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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



(Mark One)

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



For the quarterly period ended December 31, 2003.



OR



| ̈ | 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 000-23084.



Integrated Silicon Solution, Inc.

(Exact name of registrant as specified in its charter)



|Delaware                                                      |  | 77-0199971                         
|------------------------------------------------------------- |  | -----------------------------------
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|2231 Lawson Lane, Santa Clara, California                     |  | 95054                              
|(Address of principal executive offices)                      |  | Zip Code                           



(408) 969-6600

Registrants telephone number, including area code



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ̈



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

Yes ̈No x



The number of
outstanding shares of the registrants Common Stock as of January 16, 2004 was 28,963,008.



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TABLE OF CONTENTS



|PART I     |  | Financial Information                                                                                     |  |   
|---------- |  | --------------------------------------------------------------------------------------------------------- |  | --
|           |  |                                                                                                          
|Item 1.    |  | Financial Statements                                                                                      |  |   
|           |  |                                                                                                          
|           |  | Condensed Consolidated Statements of Operations Three months ended December 31, 2003 and 2002 (Unaudited) |  | 3 
|           |  |                                                                                                          
|           |  | Condensed Consolidated Balance Sheets December 31, 2003 (Unaudited) and September 30, 2003                |  | 4 
|           |  |                                                                                                          
|           |  | Condensed Consolidated Statements of Cash Flows Three months ended December 31, 2003 and 2002 (Unaudited) |  | 5 
|           |  |                                                                                                          
|           |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                          |  | 6 
|           |  |                                                                                                          
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  | 14
|           |  |                                                                                                          
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                |  | 31
|           |  |                                                                                                          
|Item 4.    |  | Controls and Procedures                                                                                   |  | 32
|           |  |                                                                                                          
|PART II    |  | Other Information                                                                                         |  |   
|           |  |                                                                                                          
|Item 1.    |  | Legal Proceedings                                                                                         |  | 32
|           |  |                                                                                                          
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                          |  | 32
|           |  |                                                                                                          
|Signatures |  |                                                                                                           |  | 33



References in this
Report on Form 10-Q to we, us, our and ISSI mean Integrated Silicon Solution, Inc. and all entities owned or controlled by Integrated Silicon Solution, Inc.





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##### Table of Contents

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



Integrated Silicon Solution, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)



|                                                                                                    |  | Three Months EndedDecember 31, |       
|--------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------
|                                                                                                    |  | 2003                           |       
|Net sales (See Note 14)                                                                             |  | $                              | 40,255
|Cost of sales                                                                                       |  |                                | 31,303
|                                                                                                    |  |                                |       
|Gross profit (loss)                                                                                 |  |                                | 8,952 
|                                                                                                    |  |                                |       
|Operating expenses:                                                                                 |  |                                |       
|Research and development                                                                            |  |                                | 4,540 
|Selling, general and administrative                                                                 |  |                                | 3,891 
|                                                                                                    |  |                                |       
|Total operating expenses                                                                            |  |                                | 8,431 
|                                                                                                    |  |                                |       
|Operating income (loss)                                                                             |  |                                | 521   
|Other income (expense), net                                                                         |  |                                | 96    
|                                                                                                    |  |                                |       
|Income (loss) before income taxes, minority interest and equity in net loss of affiliated companies |  |                                | 617   
|Provision for income taxes                                                                          |  |                                | 12    
|                                                                                                    |  |                                |       
|Income (loss) before minority interest and equity in net loss of affiliated companies               |  |                                | 605   
|Minority interest in net loss of consolidated subsidiary                                            |  |                                |      
|Equity in net income (loss) of affiliated companies                                                 |  |                                | 290   
|                                                                                                    |  |                                |       
|Net income (loss)                                                                                   |  | $                              | 895   
|                                                                                                    |  |                                |       
|Basic net income (loss) per share                                                                   |  | $                              | 0.03  
|                                                                                                    |  |                                |       
|Shares used in basic per share calculation                                                          |  |                                | 28,649
|                                                                                                    |  |                                |       
|Diluted net income (loss) per share                                                                 |  | $                              | 0.03  
|                                                                                                    |  |                                |       
|Shares used in diluted per share calculation                                                        |  |                                | 31,935
|                                                                                                    |  |                                |       



See accompanying notes
to condensed consolidated financial statements.



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Integrated Silicon Solution, Inc.

Condensed Consolidated Balance Sheets

(In thousands)



|                                                       |  | December 31,2003 |         |   | September 30,2003 |  
|------------------------------------------------------ |  | ---------------- | ------- | - | ----------------- | -
|                                                       |  | (unaudited)      |         |   | (1)               |  
|ASSETS                                                
|Current assets:                                        |  |                  |         |   |                   |  
|Cash and cash equivalents                              |  | $                | 24,748  |   |                   | $
|Short-term investments                                 |  |                  | 38,550  |   |                   |  
|Accounts receivable                                    |  |                  | 11,534  |   |                   |  
|Accounts receivable from related parties (See Note 14) |  |                  | 1,768   |   |                   |  
|Inventories                                            |  |                  | 18,487  |   |                   |  
|Other current assets                                   |  |                  | 1,275   |   |                   |  
|                                                       |  |                  |         |   |                   |  
|Total current assets                                   |  |                  | 96,362  |   |                   |  
|Property, equipment, and leasehold improvements, net   |  |                  | 5,578   |   |                   |  
|Other assets                                           |  |                  | 63,061  |   |                   |  
|                                                       |  |                  |         |   |                   |  
|Total assets                                           |  | $                | 165,001 |   |                   | $
|                                                       |  |                  |         |   |                   |  
|LIABILITIES AND STOCKHOLDERS EQUITY                  
|Current liabilities:                                   |  |                  |         |   |                   |  
|Accounts payable                                       |  | $                | 17,961  |   |                   | $
|Accounts payable to related parties (See Note 14)      |  |                  | 2,416   |   |                   | $
|Accrued compensation and benefits                      |  |                  | 3,534   |   |                   |  
|Accrued expenses                                       |  |                  | 5,142   |   |                   |  
|                                                       |  |                  |         |   |                   |  
|Total current liabilities                              |  |                  | 29,053  |   |                   |  
|Minority interest                                      |  |                  | 78      |   |                   |  
|Stockholders equity:                                  |  |                  |         |   |                   |  
|Common stock                                           |  |                  | 3       |   |                   |  
|Additional paid-in capital                             |  |                  | 237,038 |   |                   |  
|Accumulated deficit                                    |  |                  | (96,433 | ) |                   |  
|Unearned compensation                                  |  |                  | (249    | ) |                   |  
|Accumulated comprehensive loss                         |  |                  | (4,489  | ) |                   |  
|                                                       |  |                  |         |   |                   |  
|Total stockholders equity                             |  |                  | 135,870 |   |                   |  
|                                                       |  |                  |         |   |                   |  
|Total liabilities and stockholders equity             |  | $                | 165,001 |   |                   | $
|                                                       |  |                  |         |   |                   |  



|(1) | Derived from audited financial statements.
|--- | ------------------------------------------



See accompanying notes to condensed consolidated financial statements.



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Integrated Silicon Solution, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)



|                                                                          |  | Three Months EndedDecember 31, |       
|------------------------------------------------------------------------- |  | ------------------------------ | ------
|                                                                          |  | 2003                           |       
|Cash flows from operating activities                                      |  |                                |       
|Net income (loss)                                                         |  | $                              | 895   
|Depreciation and amortization                                             |  |                                | 971   
|Amortization of intangibles and unearned compensation                     |  |                                | 19    
|Loss on embedded derivative                                               |  |                                | 59    
|Net foreign currency transaction losses                                   |  |                                | (5    
|Equity in net loss of affiliated companies                                |  |                                | (290  
|Minority interest in net loss of consolidated subsidiary                  |  |                                |      
|Net effect of changes in current and other assets and current liabilities |  |                                | 389   
|                                                                          |  |                                |       
|Cash provided by (used in) operating activities                           |  |                                | 2,038 
|Cash flows from investing activities                                      |  |                                |       
|Capital expenditures                                                      |  |                                | (254  
|Purchases of available-for-sale securities                                |  |                                | (100  
|Sales of available-for-sale securities                                    |  |                                |      
|                                                                          |  |                                |       
|Cash provided by (used in) investing activities                           |  |                                | (354  
|Cash flows from financing activities                                      |  |                                |       
|Proceeds from issuance of common stock                                    |  |                                | 3,081 
|Principal payments on notes payable and long-term obligations             |  |                                |      
|                                                                          |  |                                |       
|Cash provided by financing activities                                     |  |                                | 3,081 
|                                                                          |  |                                |       
|Effect of exchange rate changes on cash and cash equivalents              |  |                                | (9    
|                                                                          |  |                                |       
|Net increase in cash and cash equivalents                                 |  |                                | 4,756 
|Cash and cash equivalents at beginning of period                          |  |                                | 19,992
|                                                                          |  |                                |       
|Cash and cash equivalents at end of period                                |  | $                              | 24,748
|                                                                          |  |                                |       



See accompanying notes
to condensed consolidated financial statements.



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|1. | Basis of Presentation
|-- | ---------------------



The accompanying unaudited condensed financial statements include the accounts of Integrated Silicon Solution, Inc. (the Company) and its
consolidated majority owned subsidiaries, after elimination of all significant intercompany accounts and transactions and have been prepared in accordance with accounting principles generally accepted in the United States for interim financial
information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of
management, all adjustments considered necessary for fair presentation have been included.



Operating results for the three months ended December 31, 2003 are not necessarily indicative of the results that may be expected for the year ending September 30, 2004 or for any other period. The financial
statements included herein should be read in conjunction with the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2003.



|2. | Stock-based Compensation
|-- | ------------------------



The Company applies the intrinsic-value method prescribed in APB Opinion No. 25, Accounting for Stock issued to Employees, in accounting for
employee stock options. Accordingly compensation expense is generally recognized only when options are granted with an exercise price less than fair value on the date of grant. Any resulting compensation expense would be recognized ratably over the
associated service period, which is generally the option vesting term.



The Company has determined pro forma loss and loss per share information as if the fair value method described in SFAS No. 123, Accounting for Stock Based Compensation, had been applied to its employee stock-based compensation.
The proforma effect on net income (loss) and net income (loss) per share is as follows for the three month periods ending December 31, 2003 and 2002 (in thousands, except per share data):



|                                                  |  | Three Months EndedDecember 31, |      
|------------------------------------------------- |  | ------------------------------ | -----
|                                                  |  | 2003                           |      
|Net income (loss)  as reported                   |  | $                              | 895  
|Compensation expense                              |  |                                | 1,208
|                                                  |  |                                |      
|Net loss  pro forma                              |  | $                              | (313 
|                                                  |  |                                |      
|Basic net income (loss) per share  as reported   |  | $                              | 0.03 
|Diluted net income (loss) per share  as reported |  | $                              | 0.03 
|Basic net income (loss) per share  pro forma     |  | $                              | (0.01
|Diluted net income (loss) per share  pro forma   |  | $                              | (0.01



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



|3. | Concentrations
|-- | --------------



In the three months ended December 31, 2003 and December 31, 2002, no single customer accounted for over 10% of net sales.



|4. | Cash, Cash Equivalents and Short-term Investments
|-- | -------------------------------------------------



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



|                                         |  | (In thousands)  
|---------------------------------------- |  | ----------------
|                                         |  | December 31,2003
|Cash                                     |  | $               
|Money market instruments                 |  |                 
|Municipal bonds due in more than 3 years |  |                 
|                                         |  |                 
|                                         |  | $               
|                                         |  |                 



|5. | Inventories
|-- | -----------



The following is a summary of inventories by major category:



|                     |  | (In thousands)  
|-------------------- |  | ----------------
|                     |  | December 31,2003
|Purchased components |  | $               
|Work-in-process      |  |                 
|Finished goods       |  |                 
|                     |  |                 
|                     |  | $               
|                     |  |                 



During the three
months ended December 31, 2002, the Company recorded inventory write-downs of $4.1 million. The inventory write-downs were predominately for lower of cost or market and excess and obsolescence issues on certain of its products.



|6. | Other Assets
|-- | ------------



Other assets consisted of the following:



|                                         |  | (In thousands)  
|---------------------------------------- |  | ----------------
|                                         |  | December 31,2003
|Investment in ICSI common stock          |  | $               
|Investment in ICSI convertible debenture |  |                 
|Investment in SMIC                       |  |                 
|Other equity investments                 |  |                 
|Other                                    |  |                 
|                                         |  |                 
|                                         |  | $               
|                                         |  |                 



The market value of
the Companys investment in the common stock and convertible debentures of ICSI at December 31, 2003 was approximately $27.0 million and $3.1 million, respectively, based on quoted market prices. Since ICSI is accounted for under the equity
method of accounting, the carrying value of the



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



Companys investment in ICSIs common stock differs from the market value. The Companys total carrying value for ICSI common stock as of
December 31, 2003 was approximately $18.7 million of which approximately $4.8 million is included in other comprehensive loss as accumulated foreign currency translation adjustment in the equity portion of the balance sheet.



|7. | Comprehensive Income (Loss)
|-- | ---------------------------



Comprehensive income (loss) includes net income (loss) as well as other comprehensive income (loss). The Companys other comprehensive income (loss)
consists of changes in cumulative translation adjustment and unrealized gains and losses on investments.



Comprehensive income (loss), net of taxes, was as follows:



|                                               |  | Three Months EndedDecember 31, |     
|---------------------------------------------- |  | ------------------------------ | ----
|                                               |  | 2003                           |     
|                                               |  | (In thousands)                 |     
|Net income (loss)                              |  | $                              | 895 
|Other comprehensive income (loss), net of tax: |  |                                |     
|Change in cumulative translation adjustment    |  |                                | (234
|Change in unrealized loss on investments       |  |                                | 160 
|                                               |  |                                |     
|Comprehensive income (loss)                    |  | $                              | 821 
|                                               |  |                                |     



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:



|                                                                                   |  | December 31,2003 |        |   | September 30,2003 |  
|---------------------------------------------------------------------------------- |  | ---------------- | ------ | - | ----------------- | -
|                                                                                   |  | (In thousands)   |       
|Accumulated foreign currency translation adjustments related to investment in ICSI |  | $                | (4,773 | ) |                   | $
|Other accumulated foreign currency translation adjustments                         |  |                  | 221    |   |                   |  
|Accumulated net unrealized gain (loss) on available-for-sale investments           |  |                  | 63     |   |                   |  
|                                                                                   |  |                  |        |   |                   |  
|Total accumulated other comprehensive loss                                         |  | $                | (4,489 | ) |                   | $
|                                                                                   |  |                  |        |   |                   |  



|8. | Income Taxes
|-- | ------------



The provision for income taxes for the three month period ended December 31, 2003 of $12,000 consists of alternative minimum taxes. The Company recorded
no provision for income taxes for the three month period ended December 31, 2002 due to its net operating loss position.



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



|9. | Per Share Data
|-- | --------------



The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):



|                                                             |  | Three Months EndedDecember 31, |       
|------------------------------------------------------------ |  | ------------------------------ | ------
|                                                             |  | 2003                           |       
|Numerator for basic and diluted net income (loss) per share: |  |                                |       
|Net income (loss)                                            |  | $                              | 895   
|                                                             |  |                                |       
|Denominator for basic net income (loss) per share:           |  |                                |       
|Weighted average common shares outstanding                   |  |                                | 28,649
|Dilutive stock options                                       |  |                                | 3,286 
|                                                             |  |                                |       
|Denominator for diluted net income (loss) per share          |  |                                | 31,935
|                                                             |  |                                |       
|Basic net income (loss) per share                            |  | $                              | 0.03  
|                                                             |  |                                |       
|Diluted net income (loss) per share                          |  | $                              | 0.03  
|                                                             |  |                                |       



The above diluted
calculation does not include approximately 412,000 and 3,908,000 shares attributable to options as of December 31, 2003 and 2002, respectively, as their impact would be anti-dilutive. Of the 3,908,000 shares excluded from the December 31, 2002
calculation, approximately 461,000 shares were in the money but excluded solely because the Company had a net loss for that period.



|10. | 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 and 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.



|11. | Impact of Recently Issued Accounting Standards
|--- | ----------------------------------------------



In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51, (FIN 46). FIN 46 requires certain variable interest entities (VIEs) to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new VIEs created
or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after March 15, 2004. The adoption of FIN 46 has not and is not
expected to have a material effect on the Companys financial position, results of operations or cash flows.



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



|12. | Commitments and Contingencies
|--- | -----------------------------



Legal Proceedings



On June 16, 2003, Symbol Technologies, Inc. (Symbol) filed suit against the Company in the Supreme Court of the State of New York. The
complaint alleges causes of action for breach of express warranty, negligent misrepresentation, breach of implied contract, negligence and breach of implied warranty of fitness for a particular purpose related to certain of the Companys
products purchased by Symbol. The complaint seeks monetary damages in an amount of $5.0 million, pre-judgment interest and court costs. The Company believes that it has meritorious defenses to the claims alleged by Symbol and intends to defend this
suit vigorously.



|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:



|                             |  | Three Months EndedDecember 31,
|---------------------------- |  | ------------------------------
|                             |  | 2003                          
|                             |  | (In thousands)                
|Net Sales                    |  |                               
|United States                |  | $                             
|China                        |  |                               
|Hong Kong                    |  |                               
|Taiwan                       |  |                               
|Korea                        |  |                               
|Other Asia Pacific countries |  |                               
|Europe                       |  |                               
|Other North America          |  |                               
|                             |  |                               
|Total net sales              |  | $                             
|                             |  |                               



|                        |  | December 31,2003 |       | September 30,2003
|----------------------- |  | ---------------- | ----- | -----------------
|                        |  | (In thousands)  
|Long-lived assets       |  |                  |       |                  
|United States           |  | $                | 3,442 |                  
|Hong Kong               |  |                  | 65    |                  
|China                   |  |                  | 1,832 |                  
|Other foreign locations |  |                  | 239   |                  
|                        |  |                  |       |                  
|                        |  | $                | 5,578 |                  
|                        |  |                  |       |                  



|14. | Related Party Transactions
|--- | --------------------------



For the three months ended December 31, 2003 and December 31, 2002, the Company sold and licensed (net of returns) approximately $188,000 and $118,000,
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 administrative services to ICSI for which it is reimbursed. At December 31, 2003 and September 30, 2003, the Company had an accounts receivable balance from ICSI of approximately $124,000 and $276,000, respectively.



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



The Company purchases goods and contract manufacturing services from ICSI. For the three months ended
December 31, 2003 and December 31, 2002, purchases of goods and services were approximately $844,000 and $15,000, respectively. The Company also pays ICSI for certain product development costs, license fees and royalties. For the three months ended
December 31, 2003 and December 31, 2002, these charges totaled approximately $499,000 and $46,000, respectively. At December 31, 2003 and September 30, 2003, the Company had an accounts payable balance to ICSI of approximately $599,000 and $386,000,
respectively.



The Company receives reimbursement from NexFlash
for some patent expenses related to jointly owned patents. 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 December 31, 2003 and
September 30, 2003, the Company had an accounts receivable balance from NexFlash of approximately $0 and $4,000, respectively.



The Company provides 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 three months ended December 31, 2003 and December 31, 2002, the Company provided services of approximately $11,000 and $19,000,
respectively, to GetSilicon. At December 31, 2003 and September 30, 2003, the Company had an accounts receivable balance from GetSilicon of approximately $42,000 and $31,000, respectively.



The Company engages GetSilicon for business-to-business data exchange and
professional services. For the three months ended December 31, 2003 and December 31, 2002, the purchase of services was approximately $53,000 and $0, respectively. At December 31, 2003 and September 30, 2003, the Company had an accounts payable
balance to GetSilicon of approximately $136,000 and $83,000, respectively.



For the three months ended December 31, 2003 and December 31, 2002, the Company sold approximately $26,000 and $11,000, respectively, of memory products to E-CMOS in which the Company currently has approximately an
11% ownership interest. The Companys Chairman and CEO, Jimmy S.M. Lee, was the Chairman of E-CMOS until June 2003 and continues to serve as a director. At December 31, 2003 and September 30, 2003, the Company had an accounts receivable balance
from E-CMOS of approximately $3,000 and $39,000, respectively.



The Company receives administrative support services and reimburses E-CMOS for expenses incurred on its behalf. For the three months ended December 31, 2003 and December 31, 2002, the purchase of services and expenses reimbursed by the
Company was approximately $111,000 and $107,000, respectively. At December 31, 2003 and September 30, 2003, the Company had an accounts payable balance to E-CMOS of approximately $25,000 and $37,000, respectively.



For the three months ended December 31, 2003 and December 31, 2002, the
Company sold approximately $2,053,000 and $145,000, respectively, of memory products to Marubun USA Corporation (Marubun USA). Hide L. Tanigami, a director of the Company, is the president and chief executive officer of Marubun USA. At
December 31, 2003 and September 30, 2003, the Company had an accounts receivable balance from Marubun USA of approximately $999,000 and $1,044,000, respectively.



The Company purchases goods from SMIC in which the Company has less than a 3% ownership interest. The Companys
Chairman and CEO, Jimmy S.M. Lee, is a director of SMIC. For the three months ended December 31, 2003 and December 31, 2002, purchases of goods from SMIC were approximately $7,143,000 and $7,502,000, respectively. At December 31, 2003 and September
30, 2003, the Company had an accounts payable balance to SMIC of approximately $1,656,000 and $4,936,000, respectively.



Lip-Bu Tan, a director of the Company, has been a director of Flextronics since April 3, 2003. For the three months ended December 31, 2003, the Company
sold approximately $534,000 of memory products to Flextronics. At December 31, 2003 and September 30, 2003, the Company had an accounts receivable balance



11



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



from Flextronics of approximately $410,000 and $355,000, respectively. The Company had been doing business with Flextronics prior to Mr. Tan joining the
board of directors of Flextronics.



The Company provides
manufacturing support services to Signia in which the Company currently has approximately a 19% ownership interest. The Companys Chairman and CEO, Jimmy S.M. Lee, is a director of Signia. For the three months ended December 31, 2003 and
December 31, 2002, the Company provided services of approximately $21,000 and $0, respectively, to Signia. At December 31, 2003 and September 30, 2003, the Company had an accounts receivable balance from Signia of approximately $190,000 and
$315,000, respectively.



Accounts receivable from related
parties consisted of the following:



|                                                                |  | December 31,2003                |       | September 30,2003
|--------------------------------------------------------------- |  | ------------------------------- | ----- | -----------------
|                                                                |  | (In thousands)                 
|E-CMOS                                                          |  | $                               | 3     |                  
|Flextronics                                                     |  |                                 | 410   |                  
|GetSilicon                                                      |  |                                 | 42    |                  
|ICSI                                                            |  |                                 | 124   |                  
|Marubun USA                                                     |  |                                 | 999   |                  
|Nexflash                                                        |  |                                 |      |                  
|Signia                                                          |  |                                 | 190   |                  
|                                                                |  |                                 |       |                  
|Total                                                           |  | $                               | 1,768 |                  
|                                                                |  |                                 |       |                  
|                                                                |  |                                
|The following table shows net sales to related parties:         |  |                                 |       |                  
|                                                                | 
|                                                                |  | Three months ended December 31,
|                                                                |  | 2003                            |       | 2002             
|                                                                |  | (In thousands)                 
|Net sales to related parties                                    |  |                                 |       |                  
|E-CMOS                                                          |  | $                               | 26    |                  
|Flextronics                                                     |  |                                 | 534   |                  
|ICSI                                                            |  |                                 | 188   |                  
|Marubun USA                                                     |  |                                 | 2,053 |                  
|Others                                                          |  |                                 | 21    |                  
|                                                                |  |                                 |       |                  
|Total                                                           |  | $                               | 2,822 |                  
|                                                                |  |                                 |       |                  
|                                                                |  |                                
|Accounts payable to related parties consisted of the following: |  |                                 |       |                  
|                                                                |  |                                
|                                                                |  | December 31,2003                |       | September 30,2003
|                                                                |  | (In thousands)                 
|E-CMOS                                                          |  | $                               | 25    |                  
|GetSilicon                                                      |  |                                 | 136   |                  
|ICSI                                                            |  |                                 | 599   |                  
|SMIC                                                            |  |                                 | 1,656 |                  
|                                                                |  |                                 |       |                  
|Total                                                           |  | $                               | 2,416 |                  
|                                                                |  |                                 |       |                  



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



|15. | Investment in Integrated Circuit Solution Inc. (ICSI)
|--- | -------------------------------------------------------



The following summarizes financial information for ICSI, an equity investee.



|                                                |  | December 31,2003 |        | September 30,2003
|----------------------------------------------- |  | ---------------- | ------ | -----------------
|                                                |  | (In thousands)  
|Current assets                                  |  | $                | 85,472 |                  
|Property, plant, and equipment and other assets |  |                  | 34,391 |                  
|Current liabilities                             |  |                  | 41,640 |                  
|Long-term debt                                  |  |                  | 18,878 |                  



|                    |  | Three Months EndedDecember 31, |       
|------------------- |  | ------------------------------ | ------
|                    |  | 2003                           |       
|                    |  | (In thousands)                 |       
|Net sales           |  | $                              | 42,429
|Gross profit (loss) |  |                                | 6,620 
|Net income (loss)   |  |                                | 1,015 



In the June 2002
quarter, the Company invested approximately $3.2 million in convertible debentures issued by ICSI. As a result of changes in ICSIs convertible debenture price, the Company has recorded an accumulated unrealized gain of approximately $63,000
related to the ICSI convertible debentures. The unrealized gain is included in accumulated other comprehensive loss. In addition, in the three months ended December 31, 2003, we recorded a charge of approximately $59,000 related to the decline in
the fair value of an embedded derivative associated with the ICSI convertible debenture. The charge associated with the embedded derivative is included in other income (expense). The market value of the Companys convertible debentures at
December 31, 2003 was approximately $3.1 million.



The Company
accounts for investments in 50% or less owned companies over which it has the ability to exercise significant influence using the equity method of accounting. At December 31, 2003 and September 30, 2003, approximately $2.1 million and $1.8 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.



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS



We have made forward-looking statements in this report that are subject to
risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of our operations. Also, when we use words such as believes, expects, anticipates or similar
expressions, we are making forward-looking statements. You should note that an investment in our securities involves certain risks and uncertainties that could affect our future financial results. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain factors, including those set forth in Certain Factors Which May Affect Our Business or Future Operating Results and elsewhere in this report.



We believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risks described in Certain Factors Which May Affect Our Business or Future Operating Results included in this
report, as well as any cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.



All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the cautionary statements set forth in this report. Except as required by federal securities laws, we are under no obligation to update any forward-looking statement, whether as a result of new
information, future events, or otherwise.



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



Overview



We are a fabless semiconductor company that designs and markets high performance integrated circuits for the following key markets: (i) digital consumer
electronics, (ii) networking, (iii) mobile communications and (iv) automotive electronics. Our primary products are high speed and low power static random access memories (SRAM) and low and medium density dynamic random access memories
(DRAM). We were founded in October 1988 and initially focused on high performance, low cost SRAM for PC cache memory applications. In 1997, we introduced our first low and medium density DRAM products. In 1996 and 1997, we began to focus
on the networking, internet access and telecommunications markets and, by 1999, revenue from such markets represented a substantial majority of our net sales. Due to our focus on these markets, we recorded revenues of $65.2 million in the quarter
ended December 31, 2000. These markets experienced a substantial downturn beginning in 2001 which resulted in a significant decline in our revenues, significant inventory write-offs and large operating losses. In response to these adverse market
conditions, we increased our focus on the digital consumer electronics, mobile communications and automotive electronics markets and also reduced our operating expenses. As a result of our success in the digital consumer electronics market, sales of
our low and medium density DRAM products have increased significantly and represented a majority of our net sales in fiscal 2003 and in the three months ended December 31, 2003.



As a fabless semiconductor company, our business model is less capital intensive because we rely on third parties to
manufacture, assemble and test our products. However, as a result of our dependence on third-party wafer foundries, our ability to increase our unit sales volumes depends on our ability to increase our wafer capacity allocation from current
foundries, add additional foundries and improve yields of die per wafer.



Although average selling prices of our SRAM and DRAM products have generally declined over time, the selling prices are very sensitive to supply and demand conditions in our target markets. For most of fiscal 2003,
average selling prices for our products declined as they had in recent years. More recently, market conditions have improved and prices have stabilized and in some cases increased. We expect average selling prices for our products to decline in the
future, principally due to continuing and increased market competition and an increased supply of competitive products in the market. Any future decreases in our average selling prices would



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have an adverse impact on our revenue growth rate, gross margins and operating margins. Our ability to maintain or increase revenues will be highly dependent
upon our ability to increase unit sales volumes of existing products and to introduce and sell new products in quantities sufficient to compensate for the anticipated declines in average selling prices of existing products. Declining average selling
prices will adversely affect gross margins unless we are able to offset such declines with commensurate reductions in per unit costs or changes in product mix in favor of higher margin products.



Revenue from product sales to our direct customers is recognized upon
shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed and determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements and there
are no remaining significant obligations. A portion of our sales is made to distributors under agreements that provide the possibility of certain sales price rebates and limited product return privileges. Given the uncertainties associated with the
levels of returns and other credits that will be issued to these distributors, we defer recognition of such sales until our products are sold by the distributors to their end customers. Revenue from sales to distributors who do not have sales price
rebates or product return privileges is recognized at the time our products are sold by us to the distributors.



We market and sell our products in Asia, the U.S. and Europe through our direct sales force, distributors and sales representatives. The percentage of our
revenues from customers located outside the U.S. was approximately 48%, 70%, 87% and 87% in fiscal 2001, 2002, 2003 and the first quarter of fiscal 2004, respectively. The increase in our revenues from Asia is due to our success in the digital
consumer electronics market. We anticipate that sales to international customers will continue to represent a significant percentage of our net sales. The percentages of our revenues by region are set forth in the following table:



|       |  | Fiscal Years EndedSeptember 30, |   |  | Three Months EndedDecember 31,2003 |  
|------ |  | ------------------------------- | - |  | ---------------------------------- | -
|       |  | 2001                            |   |  | 2002                               |  
|Asia   |  | 23                              | % |  | 56                                 | %
|Europe |  | 25                              |   |  | 14                                 |  
|U.S.   |  | 52                              |   |  | 30                                 |  
|Other  |  |                                |   |  |                                   |  
|       |  |                                 |   |  |                                    |  
|Total  |  | 100                             | % |  | 100                                | %
|       |  |                                 |   |  |                                    |  



Our sales are
generally made by purchase orders. Because industry practice allows customers to reschedule or cancel orders on relatively short notice, backlog is not a good indicator of our future sales. Cancellations of customer orders or changes in product
specifications could result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory and operating expenses.



Since a significant portion of our revenue is from the digital consumer electronics market, our business may be subject to seasonality, with increased
revenues in the third and fourth calendar quarters of each year, when customers place orders to meet year-end holiday demand. However, broad fluctuations in our overall business in the past several years makes it difficult for us to assess the
impact of seasonal factors on our business.



We hold equity
interests in a number of other companies. We acquired these interests for strategic reasons, such as developing a strong relationship with a third-party wafer foundry we rely on to manufacture our products. Our financial results for fiscal 2004 and
fiscal 2003 reflect accounting for Integrated Circuit Solution, Inc. (ICSI) on the equity basis and include our percentage share of the results of ICSIs operations. Our financial results for fiscal 2003 through the period ended
April 30, 2003 reflect accounting for E-CMOS Technology Corporation on the equity basis and include our percentage share of the results of E-CMOS operations. Effective May 2003, our ownership of E-CMOS became less than 20% and we began
accounting for E-CMOS on the cost basis. Our financial results for fiscal 2004 and fiscal 2003 reflect accounting for GetSilicon, NexFlash Technologies, Signia Technologies and Semiconductor Manufacturing International



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Corporation (SMIC) on the cost basis. ICSI is a Taiwan-based fabless memory supplier, and E-CMOS is a Taiwan-based peripherals interface device
company, GetSilicon is a semiconductor supply chain management software company, NexFlash is a Flash memory supplier, Signia Technologies is a developer of wireless semiconductors, and SMIC is a China-based semiconductor foundry. At December 31,
2003, we owned approximately 29% of ICSI, approximately 11% of E-CMOS, approximately 17% of GetSilicon, approximately 14% of NexFlash, approximately 19% of Signia Technologies and less than 3% of SMIC. In October 2001, we invested $3.0 million for a
95% interest in D2Code, a subsidiary that we established in Korea to focus on semiconductor design activities. In 2003, we transferred key designers to our U.S. team, and, at December 31, 2003, we were in the process of winding down the operations
of D2Code.



We are subject to the risks of conducting business internationally,
including economic conditions in Asia, particularly Taiwan and 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. All of our foundries and assembly and test subcontractors are located in Asia. Although we transact business predominately in U.S. dollars, we do have some transactions in New Taiwan dollars, in Hong Kong dollars and in China Renminbi.
Such transactions expose us to the risk of exchange rate fluctuations. We monitor our exposure to foreign currency fluctuations, but have not to date adopted any hedging strategy. There can be no assurance that exchange rate fluctuations will not
harm our business and operating results in the future.



Critical
Accounting Policies



The preparation of financial
statements in conformity with accounting principles generally accepted in the U.S. 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
our 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, which impacts net sales; (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 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 with sales price rebates and product return privileges. These policies are described in the notes to our financial statements contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2003.



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, obsolete or defective. 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



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from six to 30 months, the stage in the life cycle of the product, and 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 strategic 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 equity transactions. The timing of when any of these events may occur is uncertain and very difficult to predict. 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 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 future periods, which will decrease our profitability. At December 31, 2003, our strategic investments in non-marketable
securities totaled $45.9 million of which $42.0 million was invested in SMIC.



Three Months Ended December 31, 2003 Compared to Three Months Ended December 31, 2002



Net Sales. Net sales consist principally of total product sales less estimated sales returns. Net sales increased by 91% to $40.3 million in the
three months ended December 31, 2003 from $21.0 million in the three months ended December 31, 2002. The increase in sales was principally due to an increase in both the average selling prices and unit shipments of our DRAM products, specifically
our 64 and 16 Mb devices, in the three months ended December 31, 2003 compared to the three months ended December 31, 2002. An increase in unit shipments of our SRAM products in the three months ended December 31, 2003 compared to the three months
ended December 31, 2002, more than offset the decline in the average selling prices resulting in an overall increase in SRAM revenue. 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. However, the average selling prices for certain of our DRAM and SRAM products increased in the three months ended December 31, 2003 compared to the three months ended September 30, 2003. There
can be no assurance that any future price declines will be offset by higher volumes or by higher prices on newer products.



In the three months ended December 31, 2003 and December 31, 2002, no single customer accounted for over 10% of net sales.



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Gross profit (loss). Cost of sales includes die cost from the wafers acquired from foundries,
subcontracted package, assembly and test costs, costs associated with in-house product testing, quality assurance and import duties. Gross profit increased by $10.2 million to $9.0 million gross profit in the three months ended December 31, 2003
from $1.2 million gross loss in the three months ended December 31, 2002. Gross margin increased to 22.2% in the three months ended December 31, 2003 from (5.8)% in the three months ended December 31, 2002. Our gross margin for the three months
ended December 31, 2003 benefited from the sale of $0.6 million of parts previously written down to zero carrying value. In addition, in the three months ended December 31, 2002, we recorded inventory write-downs of $4.1 million predominately for
lower of cost or market accounting. Excluding the inventory write-downs in the three months ended December 31, 2002, the increase in gross profit was principally due to an increase in both the average selling prices and unit shipments of our DRAM
products, specifically our 64 and 16 Mb devices, in the three months ended December 31, 2003 compared to the three months ended December 31, 2002. Reductions in the cost of our SRAM products more than offset declines in the average selling prices of
such products in the three months ended December 31, 2003 compared to the three months ended December 31, 2002, resulting in an increase in gross profit. We believe that the average selling prices of our products will 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 addition, product unit costs could increase if our suppliers
raise prices, which could result in a material decline in our gross margin. In the past, foundries have raised wafer prices when demand for end products increases. We have recently seen some foundries raising wafer prices in response to increased
demand conditions. Although we have product cost reduction programs in place 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 decreased
by 33% to $4.5 million in the three months ended December 31, 2003 compared to $6.8 million in the three months ended December 31, 2002. As a percentage of net sales, research and development expenses decreased to 11.3% in the three months ended
December 31, 2003 from 32.3% in the three months ended December 31, 2002. The decrease in absolute dollars was primarily the result of a reduction in expenses associated with new product development as we limited the focus of our development efforts
resulting in a substantial reduction in mask costs and contracted development costs. In addition, we reduced research and development expenses through headcount reductions and the transfer of some design and engineering efforts to Asia. The
increased costs associated with the development of new products could result in our research and development expenses increasing in absolute dollars in future periods.



Selling, General and Administrative. Selling, general and administrative expenses increased by 6% to $3.9 million in
the three months ended December 31, 2003 from $3.7 million in the three months ended December 31, 2002. As a percentage of net sales, selling, general and administrative expenses decreased to 9.7% in the three months ended December 31, 2003 from
17.4% in the three months ended December 31, 2002. The increase in absolute dollars was primarily the result of increased selling commissions associated with higher revenues in the three months ended December 31, 2003 compared to the three months
ended December 31, 2002. In addition, facility expenses increased in the three months ended December 31, 2003 due to the expiration of our subleases. These increases were partially offset by decreases in payroll related expenses and limiting
discretionary spending. If our business activity increases and in response to recent changes in corporate governance rules, we expect our selling, general and administrative expenses will increase in absolute dollars in future quarters, although
such expenses may fluctuate as a percentage of net sales.



Other income (expense), net. Other income (expense), net increased by $78,000 to approximately $96,000 in the three months ended December 31, 2003 from $18,000 in the three months ended December 31, 2002. In the three months ended
December 31, 2003, we recorded a charge of approximately $59,000 related to the decline in the fair value of an embedded derivative associated with the ICSI convertible debenture compared to a charge of approximately $277,000 related to the decline
in the fair value of an embedded derivative associated with the ICSI convertible debenture in the three months ended December 31, 2002. In addition,



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interest income decreased by approximately $162,000 in the three months ended December 31, 2003 compared to the three months ended December 31, 2002 as the
result of lower cash balances.



Provision (benefit) for
income taxes.The provision for income taxes for the three month period ended December 31, 2003 of $12,000 consists of alternative minimum taxes. We recorded no provision for income taxes for the three month period ended December 31, 2002 due to
our net operating loss position.



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. In fiscal 2003, we
closed D2Code and transferred certain personnel to our facilities. At December 31, 2003, we were in the process of winding down the operations of D2Code. The results of their operations are included in our consolidated financial statements. The
minority interest in net loss of consolidated subsidiary decreased to $0 in the three months ended December 31, 2003 from $17,000 in the three months ended December 31, 2002.



Equity in net income (loss) of affiliated companies.Equity in net
income (loss) of affiliated companies increased by $1.3 million to $0.3 million income in the three months ended December 31, 2003 from $1.0 million loss in the three months ended December 31, 2002. This primarily reflects an increase in income from
our percentage share of ICSIs financial results in the three months ended December 31, 2003 compared to the three months ended December 31, 2002.



Liquidity and Capital Resources



As of December 31, 2003, our principal sources of liquidity included cash, cash equivalents and short-term investments of approximately $63.3 million.
During the three months ended December 31, 2003, operating activities generated cash of approximately $2.0 million compared to the use of $3.4 million in the three months ended December 31, 2002. Cash generated by operations was primarily due to net
income of $0.9 million adjusted for depreciation of $1.0 million, equity in net income of affiliated companies of $0.3 million, other non-cash items of $0.1 million and increases in accounts payable of $3.1 million. This was partially offset by
increases in inventories of $1.8 million, increases in accounts receivable of $1.2 million, increases in accrued expenses of $0.2 million and decreases in other assets of $0.4 million.



In the three months ended December 31, 2003, we used $0.4 million for investing activities compared to $9.1 million
generated in the three months ended December 31, 2002. The cash used for investing activities in the three months ended December 31, 2003 partially resulted from net purchases of available-for-sale securities of $0.1 million. The cash generated by
investing activities in the three months ended December 31, 2002 primarily resulted from net sales of available-for-sale securities of $9.7 million.



In the three months ended December 31, 2003, we made capital expenditures of approximately $0.3 million for engineering tools and computer software. We
expect to spend approximately $2.0 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 $3.1 million from financing activities during the
three months ended December 31, 2003 compared to $0.1 million in the three months ended December 31, 2002. The source of financing for the current quarter was proceeds from the issuance of common stock of $3.1 million from stock option exercises.
The primary source of financing for the three months ended December 31, 2002 was proceeds from the issuance of common stock of $0.1 million from stock option exercises.



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 $5.4 million.



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We generally warrant our products against defects in materials and workmanship for a period of 12 months.
Liability for a stated warranty period is usually limited to replacement of defective items or return of amounts paid. Warranty expense has historically been immaterial to our financial statements.



Our contractual cash obligations at December 31, 2003 are outlined in the
table below:



|                                    |  |                                      |       |             |   |                   |  |                   |       |  |   |    
|----------------------------------- |  | ------------------------------------ | ----- | ----------- | - | ----------------- |  | ----------------- | ----- |  | - | ---
|                                    |  | Payments Due by Period(in thousands)
|Contractual Obligations             |  | Total                                |       | Fiscal 2004 |   | Fiscal2005 - 2006 |  | Fiscal2007 - 2008
|Equipment lease debt                |  | $                                    |      |             | $ |                  |  | $                 |      |  | $ |   
|Operating leases                    |  |                                      | 5,426 |             |   | 1,434             |  |                   | 3,379 |  |   | 613
|Non-cancelable purchase commitments |  |                                      |      |             |   |                  |  |                   |      |  |   |   
|                                    |  |                                      |       |             |   |                   |  |                   |       |  |   |    
|Total contractual cash obligations  |  | $                                    | 5,426 |             | $ | 1,434             |  | $                 | 3,379 |  | $ | 613
|                                    |  |                                      |       |             |   |                   |  |                   |       |  |   |    



We believe our
existing funds 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 equity or debt financings, sales of
shares of investments, bank borrowings, or the disposition of certain assets. In this regard, in December 2003, we filed a registration statement with the SEC with respect to a follow-on public offering of up to approximately 6.9 million shares of
our common stock to be sold by us (including approximately 0.7 million shares subject to an over-allotment option granted to the underwriters). We anticipate that this offering will be completed in our second fiscal quarter ended March 31, 2004.
From time to time, we may also evaluate potential acquisitions or equity investments including strategic investments in wafer fabrication foundries or assembly and test subcontractors. 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



Risks Related to Our Business



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



Though we were profitable in the quarter ended December 31, 2003, we incurred losses in the ten consecutive quarters ended September 30, 2003 totaling $124.0 million. We may incur losses in subsequent quarters. Our
ability to maintain profitability on a quarterly or fiscal year basis in the future will depend on a variety of factors, including our ability to increase net sales, expand gross margins, introduce new products on a timely basis, secure sufficient
wafer fabrication capacity and control operating expenses. Adverse developments with respect to these or other factors could result in quarterly or annual operating losses in the future.



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
suppliers or any alternative sources in a timely manner, our business will be harmed. Our principal manufacturing relationships are with SMIC, Taiwan Semiconductor Manufacturing Corporation, or TSMC, Chartered Semiconductor Manufacturing, ProMOS
Technologies and Powerchip Semiconductor. Each of our wafer foundries also supplies wafers to other semiconductor companies, including certain of our competitors. Although we are allocated specific wafer capacity from our suppliers, we may not be
able to obtain such capacity in periods of tight supply. If any of our 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
obtain enough wafers to meet the market demand for our products which would adversely affect our revenues. Once a product is in production at a particular foundry, it is time consuming and costly to have such product manufactured at a different
foundry. In addition, 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.



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



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;
| | - | ----------------------------------------------



| |  | shortages in foundry, assembly or test capacity;
| | - | ------------------------------------------------



| |  | disruption in the supply of wafers, assembly or test services;
| | - | --------------------------------------------------------------



| |  | declines in average selling prices of our products;
| | - | ---------------------------------------------------



| |  | changes in our product mix which could reduce our gross margins;
| | - | ----------------------------------------------------------------



| |  | decreases in the demand for our products;
| | - | -----------------------------------------



| |  | oversupply of memory products in the market;
| | - | --------------------------------------------



| |  | excess inventory levels at our customers;
| | - | -----------------------------------------



| |  | cancellation of existing orders or the failure to secure new orders;
| | - | --------------------------------------------------------------------



| |  | 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 ability to obtain sufficient flash memory for use in our multi-chip packages;
| | - | ---------------------------------------------------------------------------------



| |  | our failure to anticipate changing customer product requirements;
| | - | -----------------------------------------------------------------



| |  | fluctuations in manufacturing yields at our suppliers;
| | - | ------------------------------------------------------



| |  | our failure to deliver products to customers on a timely basis;
| | - | ---------------------------------------------------------------



| |  | the timing of significant orders;
| | - | ---------------------------------



| |  | 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 litigation or future antidumping proceedings.
| | - | -------------------------------------------------------------------------------------------------------



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



Approximately 95% of our net sales are derived
from the sale of DRAM and SRAM products, which are subject to unit volume fluctuations and declines in average selling prices that could harm our business. For example, in fiscal 2001, we experienced sequential declines in revenue from $65.2 million
in our December 2000 quarter to $52.0 million in our March 2001 quarter to $20.0 million in our June 2001 quarter to $14.8 million in our September 2001 quarter. These declines were a result of a decrease in unit shipments of our



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products due to lower demand for electronic products that use our devices, as well as a decline in the average selling prices of such products. We may not be
able to offset any future price declines by higher volumes or by higher prices on newer products. While we have recently experienced increases in average selling prices for some of our products, historically, average selling prices for semiconductor
memory products have declined, and we expect that average selling prices will decline in the future. Our ability to maintain or increase revenues will depend upon our ability to increase unit sales volume of existing products and introduce and sell
new products that compensate for the anticipated declines in the average selling prices of our existing products.



Our gross margins may decline even in periods of increasing revenue.



Our gross margin is affected by a variety of factors including our mix of products sold, average selling prices for our products and cost of wafers. Even
when our revenues are increasing, our gross margin may be adversely affected if such increased revenue is from products with lower margins or declining average selling prices. During periods of strong demand, wafer capacity is likely to be in short
supply and we will likely have to pay higher prices for wafers which would adversely affect our gross margin unless we are able to increase our product prices to offset such costs. To maintain our gross margins when average selling prices are
declining, we must introduce new products with higher margins or reduce our cost per unit. There can be no assurance that we will be able to increase unit sales volumes, introduce and sell new products or reduce our cost per unit.



We rely on third-party contractors to assemble and test our products and our failure to
successfully manage our relationships with these contractors could damage our relationships with our customers, decrease our sales and limit our growth.



We rely on third-party contractors located in Asia to assemble and test our products. There are significant risks associated with our reliance on these
third-party contractors, including:



| |  | reduced control over product quality;
| | - | -------------------------------------



| |  | potential price increases;
| | - | --------------------------



| |  | reduced control over delivery schedules;
| | - | ----------------------------------------



| |  | capacity shortages;
| | - | -------------------



| |  | their inability to increase production and achieve acceptable yields on a timely basis;
| | - | ---------------------------------------------------------------------------------------



| |  | absence of long-term agreements;
| | - | --------------------------------



| |  | limited warranties on products supplied to us; and
| | - | --------------------------------------------------



| |  | general risks related to conducting business internationally.
| | - | -------------------------------------------------------------



If any of these risks are realized, our business and results of operations could be adversely affected until our subcontractor is able to remedy the
problem or until we are able to secure an alternative subcontractor.



The
loss of a significant customer or a reduction in orders from such a customer could adversely affect our operating results.



As sales to our customers are executed pursuant to purchase orders and no purchasing contracts typically exist, our customers can cease doing business
with us at any time. In the three months ended December 31, 2003, no single customer accounted for over 10% of net sales. In fiscal 2003, sales to ATM Electronic Corporation, a distributor in Taiwan, accounted for approximately 10% of our total net
sales. A substantial portion of our sales to ATM were for delivery to Ambit. In fiscal 2001, sales to Flextronics International accounted for approximately 15% of our 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



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approximately 18% of our net sales for fiscal 2001. Shipments for 3Com directly, or indirectly through subcontractors, accounted for approximately 11% of our
net sales for fiscal 2001. During fiscal 2001, we experienced cancelled or reduced orders from some of our major customers that adversely impacted our operating results. While we still do business, indirectly or directly, with both Cisco and 3Com,
neither accounted for more than 10% of our revenues in fiscal 2003. We may not be able to retain our key 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 and financial results.



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



In the three months ended December 31, 2003,
approximately 13% of our net sales was attributable to customers located in the U.S., 14% was attributable to customers located in Europe and 72% was attributable to customers located in Asia. In fiscal 2003, approximately 13% of our net sales was
attributable to customers located in the U.S., 10% was attributable to customers located in Europe and 77% was attributable to customers located in Asia. In fiscal 2002, approximately 30% of our net sales was attributable to customers located in the
U.S., 14% was attributable to customers located in Europe and 56% was attributable to customers located in Asia. In fiscal 2001, approximately 52% of our net sales was attributable to customers located in the U.S., 25% was attributable to customers
located in Europe and 23% was attributable to customers located in Asia. We anticipate that sales to international customers will continue to represent a significant percentage of our net sales. In addition, all of our wafer foundries and assembly
and test subcontractors are in Taiwan, China and Singapore.



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



| |  | global economic conditions, particularly in Taiwan and China;
| | - | -------------------------------------------------------------



| |  | travel or other restrictions related to public health issues such as severe acute respiratory syndrome (SARS);
| | - | --------------------------------------------------------------------------------------------------------------



| |  | duties, tariffs and other trade barriers and restrictions;
| | - | ----------------------------------------------------------



| |  | changes in trade policy and regulatory requirements;
| | - | ----------------------------------------------------



| |  | transportation delays;
| | - | ----------------------



| |  | the burdens of complying with foreign laws;
| | - | -------------------------------------------



| |  | foreign currency fluctuations;
| | - | ------------------------------



| |  | imposition of foreign currency controls;
| | - | ----------------------------------------



| |  | language barriers;
| | - | ------------------



| |  | difficulties in hiring experienced engineers in countries such as China;
| | - | ------------------------------------------------------------------------



| |  | difficulties in collecting foreign accounts receivable;
| | - | -------------------------------------------------------



| |  | political instability, including any changes in relations between China and Taiwan; and
| | - | ---------------------------------------------------------------------------------------



| |  | earthquakes and other natural disasters.
| | - | ----------------------------------------



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We have implemented significant cost cutting measures, and we may be required to increase expenses in response to
improving market conditions.



We implemented significant
cost cutting measures during fiscal 2002 and fiscal 2003 in response to poor industry conditions. These cost cutting efforts included:



| |  | reallocating personnel and responsibilities to countries with lower expense structures;
| | - | ---------------------------------------------------------------------------------------



| |  | reducing spending on research and development and capital expenditures;
| | - | -----------------------------------------------------------------------



| |  | reducing our workforce; and
| | - | ---------------------------



| |  | instituting temporary office and facility shutdowns.
| | - | ----------------------------------------------------



Our cost cutting measures may have negatively impacted our efficiency and may not lead to sustained profitability. In addition, our reduction in research and development
spending could harm our ability to introduce new products in the future. If our business activity increases, our operating expenses will need to increase.



Our revenues and business would be harmed if we are not able to successfully develop, introduce and sell new products and develop and implement new manufacturing
technologies in a timely manner.



We operate in highly
competitive, quickly changing markets which are characterized by rapid obsolescence of existing products. As a result, our future success depends on our ability to develop and introduce new products that our customers choose to buy in significant
quantities. If we fail to introduce new products in a timely manner or if our customers products do not achieve commercial success, our business and results of operations could be seriously harmed. The design and introduction of new products
is challenging as such products typically incorporate more functions and operate at faster speeds than prior products. Increasing complexity generally requires smaller features on a chip. This makes developing new generations of products
substantially more difficult than prior generations. If we are unable to design, introduce, market and sell new products successfully, our business and financial results would be seriously harmed.



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. From time to time, we have been involved in disputes regarding product warranty issues and are presently involved
in litigation with Symbol Technologies regarding a product dispute. Although we seek to 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 could be costly to defend.



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



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necessary or desirable, we may seek licenses under patents that we are alleged to be infringing. 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 harm our business. 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 may be unable to effectively protect our intellectual property, which would negatively
impact our ability to compete.



We believe that the
protection of our intellectual proprietary rights will continue to be important to the success of our business. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual
property rights. We also enter into confidentiality or license agreements with our employees, consultants and business partners, and control access to and distribution of our documentation and other proprietary information. Despite these efforts,
unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology. Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our
technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as do the laws of the U.S. Many U.S. companies have encountered substantial infringement problems in foreign countries, including countries
in which we design and sell our products. We do not currently hold any non-U.S. patents. We cannot be certain that patents will be issued as a result of our pending applications nor can we be certain that any issued patents would protect or benefit
us or give us adequate protection from competing products. For example, issued patents may be circumvented or challenged and declared invalid or unenforceable. We also cannot be certain that others will not develop our unpatented proprietary
technology or effective competing technologies on their own.



We have
acquired equity positions for strategic reasons in other companies which may significantly decrease in value.



Over the last few years, we have acquired equity positions for strategic reasons in other technology companies and we may make similar equity purchases in
the future. At December 31, 2003, our strategic investments in non-marketable securities totaled $45.9 million of which $42.0 million was invested in SMIC. These equity securities may not 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 equity securities 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 a $1.3 million impairment loss on one of our equity positions in the three months ended June 30, 2003. In addition, we recorded approximately $0.2 million and $0.4 million in impairment losses during fiscal 2001 and fiscal
2002, respectively.



Due to the potential value of our strategic
investments, we could be determined to be an investment company and, if such a determination were made, we would become subject to significant regulation that would adversely affect our business.



We are a fabless semiconductor company engaged in the design and marketing
of high performance integrated circuits. We have acquired non-controlling equity positions in SMIC and other companies for strategic, commercial reasons relating to our primary business. All of our equity positions are in privately held entities
that do not have a readily determinable market value, other than the shares we hold in our former wholly-owned subsidiary, ICSI, which are publicly traded in Taiwan. Despite the lack of a public market for such shares, these securities have
significant value and may increase in value in the future. In addition, our equity positions could be considered to be investment securities under the Investment Company Act of 1940 (1940 Act), raising a question of whether
we are an investment company required to register and be regulated under the 1940 Act. We believe that we are primarily engaged in the semiconductor business and that any such securities we own are ancillary and strategically related to our
semiconductor business. Accordingly, we do not believe that we are an investment company. If a court or the SEC disagrees with this interpretation, we may be required to either dispose of a portion of the securities we own in SMIC and other
companies to comply with the 1940 Act or register under the 1940 Act. If we choose to dispose of our securities in SMIC, our ability to secure access to wafer capacity from SMIC may be adversely impacted. If we choose to register as an investment
company, we will become subject to significant regulation under the 1940 Act which would materially adversely affect our ability to operate as a semiconductor company.



Our financial statements account for the results of our former subsidiary, ICSI, on the equity basis and fluctuations in ICSIs
results will also impact our results.



We held
approximately 29% of the equity of our former wholly-owned subsidiary, ICSI, at December 31, 2003. Our financial results for the three months ended December 31, 2003, fiscal 2003 and fiscal 2002 reflect accounting for ICSI on the equity basis and
include our percentage share of the results of ICSIs operations. As a result, our net income/loss will be impacted by the financial results of ICSI. We have limited visibility as to the future financial results of ICSI. Any unexpected
fluctuations in ICSIs results would have an unexpected impact on our net income which could be material to our financial results. ICSIs shares are publicly traded on the Taiwan stock exchange and its share price is subject to market
fluctuations. A significant decline in the stock price of ICSI may require us to record an impairment loss related to these shares.



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We may encounter difficulties in effectively integrating acquired businesses.



From time to time, we may acquire other companies that we believe to 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:



| |  | 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;
| | - | -----------------------------------------------------------------------------------



| |  | the risk that the markets for acquired products do not develop as expected; 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, a privately held research and development stage company developing network search
engine and content addressable memory integrated circuits. To date, we have not generated any revenue as a result of this acquisition and none is anticipated. In addition, the transaction resulted in an in-process technology charge of $4.7 million
in our March 31, 2002 quarter. As of June 30, 2003, we had written off substantially all of the value of our acquisition of Purple Ray. Any future acquisitions may not contribute positively to 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. Several of our important manufacturing and other
subcontractor relationships are based on personal relationships between our senior executive officers and such parties. In particular, our Chairman and Chief Executive Officer has long-term relationships with our key foundries. If we were to lose
the services of any key executives, it may negatively impact the related business relationships since we have no long-term contractual agreements with such parties. Our success also depends on our ability to continue to attract, retain and motivate
qualified technical 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 employees.
The loss of the service of one or more of our key personnel could harm our business.



Recently enacted and proposed changes in securities laws and regulations may increase our costs.



The Sarbanes-Oxley Act of 2002 that became law in July 2002, as well as new rules subsequently implemented by the Securities and Exchange Commission and
the Nasdaq Stock Market, have required, and will require, changes to some of our accounting and corporate governance practices, including a report on our internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002. We expect these
new rules and regulations to increase our accounting, legal and other costs, and to make some activities more difficult, time consuming and/or costly. We also expect these new rules and regulations to make it more difficult and more expensive for us
to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These new rules and regulations could also make it more difficult for us to attract and
retain qualified executive officers and qualified members of our board of directors, particularly to serve on our audit committee.



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Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the
United States.



We prepare our financial statements in
conformity with accounting principles generally accepted in the U.S. These accounting principles are subject to interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the Securities and
Exchange Commission and various bodies formed to interpret and create appropriate accounting policies. A change in these policies or interpretations could have a significant effect on our reported financial results, and could affect the reporting of
transactions completed before the announcement of a change. For example, while current accounting rules allow us to exclude the expense of stock options from our financial statements, influential business policy groups, including the Financial
Accounting Standards Board, have suggested that the rules be changed to require these options to be expensed. Technology companies generally, and our company, specifically, rely on stock options as a major component of our employee compensation
packages. If we are required to expense options, we may be less likely to sustain profitability or we may have to decrease or eliminate options grants. Decreasing or eliminating option grants may negatively impact our ability to attract and retain
qualified employees.



Our stock price is expected to be volatile, and you
may not be able to resell your shares at or above the price you paid.



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;
| | - | -------------------------------------------------------



| |  | general conditions or cyclicality in the semiconductor industry or the end markets that we serve;
| | - | -------------------------------------------------------------------------------------------------



| |  | new or revised earnings estimates by us or industry analysts;
| | - | -------------------------------------------------------------



| |  | comments or recommendations issued by analysts who follow us, our competitors or the semiconductor industry;
| | - | ------------------------------------------------------------------------------------------------------------



| |  | 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 available wafer capacity;
| | - | ---------------------------------------------------



| |  | 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 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. For
example, on October 25, 1999, our closing stock price was $5.62, rose to $39.81 on June 21, 2000, and subsequently declined to $7.69 on November 30, 2000.



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Risks Related to Our Industry



Foundry capacity can be limited, and we may be required to enter into costly 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 foundry capacity, we have entered into in the past, and may enter into in the future, various arrangements with suppliers, which
could include:



| |  | purchases of equity or debt securities in foundries;
| | - | ----------------------------------------------------



| |  | joint ventures;
| | - | ---------------



| |  | process development relationships with foundries;
| | - | -------------------------------------------------



| |  | contracts that commit us to purchase specified quantities of wafers over extended periods;
| | - | ------------------------------------------------------------------------------------------



| |  | increased price for wafers;
| | - | ---------------------------



| |  | option payments or other prepayments to foundries; and
| | - | ------------------------------------------------------



| |  | 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. Once we make commitments to secure foundry capacity, we may incur significant financial penalties if we subsequently determine that we are not able to utilize all of that capacity. Such penalties may be substantial and could
harm our financial results.



Our foundries may experience lower than
expected yields which could adversely effect our business.



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.



Any future downturn in the markets we serve would harm our business and financial results.



Substantially all of our products are incorporated into
products for the digital consumer electronics, networking, mobile communications and automotive electronics markets. Historically, these markets have experienced cyclical depressed business conditions, often in connection with, or in anticipation
of, a decline in general economic conditions or due to adverse supply and demand conditions in such markets. For example, our sales in the networking market declined significantly beginning in 2001 due to very depressed conditions in the overall
networking and communications industry. These adverse conditions continued in 2002 and 2003 and we are unable to predict when or if the networking market will recover. Industry downturns have resulted in reduced demand and declining average selling
prices for our products which adversely affected our business. We expect that industry downturns will occur again, but are unable to predict when any such downturn will occur or how long it will last.



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Shifts in industry-wide capacity may cause our results to fluctuate. These shifts may occur quickly with little or no
advance notice. In the past, such shifts have resulted in significant inventory write-downs.



The semiconductor industry is highly cyclical and is subject to significant downturns resulting from excess capacity, overproduction, reduced demand or
technological obsolescence. 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. These shifts in industry conditions can
occur quickly with little or no advance notice to us. Adverse changes in industry conditions are likely to result in a decline in average selling prices and the stated value of inventory. In fiscal 2001, fiscal 2002 and fiscal 2003, we recorded
inventory write-downs of $38.3 million, $28.6 million and $4.1 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 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 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 six 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 $5.7 million for fiscal 2001 and $10.4 million for fiscal 2002. Future additional inventory write-downs may occur due to lower of cost or market accounting,
excess inventory or inventory obsolescence.



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. Many of our competitors offer broader product lines and have greater financial, technical, marketing, distribution and other resources than us. In particular, a competitor with a materially smaller die size and lower cost could
dramatically gain market share in a short period of time. We may not be able to compete successfully against any of these competitors. Our ability to compete successfully in the memory market depends on factors both within and outside of our
control, including:



| |  | the pricing of our products;
| | - | ----------------------------



| |  | the supply and cost of wafers;
| | - | ------------------------------



| |  | product design, functionality, performance and reliability;
| | - | -----------------------------------------------------------



| |  | successful and timely product development;
| | - | ------------------------------------------



| |  | the performance of our competitors and their pricing policies;
| | - | --------------------------------------------------------------



| |  | wafer manufacturing over or under capacity;
| | - | -------------------------------------------



| |  | real or perceived imbalances in supply and demand for our products;
| | - | -------------------------------------------------------------------



| |  | the rate at which OEM customers incorporate our products into their systems;
| | - | ----------------------------------------------------------------------------



| |  | the success of our customers products and end-user demand;
| | - | -----------------------------------------------------------



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| |  | access to advanced process technologies at competitive prices;
| | - | --------------------------------------------------------------



| |  | achievement of acceptable yields of functional die;
| | - | ---------------------------------------------------



| |  | the capacity of our third-party contractors to assemble and test our products;
| | - | ------------------------------------------------------------------------------



| |  | 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 and financial results.



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



The September 2001
terrorist attacks in the U.S., as well as future events occurring in response or connection to them, including future terrorist attacks against U.S. targets, rumors or threats of war, actual conflicts involving the U.S. or its allies (such as the
war in Iraq), conflict between China and Taiwan, 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 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.



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|Item 3. |  | 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, India 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 December 31, 2003 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.



We had short-term investments of $38.6 million at December 31, 2003. 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 $0.4 million decrease in our 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 total carrying value of this investment as of December 31, 2003 was approximately $18.7 million of which $13.9 million is included in other assets and $4.8 million is included in
other comprehensive loss in the equity portion of our balance sheet. The market value of our investment in the common stock of ICSI at December 31, 2003 was approximately $27.0 million, based on quoted market prices. The share price of ICSI 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 $3.1 million of ICSI convertible debentures. As a result of changes in
ICSIs convertible debenture price, as of December 31, 2003, we recorded an accumulated unrealized gain of approximately $63,000 related to the ICSI convertible debentures. This gain was included in other comprehensive loss in the equity
portion of our balance sheet. In addition, in the three months ended December 31, 2003, we recorded a charge of approximately $59,000 related to the decline in the fair value of an embedded derivative associated with the ICSI convertible debenture.
The charge associated with the embedded derivative is included in other income (expense). Any future decline in ICSIs debenture 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 $45.9 million at December 31, 2003, of which $42.0 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. 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. In this regard, we recorded approximately a $1.3 million
impairment loss on our investment in Signia Technologies during fiscal 2003.



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



Our Chief Executive Officer and Chief Financial Officer, based on the evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e)
or 15d-15(e) under the Securities Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that, as of December 31, 2003, our disclosure controls and procedures were effective to ensure that the
information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and
forms. During the three months ended December 31, 2003, there was no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.



Part II. OTHER INFORMATION



|Item 1. |  | Legal Proceedings
|------- |  | -----------------



On June 16, 2003, Symbol Technologies, Inc. filed suit against us in the Supreme Court of the State of New York. The complaint alleges causes of action
for breach of express warranty, negligent misrepresentation, breach of implied contract, negligence and breach of implied warranty of fitness for a particular purpose related to certain of our products purchased by Symbol. The complaint seeks
monetary damages in an amount of $5.0 million, pre-judgment interest and court costs. We believe that we have meritorious defenses to the claims alleged by Symbol and intend to defend this suit vigorously.



We are not currently subject to any other material pending legal proceedings.
However, we may become subject to other lawsuits from time to time in the ordinary course of our business, and any such lawsuit could harm our business.



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



(a) The following exhibits are filed as a part of this report.



|           |  |                                                                                                                         
|---------- |  | ------------------------------------------------------------------------------------------------------------------------
|           | 
|Exhibit 31 |  | Certification Pursuant to SEC Release No. 33-8238, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|           | 
|Exhibit 32 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 



(b)
Reports on Form 8-K.



On October 30, 2003, we
furnished a report on Form 8-K related to our results for the fourth fiscal quarter and year ended September 30, 2003.



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SIGNATURES



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



|                        |  |  |  | Integrated Silicon Solution, Inc.                                                                                           
|----------------------- |  |  |  | ----------------------------------------------------------------------------------------------------------------------------
|                        |  |  |  | (Registrant)                                                                                                                
|                        |  | 
|Dated: January 26, 2004 |  |  |  | /s/    GARY L.
FISCHER                                                                                                      
|                        |  |  |  | Gary L. Fischer President, Chief Operating Officer, and Chief Financial Officer (Principal Financial and Accounting
Officer)



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