible debentures of ICSI at September 30,
2002 was approximately $26,855,000, and $2,943,000, based on
quoted market prices.

Note 5.     Property,
Equipment, and Leasehold Improvements

Property, equipment, and leasehold improvements
consisted of the following at September 30:

|                                               |  |                |        |      |  |   |        | 
|---------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                                               |  | 2002           |        | 2001
|                                               |  |                |        |     
|                                               |  |               
|                                               |  | (In thousands)
|Machinery and equipment                        |  | $              | 36,340 |      |  | $ | 29,554 | 
|Furniture and fixtures                         |  |                | 1,142  |      |  |   | 1,329  | 
|Building and improvements                      |  |                | 1,598  |      |  |   | 1,142  | 
|                                               |  |                |        |      |  |   |        | 
|                                               |  |                | 39,080 |      |  |   | 32,025 | 
|Less accumulated depreciation and amortization |  |                | 28,407 |      |  |   | 24,362 | 
|                                               |  |                |        |      |  |   |        | 
|                                               |  | $              | 10,673 |      |  | $ | 7,663  | 
|                                               |  |                |        |      |  |   |        | 

Note 6.     Accrued
Expenses

Accrued liabilities consisted of the following at
September 30:

|                                          |  |                |       |      |  |   |       | 
|----------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                                          |  | 2002           |       | 2001
|                                          |  |                |       |     
|                                          |  |               
|                                          |  | (In thousands)
|Accrued anti-dumping duties (see Note 14) |  | $              |      |      |  | $ | 1,574 | 
|Deferred distributor margin               |  |                | 592   |      |  |   | 1,446 | 
|Other                                     |  |                | 3,238 |      |  |   | 4,781 | 
|                                          |  |                |       |      |  |   |       | 
|                                          |  | $              | 3,830 |      |  | $ | 7,801 | 
|                                          |  |                |       |      |  |   |       | 

Note 7.     Long-term
Obligations

The Company leases certain of its equipment under
a capital lease. The lease is collateralized by the underlying
assets. At September 30, 2002, property and equipment with
a cost of $600,000 was subject to this financing arrangement.
Related accumulated amortization at September 30, 2002
amounted to $425,000. Under the terms of the lease, the Company
owes monthly payments of $15,108 through September 1, 2003.
Remaining principal and interest payments entirely due in fiscal
2003 were $158,000 and $8,000, respectively, at
September 30, 2002.

No interest was capitalized in 2002, 2001, or
2000.

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##### Table of Contents



INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 8.     Capital
Stock

The Companys Restated Certificate of
Incorporation provides for 70,000,000 authorized shares of
Common Stock and 5,000,000 authorized shares of preferred stock.
The terms of the preferred stock may be fixed by the Board of
Directors, who have the right to determine the price, rights,
preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by
the stockholders. The rights of the holders of common stock are
subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future.

As of September 30, 2002, shares of common
stock were reserved for future issuance as follows:

|                                                              |  |           
|------------------------------------------------------------- |  | ----------
|Common shares reserved under Employee Stock
    Purchase Plan |  | 922,000   
|Common shares reserved under stock option plans               |  | 11,501,000
|Common shares reserved for Purple Ray acquisition             |  | 50,000    

Note 9.     Stock
Plans

1989 Stock Option Plan

During 1989, the Company adopted a stock option
plan (the Plan) that provides for the grant of
incentive stock options to employees and nonstatutory stock
options to employees, consultants and nonemployee directors.

Incentive stock options and nonstatutory options
granted under the Plan have five or ten-year terms. All
incentive stock option grants and nonstatutory stock option
grants must be at prices of at least 100% and 85%, respectively,
of the fair market value of the stock on the date of grant, as
determined by the Board of Directors.

The options are exercisable as determined by the
Board of Directors. Generally, the stock options vest ratably
over a four-year period. The options expire upon the earlier of
five or ten years from the date of grant or 30 days
following termination of employment, unless specified otherwise
in the option agreement. Options to purchase 666,000 shares,
714,000 shares, and 795,000 shares were exercisable as of
September 30, 2002, 2001, and 2000, respectively.

In the event of certain changes in control of the
Company, the Plan requires that each outstanding option be
assumed or an equivalent option substituted by the successor
corporation; however, if such successor refuses to assume the
then outstanding options, the Plan provides for the full
acceleration of the exercisability of all outstanding options.

1996 Stock Option Plan

On October 18, 1996, the Company adopted a
stock option plan (the 1996 Plan) that provides for
the grant of non-statutory stock options to non-executive
employees and consultants.

Under the terms of the plan, the exercise price
and exercise period of stock option grants is determined by the
Board of Directors on the date of grant. Generally, the stock
options vest ratably over a four year period. The options expire
upon the earlier of ten years from the date of grant or
30 days following termination of employment or consultancy,
unless specified otherwise in the option agreement. Options to
purchase 1,547,000 shares, 827,000 shares, and 286,000
shares were exercisable as of September 30, 2002, 2001, and
2000, respectively.

In the event of certain changes in control of the
Company, the 1996 Plan requires that each outstanding option be
assumed or an equivalent option substituted by the successor
corporation; however, if such successor refuses to assume the
then outstanding options, the 1996 Plan provides for the full
acceleration of the exercisability of all outstanding options.

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##### Table of Contents



INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

1998 Stock Option Plan

The Board of Directors and stockholders approved
the 1998 Stock Option Plan (the 1998 Plan) in
October 1998 and January 1999, respectively. The 1998 Plan
provides for the grant of incentive stock options to employees
and nonstatutory stock options to employees, consultants and
nonemployee directors of ISSI. Stock purchase rights may also be
granted under the 1998 Plan.

Under the terms of the 1998 Plan, the exercise
price and exercise period of non-statutory stock option grants
is determined by the Board of Directors on the date of grant.
All incentive stock option grants must be at prices of at least
100% of the fair market value of the stock on the date of grant,
as determined by the Board of Directors. Generally, the stock
options vest ratably over a four year period. The options expire
upon the earlier of ten years from the date of grant or
90 days following termination of employment or consultancy,
unless specified otherwise in the option agreement. Options to
purchase 394,000 shares, 205,000 shares, and 67,000 shares were
exercisable as of September 30, 2002, 2001, and 2000,
respectively.

In the event of certain changes in control of the
Company, the 1998 Plan requires that each outstanding option be
assumed or an equivalent option substituted by the successor
corporation; however, if such successor refuses to assume the
then outstanding options, the 1998 Plan provides for the full
acceleration of the exercisability of all outstanding options.

1995 Director Stock Option Plan

The Board of Directors and stockholders approved
the 1995 Director Stock Option Plan (the Director
Plan) in December 1995 and January 1996, respectively.
Under the terms of the Director Plan, 125,000 shares of
Common Stock were authorized for issuance. Each director who has
been a non-employee director for at least six months will
automatically receive a non-statutory option to purchase
2,500 shares of Common Stock upon such directors
annual reelection to the Board by the stockholders. Options to
purchase 38,000 shares, 30,000 shares, and
32,000 shares, were exercisable at September 30, 2002,
2001, and 2000, respectively.

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##### Table of Contents



INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Purple Ray Stock Option Plan

In connection with the Companys acquisition
of Purple Ray, the Company assumed the outstanding options to
purchase shares of Purple Ray common stock and converted such
options into options to purchase approximately 163,000 shares of
the Companys stock. The options had exercise prices
ranging from $0.31 to $3.06 with a weighted average exercise
price of $2.70. No further options will be granted under this
plan. Options to purchase 106,000 shares were outstanding at
September 30, 2002 of which 11,000 shares were exercisable.

The following table summarizes activity of the
1989, 1996, 1998, Director and Purple Ray Stock Option Plans:

|                              |                              |                                       |       |                     |   |           |       |                |   |   |             |             |  |   |      |       | 
|----------------------------- | ---------------------------- | ------------------------------------- | ----- | ------------------- | - | --------- | ----- | -------------- | - | - | ----------- | ----------- |  | - | ---- | ----- | 
|                              |                              |                                       |       |                    
|                              |                              |                                       |       | Options Outstanding
|                              |                              | Options                               |       |                    
|                              |                              | Available                             |       | Number              |   |           |       | Weighted-     
|                              |                              | For                                   |       | Of                  |   | Price Per |       | Average       
|                              |                              | Grant                                 |       | Shares              |   | Share     |       | Exercise Price
|                              |                              |                                       |       |                     |   |           |       |               
|                              |                              |                                      
|                              |                              | (In thousands, except per share data)
|Balance at September 30, 1999 |                              |                                       | 2,458 |                     |   |           | 3,086 |                |   | $ | 2.56-$14.50 |             |  | $ | 4.42 |      
|                              | Authorized                   |                                       |       |                    |   |           |       |               |   |   |             |            |  |   |      |      | 
|                              | Granted                      |                                       |       | (1,550              | ) |           |       | 1,550          |   |   | $           | 5.63-$30.13 |  |   |      | 16.21 | 
|                              | Exercised                    |                                       |       |                    |   |           |       | (1,006         | ) |   | $           | 2.56-$13.81 |  |   |      | 5.43  | 
|                              | Canceled                     |                                       |       | 184                 |   |           |       | (184           | ) |   | $           | 2.56-$30.13 |  |   |      | 11.14 | 
|                              |                              |                                       |       |                     |   |           |       |                |   |   |             |             |  |   |      |      
|Balance at September 30, 2000 |                              |                                       | 1,092 |                     |   |           | 3,446 |                |   | $ | 2.56-$24.88 |             |  | $ | 9.07 |      
|                              | Authorized                   |                                       |       | 2,250               |   |           |       |               |   |   |             |            |  |   |      |      | 
|                              | Granted                      |                                       |       | (1,630              | ) |           |       | 1,630          |   |   | $           | 8.06-$17.06 |  |   |      | 10.68 | 
|                              | Exercised                    |                                       |       |                    |   |           |       | (556           | ) |   | $           | 2.56-$18.56 |  |   |      | 4.56  | 
|                              | Canceled                     |                                       |       | 413                 |   |           |       | (413           | ) |   | $           | 2.56-$24.88 |  |   |      | 18.56 | 
|                              |                              |                                       |       |                     |   |           |       |                |   |   |             |             |  |   |      |      
|Balance at September 30, 2001 |                              |                                       | 2,125 |                     |   |           | 4,107 |                |   | $ | 2.56-$23.38 |             |  | $ | 9.36 |      
|                              | Authorized                   |                                       |       | 5,500               |   |           |       |               |   |   |             |            |  |   |      |      | 
|                              | Purple Ray plan assumed      |                                       |       | 163                 |   |           |       |               |   |   |             |            |  |   |      |      | 
|                              | Purple Ray options converted |                                       |       | (163                | ) |           |       | 163            |   |   | $           | 0.31-$3.06  |  |   |      | 2.16  | 
|                              | Granted                      |                                       |       | (2,051              | ) |           |       | 2,051          |   |   | $           | 3.32-$11.97 |  |   |      | 6.72  | 
|                              | Exercised                    |                                       |       |                    |   |           |       | (394           | ) |   | $           | 0.31-$11.54 |  |   |      | 4.21  | 
|                              | Canceled                     |                                       |       | 419                 |   |           |       | (419           | ) |   | $           | 2.56-$23.28 |  |   |      | 10.87 | 
|                              |                              |                                       |       |                     |   |           |       |                |   |   |             |             |  |   |      |      
|Balance at September 30, 2002 |                              |                                       | 5,993 |                     |   |           | 5,508 |                |   | $ | 0.31-$23.38 |             |  | $ | 8.42 |      
|                              |                              |                                       |       |                     |   |           |       |                |   |   |             |             |  |   |      |      

In connection with the acquisition of Purple Ray,
the Company recorded approximately $889,000 of deferred
stock-based compensation. The amortization of deferred-stock
based compensation in connection with Purple Ray was
approximately $111,000 in fiscal 2002. In addition, for certain
options granted in 1997, the Company recognized as unearned
compensation the excess of the deemed value for accounting
purposes of the common stock issuable upon exercise of such
options over the aggregate exercise price of such options. The
deemed value for accounting purposes represents the fair value
at the date of grant. The compensation expense was amortized
ratably over the vesting period of the option. Compensation
expense amounting to $0, $18,000, and $18,000 was recognized for
the years ending September 30, 2002, 2001, and 2000,
respectively, related to the 1997 grants.

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##### Table of Contents



INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Outstanding and exercisable options presented by
price range at September 30, 2002 are as follows:

|                         |              |                     |           |                     |  |                |      |             |  |                |       |      |  |  |           |         |  |   |       |      | 
|------------------------ | ------------ | ------------------- | --------- | ------------------- |  | -------------- | ---- | ----------- |  | -------------- | ----- | ---- |  |  | --------- | ------- |  | - | ----- | ---- | 
|                         |              |                     |           |                    
|                         |              | Options Outstanding |           | Options Exercisable
|                         |              |                     |           |                    
|                         |              | Number of           |           | Wtd. Average        |  |                |      | Number of   |  |               
|                         |              | Options             |           | Remaining Life      |  | Wtd. Average   |      | Options     |  | Wtd. Average  
|Range of Exercise Prices |              | Outstanding         |           | (Years)             |  | Exercise Price |      | Exercisable |  | Exercise Price
|                         |              |                     |           |                     |  |                |      |             |  |               
|$ 0.31   3.32           |              |                     | 1,373,000 |                     |  |                | 7.48 |             |  | $              | 3.01  |      |  |  | 868,000   |         |  | $ | 2.95  |     
|                         | 3.60   6.75 |                     |           | 1,195,000           |  |                |      | 8.65        |  |                |       | 6.08 |  |  |           | 452,000 |  |   |       | 5.94 | 
|                         | 6.88  11.19 |                     |           | 1,461,000           |  |                |      | 8.65        |  |                |       | 9.34 |  |  |           | 426,000 |  |   |       | 9.57 | 
|11.24  18.38            |              |                     | 1,097,000 |                     |  |                | 8.25 |             |  |                | 12.90 |      |  |  | 566,000   |         |  |   | 13.14 |     
|18.56  23.38            |              |                     | 382,000   |                     |  |                | 7.55 |             |  |                | 18.80 |      |  |  | 344,000   |         |  |   | 18.71 |     
|                         |              |                     |           |                     |  |                |      |             |  |                |       |      |  |  |           |         |  |   |       |     
|$ 0.31  23.38           |              |                     | 5,508,000 |                     |  |                | 8.18 |             |  | $              | 8.42  |      |  |  | 2,656,000 |         |  | $ | 8.73  |     
|                         |              |                     |           |                     |  |                |      |             |  |                |       |      |  |  |           |         |  |   |       |     

Employee Stock Purchase Plan

Effective February 1995, the Company adopted an
Employee Stock Purchase Plan (the Purchase Plan)
under Section 423 of the Internal Revenue Code. Under the
Companys Purchase Plan, eligible employees may purchase
shares of the Companys common stock through payroll
deductions. The shares are purchased at a price equal to 85% of
the lesser of the fair value of the Companys common stock
as of the first day of the 24-month offering period or the last
day of each six-month purchase period. During fiscal 2002,
155,000 shares were issued under the plan. As of
September 30, 2002, 922,000 shares were available under the
plan for future issuance.

Stock-Based Compensation

As permitted under FAS 123, the Company has
elected to follow APB 25 and related Interpretations, in
accounting for stock-based awards to employees. Under
APB 25, the Company generally recognized no compensation
expense with respect to such awards.

Pro forma information regarding net income
(loss) and earnings (loss) per share is required by
FAS 123 for awards granted or modified after
September 30, 1995, as if the Company had accounted for its
stock-based awards to employees under the fair value method of
FAS 123. The fair value of the Companys stock-based
awards to employees was estimated using a Black-Scholes option
pricing model. The Black-Scholes model requires the input of
highly subjective assumptions including the expected stock price
volatility. Because the Companys stock-based awards to
employees 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 managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its stock-based awards to employees. The fair value of the
Companys stock-based awards to employees was estimated
assuming no expected dividends and the following
weighted-average assumptions:

|                        |  |               |      |      |  |      |      |      |  |      |      |      |  |  |      |   |  |  |      |   |  |  |      |  
|----------------------- |  | ------------- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|                        |  |               |      |     
|                        |  | Stock Options |      | ESPP
|                        |  |               |      |     
|                        |  | 2002          |      | 2001 |  | 2000 |      | 2002 |  | 2001 |      | 2000
|                        |  |               |      |      |  |      |      |      |  |      |      |     
|Expected life (years)   |  |               | 5.0  |      |  |      | 5.0  |      |  |      | 5.0  |      |  |  | 0.5  |   |  |  | 0.5  |   |  |  | 0.5  |  
|Expected volatility     |  |               | 0.92 |      |  |      | 0.93 |      |  |      | 0.91 |      |  |  | 0.78 |   |  |  | 1.14 |   |  |  | 1.10 |  
|Risk-free interest rate |  |               | 4.12 | %    |  |      | 4.82 | %    |  |      | 6.32 | %    |  |  | 1.73 | % |  |  | 4.38 | % |  |  | 5.91 | %

The weighted-average fair value of options
granted at market value during fiscal 2002, 2001, and 2000 was
$5.43, $6.52, and $9.57 per share, respectively. The
weighted-average fair value of employee stock purchase rights
during fiscal 2002, 2001, and 2000 was $4.37, $7.42, and $4.81
per share, respectively.

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##### Table of Contents



INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For pro forma purposes, the estimated fair value
of the Companys stock-based awards to employees is
amortized over the options vesting period (for options)
and the six-month purchase period (for stock purchases under the
ESPP). The Companys pro forma information for the years
ended September 30, is as follows (in thousands, except for
income (loss) per share information):

|                                |             |      |   |         |   |      |   |        |   |  |   |        | 
|------------------------------- | ----------- | ---- | - | ------- | - | ---- | - | ------ | - |  | - | ------ | 
|                                |             | 2002 |   | 2001    |   | 2000
|                                |             |      |   |         |   |     
|Net income (loss)               |             |      |   |         |   |      |   |        |   |  |   |       
|                                | As reported |      | $ | (67,540 | ) |      | $ | 1,115  |   |  | $ | 25,026 | 
|                                | Pro forma   |      | $ | (76,785 | ) |      | $ | (5,593 | ) |  | $ | 17,981 | 
|Basic income (loss) per share   |             |      |   |         |   |      |   |        |   |  |   |       
|                                | As reported |      | $ | (2.49   | ) |      | $ | 0.04   |   |  | $ | 1.07   | 
|                                | Pro forma   |      | $ | (2.84   | ) |      | $ | (0.21  | ) |  | $ | 0.77   | 
|Diluted income (loss) per share |             |      |   |         |   |      |   |        |   |  |   |       
|                                | As reported |      | $ | (2.49   | ) |      | $ | 0.04   |   |  | $ | 0.96   | 
|                                | Pro forma   |      | $ | (2.84   | ) |      | $ | (0.21  | ) |  | $ | 0.69   | 

Due to the subjective nature of the assumptions
used in the Black-Scholes model, the proforma net income
(loss) and proforma net income (loss) per share may
not be indicative of the effects on net income (loss) and
net income (loss) per share in future years.

Note 10.     1998
ISSI-Taiwan Stock Plan

On October 29, 1998, the Company adopted the
1998 ISSI-Taiwan Stock Plan (the Taiwan Stock Plan)
that provides for the grant of non-statutory stock options in
the common stock of ICSI to the employees, consultants, and
directors of the Company. Upon exercise, if any, the Company
would sell its shares in ICSI to the optionee. Under the terms
of the Taiwan Stock Plan, the maximum aggregate number of shares
of ICSI stock which may be optioned and sold was
12.0 million. The plan was terminated in January 2001 upon
the completion of ICSIs initial public offering in Taiwan.

During fiscal 2001 and fiscal 2000, options to
purchase 6,910,000 and 3,110,000 shares of ICSI stock were
exercised, respectively. At September 30, 2002 and 2001,
there were no options to purchase shares of ICSI stock
outstanding.

45



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##### Table of Contents



INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 11.     Income
Taxes

The provision/(benefit) for income taxes
consisted of the following for the years ended September 30:

|                          |         |                |        |        |   |      |     |     |  |   |     |     | 
|------------------------- | ------- | -------------- | ------ | ------ | - | ---- | --- | --- |  | - | --- | --- | 
|                          |         | 2002           |        | 2001   |   | 2000
|                          |         |                |        |        |   |     
|                          |         |               
|                          |         | (In thousands)
|Current:                  |         |                |        |        |   |      |     |     |  |   |     |    
|                          | Federal |                | $      | (3,250 | ) |      | $   | 150 |  |   | $   | 300 | 
|                          | State   |                |        |       |   |      |     |    |  |   |     |    | 
|                          | Foreign |                |        | 30     |   |      |     |    |  |   |     | 380 | 
|                          |         |                |        |        |   |      |     |     |  |   |     |    
|Total current             |         | $              | (3,220 | )      |   | $    | 150 |     |  | $ | 680 |    
|Deferred:                 |         |                |        |        |   |      |     |     |  |   |     |    
|                          | Federal |                |        |       |   |      |     |    |  |   |     |    | 
|                          | State   |                |        |       |   |      |     |    |  |   |     |    | 
|                          | Foreign |                |        |       |   |      |     |    |  |   |     |    | 
|                          |         |                |        |        |   |      |     |     |  |   |     |    
|Total deferred            |         |                |       |        |   |      |    |     |  |   |    |    
|                          |         |                |        |        |   |      |     |     |  |   |     |    
|Total provision (benefit) |         | $              | (3,220 | )      |   | $    | 150 |     |  | $ | 680 |    
|                          |         |                |        |        |   |      |     |     |  |   |     |    

Pretax income (loss) from foreign operations was
approximately $(3,532,000), $(940,000), and $572,000, for 2002,
2001, and 2000, respectively.

The Companys provision (benefit) for income
taxes differs from the amount computed by applying the U.S.
federal statutory rate (35%) to income before taxes and minority
interest as follows for the years ended September 30:

|                                                             |                 |                |         |        |   |      |        |     |  |   |        |     | 
|------------------------------------------------------------ | --------------- | -------------- | ------- | ------ | - | ---- | ------ | --- |  | - | ------ | --- | 
|                                                             |                 | 2002           |         | 2001   |   | 2000
|                                                             |                 |                |         |        |   |     
|                                                             |                 |               
|                                                             |                 | As adjusted   
|                                                             |                 | (In thousands)
|Income taxes computed at the U.S. federal
    statutory rate |                 | $              | (22,228 | )      |   | $    | (152   | )   |  | $ | 5,206  |    
|Unbenefitted foreign losses                                  |                 |                | 1,236   |        |   |      |       |     |  |   |       |    
|Valuation on deferred tax assets                             |                 |                | 20,276  |        |   |      | 16,255 |     |  |   |       |    
|Net operating loss utilized                                  |                 |                |        |        |   |      | (6,469 | )   |  |   | (4,802 | )  
|R&D and foreign tax credits                                  |                 |                | (2,403  | )      |   |      | (4,566 | )   |  |   |       |    
|Reversal of taxes for foreign operations                     |                 |                |        |        |   |      | (4,996 | )   |  |   |       |    
|Other individually immaterial items                          |                 |                | (101    | )      |   |      | 78     |     |  |   | 276    |    
|                                                             |                 |                |         |        |   |      |        |     |  |   |        |    
|                                                             | Total provision |                | $       | (3,220 | ) |      | $      | 150 |  |   | $      | 680 | 
|                                                             |                 |                |         |        |   |      |        |     |  |   |        |    

As of September 30, 2002 the Company has
federal and state net operating loss carryforwards of
approximately $50 million and $25 million,
respectively. The Company has federal research and development
credit carryforwards and foreign tax credit carryforwards of
approximately $2.0 million and $1.8 million
respectively. The Company also has state research tax credit
carryforwards of approximately $1.5 million. The federal
net operating loss and foreign tax credits will expire at
various dates beginning in 2004 through 2022, if not utilized.
The California research and development credits can be carried
forward indefinitely.

Utilization of the net operating loss
carryforwards and credits may be subject to a substantial annual
limitation due to the ownership change limitations provided by
the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration
of net operating losses and credits before utilization.

46



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##### Table of Contents



INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amount
used for income tax purposes. Significant components of deferred
taxes consisted of the following at September 30:

|                          |                                                    |                |        |         |   |   |        |         |  
|------------------------- | -------------------------------------------------- | -------------- | ------ | ------- | - | - | ------ | ------- | -
|                          |                                                    | 2002           |        | 2001   
|                          |                                                    |                |        |        
|                          |                                                    |               
|                          |                                                    | (In thousands)
|Deferred tax assets:      |                                                    |                |        |         |   |   |        |        
|                          | Depreciation                                       |                | $      | 957     |   |   | $      | 1,068   |  
|                          | Inventory and other valuation reserves             |                |        | 19,100  |   |   |        | 19,985  |  
|                          | Accrued expenses                                   |                |        | 2,493   |   |   |        | 2,123   |  
|                          | Federal and state credit carryforwards             |                |        | 4,811   |   |   |        | 2,408   |  
|                          | Federal and state net operating loss carryforwards |                |        | 18,413  |   |   |        | 2,170   |  
|                          | Other, net                                         |                |        | 410     |   |   |        | 489     |  
|                          |                                                    |                |        |         |   |   |        |        
|Subtotal                  |                                                    |                | 46,184 |         |   |   | 28,243 |        
|                          | Valuation allowance                                |                |        | (41,140 | ) |   |        | (20,214 | )
|                          |                                                    |                |        |         |   |   |        |        
|Total deferred tax assets |                                                    | $              | 5,044  |         |   | $ | 8,029  |        
|Deferred tax liabilities: |                                                    |                |        |         |   |   |        |        
|                          | Equity investment basis difference                 |                |        | (5,044  | ) |   |        | (8,029  | )
|                          |                                                    |                |        |         |   |   |        |        
|Net deferred tax assets   |                                                    | $              | 0      |         |   | $ | 0      |        
|                          |                                                    |                |        |         |   |   |        |        

Management has established a valuation allowance
for a portion of the gross deferred tax assets based on
managements expectations of future taxable income and the
actual taxable income during the three years ended
September 30, 2002. The valuation allowance for deferred
tax assets increased by $20,920,000 in 2002, and increased by
$5,923,000 in 2001. Approximately $6,850,000 of the valuation
allowance is attributable to tax benefits of stock option
deductions which will be credited to paid in capital when
recognized.

Note 12.     Per
Share Data

The calculations of basic and diluted net income
(loss) per share for each of the three years ended
September 30, 2002 are as follows:

|                                                                 |                                            |                                       |         |        |  |      |        |        |  |   |        |        | 
|---------------------------------------------------------------- | ------------------------------------------ | ------------------------------------- | ------- | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                                 |                                            |                                      
|                                                                 |                                            | Years Ended September 30,            
|                                                                 |                                            |                                      
|                                                                 |                                            | 2002                                  |         | 2001   |  | 2000
|                                                                 |                                            |                                       |         |        |  |     
|                                                                 |                                            |                                      
|                                                                 |                                            | (In thousands, except per share data)
|Numerator for basic and diluted net income
    (loss) per share: |                                            |                                       |         |        |  |      |        |        |  |   |        |       
|Net income (loss)                                                |                                            | $                                     | (67,540 | )      |  | $    | 1,115  |        |  | $ | 25,026 |       
|                                                                 |                                            |                                       |         |        |  |      |        |        |  |   |        |       
|Denominator for basic net income (loss) per
    share:           |                                            |                                       |         |        |  |      |        |        |  |   |        |       
|                                                                 | Weighted average common shares outstanding |                                       |         | 27,084 |  |      |        | 26,183 |  |   |        | 23,357 | 
|Dilutive stock options                                           |                                            |                                       |        |        |  |      | 1,587  |        |  |   | 2,323  |       
|Dilutive warrants                                                |                                            |                                       |        |        |  |      | 18     |        |  |   | 376    |       
|                                                                 |                                            |                                       |         |        |  |      |        |        |  |   |        |       
|Denominator for diluted net income
    (loss) per share          |                                            |                                       | 27,084  |        |  |      | 27,788 |        |  |   | 26,056 |       
|                                                                 |                                            |                                       |         |        |  |      |        |        |  |   |        |       
|Basic net income (loss) per share                                |                                            | $                                     | (2.49   | )      |  | $    | 0.04   |        |  | $ | 1.07   |       
|                                                                 |                                            |                                       |         |        |  |      |        |        |  |   |        |       
|Diluted net income (loss) per share                              |                                            | $                                     | (2.49   | )      |  | $    | 0.04   |        |  | $ | 0.96   |       
|                                                                 |                                            |                                       |         |        |  |      |        |        |  |   |        |       

47



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##### Table of Contents



INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The above diluted calculation for the years ended
September 30, 2002, 2001, and 2000, does not include
approximately 5,508,000, 779,000, and 101,000 shares
attributable to options as of September 30, 2002, 2001, and
2000, respectively, as their impact would be anti-dilutive.

Note
13.     Geographic and Segment
Information

The Company has one operating segment, which is
to design, develop, and market high-performance SRAM, DRAM, and
other memory products. The following table summarizes the
Companys operations in different geographic areas:

|                  |                         |                           |   |        |  |      |   |         |  |  |   |         | 
|----------------- | ----------------------- | ------------------------- | - | ------ |  | ---- | - | ------- |  |  | - | ------- | 
|                  |                         |                          
|                  |                         | Years Ended September 30,
|                  |                         |                          
|                  |                         | 2002                      |   | 2001   |  | 2000
|                  |                         |                           |   |        |  |     
|                  |                         |                          
|                  |                         | (In thousands)           
|Net Sales         |                         |                           |   |        |  |      |   |         |  |  |   |        
|                  | United States           |                           | $ | 20,752 |  |      | $ | 77,823  |  |  | $ | 72,952  | 
|                  | China                   |                           |   | 14,015 |  |      |   | 9,728   |  |  |   |        | 
|                  | Hong Kong               |                           |   | 7,512  |  |      |   | 10,751  |  |  |   | 21,671  | 
|                  | Taiwan                  |                           |   | 8,913  |  |      |   | 1,045   |  |  |   | 3,112   | 
|                  | Asia/ Pacific other     |                           |   | 8,798  |  |      |   | 13,529  |  |  |   | 9,695   | 
|                  | Europe                  |                           |   | 10,084 |  |      |   | 38,076  |  |  |   | 31,524  | 
|                  | Canada                  |                           |   | 374    |  |      |   | 1,096   |  |  |   | 2,969   | 
|                  |                         |                           |   |        |  |      |   |         |  |  |   |        
|                  | Total net sales         |                           | $ | 70,448 |  |      | $ | 152,048 |  |  | $ | 141,923 | 
|                  |                         |                           |   |        |  |      |   |         |  |  |   |        
|Long-lived assets |                         |                           |   |        |  |      |   |         |  |  |   |        
|                  | United States           |                           | $ | 7,942  |  |      | $ | 6,634   |  |  | $ | 5,338   | 
|                  | Hong Kong               |                           |   | 691    |  |      |   | 566     |  |  |   | 91      | 
|                  | China                   |                           |   | 1,771  |  |      |   | 463     |  |  |   |        | 
|                  | Other foreign locations |                           |   | 269    |  |      |   |        |  |  |   |        | 
|                  |                         |                           |   |        |  |      |   |         |  |  |   |        
|                  | Total long-lived assets |                           | $ | 10,673 |  |      | $ | 7,663   |  |  | $ | 5,429   | 
|                  |                         |                           |   |        |  |      |   |         |  |  |   |        

Revenues are attributed to countries based on the
location of customers.

Long-lived assets by geographic area are those
assets used in the Companys operations in each area.

Net foreign currency transaction losses of
approximately $47,000, $5,000, and $40,000 for the years ended
September 30, 2002, 2001, and 2000, respectively, were
primarily the result of the settlement of intercompany
transactions and are included in the determination of net income
(loss).

48



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##### Table of Contents



INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|         |                              
|-------- | -----------------------------
|Note 14. | Commitments and Contingencies

Patents and Licenses

In the semiconductor industry, it is not unusual
for companies to receive notices alleging infringement of
patents or other intellectual property rights of others. The
Company has been, and from time-to-time expects to be, notified
of claims that it may be infringing patents, maskwork rights or
copyrights owned by third parties. If it appears necessary or
desirable, the Company may seek licenses under patents that it
is alleged to be infringing. Although patent holders commonly
offer such licenses, licenses may not be offered and the terms
of any offered licenses may not be acceptable to the Company.
The failure to obtain a license under a key patent or
intellectual property right from a third party for technology
used by the Company could cause it to incur substantial
liabilities and to suspend the manufacture of the products
utilizing the invention or to attempt to develop non-infringing
products, any of which could materially and adversely affect the
Companys business and operating results. Furthermore,
there can be no assurance that the Company will not become
involved in protracted litigation regarding its alleged
infringement of third party intellectual property rights or
litigation to assert and protect its patents or other
intellectual property rights. Any litigation relating to patent
infringement or other intellectual property matters could result
in substantial cost and diversion of the Companys
resources that could materially and adversely affect the
Companys business and operating results.

Litigation

On September 21, 2001, the U.S. Court of
Appeals for the Federal Circuit issued a ruling favorable to the
Company regarding an April 1998 antidumping duty order on
imports of SRAMs from Taiwan. Subsequently, the antidumping case
was terminated, the antidumping order revoked, and the
Companys cash deposits were returned during fiscal 2002.
As a result of the termination of the antidumping case, the
Company reversed amounts previously expensed to cost of goods
sold of approximately $5.2 million of which approximately
$3.6 million had been cash payments and $1.6 million
was accrued as a liability. At September 30, 2002, all
refunds due the Company had been received.

Operating Leases

The Company leases its facilities under operating
lease agreements that expire at various dates through 2007. The
Company entered into a ten year lease effective December 1,
1996 for its headquarters facility in Santa Clara, California.
The Company subleases approximately 24,000 square feet and 9,000
square feet to third parties whose subleases expire in March
2003 and September 2003, respectively. Minimum rental
commitments under these leases are as follows (in thousands):

|                                               |  |   |       | 
|---------------------------------------------- |  | - | ----- | 
|2003 (net of expected sublease income of $318) |  | $ | 1,358 | 
|2004                                           |  |   | 1,589 | 
|2005                                           |  |   | 1,627 | 
|2006                                           |  |   | 1,600 | 
|2007                                           |  |   | 613   | 
|                                               |  |   |       | 
|Total minimum rental commitments               |  | $ | 6,787 | 
|                                               |  |   |       | 

Total rental expense for the years ended
September 30, 2002, 2001, and 2000, was approximately
$1,329,000 (net of sublease income of $550,000), $1,164,000 (net
of sublease income of $584,000), and $1,034,000 (net of sublease
income of $634,000), respectively.

49



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##### Table of Contents



INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Commitments to Wafer Fabrication
Facilities

In August 2000, the Company made a commitment for
an equity investment in SMIC, the first 8-inch wafer foundry in
the Peoples Republic of China. In fiscal 2002, the Company
made investments totaling $21.2 million in SMIC, bringing
its total investment in this foundry as of September 30,
2002, to $40.0 million. The Company has no further
commitments to SMIC for additional equity investments at this
time. The Company has received certain capacity commitments from
SMIC.

At September 30, 2002, the Company had a
remaining non-cancelable purchase commitment to a wafer foundry
for approximately $1,293,000 by June 30, 2003. The Company
purchased approximately $332,000 under this commitment in fiscal
2002.



|         |                      
|-------- | ---------------------
|Note 15. | Employee Benefit Plan

In August 1992, the Company established a defined
contribution retirement plan with 401(k) plan features. The plan
covers all United States employees 18 years and older. Employees
may make contributions through payroll withholdings of up to the
lesser of $11,000 ($12,000 for participants older than 50) or
20% of their annual compensation for 2002. The Company elected
to make no contributions during the years ended
September 30, 2002, 2001, and 2000. Administrative expenses
relating to the plan are insignificant.



|         |                                   
|-------- | ----------------------------------
|Note 16. | Supplemental Cash Flow Information

|                                          |  |                           |       |      |  |      |       |  |  |   |     | 
|----------------------------------------- |  | ------------------------- | ----- | ---- |  | ---- | ----- |  |  | - | --- | 
|                                          |  |                          
|                                          |  | Years Ended September 30,
|                                          |  |                          
|                                          |  | 2002                      |       | 2001 |  | 2000
|                                          |  |                           |       |      |  |     
|                                          |  |                          
|                                          |  | (In thousands)           
|Cash paid for interest                    |  | $                         | 24    |      |  | $    | 42    |  |  | $ | 134 | 
|Cash paid for income taxes                |  |                           | 1,741 |      |  |      | 2,209 |  |  |   | 354 | 
|Fixed assets acquired under capital lease |  |                           |      |      |  |      |      |  |  |   | 600 | 
|Stock issued in acquisition of Purple Ray |  |                           | 6,879 |      |  |      |      |  |  |   |    | 
|Assets acquired from Purple Ray           |  |                           | 730   |      |  |      |      |  |  |   |    | 
|Liabilities assumed from Purple Ray       |  |                           | 701   |      |  |      |      |  |  |   |    | 

Note
17.     Transactions

In August 2000, the Company made a commitment for
an equity investment in SMIC, the first 8-inch wafer foundry in
the Peoples Republic of China. As of September 30,
2002, the Company had invested $40 million in SMIC. The
Company has no further commitments to SMIC for additional equity
investments at this time.

In December 2000, the Company sold its investment
of $23.5 million in WaferTech, LLC to Taiwan Semiconductor
Manufacturing Corporation for $40.7 million resulting in a
prE-tax gain of $17.2 million.

On January 16, 2001, ICSI completed an
initial public offering in Taiwan. As a result of shares of ICSI
sold by the Company in the initial public offering and
subsequently, the Company received gross proceeds of
approximately $10.7 million in fiscal 2001 resulting in a
prE-tax gain of $8.2 million.

In February 2001, the Company, along with other
shareholders, sold a portion of its ownership in NexFlash to
Winbond International Corporation for $6.2 million,
resulting in a prE-tax gain of $5.3 million. As a result of
this transaction, the Companys ownership percentage of
NexFlash decreased from approximately 32% to approximately 14%.
Subsequent to the completion of the transaction, the Company
accounts for NexFlash on the cost basis.

50



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##### Table of Contents



INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In February 2001, the Company invested
$3.0 million for approximately 22% of E-CMOS located in
Hsin-Chu, Taiwan, R.O.C. In fiscal 2002, the Company invested an
additional $0.6 million in E-CMOS. At September 30,
the Company owned approximately 26% of E-CMOS. The Company is
accounting for E-CMOS on the equity basis and recording its
percentage gain or loss of their results of operations on a one
quarter lag.

On April 19, 2002, the Company entered into
a Product Collaboration Agreement with Signia Technologies, Inc.
(Signia), pursuant to which the Company has the
right to make certain products and derivatives of products of
Signia. In addition, on April 19, 2002, the Company
purchased $1,000,000 in aggregate principal amount of Secured
Convertible Promissory Notes of Signia (the Notes).

On July 19, 2002, the Company entered into a
Series B Preferred Stock and Warrant Purchase Agreement
(the Purchase Agreement), an Amended and Restated
Shareholders Agreement and an Amended and Restated Right
of First Refusal and Co-Sale Agreement with Signia, pursuant to
which the Company purchased 3,000,000 shares of Series B
Preferred Stock and warrants to purchase 3,000,000 shares of
Series B Preferred Stock for $1,500,000, including the
conversion of the principal and accrued interest on the Notes.
Pursuant to the Purchase Agreement, the Company is obligated to
purchase another 3,000,000 shares of Series B Preferred
Stock and warrants to purchase 3,000,000 shares of Series B
Preferred Stock for $1,500,000 if Signia achieves certain
milestones with respect to its BlueTooth product by
January 19, 2003.



|         |                           
|-------- | --------------------------
|Note 18. | Related Party Transactions

For the years ended September 30, 2002,
September 30, 2001 and September 30, 2000, the Company sold
approximately $1,094,000, $188,000 and $921,000, respectively,
of memory products to ICSI. The Company currently has
approximately a 29% ownership interest in ICSI. The
Companys Chairman and Chief Executive Officer
(CEO), Jimmy S.M. Lee, is a director of ICSI. The
Company also provides services and licenses certain products to
ICSI. At September 30, 2002 and 2001, the Company had an
accounts receivable balance from ICSI of approximately $560,000
and $327,000, respectively.

The Company purchases goods and contract
manufacturing services from ICSI. For the years ended
September 30, 2002, September 30, 2001 and
September 30, 2000, purchases of goods and services were
approximately $3,309,000, $12,815,000 and $74,001,000,
respectively. The Company also pays ICSI certain product
development costs, license fees and royalties. For fiscal 2002,
these charges totaled approximately $2,905,000. At
September 30, 2002 and 2001, the Company had an accounts
payable balance to ICSI of approximately $777,000 and $551,000,
respectively.

The Company provides NexFlash various
administrative support services for which it is reimbursed. In
addition, the Company received approximately $0, $183,000 and
$180,000 in sublease income from NexFlash in the years ended
September 30, 2002, 2001 and 2000, respectively (See Note
14). For the year ended September 30, 2000, the Company
sold approximately $208,000 of memory products to NexFlash. The
Company currently has approximately a 14% ownership interest in
NexFlash. The Companys Chairman and CEO, Jimmy
S.M. Lee, is a director of NexFlash. At September 30,
2002 and 2001, the Company had an accounts receivable balance
from NexFlash of approximately $0 and $81,000, respectively.

The Company purchases goods and services from
NexFlash. For the years ended September 30, 2002,
September 30, 2001 and September 30, 2000, purchases
of goods and services were approximately $4,000, $0 and
$391,000, respectively. At September 30, 2002 and 2001, the
Company had an accounts payable balance to NexFlash of
approximately $4,000 and $0, respectively.

The Company provides goods and services to
GetSilicon in which the Company currently has approximately a
17% ownership interest. The Companys Chairman and CEO,
Jimmy S.M. Lee, was the Chairman of GetSilicon until
May 14, 2002 and continues to serve as a director. For the
years ended September 30, 2002, September 30, 2001 and
September 30, 2000, the Company provided goods and services

51



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INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of approximately $140,000, $559,000 and $595,000,
respectively, to GetSilicon. At September 30, 2002 and
2001, the Company had an accounts receivable balance from
GetSilicon of approximately $73,000 and $30,000, respectively.

The Company engages GetSilicon for
business-to-business data exchange and professional services.
For the years ended September 30, 2002 and
September 30, 2001, the purchase of services under this
agreement was approximately $540,000 and $259,000, respectively.
At September 30, 2002 and 2001, the Company had an accounts
payable balance to GetSilicon of approximately $317,000 and
$32,000, respectively.

For the years ended September 30, 2002 and
September 30, 2001, the Company sold approximately $418,000
and $292,000, respectively, of memory products to E-CMOS in
which the Company currently has approximately a 26% ownership
interest. The Companys Chairman and CEO, Jimmy S.M. Lee,
is the Chairman of E-CMOS. At September 30, 2002 and 2001,
the Company had an accounts receivable balance from E-CMOS of
approximately $12,000 and $159,000, respectively.

The Company receives administrative support
services and reimburses E-CMOS for expenses incurred on its
behalf. At September 30, 2002 and 2001, the Company had an
accounts payable balance to E-CMOS of approximately $434,000 and
$271,000, respectively.

In fiscal 2002, the Company sold 100,000 shares
of its holdings in E-CMOS common stock to a relative of the
Companys Chairman, Jimmy S.M. Lee, for approximately
$37,000. No gain or loss was recognized in regards to this
transaction.

For the year ended September 30, 2002, the
Company sold approximately $1,033,000 of memory products to
Marubun USA Corporation (Marubun). Hide L. Tanigami,
a director of the Company, is the president and chief executive
officer of Marubun. At September 30, 2002, the Company had
an accounts receivable balance from Marubun of approximately
$301,000.

The Company purchases goods from SMIC in which
the Company has less than a 4% ownership interest. The
Companys Chairman and CEO, Jimmy S.M. Lee, is a director
of SMIC. For the year ended September 30, 2002, purchases
of goods from SMIC were approximately $5,187,000. At
September 30, 2002, the Company had an accounts payable
balance to SMIC of approximately $2,373,000.

Note 19.     Acquisition
of Purple Ray

On February 13, 2002, the Company acquired
all of the outstanding shares of Purple Ray, Inc. (Purple
Ray) through a merger of Purple Ray with and into ISSI
pursuant to the terms of an Agreement and Plan of Reorganization
dated January 23, 2002. The results of Purple Rays
operations have been included in the consolidated financial
statements since that date.

Purple Ray was a privately held research and
development stage company developing network search engine and
content addressable memory integrated circuits. The Company
acquired Purple Ray primarily to diversify its product offerings
and to acquire an existing design team rather than trying to
develop its own capability internally.

The assets of Purple Ray consisted primarily of
intellectual property. The transaction was accounted for using
the purchase method of accounting. The total estimated purchase
price of $7.1 million consisted of the fair market value of
ISSIs common stock issued of $5.2 million, the fair
value of options to purchase Purple Ray common stock assumed by
ISSI of approximately $1.7 million and estimated
transaction costs of $0.2 million. The value of the shares
issued was based on the three-day average closing price leading
up to and including the February 13, 2002 closing.
Approximately 50,000 additional shares of ISSI common stock
may be issued contingent upon meeting certain milestones.

52



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INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The purchase price allocation is as follows (in
thousands):

|                      |                       |                                 |     |       |       | 
|--------------------- | --------------------- | ------------------------------- | --- | ----- | ----- | 
|Net tangible assets   |                       | $                               | 290 |      
|Intangible assets:    |                       |                                 |     |      
|                      | In-process technology |                                 |     | 4,689 |      
|                      | Patent applications   |                                 |     | 963   |      
|                      | Assembled workforce   |                                 |     | 248   |      
|Unearned compensation |                       |                                 | 889 |      
|                      |                       |                                 |     |      
|                      |                       | Total purchase price allocation |     | $     | 7,079 | 
|                      |                       |                                 |     |      

The intangible assets, other than the in-process
technology, are being amortized over lives of three to five
years. As of September 30, 2002, the net carrying value of
the assembled workforce was approximately $196,000.

ISSI recorded deferred compensation of
approximately $0.9 million at the acquisition date,
representing the intrinsic value of unvested Purple Ray options
assumed. The deferred compensation is being amortized over the
option vesting period of five years.

The in-process technology acquired from Purple
Ray was valued at $4.7 million. The write-off of the
in-process technology acquired impacted the Companys
statement of operations in the quarter ended March 31,
2002. The value of the acquired in-process technology represents
the value of technology in the development stage that had not
yet reached technological feasibility. In reaching this
determination, the Company used a present value net income
approach and considered the stage of development of each
product, the time and resources needed to complete each product,
and the expected income and associated risks. The rate utilized
to discount the net cash flows to their present value was based
on an estimated cost of capital calculation. We utilized a
discount rate of 35% for the in-process technology, which we
believe is commensurate with the inherent risk and the expected
growth of the in-process products.

In September 2002, the Company wrote-off the
unamortized balance of the patent applications of approximately
$0.8 million. The charge is included in research and
development expenses. The write-off was made as it became
evident, based on anticipated cash flows, that the product line
had not and would not meet the goals that the Company had at the
time the acquisition was made and that the Company would not
recover any value for the patent applications.

Pro forma
Financial Information

The pro forma financial information presented
below is presented as if the acquisition of Purple Ray had
occurred at the beginning of fiscal 2001. The pro forma
statements of operations for the fiscal years ended
September 30, 2002 and September 30, 2001, include the
historical results of the Company and Purple Ray plus the effect
of recurring amortization of the related intangibles and
unearned compensation. Such pro

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INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

forma results do not purport to be indicative of
what would have occurred had the acquisition been made as of
those dates or the results which may occur in the future. The
pro forma financial results are as follows:

|                                             |  |                        |         |      |  |   |         |  
|-------------------------------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | -
|                                             |  |                       
|                                             |  | Fiscal Years Ended    
|                                             |  | September 30,         
|                                             |  |                       
|                                             |  | 2002                   |         | 2001
|                                             |  |                        |         |     
|                                             |  |                       
|                                             |  | (In thousands,        
|                                             |  | except per share data)
|Net sales                                    |  | $                      | 70,448  |      |  | $ | 152,048 |  
|                                             |  |                        |         |      |  |   |         |  
|Net income (loss)                            |  | $                      | (63,656 | )    |  | $ | (1,348  | )
|                                             |  |                        |         |      |  |   |         |  
|Basic net income (loss) per share            |  |                        | (2.34   | )    |  |   | (0.05   | )
|                                             |  |                        |         |      |  |   |         |  
|Shares used in basic per share calculation   |  |                        | 27,246  |      |  |   | 26,621  |  
|                                             |  |                        |         |      |  |   |         |  
|Diluted net income (loss) per share          |  |                        | (2.34   | )    |  |   | (0.05   | )
|                                             |  |                        |         |      |  |   |         |  
|Shares used in diluted per share calculation |  |                        | 27,246  |      |  |   | 26,621  |  
|                                             |  |                        |         |      |  |   |         |  



|         |                               
|-------- | ------------------------------
|Note 20. | Investment in ICSI (Unaudited)

The following summarizes financial information
for ICSI at September 30:

|                                                |  |                |        |      |  |   |        | 
|----------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                                                |  | 2002           |        | 2001
|                                                |  |                |        |     
|                                                |  |               
|                                                |  | (In thousands)
|Current assets                                  |  | $              | 77,026 |      |  | $ | 76,624 | 
|Property, plant, and equipment and other assets |  |                | 45,810 |      |  |   | 51,345 | 
|Current liabilities                             |  |                | 39,516 |      |  |   | 34,181 | 
|Long-term debt                                  |  |                | 18,664 |      |  |   | 9,352  | 

The following summarizes financial information
for ICSI, for the twelve months ended September 30, 2002,
September 30, 2001 and September 30, 2000 (in
thousands).

|                    |  |                    |         |                    |  |                    |         |  |  |   |         | 
|------------------- |  | ------------------ | ------- | ------------------ |  | ------------------ | ------- |  |  | - | ------- | 
|                    |  | Twelve Months      |         | Twelve Months      |  | Twelve Months     
|                    |  | Ended              |         | Ended              |  | Ended             
|                    |  | September 30, 2002 |         | September 30, 2001 |  | September 30, 2000
|                    |  |                    |         |                    |  |                   
|Net sales           |  | $                  | 74,820  |                    |  | $                  | 113,514 |  |  | $ | 169,994 | 
|Gross profit (loss) |  |                    | (3,411  | )                  |  |                    | 28,446  |  |  |   | 55,575  | 
|Net income (loss)   |  |                    | (18,773 | )                  |  |                    | 11,379  |  |  |   | 37,010  | 

In the June 2002 quarter, the Company invested
approximately $3.2 million in convertible debentures issued
by ICSI. The Company classifies this investment as
available-for-sale. ICSI raised approximately $17 million
with the proceeds to be used for general working capital
purposes. Key terms of the issuance included: 5 year term,
0% coupon rate, convertible into ICSI common stock after
90 days, four specified conversion dates per year,
conversion price at 101% over a calculated average closing
price, an anti-dilution clause, a put option at 4% interest
after 3 years and 4.5% after 4 years, and callable
after 2 years if the market price of ICSI common stock
meets certain conditions.

As a result of a decline in ICSIs
convertible bond price, the Company recorded an unrealized loss
of approximately $238,000 related to the ICSI convertible
debentures in the September 2002 quarter. The unrealized loss is
included in accumulated other comprehensive loss. The market
value of the Companys convertible debentures at
September 30, 2002 was approximately $2.9 million.

The Company accounts for investments in
50 percent or less owned companies over which it has the
ability to exercise significant influence using the equity
method of accounting. At September 30, 2002 and

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INTEGRATED SILICON SOLUTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

September 30, 2001, approximately,
$11.5 million and $4.6 million, respectively, of
undistributed earnings of 50% or less owned companies accounted
for using the equity method are included in consolidated
retained earnings. The Company periodically reviews these
investments for other-than-temporary declines in market value
and writes these investments to their fair value when an
other-than-temporary decline has occurred.



|         |                                                
|-------- | -----------------------------------------------
|Note 21. | Quarterly Financial Information
    (Unaudited)

The following is a summary of the quarterly
results of operations for the years ended September 30,
2002 and 2001.

|                                    |  |                                       |        |        |  |         |         |         |  |   |         |   |  |   |         |  
|----------------------------------- |  | ------------------------------------- | ------ | ------ |  | ------- | ------- | ------- |  | - | ------- | - |  | - | ------- | -
|                                    |  | Dec 31                                |        | Mar 31 |  | June 30 |         | Sept 30
|                                    |  |                                       |        |        |  |         |         |        
|                                    |  |                                      
|                                    |  | (In thousands, except per share data)
|                                    |  | (unaudited)                          
|Fiscal 2002                         |  |                                       |        |        |  |         |         |         |  |   |         |   |  |   |         |  
|Net sales                           |  | $                                     | 15,091 |        |  | $       | 16,638  |         |  | $ | 18,532  |   |  | $ | 20,187  |  
|Gross margin (loss)                 |  |                                       | 2,691  |        |  |         | 3,004   |         |  |   | (13,031 | ) |  |   | (8,429  | )
|Operating loss                      |  |                                       | (7,612 | )      |  |         | (13,149 | )       |  |   | (25,260 | ) |  |   | (20,236 | )
|Net loss                            |  |                                       | (9,938 | )      |  |         | (10,646 | )       |  |   | (24,927 | ) |  |   | (22,029 | )
|Basic net loss per share            |  | $                                     | (0.37  | )      |  | $       | (0.39   | )       |  | $ | (0.91   | ) |  | $ | (0.80   | )
|Diluted net loss per share          |  | $                                     | (0.37  | )      |  | $       | (0.39   | )       |  | $ | (0.91   | ) |  | $ | (0.80   | )
|Fiscal 2001                         |  |                                       |        |        |  |         |         |         |  |   |         |   |  |   |         |  
|Net sales                           |  | $                                     | 65,229 |        |  | $       | 52,023  |         |  | $ | 20,013  |   |  | $ | 14,783  |  
|Gross margin                        |  |                                       | 22,175 |        |  |         | 3,459   |         |  |   | (3,500  | ) |  |   | (14,955 | )
|Operating income (loss)             |  |                                       | 9,228  |        |  |         | (9,041  | )       |  |   | (14,274 | ) |  |   | (24,758 | )
|Net income (loss)                   |  |                                       | 25,075 |        |  |         | 4,469   |         |  |   | (3,703  | ) |  |   | (24,726 | )
|Basic net income (loss) per share   |  | $                                     | 0.97   |        |  | $       | 0.17    |         |  | $ | (0.14   | ) |  | $ | (0.93   | )
|Diluted net income (loss) per share |  | $                                     | 0.91   |        |  | $       | 0.16    |         |  | $ | (0.14   | ) |  | $ | (0.93   | )

55



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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

Not applicable.




PART III

Certain information required by Part III is
omitted from this Report on Form 10-K in that the
Registrant will file its definitive Proxy Statement for its
Annual Meeting of Stockholders to be held on February 7,
2003, pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended (the Proxy Statement), not
later than 120 days after the end of the fiscal year
covered by this Report, and certain information included in the
Proxy Statement is incorporated herein by reference.






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

(a) Executive Officers  See the
section entitled Executive Officers in Part I,
Item 1 hereof.

(b) Directors  The information
required by this Item is incorporated by reference to the
section entitled Election of Directors in the Proxy
Statement.

The disclosure required by Item 405 of
Regulation S-K is incorporated by reference to the section
entitled Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement.






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

The information required by this Item is
incorporated by reference to the sections entitled
Compensation of Executive Officers and
Compensation of Directors in the Proxy Statement.






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

The disclosure required by Item 403 of Regulation
S-K is incorporated by reference to the sections entitled
Principal Share Ownership and Security
Ownership of Management in the Proxy Statement.

Securities Authorized for Issuance under
Equity Compensation Plans

The following table summarizes our equity
compensation plans as of September 30, 2002:

Equity Compensation Plan Information

|                                                                  |  |                      |           |                      |  |                             |      |  |  |  |           |    
|----------------------------------------------------------------- |  | -------------------- | --------- | -------------------- |  | --------------------------- | ---- |  |  |  | --------- | ---
|                                                                  |  |                      |           |                      |  | Number of Securities       
|                                                                  |  | Number of Securities |           |                      |  | Remaining Available for    
|                                                                  |  | to be Issued upon    |           | Weighted Average     |  | Future Issuance Under      
|                                                                  |  | Exercise of          |           | Exercise Price of    |  | Equity Compensation        
|                                                                  |  | Outstanding Options, |           | Outstanding Options, |  | Plans (Excluding Securities
|                                                                  |  | Warrants and Rights  |           | Warrants and Rights  |  | Reflected in Column (a))   
|Plan Category                                                     |  | (a)                  |           | (b)                  |  | (c)                        
|                                                                  |  |                      |           |                      |  |                            
|Equity compensation plans approved by security
    holders        |  |                      | 1,524,000 |                      |  | $                           | 5.95 |  |  |  | 1,933,000 | (1)
|Equity compensation plans not approved by
    security holders(2) |  |                      | 3,878,000 |                      |  | $                           | 9.55 |  |  |  | 4,982,000 |    
|                                                                  |  |                      |           |                      |  |                             |      |  |  |  |           |    
|Total                                                             |  |                      | 5,402,000 |                      |  | $                           | 8.53 |  |  |  | 6,915,000 |    
|                                                                  |  |                      |           |                      |  |                             |      |  |  |  |           |    



---

Notes:



|    |                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The number of shares includes 922,000 shares of
    Common Stock reserved for future issuance under our 1995
    Employee Stock Purchase Plan. This plan was approved by
    stockholders effective February 1995 and was amended by the
    stockholders on February 6, 2002. See Note 9 of Notes to
    Consolidated Financial Statements.

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The number of shares does not include outstanding
    options to purchase 106,000 shares of our Common Stock which
    were assumed in connection with our acquisition of Purple Ray.
    At September 30, 2002, these assumed options had a weighted
    average exercise price of $2.70. There are no shares available
    for future issuance under the Purple Ray plan and, in the event
    that any such outstanding option that was assumed option is not
    exercised, no further options to purchase shares of our Common
    Stock will be issued in place of such unexercised option.

Equity compensation plan not approved by
security holders

At September 30, 2002, we had the following
equity compensation plan that was not approved by our
stockholders under which shares of our Common Stock are
authorized for issuance:

1996 Stock Option
Plan.On October 18, 1996, our
Board of Directors approved the 1996 Stock Option Plan that
provides for the grant of non-statutory stock options to
non-executive employees and consultants. At September 30,
2002, options to purchase 4,982,000 shares of our Common
Stock remained available for future issuance under this plan and
options to purchase 3,878,000 shares of our Common Stock
were outstanding with a weighted average exercise price of $9.55
and grant prices ranging from $3.16 to $23.38. Under the terms
of the plan, the exercise price and exercise period of stock
option grants is determined by the Board of Directors on the
date of grant. Generally, the stock options vest ratably over a
four year period. The options expire upon the earlier of ten
years from the date of grant or 30 days following
termination of employment or consultancy, unless specified
otherwise in the option agreement. In the event of certain
changes in control of the Company, the 1996 Plan requires that
each outstanding option be assumed or an equivalent option
substituted by the successor corporation; however, if such
successor refuses to assume the then outstanding options, the
1996 Plan provides for the full acceleration of the
exercisability of all outstanding options.






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

The information required by this Item is
incorporated by reference to the section entitled Certain
Transactions in the Proxy Statement.






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

(a) Evaluation of disclosure controls and
procedures

Within the 90-day period prior to the date of
this report, the Company carried out an evaluation, under the
supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design
and operation of the Companys disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934 (the Exchange Act). Based upon
that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls
and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated
subsidiaries) required to be included in the Companys
Exchange Act filings.

(b) Changes in internal controls

There have been no significant changes in the
Companys internal controls or in other factors which could
significantly affect internal controls subsequent to the date
the Company carried out the evaluation described above.

57



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

(a) List of documents filed as part of this
Report.



|   |                     
|-- | --------------------
|1. | Financial Statements

The following consolidated financial statements
of Integrated Silicon Solution, Inc. are contained in Part II,
Item 8 of this Report on Form 10-K:



| |                                                      
| | -----------------------------------------------------
| | Report of Ernst & Young LLP, Independent
    Auditors
| | Consolidated Statements of Operations                
| | Consolidated Statements of Comprehensive Income      
| | Consolidated Balance Sheets                          
| | Consolidated Statements of Cash Flows                
| | Consolidated Statements of Stockholders
    Equity  
| | Notes to Consolidated Financial Statements           



|   |                              
|-- | -----------------------------
|2. | Financial Statement Schedules

All other schedules for which provision is made
in the Applicable Accounting Regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been
omitted.



|   |         
|-- | --------
|3. | Exhibits

|        |      |                         |  |                                                                                                                                                                              
|------- | ---- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |                        
|Number  |      | Description of Document
|        |      |                        
|        | 2.1  | (4)                     |  | Agreement and Plan of Reorganization dated
    November 5, 1997 by and among the Company, Nexcom
    Technology, Inc. and certain shareholders of Nexcom Technology,
    Inc.
|        | 3.1  | (2)                     |  | Restated Certificate of Incorporation of
    Registrant.                                                                                                                     
|        | 3.2  | (1)                     |  | Bylaws of Registrant.                                                                                                                                                        
|        | 4.2  | (1)                     |  | Form of Common Stock Certificate.                                                                                                                                            
|        | 10.1 | (1)                     |  | Form of Indemnification Agreement.                                                                                                                                           
|        | 10.2 | (8)*                    |  | Form of 1993 Employee Stock Purchase Plan, as
    amended, and form of Subscription Agreement.                                                                               
|        | 10.3 | (5)*                    |  | Form of 1989 Stock Plan, as amended, and form of
    Stock Option Agreements.                                                                                                
|        | 10.4 | (6)*                    |  | 1995 Director Stock Option Plan, as amended.                                                                                                                                 
|        | 10.5 | (3)                     |  | Sublease Agreement for facility located at 2231
    Lawson Lane, Santa Clara, California.                                                                                    
|        | 10.6 | (9)*                    |  | Nonstatutory Stock Plan, as amended.                                                                                                                                         
|        | 10.8 | (7)*                    |  | 1998 Stock Plan, as amended.                                                                                                                                                 
|        | 21.1 | (1)                     |  | Subsidiaries of the Registrant                                                                                                                                               
|        | 23.1 |                         |  | Consent of Ernst & Young LLP, Independent
    Auditors                                                                                                                       
|        | 24.1 |                         |  | Power of Attorney (see page 60).                                                                                                                                             
|        | 99.1 |                         |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                              



---



|  |                                                                                                                                                                      
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Management contract or compensatory plan or
    arrangement required to be filed as an exhibit to this Report on
    Form 10-K pursuant to form 14(c) of this report.



|    |                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Companys
    Registration Statement on Form S-1, as amended (file
    no. 33-72960).
|   
|(2) | Incorporated by reference to the Companys
    Registration Statement on Form S-1, as amended (file
    no. 33-91520) 

58



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##### Table of Contents





|    |                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------
|(3) | Incorporated by reference to the Companys
    Annual Report on Form 10-K for the period ended
    September 30, 1996.
|   
|(4) | Incorporated by reference to the Companys
    Annual Report on Form 10-K for the period ended
    September 30, 1997.
|   
|(5) | Incorporated by reference to the Companys
    Registration Statement on Form S-8 filed April 22,
    1998.           
|   
|(6) | Incorporated by reference to the Companys
    Registration Statement on Form S-8 filed April 26,
    1999.           
|   
|(7) | Incorporated by reference to the Companys
    Registration Statement on Form S-8 filed March 9, 2001.                
|   
|(8) | Incorporated by reference to the Companys
    Registration Statement on Form S-8 filed March 15,
    2002.           
|   
|(9) | Incorporated by reference to the Companys
    Registration Statement on Form S-8 filed November 21,
    2002.        



| |     |                    
| | --- | -------------------
| | (b) | Reports on Form 8-K
|
| | (c) | Exhibits           



| |  |              
| |  | -------------
| |  | See (a) above



| |     |                              
| | --- | -----------------------------
| | (d) | Financial statement schedules



| |  |              
| |  | -------------
| |  | See (a) above

59



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this Report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized in the
City of Santa Clara, State of California, on the 19th day
of December, 2002.



| |                                  
| | ---------------------------------
| | INTEGRATED SILICON SOLUTION, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ GARY L. FISCHER

| |                                   
| | ----------------------------------
| |                                   
| | Gary L. Fischer                   
| | President, Chief Operating Officer
| | and Chief Financial Officer       

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below hereby constitutes and
appoints Jimmy S.M. Lee and Gary L. Fischer, and each of them
acting individually, as his or her attorney-in-fact, each with
full power of substitution, for him or her in any and all
capacities, to sign any and all amendments to this Report on
Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to any and
all amendments to said Report.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Annual Report on Form 10-K has
been signed below on December 19, 2002 by the following
persons on behalf of the Registrant and in the capacities
indicated.

|                                   |  |                                                                                                                                             |  | 
|---------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|                                   |  |                                                                                                                                            
|Signature                          |  | Title                                                                                                                                      
|                                   |  |                                                                                                                                            
|                                  
|/s/ JIMMY S.M. LEEJimmy S.M. Lee   |  | Chairman of the Board and Chief Executive
    Officer
    (Principal Executive Officer)                                                    
|                                  
|/s/ GARY L. FISCHERGary L. Fischer |  | Director, President, Chief Operating Officer
    and
    Chief Financial Officer
    (Principal Financial and Principal Accounting Officer)
|                                  
|/s/ LIP-BU TANLip-Bu Tan           |  | Director                                                                                                                                   
|                                  
|/s/ HIDE TANIGAMIHide Tanigami     |  | Director                                                                                                                                   
|                                  
|/s/ CHUN WIN WONGChun Win Wong     |  | Director                                                                                                                                   
|                                  
|/s/ BRUCE A. WOOLEYBruce A. Wooley |  | Director                                                                                                                                   

60



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##### Table of Contents






CERTIFICATION

I, Jimmy S.M. Lee, certify that:

1.     I have reviewed
this annual report on Form 10-K of Integrated Silicon
Solution, Inc.;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.     The
registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:



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

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



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

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



| |                        
| | -----------------------
| | /s/ JIMMY S.M. LEE     
| |                        
| | (Jimmy S.M. Lee)       
| | Chief Executive Officer

Date: December 19, 2002

61



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##### Table of Contents



CERTIFICATION

I, Gary L. Fischer, certify that:

1.     I have reviewed
this annual report on Form 10-K of Integrated Silicon
Solution, Inc.;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.     The
registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:



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

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



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

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



| |                                            
| | -------------------------------------------
| | /s/ GARY L. FISCHER                        
| |                                            
| | (Gary L. Fischer)                          
| | President, Chief Operating Officer,
    and
| | Chief Financial Officer                    

Date: December 19, 2002

62



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##### Table of Contents



EXHIBIT INDEX

|        |      |                         |  |                                                                                                                                                                              
|------- | ---- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |                        
|Number  |      | Description of Document
|        |      |                        
|        | 2.1  | (4)                     |  | Agreement and Plan of Reorganization dated
    November 5, 1997 by and among the Company, Nexcom
    Technology, Inc. and certain shareholders of Nexcom Technology,
    Inc.
|        | 3.1  | (2)                     |  | Restated Certificate of Incorporation of
    Registrant.                                                                                                                     
|        | 3.2  | (1)                     |  | Bylaws of Registrant.                                                                                                                                                        
|        | 4.2  | (1)                     |  | Form of Common Stock Certificate.                                                                                                                                            
|        | 10.1 | (1)                     |  | Form of Indemnification Agreement.                                                                                                                                           
|        | 10.2 | (8)*                    |  | Form of 1993 Employee Stock Purchase Plan, as
    amended, and form of Subscription Agreement.                                                                               
|        | 10.3 | (5)*                    |  | Form of 1989 Stock Plan, as amended, and form of
    Stock Option Agreements.                                                                                                
|        | 10.4 | (6)*                    |  | 1995 Director Stock Option Plan, as amended.                                                                                                                                 
|        | 10.5 | (3)                     |  | Sublease Agreement for facility located at 2231
    Lawson Lane, Santa Clara, California.                                                                                    
|        | 10.6 | (9)*                    |  | Nonstatutory Stock Plan, as amended.                                                                                                                                         
|        | 10.8 | (7)*                    |  | 1998 Stock Plan, as amended.                                                                                                                                                 
|        | 21.1 | (1)                     |  | Subsidiaries of the Registrant                                                                                                                                               
|        | 23.1 |                         |  | Consent of Ernst & Young LLP, Independent
    Auditors                                                                                                                       
|        | 24.1 |                         |  | Power of Attorney (see page 60).                                                                                                                                             
|        | 99.1 |                         |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                              



---



|    |                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Management contract or compensatory plan or
    arrangement required to be filed as an exhibit to this Report on
    Form 10-K pursuant to form 14(c) of this report.
|   
|(1) | Incorporated by reference to the Companys
    Registration Statement on Form S-1, as amended (file
    no. 33-72960).                                               
|   
|(2) | Incorporated by reference to the Companys
    Registration Statement on Form S-1, as amended (file
    no. 33-91520)                                                
|   
|(3) | Incorporated by reference to the Companys
    Annual Report on Form 10-K for the period ended
    September 30, 1996.                                               
|   
|(4) | Incorporated by reference to the Companys
    Annual Report on Form 10-K for the period ended
    September 30, 1997.                                               
|   
|(5) | Incorporated by reference to the Companys
    Registration Statement on Form S-8 filed April 22,
    1998.                                                          
|   
|(6) | Incorporated by reference to the Companys
    Registration Statement on Form S-8 filed April 26,
    1999.                                                          
|   
|(7) | Incorporated by reference to the Companys
    Registration Statement on Form S-8 filed March 9, 2001.                                                               
|   
|(8) | Incorporated by reference to the Companys
    Registration Statement on Form S-8 filed March 15,
    2002.                                                          
|   
|(9) | Incorporated by reference to the Companys
    Registration Statement on Form S-8 filed November 21,
    2002.                                                       

63