<PAGE>   1
                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

(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, 1998. 

                                       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.



            Delaware                                       77-0199971.
-------------------------------                         -----------------
(State or other jurisdiction of                          (I.R.S Employer
incorporation or organization)                          Identification No.)

2231 Lawson Lane, Santa Clara, California                     95054.
-----------------------------------------               -----------------
(Address of principal executive offices)                     zip code

Registrant's telephone number, including area code (408) 588-0800.
                                                   ---------------

        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 [ ]

        The number of outstanding shares of the registrant's Common Stock as of
February 5, 1999 was 19,566,863



<PAGE>   2
                        INTEGRATED SILICON SOLUTION, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                 Three Months Ended
                                                   December 31,
                                             --------------------------
                                               1998            1997
                                             --------         --------
                                                    (Unaudited)
<S>                                          <C>              <C>     
Net sales                                    $ 26,801         $ 39,414
Cost of sales                                  22,796           30,218
                                             --------         --------
Gross Profit                                    4,005            9,196
                                             --------         --------

Operating Expenses:
  Research and development                      5,773            7,401
  Selling, general and administrative           3,622            4,650
  In-process technology charge                     --            7,078
                                             --------         --------
    Total operating expenses                    9,395           19,129
                                             --------         --------

Operating loss                                 (5,390)          (9,933)
Other income, net                               1,586              255
                                             --------         --------
Loss before income taxes and
  minority interest                            (3,804)          (9,678)
Provision  for income taxes                       633               58
                                             --------         --------

Net loss before minority interest              (4,437)          (9,736)
Minority interest in net loss of
  consolidated subsidiary                        (472)              --
                                             --------         --------

Net loss                                     $ (3,965)        $ (9,736)
                                             ========         ========

Basic and diluted net loss per share         $  (0.20)        $  (0.53)
                                             ========         ========

Shares used in per share calculation           19,418           18,199
                                             ========         ========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.



<PAGE>   3

                        INTEGRATED SILICON SOLUTION, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                           December 31,     September 30,
                                                               1998             1998
                                                            ---------         ---------
                                                            (unaudited)          (1)
<S>                                                         <C>               <C>      
                                     ASSETS
Current assets:
  Cash and cash equivalents                                 $  13,354         $  27,776
  Restricted cash                                                  --               333
  Short-term investments                                        7,700             7,800
  Accounts receivable                                          10,646            19,069
  Inventories                                                  30,620            46,484
  Other current assets                                          9,506             4,938
                                                            ---------         ---------

Total current assets                                           71,826           106,400
Property, equipment, and leasehold improvements, net            5,657            44,316
Other assets                                                   63,491            51,452
                                                            ---------         ---------
Total assets                                                $ 140,974         $ 202,168
                                                            =========         =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes payable                                             $     100         $  18,325
  Accounts payable                                             34,641            40,642
  Accrued compensation and benefits                             1,887             2,945
  Accrued expenses                                              7,587             8,036
  Income tax payable                                              477               524
  Current portion of long-term obligations                         --             3,339
                                                            ---------         ---------

Total  current liabilities                                     44,692            73,811
Income tax payable - non-current                                4,996             4,996
Long-term obligations                                              --            12,127
Minority interest in consolidated subsidiary                       --            20,314

Stockholders' equity:
  Preferred stock                                                  --                --
  Common stock                                                      2                 2
  Additional paid-in capital                                  118,140           116,199
  Accumulated deficit                                         (22,306)          (18,341)
  Cumulative translation adjustment                            (4,465)           (6,787)
  Unearned compensation                                           (85)             (153)
                                                            ---------         ---------

Total stockholders' equity                                     91,286            90,920
                                                            ---------         ---------
Total liabilities and stockholders' equity                  $ 140,974         $ 202,168
                                                            =========         =========
</TABLE>



                 (1) Derived from audited financial statements.
     See accompanying notes to condensed consolidated financial statements.




<PAGE>   4
                        INTEGRATED SILICON SOLUTION, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                      Three Months Ended
                                                                                         December 31,
                                                                                   -------------------------
                                                                                     1998            1997
                                                                                   --------         --------
<S>                                                                                <C>              <C>      
CASH FLOWS FROM OPERATING ACTIVITIES
  Net Income (loss)                                                                $ (3,965)        $ (9,736)
  In-process technology charge                                                           --            7,078
  Gain on partial sale of ISSI-Taiwan                                                (1,211)              --
  Other charges to net income (loss) not affecting cash                               1,297            1,715
  Net effect of changes in current and other assets and current liabilities            (503)           4,508
                                                                                   --------         --------
     Cash provided by (used in) operating activities                                 (4,382)           3,565

CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures                                                               (2,250)          (5,043)
  Purchases of available-for-sale securities                                        (13,900)         (20,350)
  Sales of available-for-sale securities                                             14,000           33,300
  Partial sale of ISSI-Taiwan                                                         4,957               --
  Deconsolidation of ISSI-Taiwan                                                    (12,818)              --
  Investment in Wafertech, LLC                                                           --          (12,480)
  Investment in UICC                                                                     --           (4,730)
  Investment in NexFlash                                                             (1,000)              --
  Investment in DynaChip                                                               (500)              --
  Acquisition of Nexcom                                                                  --             (869)
                                                                                   --------         --------
     Cash used in investing activities                                              (11,511)         (10,172)

CASH FLOWS FROM FINANCING ACTIVITIES
  Borrowings under notes payable and long-term obligations                           33,435           14,508
  Proceeds from issuance of common stock                                                  2              165
  Principal payments on notes payable and long-term obligations                     (32,293)         (15,876)
  Increase in restricted cash                                                            --           (1,100)
                                                                                   --------         --------
     Cash provided by (used in) financing activities                                  1,144           (2,303)
                                                                                   --------         --------

Effect of exchange rate changes on cash and cash equivalents                            327           (1,420)
                                                                                   --------         --------

Net increase (decrease) in cash and cash equivalents                                (14,422)         (10,330)
Cash and cash equivalents at beginning of period                                     27,776           22,334
                                                                                   --------         --------
Cash and cash equivalents at end of period                                         $ 13,354         $ 12,004
                                                                                   ========         ========
</TABLE>



     See accompanying notes to condensed consolidated financial statements.


<PAGE>   5
                        INTEGRATED SILICON SOLUTION, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1. BASIS OF PRESENTATION

        The accompanying condensed financial statements include the accounts of
Integrated Silicon Solution, Inc. (the "Company") and its consolidated majority
owned subsidiaries (See note 14), after elimination of all significant
intercompany accounts and transactions and have been prepared in accordance with
generally accepted accounting principles 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 generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for fair
presentation have been included.

        Operating results for the three months ended December 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 1999.


2. CONCENTRATIONS

        Sales to one customer accounted for approximately 15% and 18% of total
net sales for the quarters ended December 31, 1998 and December 31, 1997,
respectively.

        The Company uses ISSI-Taiwan for coordinating wafer purchases, assembly,
and testing for substantially all its inventory.


3. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS

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


<TABLE>
<CAPTION>
                                                            (In thousands)
                                                        December 31   September 30
                                                           1998          1998
                                                         -------        -------
<S>                                                      <C>            <C>    
         Cash                                            $12,743        $23,893
         Money market instruments                            386            195
         Certificates of deposit                             225          4,021
         Auction preferred stock                           1,200          1,000
         Municipal bonds due in more than 3 years          6,500          6,800
                                                         -------        -------
                                                         $21,477        $35,909
                                                         =======        =======
</TABLE>


4. INVENTORIES

        The following is a summary of inventories by major category:


<TABLE>
<CAPTION>
                                    (In thousands)
                               December 31   September 30
                                  1998           1998
                                -------        -------
<S>                             <C>            <C>    
         Raw materials          $ 2,234        $ 5,447
         Work-in-process         13,753         14,868
         Finished goods          14,633         26,169
                                -------        -------
                                $30,620        $46,484
                                =======        =======
</TABLE>




                                       4
<PAGE>   6

                        INTEGRATED SILICON SOLUTION, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


5. OTHER ASSETS

        Other assets consisted of the following:

<TABLE>
<CAPTION>
                                                                  (In thousands)
                                                              December 31   September 30
                                                                 1998           1998
                                                               -------        -------
<S>                                                            <C>            <C>    
         Investment in WaferTech LLC                           $31,200        $31,200
         Investment in United Integrated Circuits Corp.          7,371         16,486
         Investment in ISSI-Taiwan                              19,413             --
         Investment in NexFlash                                  2,576             --
         Other                                                   2,931          3,766
                                                               -------        -------
                                                               $63,491        $51,452
                                                               =======        =======
</TABLE>

6. INCOME TAXES

        The income tax provision for the three month period ended December 31,
1998 is based on an annual estimate of Taiwan taxable income after the exemption
for the Taiwan tax holiday plus withholding taxes primarily related to the sale
of ISSI-Taiwan stock. Due to U.S. losses, there is no U.S. tax provision. The
effective tax rate for the three months ended December 31, 1998 differs from the
federal statutory rate primarily as a result of a valuation allowance
established to cover federal net operating losses and foreign withholding taxes
which will not be realized on a current basis based on management's expectations
of future taxable income and actual taxable income for the prior years.

7. NET LOSS PER SHARE

        The Company calculates earnings per share in accordance with the
Financial Accounting Standards Board Statement No. 128, "Earnings Per Share."

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

<TABLE>
<CAPTION>
                                                                     Three Months Ended
                                                                        December 31,
                                                                   1998             1997
                                                                  -------         --------
<S>                                                               <C>             <C>      
         Numerator for basic and diluted loss per share:
         Net loss                                                 $(3,965)        $ (9,736)
                                                                  =======         ========

         Denominator for basic and diluted loss per share:
         Weighted average of common shares                         19,418           18,199
                                                                  =======         ========

         Basic and diluted loss per share                         $ (0.20)        $  (0.53)
                                                                  =======         ========
</TABLE>

        The above diluted calculation does not include approximately 3,492,000
and 3,608,000 shares attributable to options as of December 31, 1998 and 1997,
respectively, and 981,659 shares attributable to warrants as of December 31,
1998 as their impact would be anti-dilutive.



                                       5
<PAGE>   7
                        INTEGRATED SILICON SOLUTION, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


8. USE OF ESTIMATES

        The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.


9. COMPREHENSIVE INCOME

        The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," (FAS No. 130) as of the beginning of the
three month period ending December 31, 1998. FAS No. 130 establishes new rules
for the reporting and display of comprehensive income and its components.
However, it has no impact on the Company's net income or total stockholders'
equity.

        The components of comprehensive income, net of related tax, are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                Three Months Ended
                                                                   December 31,
                                                              1998             1997
                                                            --------         --------
<S>                                                         <C>              <C>      
         Net loss                                           $ (3,965)        $ (9,736)
         Change in cumulative translation adjustment           2,322           (8,130)
                                                            --------         --------
         Comprehensive income                               $ (1,643)        $(17,866)
                                                            ========         ========
</TABLE>

        Comprehensive income consists entirely of the cumulative translation
adjustment on the Company's Condensed Consolidated Balance Sheets.


10. LITIGATION

        On April 22, 1998, the U.S. Department of Commerce ("DOC") published an
amended antidumping duty order on imports of SRAMs from Taiwan from where the
Company currently imports a majority of its SRAMs. As a consequence of this
antidumping duty order, the Company is required to post a cash deposit on
imports of Taiwan fabricated SRAM wafers or devices, at the ad valorem rate of
7.56%. The cash deposits subsequently could be returned to the Company or,
alternatively, the Company could forfeit amounts deposited and owe duties and
interest in addition to the amounts deposited. The outcome is dependent on
whether the DOC conducts an administrative review of imports entered after the
imposition of the antidumping order, and if so, on the results of the DOC
review. The decision on whether to conduct a review will be made in 1999 and the
results of the review will be issued in the year 2000.

        The Company has retained legal counsel to defend and assist in its
interests in the antidumping proceedings. In addition, certain aspects of the
antidumping determination are being challenged in federal court proceedings by
some of the respondents to the investigation, and these proceedings could result
in the termination of this antidumping case. Duties calculated and assessed by
the government could have a material adverse affect on the Company's gross
margins and profits. There can be no assurance that any reviews or proceedings
will mitigate or eliminate antidumping duties.



                                       6
<PAGE>   8
                        INTEGRATED SILICON SOLUTION, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


        On October 22, 1998, Micron Technology filed an anti-dumping petition
against DRAMs fabricated in Taiwan. Currently, the Company's DRAM products are
fabricated in Taiwan. The case is expected to take from 12 to 18 months to
complete. If the petition is upheld, the Company could face DRAM duties unless
it is able to secure DRAM from outside of Taiwan. Currently, DRAM accounts for
less than 10% of the Company's revenue.


11. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

        In June 1997, the Financial Accounting Standards Board issued Statement
No. 131 "Disclosures About Segments of An Enterprise and Related Information"
(FAS No. 131). FAS No. 131 will require the Company to use the "management
approach" in disclosing segment information. FAS No. 131 became effective for
the Company during fiscal 1999. The Company does not believe that the adoption
of FAS No. 131 will have a material impact on the Company's results of
operations, cash flows, or financial position.

        In June 1998, the Financial Accounting Standards Board issued Statement
No. 133 "Accounting for Derivative Instruments and Hedging Activities" (FAS No.
133). FAS No. 133 will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. The change in a derivative's fair
value related to the ineffective portion of a hedge, if any will be immediately
recognized in earnings. The Company expects to adopt FAS No. 133 as of the
beginning of its fiscal year 2000. The Company does not believe that the
adoption of FAS No. 133 will have a material impact on the Company's results of
operations, cash flows, or financial position.


12. SPIN-OFF OF NEXFLASH TECHNOLOGIES, INC.

        Effective October 1, 1998, the Company transferred certain employees and
joint ownership of certain patents and related Flash technology to a newly
formed company, NexFlash Technologies, Inc. The Company and NexFlash jointly own
existing Flash related patents, and NexFlash will continue development of Flash
products. The Company owns approximately 32% of NexFlash, and ISSI-Taiwan owns
approximately 17%, which includes approximately 6% of NexFlash purchased for
$1,000,000. ISSI's President is temporarily acting as Chief Executive Officer of
NexFlash.

        In connection with the NexFlash transaction, the Company issued warrants
to purchase an aggregate of 981,659 shares of ISSI Common Stock at an exercise
price of $3.76 per share to the NexFlash investors. The warrants expire on
November 4, 2000.

        As a result of this transaction and after recording its equity in the
net loss of NexFlash of $0.5 million for the quarter ended December 31, 1998,
the Company is carrying an equity investment in NexFlash of $2.6 million.



                                       7
<PAGE>   9
                        INTEGRATED SILICON SOLUTION, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


13. OTHER TRANSACTIONS

1998 ISSI-TAIWAN STOCK PLAN

        On October 29, 1998, the Company adopted the 1998 ISSI-Taiwan Stock Plan
"Taiwan Stock Plan" that provides for non-statutory stock options in the common
stock of ISSI-Taiwan for employees, consultants, and directors of the Company.
Upon exercise, if any, the Company would sell its shares in ISSI-Taiwan to the
optionee. Under terms of the Taiwan Stock Plan, the maximum aggregate number of
shares of ISSI-Taiwan stock which may be optioned and sold is 12,000,000. This
represents approximately 10% of the outstanding shares of ISSI-Taiwan. At
December 31, 1998, 11,999,000 shares were outstanding under the ISSI-Taiwan
Stock Plan.

        Under the terms of the Taiwan Stock Plan, the exercise price, which is
deemed to be fair value, and the exercise period of the non-statutory stock
option grants are determined by the Board of Directors on the date of grant.
Generally, the stock options vest one-third annually on the anniversary of the
date of grant. The options expire upon the earlier of ten years from the date of
grant or 30 days following termination of employment or consultancy.

        In the event of an optionee's termination of status as an employee or
consultant of the Company, without cause, within twelve months of certain
changes of control of the Company, the Taiwan Stock Plan provides for full
acceleration of the exercisability of all outstanding options.

REPRICE OF STOCK OPTIONS

        On December 2, 1998, the Board of Directors approved the repricing of
certain options outstanding previously granted to employees of the Company.
Approximately 2,007,000 shares with an aggregate exercise price of approximately
$17.3 million were repriced to an exercise price of $3.1562 per share. In
connection with the repricing, certain vesting and exercise rights were
surrendered.


14. PARTIAL SALE OF INTEGRATED SILICON SOLUTION (TAIWAN) INC.

        In December 1998, the Company sold an additional 20% of its holdings in
ISSI-Taiwan to a group of private investors resulting in a pre-tax gain of $1.2
million. Proceeds from the transaction net of withholding and transaction taxes
totaled $6.6 million (including cash of $4.3 million). Effective December 31,
1998, the Company owned approximately 43% of ISSI-Taiwan and accounted for
ISSI-Taiwan on the equity basis.

        ISSI-Taiwan was consolidated in the accompanying statement of operations
until December 31, 1998 when the additional 20% of its holdings were sold. The
accompanying consolidated balance sheet as of December 31, 1998 reflects
ISSI-Taiwan as an investment accounted for on the equity basis.


15. RESTATEMENT

        The Company's retained earnings as reported in its Form 10-K for the
year ended September 30, 1998 was restated. The impact of the restatement was to
increase accumulated deficit and decrease cumulative translation adjustment by
$6.7 million. There was no impact on income reported for any of the periods
presented herein.



                                       8
<PAGE>   10

                        INTEGRATED SILICON SOLUTION, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


16. SUBSEQUENT EVENT

PARTIAL SALE OF INVESTMENT IN WAFERTECH, LLC.

        In December 1998, the Company agreed to sell approximately 33% of its
investment in WaferTech to TSMC for approximately $10.0 million. The transaction
was completed in January 1999, and the Company retains a 2.67% interest in
WaferTech. The Company will record a loss of approximately $0.4 million in the
March 1999 quarter related to this transaction.



                                       9
<PAGE>   11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

        This report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934. All forward looking statements contained herein are
subject to certain factors that could cause actual results to differ materially
from those projected in the forward-looking statements. Such factors include,
but are not limited to the risk related factors set forth in this report on Form
10-Q.

BACKGROUND

        The Company designs, develops and markets high performance memory
devices including static random access memory ("SRAM"), specialty dynamic random
access memory ("DRAM"), and nonvolatile memory ("NVM"). The Company also
designs, develops and markets embedded memory devices which include voice
recording chips and certain microcontroller devices. The Company's memory
devices are used in networking applications, telecommunications, personal
computers ("PCs"), disk drives and other peripherals, data communications,
office automation, instrumentation and consumer products. SRAM products include
both asynchronous and synchronous devices ranging in densities from 64K to 4
megabit. DRAM products focus on high speed, low density devices with densities
of 2, 4, and 16 megabits. Nonvolatile memory products include EEPROMs
(electrically erasable programmable read only memories) and EPROMs (erasable
programmable read only memories). The Company has its headquarters in Santa
Clara, California and markets its products on a worldwide basis.

        The Company leverages its SRAM design and advanced complimentary metal
oxide semiconductor ("CMOS") process technology expertise to establish
collaborative manufacturing relationships with Asian semiconductor manufacturers
which use the Company's memory products as a vehicle for the development of
advanced process technology. Although the Company believes that these
relationships assist in securing access to leading edge process technology and a
committed source for wafer processing, there are also certain risks associated
with dependence on foundries for wafer manufacturing. See "Dependence on
Independent Wafer Foundries." The Company's principal collaborative
manufacturing relationship is with Taiwan Semiconductor Manufacturing
Corporation ("TSMC"), with which it jointly develops process technology for
producing the Company's SRAMs. The Company also has a collaborative program with
Chartered Semiconductor Manufacturing ("Chartered") in Singapore. In addition,
the Company has a manufacturing program with United Microelectronics Corporation
("UMC") in Taiwan. To further strengthen its manufacturing relationships, the
Company has made an equity investment in a business venture with TSMC and an
equity investment in a business venture with UMC.


RESULTS OF OPERATIONS

        The Company's financial results for fiscal 1998 are presented on a
consolidated basis and include the results of the operations which were
transferred to NexFlash as well as those of ISSI-Taiwan. Effective November
1998, the Company's financial results no longer consolidate the results of
NexFlash, as the Company's ownership of NexFlash became less than 50%. Effective
November 1998, the Company accounts for NexFlash on the equity basis and
includes in its financial statements its percentage share of NexFlash's results
of operations. This change is expected to have a minimal effect on the Company's
consolidated revenue and will result in a decrease in the Company's consolidated
research and development expenses. In late December 1998, the Company sold an
additional 20% of its interest in ISSI-Taiwan and, as a result, reduced its
ownership interest in ISSI-Taiwan to approximately 43%. The Balance Sheet as of
December 31, 1998 reflects the accounting for ISSI-Taiwan on the equity basis.
Beginning with the second quarter of fiscal 1999, the Company's Statement of
Operations will no longer consolidate the results of ISSI-Taiwan, but will
instead account for ISSI-Taiwan on the equity basis and will include its
percentage share of ISSI-Taiwan's results of operations. Beginning in the second
quarter of fiscal 1999, as the Company's consolidated results will no longer
include ISSI-Taiwan, there will be a significant decline in the Company's
consolidated revenue and operating expenses and there may be an increase in the
Company's effective tax rate. 



                                       10
<PAGE>   12

THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1997

        Net Sales. Net sales consist principally of total product sales less
estimated sales returns. Net sales decreased by 32% to $26.8 million in the
three months ended December 31, 1998, from $39.4 million in the three months
ended December 31, 1997. The decrease in sales was principally due to a decrease
in the average selling prices of the Company's SRAM products, as well as a
significant decline in unit shipments of the Company's 256K SRAM. Additionally,
shipments and average selling prices of the Company's DRAM products declined
significantly in the three months ended December 31, 1998 compared to the three
months ended December 31, 1997. The Company anticipates that the average selling
prices of its existing products will continue to decline over time, although the
rate of decline may fluctuate for certain products. There can be no assurance
that such declines will be offset by higher volumes or by higher prices on newer
products. See "Quarterly Fluctuations in Operating Results" and "Declines in
Average Selling Prices." Net sales includes approximately $1.2 million in sales
to NexFlash in the three months ended December 31, 1998. Additionally, included
in net sales for the three months ended December 31, 1998 were sales of
ISSI-Taiwan of approximately $9.7 million. Effective January 1, 1999, the
Company's financials results will no longer consolidate the sales of
ISSI-Taiwan. Sales to 3Com accounted for approximately 15% and 18% of total net
sales for the quarter ended December 31, 1998 and December 31, 1997,
respectively. As sales to this customer are executed pursuant to purchase orders
and no purchasing contract exists, the customer can cease doing business with
the Company at any time.

        Gross Profit. The Company's cost of sales includes die cost from the
wafers acquired from foundries, subcontracted package and assembly costs, costs
associated with in-house product testing, quality assurance and import duties.
Gross profit decreased 56% to $4.0 million in the three months ended December
31, 1998, from $9.2 million in the three months ended December 31, 1997. As a
percentage of net sales, gross profit decreased to 14.9% in the three months
ended December 31, 1998 from 23.3% in the three months ended December 31, 1997.
The December 31, 1997 quarter included a $2.6 million inventory write-down, of
which $1.8 million related to lower of cost or market issues on certain of the
Company's NVM products and $0.8 million related to the write-down of a specific
DRAM product, for which the Company's six month forecast showed minimal demand
at December 31, 1997. Excluding the inventory write-down in the December 1997
quarter, the decrease in gross profit was primarily due to a decrease in the
average selling prices of the Company's SRAM products, as well as a significant
decline in unit shipments of the Company's 256K SRAM. Additionally, shipments
and average selling prices of the Company's DRAM products declined significantly
in the three months ended December 31, 1998 compared to the three months ended
December 31, 1997. Although product unit costs were lower in the December 1998
quarter compared to the December 1997 quarter, such reductions did not offset
the declines in average selling prices resulting in lower gross margins. The
Company believes that the average selling price of its products will continue to
decline and, unless the Company is able to reduce its cost per unit to the
extent necessary to offset such declines, the decline in average selling prices
will result in a material decline in the Company's gross margin. Although the
Company has product cost reduction programs in place for certain products that
involve efforts to reduce internal costs and supplier costs, there can be no
assurance that product costs will be reduced or that such reductions will be
sufficient to offset the expected declines in average selling prices. The
Company does not believe that such cost reduction efforts are likely to have a
material adverse impact on the quality of its products or the level of service
provided by the Company.

        Research and Development. Research and development expenses decreased by
22% to $5.8 million in the three months ended December 31, 1998, from $7.4
million in the three months ended December 31, 1997. As a percentage of net
sales, research and development expenses increased to 21.5% in the three months
ended December 31, 1998, from 18.8% in the three months ended December 31, 1997.
The decreases in absolute dollars were primarily the result of the Company's
transfer of Flash development efforts to NexFlash, as well as the Company's
expense reduction efforts, which include a reduction in workforce during fiscal
1998, salary cuts, and limitations on discretionary spending. The Company
anticipates research and development expenses will decline next quarter
primarily as a result of its no longer consolidating the financial results of
ISSI-Taiwan, and believes that such expenses in subsequent quarters may
fluctuate as a percentage of net sales.



                                       11
<PAGE>   13
        In-process Technology. In December 1997, the Company completed its
acquisition of Nexcom in exchange for the issuance of 772,693 shares of Common
Stock, $0.5 million in cash, and the assumption of $1.2 million of net
liabilities (total consideration of approximately $8.5 million). In addition,
the Company incurred approximately $400,000 in other costs related to this
transaction. The transaction was accounted for as a purchase and resulted in an
in-process technology charge of $7.1 million in the Company's December 31, 1997
quarter.

        Selling, General and Administrative. Selling, general and administrative
expenses decreased by 22% to $3.6 million in the three months ended December 31,
1998 from $4.7 million in the three months ended December 31, 1997. As a
percentage of net sales, selling, general and administrative expenses increased
to 13.5% in the three months ended December 31, 1998, from 11.8% in the three
months ended December 31, 1997. The decrease in absolute dollars was primarily
the result of decreased selling commissions associated with lower revenues and,
to a lesser extent, decreased payroll resulting from the spin-off of NexFlash.
The Company expects its selling, general and administrative expenses to decline
next quarter primarily as a result of its no longer consolidating the financial
results of ISSI-Taiwan and believes that such expenses in subsequent quarters
may fluctuate as a percentage of net sales.

        Other income, Net. Other income, net increased to $1.6 million in the
three months ended December 31, 1998 from $0.3 million in the three months ended
December 31, 1997. In December 1998, the Company sold an additional 20% of its
holdings in ISSI-Taiwan to a group of private investors resulting in a pre-tax
gain of $1.2 million. After completion of this transaction, the Company owns
approximately 43% of ISSI-Taiwan. Proceeds from the transaction net of
withholding and transaction taxes totaled $6.6 million (including cash of $4.3
million).

        Provision (benefit) for Income Taxes. The income tax provision for the
three month period ended December 31, 1997 is based on an annual estimate of
Taiwan taxable income after the exemption for the Taiwan tax holiday plus
withholding taxes. The effective tax rate for the three months ended December
31, 1998 is higher than for the same period for 1997 due to higher withholding
taxes related to the sale of ISSI-Taiwan stock. Subsequent to the sale of
additional ISSI-Taiwan shares and the transfer of NexFlash to joint ownership,
the Company's effective tax rate may increase if profits are earned in the U.S.

LIQUIDITY AND CAPITAL RESOURCES

        As of December 31, 1998, the Company's principal sources of liquidity
included cash, cash equivalents and short-term investments of approximately
$21.1 million. During the first three months of fiscal 1999, operating
activities used cash of approximately $4.4 million. Cash used by operations was
primarily due to decreases in accounts payable and net loss partially offset by
decreases in inventory, accounts receivable, and other assets.

        Inventory decreased to $30.6 million at December 31, 1998 from $46.5
million at September 30, 1998. The decrease in inventory was primarily the
result of accounting for ISSI-Taiwan on the equity basis.

        Accounts payable decreased to $34.6 million at December 31, 1998 from
$40.6 million at September 30, 1998. The balance of accounts payable is
principally related to inventory purchases.

        In the first three months of fiscal 1999, the Company used $11.5 million
for investing activities compared to $10.2 million in the first three months of
fiscal 1998. The cash used for investing activities was primarily the result of
a net cash outflow of $7.9 million from the partial sale of ISSI-Taiwan which
represents the pre-tax cash received from the partial sale net of the cash
excluded from the balance sheet as a result of accounting for ISSI-Taiwan on the
equity basis. In addition, $2.3 million was used for the acquisition of fixed
assets, $1.0 million invested by ISSI-Taiwan in NexFlash, and $0.5 million was
invested in Dynachip which includes $0.3 million invested by ISSI-Taiwan.



                                       12
<PAGE>   14

        In the first three months of fiscal 1999, the Company made capital
expenditures of approximately $2.3 million, of which substantially all was by
ISSI-Taiwan for the purchase of test equipment. The Company expects to spend
approximately $2.5 million to purchase capital equipment during the next twelve
months, principally for the purchase of computer software and hardware, design
and engineering tools and additional test equipment.

        In June 1998, the Company sold approximately 46% of ISSI-Taiwan to a
group of private investors. In December 1998, the Company sold an additional 20%
of its holdings in ISSI-Taiwan to a group of private investors resulting in a
pre-tax gain of $1.2 million. Proceeds from the transaction net of withholding
and transaction taxes totaled $6.6 million (including cash of $4.3 million).
After completion of this transaction the Company owns approximately 43% of
ISSI-Taiwan and will account for ISSI-Taiwan on the equity basis.

        In June 1996, the Company entered into a business venture "WaferTech,
LLC" with TSMC, Altera, Analog Devices, and private investors to build a wafer
fabrication facility in Camas, Washington. The Company agreed to invest $31.2
million for a 4% equity interest in the venture and, as of September 30, 1998,
all of this amount had been paid. The last scheduled payment to WaferTech by the
Company of $12.5 million was made in November 1997. In December 1998, the
Company agreed to sell approximately 33% of its investment in WaferTech to TSMC
for approximately $10.0 million. The transaction was completed in January 1999,
and the Company retains a 2.67% interest in WaferTech. The Company will record a
loss of approximately $0.4 million in the March 1999 quarter related to this
transaction. The Company has also agreed to certain minimum wafer purchase
commitments with its foundry partners in exchange for wafer capacity
commitments. In fiscal 1995, the Company entered into an agreement with TSMC
pursuant to which the Company agreed to acquire specified wafer capacity through
2001. The Company also agreed to make certain annual payments totaling
approximately $19.2 million through 2001 to TSMC for additional capacity above
the annual base capacity. Wafer purchases in any given year are first applied to
the base capacity and then to the Company's $19.2 million obligation. As a
result, the $19.2 million may be subject to forfeiture if the Company does not
purchase the base capacity and additional capacity for which it has contracted.
The Company also has minimum purchase obligations to TSMC related to WaferTech
LLC. The Company is obligated to purchase from WaferTech or TSMC a minimum of
2.3% of WaferTech's installed capacity. Initial wafer outs occurred in the
second half of calendar 1998. Additionally, in fiscal 1995, the Company entered
into a business venture "United Integrated Circuits Corp" ("UICC") with UMC and
other investors to build a wafer fabrication facility in Hsinchu, Taiwan. The
Company has invested approximately $7.4 million for approximately a 1.7% equity
interest and ISSI-Taiwan has invested approximately $9.8 million (subject to
fluctuations in the New Taiwanese Dollar) for approximately a 2.1% equity
interest in the venture of which UMC retains 55% ownership. The final payment of
approximately $4.7 million was made to UICC in December 1997. The UICC facility
was severely damaged by fire in October 1997. It is the Company's understanding
that the damage was covered by insurance. UICC has undertaken a clean up of the
facility but reconstruction has not commenced as an alternative site is being
evaluated. A decision as to whether to build on the existing site or the
alternative site has not yet been made. The Company believes that its investment
of $7.4 million is recoverable.

        The Company generated $1.1 million from financing activities during the
first three months of fiscal 1999, as compared to using $2.3 million in the
first three months of fiscal 1998. The source of financing for the current
quarter was from net borrowings under short-term and long-term lines of credit.

        On April 22, 1998, the U.S. Department of Commerce ("DOC") published an
amended antidumping duty order on imports of SRAMs from Taiwan from where the
Company currently imports a majority of its SRAMs. As a consequence of this
antidumping duty order, the Company is required to post a cash deposit on
imports of Taiwan fabricated SRAM wafers or devices, at the ad valorem rate of
7.56%. The cash deposits subsequently could be returned to the Company or,
alternatively, the Company could forfeit amounts deposited and owe duties and
interest in addition to the amounts deposited, depending on whether the DOC
conducts an administrative review of imports entered after the imposition of the
antidumping order, and if so, on the results of the DOC review. The decision on
whether to conduct a review will be made in 1999, and the results of the review
would be issued in the year 2000.



                                       13
<PAGE>   15

        The Company has retained legal counsel to defend and assist in its
interests in the antidumping proceedings. In addition, certain aspects of the
antidumping determination are being challenged in federal court proceedings by
some of the respondents to the investigation, and these proceedings could result
in the termination of this antidumping case. Duties calculated and assessed by
the government could have a material adverse affect on the Company's gross
margins and profits. There can be no assurance that any reviews or proceedings
will mitigate or eliminate antidumping duties.

        On October 22, 1998, Micron Technology filed an antidumping petition
against DRAMs fabricated in Taiwan. Currently, the Company's DRAM products are
fabricated in Taiwan. The case is expected to take from 12 to 18 months to
complete. If the petition is upheld, the Company could face DRAM duties, unless
it is able to secure DRAM from outside of Taiwan. Currently, DRAM accounts for
less than 10% of the Company's revenue.

        The Company believes that its existing funds together with available
financing will satisfy the Company's anticipated working capital and other cash
requirements through the next 12 months. The Company may evaluate actions to
further increase its cash position such as bank borrowings, sales of additional
shares of ISSI-Taiwan, the disposition of certain assets, equity financing, and
debt financing.

        The Company, from time to time, evaluates potential acquisitions and
equity investments complementary to its memory expertise and market strategy. To
the extent the Company pursues such transactions, any such transactions could
require the Company 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 the Company, if at all.



                                       14
<PAGE>   16




CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S BUSINESS OR FUTURE OPERATING
RESULTS

DEPENDENCE ON SRAM PRODUCTS; DECLINE IN AVERAGE SELLING PRICES FOR SRAM PRODUCTS

               A substantial majority of the Company's net sales are derived
from the sale of SRAM products, which are subject to unit volume fluctuations
and declines in average selling prices. For example, in the June 1998 quarter,
the Company's net sales decreased by 38% to $25.0 million from $40.7 million in
the March 1998 quarter, principally due to a decrease in unit shipments of the
Company's SRAM products. In fiscal 1997, the Company's net sales decreased by
18% to $108.3 million from $132.0 million in fiscal 1996. This decrease in sales
was principally due to significant deterioration in the average selling prices
of the Company's SRAM and NVM products. The Company anticipates that the average
selling prices of its existing products will continue to decline over time,
although the rate of decline may fluctuate for certain products. There can be no
assurance that such declines will be offset by higher volumes or by higher
prices on newer products.

QUARTERLY FLUCTUATIONS IN OPERATING RESULTS

        The Company's future quarterly and annual operating results are subject
to fluctuations due to a wide variety of factors, many of which are outside of
its control, including declines in average selling prices of the Company's
products, oversupply of memory products in the market, failure to introduce new
products and to implement technologies on a timely basis, the timing and
announcement of new product introductions by the Company and its competitors,
market acceptance of the Company's and its customers' products, the failure to
anticipate changing customer product requirements, fluctuations in manufacturing
yields, disruption in delivery and order fulfillment, and disruption in the
supply of wafers or assembly services. Other factors include changes in product
mix, seasonal fluctuations in customer demand for the Company's products, the
timing of significant orders, increased expenses associated with new product
introductions or process changes, the ability of customers to make payments to
the Company, increases in material costs, increases in antidumping duties,
increases in costs associated with the expansion of sales channels, increases in
general and administrative expenses, and certain production and other risks
associated with using independent manufacturers. In this regard, in the June
1998 quarter, the Company's net sales decreased by 38% to $25.0 million from
$40.7 million in the March 1998 quarter principally due to a decrease in unit
shipments of the Company's SRAM products. In addition, in fiscal 1997, the
Company's net sales decreased by 18% to $108.3 million from $132.0 million in
fiscal 1996. This decrease in sales was principally due to significant
deterioration in the average selling prices of the Company's SRAM and NVM
products. In the first three months of fiscal 1999, approximately 42% of the
Company's net sales was attributable to customers located in the United States,
14% was attributable to customers located in Europe and 44% was attributable to
customers located in Asia. In fiscal 1998, approximately 43% of the Company's
net sales was attributable to customers located in the United States, 18% was
attributable to customers located in Europe and 39% was attributable to
customers located in Asia. In fiscal 1997, approximately 45% of the Company's
net sales was attributable to customers located in the United States, 13% was
attributable to customers located in Europe and 42% was attributable to
customers located in Asia. In the first three months of fiscal 1999, in fiscal
1998 and 1997, international sales (sales by ISSI-Taiwan and export sales by
ISSI-U.S.) comprised approximately 58%, 57% and 55% of the Company's net sales,
respectively. Accordingly, the Company's future operating results will also
depend in part on general economic conditions in Asia, the United States and its
other markets. In this regard, since late 1997 many Asian countries, including
Korea, Japan and Thailand, have experienced significant economic downturns and
significant declines in the value of their currencies relative to the U.S.
dollar. The Company is unable to predict what future effect, if any, these
factors will have on its ability to maintain or increase its sales in these
markets. In addition, there can be no assurance that the markets for the
Company's products, which are highly cyclical, will continue to grow.

        In late December 1998, the Company sold an additional 20% of its
interest in ISSI-Taiwan and, as a result, reduced its ownership interest in
ISSI-Taiwan to approximately 43%. Beginning with the second quarter of fiscal
1999, the Company's Statement of Operations will no longer consolidate the
results of ISSI-Taiwan, but will instead account for ISSI-Taiwan on the equity
basis and will include its percentage share of 



                                       15
<PAGE>   17

ISSI-Taiwan's results of operations. Beginning in the second quarter of fiscal
1999, as the Company's consolidated results no longer include ISSI-Taiwan, there
will be a significant decline in the Company's consolidated revenue and
operating expenses, and there may be an increase in the Company's effective tax
rate.

DECLINES IN AVERAGE SELLING PRICES

        Competitive pricing pressures due to an industry-wide oversupply of
wafer capacity resulted in significant price decreases for the Company's
products during 1996, 1997 and 1998. Historically, average selling prices for
semiconductor memory products have declined, and the Company expects that
average selling prices will decline in the future. Accordingly, the Company's
ability to maintain or increase revenues will be highly dependent upon its
ability to increase unit sales volume of existing products and introduce and
sell new products which compensate for the anticipated declines in the average
selling prices of its existing products. Declining average selling prices will
also adversely affect the Company's gross margins and profits unless the Company
is able to introduce new products with higher margins or reduce its cost per
unit to offset declines in average selling prices. There can be no assurance
that the Company will be able to increase unit sales volumes, introduce and sell
new products or reduce its cost per unit. In this regard, the Company has a cost
reduction program in place, which involves efforts to reduce internal costs and
supplier costs, in an effort to reduce its cost per unit for certain products.
The Company does not believe that such cost reduction efforts are likely to have
a material adverse impact on the quality of its products or the level of service
provided by the Company.

RISK OF INVENTORY WRITE-DOWNS

        Shifts in industry-wide capacity from shortages to oversupply or from
oversupply to shortages may result in significant fluctuations in the Company's
quarterly or annual operating results. The semiconductor industry is highly
cyclical and is subject to significant downturns resulting from excess capacity,
overproduction, reduced demand or technological obsolescence. These factors can
result in a decline in average selling prices and the stated value of inventory.
In fiscal 1998, the Company recorded inventory write-downs of $23.0 million,
including $9.6 million in the September 1998 quarter. The inventory write-downs
were predominately for lower of cost or market issues on certain of the
Company's products, primarily SRAMs. The September 1998 quarter included a $2.9
million write-down of certain of the Company's Flash inventories due to
obsolescence resulting from the Company's decision to spin off the Flash product
business to form NexFlash. In addition, in the December 1997 quarter, the
Company wrote-off $0.8 million worth of a specific DRAM product, for which the
Company's six month forecast showed minimal demand at December 31, 1997 and for
which the Company has had minimal sales to date. It is the Company's practice to
write-down to zero carrying value inventory on hand in excess of six months
estimated sales volumes to cover estimated exposures unless adjustments are made
to the forecast based on management's judgments for newer products, end of life
products or planned inventory increases. Management's judgments take into
account the product life cycles which can range from 6 to 24 months, the
maturity of the product as to whether it is newly introduced or is approaching
its end of life, the impact of competitor announcements and product
introductions on the Company's products and purchasing opportunities due to
excess wafer capacity. The Company believes that six months is an appropriate
period because it is difficult to accurately forecast for a specific product
beyond this time frame due to potential introduction of products by competitors,
technology obsolescence or fluctuations in demand. In this regard, in the June
1996 quarter, the Company recorded a $15 million write-down for various SRAM and
NVM products that the Company's forecast indicated would not be sold in the next
six months. The Company did not expect to sell the excess inventory at the time
because the volume and price declines from the December 1995 quarter to the June
1996 quarter resulted in a decrease in revenues of 38%. During this period,
market conditions were extremely uncertain. Furthermore, during the fourth
fiscal quarter of 1996 the Company experienced a continued decline in revenue of
16% from the June 1996 quarter. While the Company continued to focus on the
selling of this product, sales reached a bottom in its decline in the September
1996 quarter and stayed relatively flat in the December 1996 quarter.
Subsequently, as market conditions improved in the latter part of the December
1996 quarter, the Company was able to sell certain of these products. As a
result of improving market conditions during fiscal 1997, the Company was able
to sell 



                                       16
<PAGE>   18
$13.9 million of the written-off product. However, the Company considers
such sales unusual and there can be no assurance that in the future written-off
inventory can be sold. Historically, the Company has consistently applied this
practice in valuing inventory and, until the events that transpired in the first
through third quarters of fiscal 1996, had never recorded material write-downs
or recoveries. The Company believes that based on the factors noted above, its
six month write-off policy is still appropriate as a method to identify and
estimate inventory exposure. There can be no assurance that in the future
additional inventory write-downs will not occur.

PRODUCT CONCENTRATION AND DEPENDENCE ON PERSONAL COMPUTER INDUSTRY

        A majority of the Company's products are incorporated into products such
as modems, networking equipment, disk drives and PC cache. The PC and PC
peripherals industry has from time to time experienced cyclical, depressed
business conditions, often in connection with, or in anticipation of, a decline
in general economic conditions. Such industry downturns have resulted in reduced
product demand and declining average selling prices. The Company's business and
operating results would be materially and adversely affected by any future
downturns in the peripherals industry or in PCs.

CUSTOMER CONCENTRATION

        The Company's sales are concentrated within a limited customer base.
Sales to one customer, 3Com, accounted for approximately 15% and 18% of total
net sales for the quarter ended December 31, 1998 and December 31, 1997,
respectively. As sales to this customer are executed pursuant to purchase orders
and no purchasing contract exists, the customer can cease doing business with
the Company at any time. The Company expects a significant portion of its future
sales to remain concentrated within a limited number of strategic customers.
There can be no assurance that the Company will be able to retain its strategic
customers or that such customers will not otherwise cancel or reschedule orders,
or in the event of canceled orders, that such orders will be replaced by other
sales. In addition, sales to any particular customer may fluctuate significantly
from quarter to quarter. The occurrence of any such events could have a material
adverse effect on the Company's business and operating results.

DEPENDENCE ON INDEPENDENT WAFER FOUNDRIES

        The Company has combined its fabless manufacturing strategy with
technology partnerships and equity investments. This hybrid approach, which the
Company calls "Fab-Lite(TM)", has provided advanced process technology and a
committed wafer supply. To date, the Company's principal manufacturing
relationship has been with TSMC, from which the Company has obtained a
substantial majority of its wafers. The Company also receives wafers from
Chartered Semiconductor and UMC. Each of the Company's wafer suppliers also
fabricates for other integrated circuit companies, including certain of the
Company's competitors. Although the Company has written commitments specifying
wafer capacities from its suppliers, if these suppliers experience manufacturing
failures or yield shortfalls, choose to prioritize capacity for other use or
reduce or eliminate deliveries to the Company, there can be no assurance that
the Company could enforce fulfillment of the delivery commitments. There can be
no assurance that the Company would be able to qualify additional manufacturing
sources for existing or new products in a timely manner or that such additional
manufacturing sources would agree to deliver an adequate supply of wafers. If
the Company were unable to obtain an adequate supply of wafers from its current
or any alternative sources in a timely manner, its business and operating
results would be materially and adversely affected.

        The Company has certain minimum wafer purchase commitments with its
foundry partners in exchange for wafer capacity commitments. The Company has
agreed to make certain annual purchases totaling, in aggregate, approximately
$19.2 million through 2001 from TSMC for additional capacity above the annual
base capacity. Wafer purchases in any given year are first applied to the base
capacity and then to the Company's $19.2 million obligation. As a result, the
$19.2 million may be subject to forfeiture if the Company does not purchase the
base capacity and additional capacity for which it has contracted. The Company
has minimum purchase obligations to TSMC related to WaferTech LLC, a business
venture in 



                                       17
<PAGE>   19

which the Company is an investor. The Company is obligated to purchase from
WaferTech or TSMC a minimum of 2.3% of WaferTech's installed capacity. Although
the Company has rights to re-schedule or assign capacity to another party, there
can be no assurance that such re-schedule or assignment would be successfully
accomplished. Should the Company fail to re-schedule or assign unneeded
capacity, the Company will be required to make payments for the unused capacity
and its business and operating results would be materially and adversely
affected.

INTERNATIONAL OPERATIONS

        The Company is subject to the risks of conducting business
internationally, including economic conditions in Asia, particularly Taiwan,
changes in trade policy and regulatory requirements, tariffs and other trade
barriers and restrictions, the burdens of complying with foreign laws, and
possibly, political instability. The Company anticipates that sales to
international customers will continue to represent a significant percentage of
net sales. In addition, substantially all of the Company's foundries and
assembly and test operations are located in Asia. The Company transacts business
predominately in U.S. and New Taiwan dollars. Such transactions expose the
Company to the risk of exchange rate fluctuations. The Company monitors its
exposure to foreign currency fluctuations, and has from time to time taken
action to hedge against such exposure, but has not to date adopted any formal
hedging strategy. The Company's business and results of operations have been
negatively impacted by exchange rate fluctuations in the past and there can be
no assurance that exchange rate fluctuations will not materially and adversely
affect its business and operating results in the future.

COMPETITION

        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. The ability of the Company to compete
successfully in the high performance memory market depends on factors both
within and outside of its control, including imbalances in supply and demand,
product pricing, the rate at which OEM customers incorporate the Company's
products into their systems, access to advance process technologies at
competitive prices, product functionality, performance, and reliability,
successful and timely product development, wafer supply, wafer costs,
achievement of acceptable yields of functional die, the gain or loss of
significant customers, the nature of its competitors and general economic
conditions. There can be no assurance that the Company will be able to compete
successfully in the future as to any of these factors. The failure of the
Company to compete successfully in these or other areas could materially and
adversely affect the Company's business and operating results. In addition, the
Company is vulnerable to technology advances utilized by competitors to
manufacture higher performance or lower cost products.

CLAIMS REGARDING INTELLECTUAL PROPERTY

        In the semiconductor industry it is typical for companies to receive
notices from time to time alleging infringement of patents or other intellectual
property rights of others. The Company has been, and from time-to-time expects
to be, notified of claims that it may be infringing patents, maskwork rights or
copyrights owned by third parties. Although none of these companies have pursued
a claim against the Company, there can be no assurance that other companies will
not in the future pursue claims against the Company with respect to the alleged
infringement of patents, maskwork rights, copyrights or other intellectual
property owned by third parties. If it appears necessary or desirable, the
Company may seek licenses under patents that it is alleged to be infringing.
Although patent holders commonly offer such licenses, there is no assurance that
any licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain a license under a key patent or
intellectual property right from a third party for technology used by the
Company could cause the Company to incur substantial liabilities and to suspend
the manufacture of the products utilizing the invention or to attempt to develop
non-infringing products, any of which could materially and adversely affect the
Company's business and operating results.



                                       18
<PAGE>   20

RISK OF INCREASED TAXES

        The Company's tax rate could fluctuate for a number of reasons. For
example, if the proportions of taxable income shifted such that a greater
proportion of taxable income is earned by U.S. operations, the Company's
effective tax rate may increase. In addition, the Company's taxes would increase
if all or a portion of the earnings of ISSI-Taiwan were to become subject to
U.S. tax as the result of actual dividends or through U.S. rules for taxing
controlled foreign corporations. Further, if profits of ISSI-Taiwan are
distributed to the Company as dividends they become subject to Taiwan
withholding tax as well as U.S. tax (with an offset for underlying Taiwan taxes
paid) and the tax rate would increase.

        Through December 1998, ISSI-Taiwan was a controlled foreign corporation
("CFC") for U.S. income tax purposes. Under U.S. rules for taxing CFCs, all or a
portion of the earnings of ISSI-Taiwan may become subject to U.S. tax as
inclusions in the U.S. taxable income of the Company (with a credit for foreign
taxes paid by ISSI-Taiwan) if one or more of a number of events occur. Such
events include, but are not limited to, ISSI-Taiwan lending funds to the Company
or otherwise investing in certain proscribed assets and ISSI-Taiwan engaging in
various types of transactions defined in the Subpart F provisions of the U.S.
Internal Revenue Code. The Company believes that its existing plans will
minimize the impact of the CFC rules for the immediate future, subject to such
changes in U.S. tax laws as may occur. However, over time the CFC rules may
cause the Company's tax rate to increase.

YEAR 2000 READINESS DISCLOSURE

        The Company is aware of the issues associated with computer systems as
the Year 2000 approaches. The Year 2000 issues are the result of common computer
programming techniques that result in systems that do not function properly when
manipulating dates later than December 31, 1999. The problem may affect internal
information technology (IT) systems used by the Company for product design,
product test, accounting, distribution and planning. The problem may also affect
non-IT systems such as security systems, communication equipment and other
equipment.

        The Company has done an initial assessment of its critical IT systems
and has identified at least one area (accounting software) that is not Year 2000
compliant. The Company has selected an alternative software package and intends
to have implementation completed by October 1999. However, there can be no
assurance that there will not be a delay in the implementation of such systems.
It is estimated that the cost of implementing the new software will range
between $0.3 million to $0.6 million. With respect to critical non-IT systems,
the Company has assessed the compliance of these systems and believes that these
systems are Year 2000 compliant. There can be no assurance that the Company has
successfully identified all its internal Year 2000 issues. The failure to
identify and address internal Year 2000 issues in a timely fashion could have a
material adverse affect on the Company's business and results of operations.

        The Company could possibly be adversely impacted by Year 2000 issues
faced by major suppliers, subcontractors, and customers. The Company is in the
process of determining the potential impact on its operations as a result of the
Year 2000 readiness of these third parties. Their failure to address Year 2000
issues could have an impact on the Company's operations and financial results.
The extent of this impact, if any, is not known at this time.

        The above discussion regarding costs, risks and estimated completion
dates for the Year 2000 is based on the Company's best estimates given
information that is currently available, and is subject to change. As the
Company proceeds with this project, it may discover that actual results will
differ materially from these estimates.



                                       19
<PAGE>   21
VOLATILITY OF STOCK PRICE

        The trading price of the Company's Common Stock has been subject to wide
fluctuations in response to quarter-to-quarter variations in operating results,
announcements by the Company or its competitors, increases or decreases in wafer
capacity, general conditions in the semiconductor or computer industries,
governmental regulations, trade laws and import duties, litigation, new or
revised earnings estimates, comments or recommendations issued by analysts who
follow the Company, its competitors or the semiconductor industry and other
events or factors. In addition, stock markets have experienced extreme price and
trading volume volatility in recent years. This volatility has had a substantial
effect on the market prices of securities of many high technology companies for
reasons frequently unrelated to the operating performance of the specific
companies. These broad market fluctuations may adversely affect the market price
of the Company's Common Stock.



                                       20
<PAGE>   22
                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        On April 22, 1998, the U.S. Department of Commerce ("DOC") published an
amended antidumping duty order on imports of SRAMs from Taiwan from where the
Company currently imports a majority of its SRAMs. As a consequence of this
antidumping duty order, the Company is required to post a cash deposit on
imports of Taiwan fabricated SRAM wafers or devices, at the ad valorem rate of
7.56%. The cash deposits subsequently could be returned to the Company or,
alternatively, the Company could forfeit amounts deposited and owe duties and
interest in addition to the amounts deposited. The outcome is dependent on
whether the DOC conducts an administrative review of imports entered after the
imposition of the antidumping order, and if so, on the results of the DOC
review. The decision on whether to conduct a review will be made in 1999 and the
results of the review will be issued in the year 2000.

        The Company has retained legal counsel to defend and assist in its
interests in the antidumping proceedings. In addition, certain aspects of the
antidumping determination are being challenged in federal court proceedings by
some of the respondents to the investigation, and these proceedings could result
in the termination of this antidumping case. Duties calculated and assessed by
the government could have a material adverse affect on the Company's gross
margins and profits. There can be no assurance that any reviews or proceedings
will mitigate or eliminate antidumping duties.

        On October 22, 1998, Micron Technology filed an anti-dumping petition
against DRAMs fabricated in Taiwan. Currently, the Company's DRAM products are
fabricated in Taiwan. The case is expected to take from 12 to 18 months to
complete. If the petition is upheld, the Company could face DRAM duties unless
it is able to secure DRAM from outside of Taiwan. Currently, DRAM accounts for
less than 10% of the Company's revenue.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K


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

                Exhibit 27 Financial Data Schedule.

        (b) Reports on Form 8-K.

        The registrant did not file any reports on Form 8-K during the quarter
ended December 31, 1998.

ITEM 7A. FINANCIAL MARKET RISK

        The Company's principal financial market risk relates to the interest
rates associated with our available-for-sale securities. At December 31, 1998,
our market risk related to these investments was immaterial.



                                       21
<PAGE>   23
                                   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:  February 16, 1999              /s/ Gary L. Fischer
                                       -----------------------------------------
                                       Gary L. Fischer
                                       Executive Vice President,
                                       Office of the President, and
                                       Chief Financial Officer
                                       (Principal Financial and
                                       Accounting Officer)



                                       22
<PAGE>   24


                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
EXHIBIT
NUMBER             DESCRIPTION
-------            -----------
<S>                <C>
  27               Financial Data Schedule.
</TABLE>