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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended March 31, 2005



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



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Integrated Silicon Solution, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 77-0199971                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification 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)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No ̈



The number of outstanding shares of the registrants Common Stock as of April 29, 2005 was 36,832,885.



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##### Table of Contents

TABLE OF CONTENTS



|               |  |                                                                                                                |  |   
|-------------- |  | -------------------------------------------------------------------------------------------------------------- |  | --
|PART I         |  | Financial Information                                                                                          |  |   
|               |  |                                                                                                               
|Item 1.        |  | Financial Statements                                                                                           |  |   
|               |  |                                                                                                               
|               |  | Condensed Consolidated Statements of Operations Three and six months ended March 31, 2005 and 2004 (Unaudited) |  | 1 
|               |  |                                                                                                               
|               |  | Condensed Consolidated Balance Sheets March 31, 2005 (Unaudited) and September 30, 2004                        |  | 2 
|               |  |                                                                                                               
|               |  | Condensed Consolidated Statements of Cash Flows Six months ended March 31, 2005 and 2004 (Unaudited)           |  | 3 
|               |  |                                                                                                               
|               |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                               |  | 4 
|               |  |                                                                                                               
|Item 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                          |  | 14
|               |  |                                                                                                               
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                                     |  | 35
|               |  |                                                                                                               
|Item 4.        |  | Controls and Procedures                                                                                        |  | 36
|               |  |                                                                                                               
|PART II        |  | Other Information                                                                                              |  |   
|               |  |                                                                                                               
|Item 1.        |  | Legal Proceedings                                                                                              |  | 36
|               |  |                                                                                                               
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                                            |  | 36
|               |  |                                                                                                               
|Item 6.        |  | Exhibits                                                                                                       |  | 37
|               | 
|Signatures     |  | 38                                                                                                            
|               | 
|Certifications |  |                                                                                                               



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

Integrated Silicon Solution, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share
data)



|                                                                                                             |  |                              |         |                            |      |   |        |  |   |         |   |  |   |       
|------------------------------------------------------------------------------------------------------------ |  | ---------------------------- | ------- | -------------------------- | ---- | - | ------ |  | - | ------- | - |  | - | ------
|                                                                                                             |  | Three Months Ended March 31, |         | Six Months Ended March 31,
|                                                                                                             |  | 2005                         |         |                            | 2004 |   | 2005   |  |   | 2004   
|Net sales (See Note 14)                                                                                      |  | $                            | 35,674  |                            |      | $ | 51,504 |  | $ | 66,249  |   |  | $ | 91,759
|Cost of sales                                                                                                |  |                              | 31,148  |                            |      |   | 39,619 |  |   | 67,499  |   |  |   | 70,922
|                                                                                                             |  |                              |         |                            |      |   |        |  |   |         |   |  |   |       
|Gross profit (loss)                                                                                          |  |                              | 4,526   |                            |      |   | 11,885 |  |   | (1,250  | ) |  |   | 20,837
|                                                                                                             |  |                              |         |                            |      |   |        |  |   |         |   |  |   |       
|Operating expenses:                                                                                          |  |                              |         |                            |      |   |        |  |   |         |   |  |   |       
|Research and development                                                                                     |  |                              | 4,636   |                            |      |   | 5,381  |  |   | 9,726   |   |  |   | 9,921 
|Selling, general and administrative                                                                          |  |                              | 5,388   |                            |      |   | 4,162  |  |   | 9,609   |   |  |   | 8,053 
|In-process research and development                                                                          |  |                              | 435     |                            |      |   |       |  |   | 435     |   |  |   |      
|                                                                                                             |  |                              |         |                            |      |   |        |  |   |         |   |  |   |       
|Total operating expenses                                                                                     |  |                              | 10,459  |                            |      |   | 9,543  |  |   | 19,770  |   |  |   | 17,974
|                                                                                                             |  |                              |         |                            |      |   |        |  |   |         |   |  |   |       
|Operating income (loss)                                                                                      |  |                              | (5,933  | )                          |      |   | 2,342  |  |   | (21,020 | ) |  |   | 2,863 
|Other income (expense), net                                                                                  |  |                              | 820     |                            |      |   | 896    |  |   | 1,426   |   |  |   | 992   
|Gain on sale of other investments                                                                            |  |                              | 535     |                            |      |   | 8,740  |  |   | 2,905   |   |  |   | 8,740 
|                                                                                                             |  |                              |         |                            |      |   |        |  |   |         |   |  |   |       
|Income (loss) before income taxes, minority interest and equity in net (income) loss of affiliated companies |  |                              | (4,578  | )                          |      |   | 11,978 |  |   | (16,689 | ) |  |   | 12,595
|Provision for income taxes                                                                                   |  |                              | 16      |                            |      |   | 366    |  |   | 17      |   |  |   | 378   
|                                                                                                             |  |                              |         |                            |      |   |        |  |   |         |   |  |   |       
|Income (loss) before minority interest and equity in net income (loss) of affiliated companies               |  |                              | (4,594  | )                          |      |   | 11,612 |  |   | (16,706 | ) |  |   | 12,217
|Minority interest in net loss of consolidated subsidiary                                                     |  |                              | 91      |                            |      |   |       |  |   | 186     |   |  |   |      
|Equity in net income (loss) of affiliated companies                                                          |  |                              | (9,328  | )                          |      |   | 900    |  |   | (10,642 | ) |  |   | 1,190 
|                                                                                                             |  |                              |         |                            |      |   |        |  |   |         |   |  |   |       
|Net income (loss)                                                                                            |  | $                            | (13,831 | )                          |      | $ | 12,512 |  | $ | (27,162 | ) |  | $ | 13,407
|                                                                                                             |  |                              |         |                            |      |   |        |  |   |         |   |  |   |       
|Basic net income (loss) per share                                                                            |  | $                            | (0.38   | )                          |      | $ | 0.38   |  | $ | (0.75   | ) |  | $ | 0.43  
|                                                                                                             |  |                              |         |                            |      |   |        |  |   |         |   |  |   |       
|Shares used in basic per share calculation                                                                   |  |                              | 36,460  |                            |      |   | 33,350 |  |   | 36,346  |   |  |   | 31,000
|                                                                                                             |  |                              |         |                            |      |   |        |  |   |         |   |  |   |       
|Diluted net income (loss) per share                                                                          |  | $                            | (0.38   | )                          |      | $ | 0.34   |  | $ | (0.75   | ) |  | $ | 0.39  
|                                                                                                             |  |                              |         |                            |      |   |        |  |   |         |   |  |   |       
|Shares used in diluted per share calculation                                                                 |  |                              | 36,460  |                            |      |   | 36,550 |  |   | 36,346  |   |  |   | 34,242
|                                                                                                             |  |                              |         |                            |      |   |        |  |   |         |   |  |   |       



See accompanying notes
to condensed consolidated financial statements.



1



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##### Table of Contents

Integrated Silicon Solution, Inc.

Condensed Consolidated Balance Sheets

(In thousands)



|                                                       |  |                |          |   |                    |   |         |  
|------------------------------------------------------ |  | -------------- | -------- | - | ------------------ | - | ------- | -
|                                                       |  | March 31, 2005 |          |   | September 30, 2004 |  
|                                                       |  | (unaudited)    |          |   | (1)                |  
|ASSETS                                                 |  |                |          |   |                    |   |         |  
|Current assets:                                        |  |                |          |   |                    |   |         |  
|Cash and cash equivalents                              |  | $              | 38,100   |   |                    | $ | 17,015  |  
|Restricted cash                                        |  |                | 314      |   |                    |   | 1,500   |  
|Short-term investments                                 |  |                | 75,650   |   |                    |   | 120,450 |  
|Accounts receivable, net                               |  |                | 17,636   |   |                    |   | 23,291  |  
|Accounts receivable from related parties (See Note 14) |  |                | 5,718    |   |                    |   | 3,442   |  
|Inventories                                            |  |                | 36,018   |   |                    |   | 44,718  |  
|Other current assets                                   |  |                | 1,771    |   |                    |   | 1,541   |  
|                                                       |  |                |          |   |                    |   |         |  
|Total current assets                                   |  |                | 175,207  |   |                    |   | 211,957 |  
|Property, equipment, and leasehold improvements, net   |  |                | 4,997    |   |                    |   | 5,622   |  
|Other assets                                           |  |                | 85,978   |   |                    |   | 83,285  |  
|                                                       |  |                |          |   |                    |   |         |  
|Total assets                                           |  | $              | 266,182  |   |                    | $ | 300,864 |  
|                                                       |  |                |          |   |                    |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                   |  |                |          |   |                    |   |         |  
|Current liabilities:                                   |  |                |          |   |                    |   |         |  
|Accounts payable                                       |  | $              | 9,477    |   |                    | $ | 27,058  |  
|Accounts payable to related parties (See Note 14)      |  |                | 11,386   |   |                    |   | 3,435   |  
|Accrued compensation and benefits                      |  |                | 2,180    |   |                    |   | 2,431   |  
|Accrued expenses                                       |  |                | 6,344    |   |                    |   | 4,903   |  
|                                                       |  |                |          |   |                    |   |         |  
|Total current liabilities                              |  |                | 29,387   |   |                    |   | 37,827  |  
|Minority interest                                      |  |                | 1,675    |   |                    |   |        |  
|Stockholders equity:                                  |  |                |          |   |                    |   |         |  
|Common stock                                           |  |                | 4        |   |                    |   | 4       |  
|Additional paid-in capital                             |  |                | 338,209  |   |                    |   | 336,524 |  
|Accumulated deficit                                    |  |                | (121,005 | ) |                    |   | (93,843 | )
|Unearned compensation                                  |  |                | (172     | ) |                    |   | (218    | )
|Accumulated comprehensive income                       |  |                | 18,084   |   |                    |   | 20,570  |  
|                                                       |  |                |          |   |                    |   |         |  
|Total stockholders equity                             |  |                | 235,120  |   |                    |   | 263,037 |  
|                                                       |  |                |          |   |                    |   |         |  
|Total liabilities and stockholders equity             |  | $              | 266,182  |   |                    | $ | 300,864 |  
|                                                       |  |                |          |   |                    |   |         |  

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



See accompanying notes to condensed consolidated financial statements.



2



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Integrated Silicon Solution, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)



|                                                                                   |  |                            |         |   |      |   |          |  
|---------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | -------- | -
|                                                                                   |  | Six Months Ended March 31, |        
|                                                                                   |  | 2005                       |         |   | 2004 |  
|Cash flows from operating activities                                               |  |                            |         |   |      |   |          |  
|Net income (loss)                                                                  |  | $                          | (27,162 | ) |      | $ | 13,407   |  
|Depreciation and amortization                                                      |  |                            | 1,400   |   |      |   | 1,889    |  
|Amortization of intangibles and unearned compensation                              |  |                            | 227     |   |      |   | 50       |  
|In-process research & development charge                                           |  |                            | 435     |   |      |   |         |  
|Gain on sale of shares of Semiconductor Manufacturing International Corp. (SMIC) |  |                            | (2,905  | ) |      |   | (8,740   | )
|(Gain) loss on embedded derivative                                                 |  |                            | 21      |   |      |   | (252     | )
|Loss on disposal of asset                                                          |  |                            | 154     |   |      |   |         |  
|Gain on liquidation of D2Code                                                      |  |                            |        |   |      |   | (282     | )
|Net foreign currency transaction losses                                            |  |                            | 4       |   |      |   | (8       | )
|Equity in net (income) loss of affiliated companies                                |  |                            | 10,642  |   |      |   | (1,190   | )
|Minority interest in net loss of consolidated subsidiary                           |  |                            | (186    | ) |      |   |         |  
|Net effect of changes in current and other assets and current liabilities          |  |                            | 5,062   |   |      |   | (14,751  | )
|                                                                                   |  |                            |         |   |      |   |          |  
|Cash used in operating activities                                                  |  |                            | (12,308 | ) |      |   | (9,877   | )
|Cash flows from investing activities                                               |  |                            |         |   |      |   |          |  
|Capital expenditures                                                               |  |                            | (796    | ) |      |   | (332     | )
|Proceeds from partial sale of SMIC equity securities                               |  |                            | 5,627   |   |      |   | 13,236   |  
|Investment in Signia Technologies, Inc. (Signia)                                 |  |                            | (6,827  | ) |      |   |         |  
|Investment in Integrated Circuit Solution, Inc. (ICSI)                           |  |                            | (11,849 | ) |      |   |         |  
|Investment in NexFlash                                                             |  |                            | (452    | ) |      |   |         |  
|Purchases of available-for-sale securities                                         |  |                            | (79,300 | ) |      |   | (108,200 | )
|Sales of available-for-sale securities                                             |  |                            | 124,100 |   |      |   | 13,550   |  
|                                                                                   |  |                            |         |   |      |   |          |  
|Cash provided by (used in) investing activities                                    |  |                            | 30,503  |   |      |   | (81,746  | )
|Cash flows from financing activities                                               |  |                            |         |   |      |   |          |  
|Proceeds from issuance of common stock                                             |  |                            | 1,685   |   |      |   | 99,076   |  
|Decrease in restricted cash                                                        |  |                            | 1,186   |   |      |   |         |  
|                                                                                   |  |                            |         |   |      |   |          |  
|Cash provided by financing activities                                              |  |                            | 2,871   |   |      |   | 99,076   |  
|                                                                                   |  |                            |         |   |      |   |          |  
|Effect of exchange rate changes on cash and cash equivalents                       |  |                            | 19      |   |      |   | 5        |  
|Net increase in cash and cash equivalents                                          |  |                            | 21,085  |   |      |   | 7,458    |  
|Cash and cash equivalents at beginning of period                                   |  |                            | 17,015  |   |      |   | 19,992   |  
|                                                                                   |  |                            |         |   |      |   |          |  
|Cash and cash equivalents at end of period                                         |  | $                          | 38,100  |   |      | $ | 27,450   |  
|                                                                                   |  |                            |         |   |      |   |          |  



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 and six months ended
March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending September 30, 2005 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, 2004.



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 net income (loss) and net income (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 and six month periods ending March 31, 2005 and 2004 (in thousands, except per share data):



|                                                                                  |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |        |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                  |  | Three Months EndedMarch 31, |         |   | Six Months EndedMarch 31, |  
|                                                                                  |  | 2005                        |         |   | 2004                      |   |        | 2005 |  |   | 2004    |  
|Net income (loss)  as reported                                                   |  | $                           | (13,831 | ) |                           | $ | 12,512 |      |  | $ | (27,162 | ) |  | $ | 13,407 |  
|Intrinsic value method expense included in reported net income (loss), net of tax |  |                             | 23      |   |                           |   |       |      |  |   | 46      |   |  |   |       |  
|Fair value method expense, net of tax                                             |  |                             | (559    | ) |                           |   | (1,160 | )    |  |   | (1,796  | ) |  |   | (2,346 | )
|                                                                                  |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Net income (loss)  pro forma                                                     |  | $                           | (14,367 | ) |                           | $ | 11,352 |      |  | $ | (28,912 | ) |  | $ | 11,061 |  
|                                                                                  |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Basic net income (loss) per share  as reported                                   |  | $                           | (0.38   | ) |                           | $ | 0.38   |      |  | $ | (0.75   | ) |  | $ | 0.43   |  
|Diluted net income (loss) per share  as reported                                 |  | $                           | (0.38   | ) |                           | $ | 0.34   |      |  | $ | (0.75   | ) |  | $ | 0.39   |  
|Basic net income (loss) per share  pro forma                                     |  | $                           | (0.39   | ) |                           | $ | 0.34   |      |  | $ | (0.80   | ) |  | $ | 0.36   |  
|Diluted net income (loss) per share  pro forma                                   |  | $                           | (0.39   | ) |                           | $ | 0.31   |      |  | $ | (0.80   | ) |  | $ | 0.33   |  



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



3. Concentrations



Sales to ATM Electronic Corporation accounted for approximately 10%
of total net sales for the three months ended March 31, 2005. Revenue recognized for Arrow Electronics accounted for approximately 10% and 11% of total net sales for the three and six months ended March 31, 2005, respectively. Sales to Asian
Information Technology Inc. accounted for approximately 12% and 10% of total net sales for the three and six months ended March 31, 2004, respectively. Sales to ATM Electronic Corporation accounted for approximately 10% and 9% of total net sales for
the three months and six months ended March 31, 2004, respectively.



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



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



|                                            |  |                |         |                    |   |        
|------------------------------------------- |  | -------------- | ------- | ------------------ | - | -------
|                                            |  | (In thousands)
|                                            |  | March 31, 2005 |         | September 30, 2004
|Cash                                        |  | $              | 30,908  |                    | $ | 13,251 
|Cash equivalents - Money market instruments |  |                | 7,192   |                    |   | 3,764  
|Restricted cash - Certificates of deposit   |  |                | 314     |                    |   | 1,500  
|Short-term investments - Municipal bonds    |  |                | 75,650  |                    |   | 120,450
|                                            |  |                |         |                    |   |        
|                                            |  | $              | 114,064 |                    | $ | 138,965
|                                            |  |                |         |                    |   |        



All debt securities
held at March 31, 2005 are due in less than one year.



5. Inventories



The following is a summary of inventories by major
category:



|                     |  |                |        |                    |   |       
|-------------------- |  | -------------- | ------ | ------------------ | - | ------
|                     |  | (In thousands)
|                     |  | March 31, 2005 |        | September 30, 2004
|Purchased components |  | $              | 12,869 |                    | $ | 16,178
|Work-in-process      |  |                | 3,119  |                    |   | 3,463 
|Finished goods       |  |                | 20,030 |                    |   | 25,077
|                     |  |                |        |                    |   |       
|                     |  | $              | 36,018 |                    | $ | 44,718
|                     |  |                |        |                    |   |       



During the three and
six months ended March 31, 2005, the Company recorded inventory write-downs of $1.3 million and $10.9 million, respectively. The inventory write-downs primarily related to valuing inventory at the lower-of-cost-or-market and to adjust inventory
valuation for certain excess and obsolete products.



5



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



6. Other Assets



Other assets consisted of the following:



|                                                          |  |                |        |                    |   |       
|--------------------------------------------------------- |  | -------------- | ------ | ------------------ | - | ------
|                                                          |  | (In thousands)
|                                                          |  | March 31, 2005 |        | September 30, 2004
|Investment in ICSI common stock (See Note 15 and Note 17) |  | $              | 17,234 |                    | $ | 16,114
|Investment in ICSI convertible debenture                  |  |                | 3,750  |                    |   | 3,180 
|Investment in SMIC                                        |  |                | 53,897 |                    |   | 59,701
|Other equity investments                                  |  |                | 3,336  |                    |   | 3,962 
|Other                                                     |  |                | 7,761  |                    |   | 328   
|                                                          |  |                |        |                    |   |       
|                                                          |  | $              | 85,978 |                    | $ | 83,285
|                                                          |  |                |        |                    |   |       



The market value of
the Companys investment in the common stock and convertible debentures of ICSI at March 31, 2005 was approximately $39.8 million and $3.8 million, respectively, based on quoted market prices. Since ICSI is accounted for under the equity method
of accounting, the carrying value of the 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 March 31, 2005 was approximately $22.0 million of which
approximately $4.8 million is included in other comprehensive income as an accumulated foreign currency translation adjustment in the equity portion of the balance sheet.



On March 17, 2004, SMIC completed an initial public offering (IPO). SMICs ordinary shares are traded on
the Hong Kong Stock Exchange and SMIC American Depository Receipts (ADR) are traded on the New York Stock Exchange. Each SMIC ADR represents fifty (50) ordinary shares. The Company sold certain shares of its SMIC stock in the IPO, and
recorded gross proceeds of approximately $13.2 million in the March 2004 quarter resulting in a pre-tax gain of approximately $8.8 million. In the September 2004 quarter, the Company sold additional shares of SMIC and recorded gross proceeds of
approximately $5.0 million and a pre-tax gain of approximately $2.1 million. In the December 2004 quarter, the Company sold additional shares of SMIC and recorded gross proceeds of approximately $4.5 million and a pre-tax gain of approximately $2.4
million. In the March 2005 quarter, the Company sold additional shares of SMIC and recorded gross proceeds of approximately $1.1 million and a pre-tax gain of approximately $0.5 million. Since SMICs IPO, the Company accounts for its shares in
SMIC under the provisions of FASB 115 and has marked its investment to the market value as of March 31, 2005 by increasing other assets and by increasing accumulated comprehensive income in the equity section of the balance sheet. The cost basis of
the Companys remaining shares in SMIC is approximately $31.9 million and the market value at March 31, 2005 was approximately $54.0 million. The market value of SMIC shares is subject to fluctuation and the Companys carrying value will
be subject to adjustments to reflect the current market value. The Companys shares in SMIC are subject to certain lockup restrictions and therefore all of such shares are not freely tradable. These lockup restrictions generally lapse at the
rate of 15% of the Companys pre-offering shares every 180 days following the IPO. Thus all of the Companys shares in SMIC will be freely tradable 3 years and 180 days following the IPO.



In the fourth quarter of fiscal 2004, the Company recorded approximately a
$0.3 million impairment loss on one of its equity investments accounted for under the cost method.



6



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



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 Ended March 31, |         | Six Months Ended March 31,
|                                                 |  | 2005                         |         |                            | 2004 |   | 2005   |  |   | 2004   
|                                                 |  | (In thousands)              
|Net income (loss)                                |  | $                            | (13,831 | )                          |      | $ | 12,512 |  | $ | (27,162 | ) |  | $ | 13,407
|Other comprehensive income (loss), net of tax:   |  |                              |         |                            |      |   |        |  |   |         |   |  |   |       
|Change in cumulative translation adjustment      |  |                              | (472    | )                          |      |   | 273    |  |   | 64      |   |  |   | 39    
|Change in unrealized gains/losses on investments |  |                              | (6,444  | )                          |      |   | 61,449 |  |   | (2,550  | ) |  |   | 61,609
|                                                 |  |                              |         |                            |      |   |        |  |   |         |   |  |   |       
|Comprehensive income (loss)                      |  | $                            | (20,747 | )                          |      | $ | 74,234 |  | $ | (29,648 | ) |  | $ | 75,055
|                                                 |  |                              |         |                            |      |   |        |  |   |         |   |  |   |       



The accumulated
comprehensive income (loss) component within the stockholders equity section of the Companys balance sheet is comprised of foreign currency translation adjustments and unrealized gains and losses on investments.



The components of accumulated other comprehensive income, net of tax, were as
follows:



|                                                                                   |  |                |        |   |                   |   |        |  
|---------------------------------------------------------------------------------- |  | -------------- | ------ | - | ----------------- | - | ------ | -
|                                                                                   |  | March 31,2005  |        |   | September 30,2004 |  
|                                                                                   |  | (In thousands) |       
|Accumulated foreign currency translation adjustments related to investment in ICSI |  | $              | (4,785 | ) |                   | $ | (4,698 | )
|Other accumulated foreign currency translation adjustments                         |  |                | 156    |   |                   |   | 5      |  
|Accumulated net unrealized gain on SMIC                                            |  |                | 21,980 |   |                   |   | 25,063 |  
|Accumulated net unrealized gain (loss) on other available-for-sale investments     |  |                | 733    |   |                   |   | 200    |  
|                                                                                   |  |                |        |   |                   |   |        |  
|Total accumulated other comprehensive income (loss)                                |  | $              | 18,084 |   |                   | $ | 20,570 |  
|                                                                                   |  |                |        |   |                   |   |        |  



8. Income Taxes



The provision for income taxes for the three month and six month
periods ended March 31, 2005 of $16,000 and $17,000, respectively, consists solely of foreign withholding taxes. The Company has a full valuation allowance against its deferred tax assets due to its operating loss history and has not recorded any
tax benefit for its deferred tax assets for the three month and six month periods ended March 31, 2005. The provision for income taxes for the three month and six month periods ended March 31, 2004 of $366,000 and $378,000, respectively, consists of
alternative minimum taxes.



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##### Table of Contents

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
income (loss) per share (in thousands, except per share amounts):



|                                                             |  |                             |         |                           |      |   |        |  |   |         |   |  |   |       
|------------------------------------------------------------ |  | --------------------------- | ------- | ------------------------- | ---- | - | ------ |  | - | ------- | - |  | - | ------
|                                                             |  | Three Months EndedMarch 31, |         | Six Months EndedMarch 31,
|                                                             |  | 2005                        |         |                           | 2004 |   | 2005   |  |   | 2004   
|Numerator for basic and diluted net income (loss) per share: |  |                             |         |                           |      |   |        |  |   |         |   |  |   |       
|Net income (loss)                                            |  | $                           | (13,831 | )                         |      | $ | 12,512 |  | $ | (27,162 | ) |  | $ | 13,407
|                                                             |  |                             |         |                           |      |   |        |  |   |         |   |  |   |       
|Denominator for basic net income (loss) per share:           |  |                             |         |                           |      |   |        |  |   |         |   |  |   |       
|Weighted average common shares outstanding                   |  |                             | 36,460  |                           |      |   | 33,350 |  |   | 36,346  |   |  |   | 31,000
|Dilutive stock options                                       |  |                             |        |                           |      |   | 3,200  |  |   |        |   |  |   | 3,242 
|                                                             |  |                             |         |                           |      |   |        |  |   |         |   |  |   |       
|Denominator for diluted net income (loss) per share          |  |                             | 36,460  |                           |      |   | 36,550 |  |   | 36,346  |   |  |   | 34,242
|                                                             |  |                             |         |                           |      |   |        |  |   |         |   |  |   |       
|Basic net income (loss) per share                            |  | $                           | (0.38   | )                         |      | $ | 0.38   |  | $ | (0.75   | ) |  | $ | 0.43  
|                                                             |  |                             |         |                           |      |   |        |  |   |         |   |  |   |       
|Diluted net income (loss) per share                          |  | $                           | (0.38   | )                         |      | $ | 0.34   |  | $ | (0.75   | ) |  | $ | 0.39  
|                                                             |  |                             |         |                           |      |   |        |  |   |         |   |  |   |       



The above diluted
calculation for the three months ended March 31, 2005 and March 31, 2004 does not include approximately 3,907,000 shares and 394,000 shares attributable to options as of March 31, 2005 and 2004, respectively, as their impact would be anti-dilutive.
The above diluted calculation for the six months ended March 31, 2005 and 2004, does not include approximately 3,479,000 shares and 414,000 shares attributable to options as of March 31, 2005 and 2004, respectively, as their impact would be
anti-dilutive. Of the 3,907,000 shares and 3,479,000 shares excluded from the three and six month ended March 31, 2005 calculation, approximately 907,000 shares and 1,111,000 shares, respectively, had exercise prices less than the daily average
closing price of the Companys stock during the period but were excluded under the treasury stock method 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 differences, may be material to the financial statements.



11. Impact of Recently Issued Accounting Standards



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which replaces SFAS No. 123,
Accounting for Stock-Based Compensation, (SFAS 123) and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. On April 14, 2005,
the Securities and Exchange Commission (SEC) announced a delay in the effective date of the option-expensing requirements of SFAS 123R. The Company is now required and plans to adopt SFAS 123R in the first quarter of fiscal 2006, beginning October
1, 2005. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition
methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all



8



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



periods presented. The prospective method requires that compensation expense be recorded for
all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the
first period restated. The Company is evaluating the requirements of SFAS 123R and expects that the adoption of SFAS 123R will have a material impact on the Companys consolidated results of operations and earnings per share. The Company has
not yet determined the method of adoption or the effect of adopting SFAS 123R, and it has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.



12. Commitments and Contingencies



Commitments to Wafer Fabrication Facilities and Contract Manufacturers



The Company issues purchase orders for wafers to various
wafer foundries. These purchase orders are generally considered to be cancelable. However, to the degree that the wafers have entered into work-in-process, as a matter of practice it becomes increasingly difficult to cancel the purchase order. As of
March 31, 2005, the Company had approximately $1.3 million of purchase orders for which the related wafers had been entered into wafer work-in-process (i.e., manufacturing had begun). In addition, the Company had noncancelable purchase commitments
of approximately $3.7 million to ICSI for certain finished goods inventories for which ICSI is providing contract manufacturing services.



Write-off of Excess Facility Space



In the three months ended March 31, 2005, the Company recorded a $1.1 million write-off of excess facility space in its Santa Clara headquarters.



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 and non-memory semiconductor products. The following table summarizes the Companys operations in different geographic areas:



|                             |  |                             |        |                           |   |        |  |      |        |  |   |       
|---------------------------- |  | --------------------------- | ------ | ------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                             |  | Three Months EndedMarch 31, |        | Six Months EndedMarch 31,
|                             |  | 2005                        |        | 2004                      |   | 2005   |  | 2004
|                             |  | (In thousands)             
|Net sales                    |  |                             |        |                           |   |        |  |      |        |  |   |       
|United States                |  | $                           | 6,547  |                           | $ | 6,757  |  | $    | 12,228 |  | $ | 11,997
|China                        |  |                             | 7,633  |                           |   | 4,926  |  |      | 12,508 |  |   | 8,967 
|Hong Kong                    |  |                             | 5,900  |                           |   | 12,040 |  |      | 11,438 |  |   | 19,998
|Taiwan                       |  |                             | 8,565  |                           |   | 15,922 |  |      | 13,052 |  |   | 25,415
|Korea                        |  |                             | 1,526  |                           |   | 2,491  |  |      | 2,604  |  |   | 5,612 
|Other Asia Pacific countries |  |                             | 2,278  |                           |   | 4,729  |  |      | 4,881  |  |   | 9,197 
|Europe                       |  |                             | 3,022  |                           |   | 4,310  |  |      | 7,969  |  |   | 9,947 
|Other North America          |  |                             | 203    |                           |   | 329    |  |      | 1,569  |  |   | 626   
|                             |  |                             |        |                           |   |        |  |      |        |  |   |       
|Total net sales              |  | $                           | 35,674 |                           | $ | 51,504 |  | $    | 66,249 |  | $ | 91,759
|                             |  |                             |        |                           |   |        |  |      |        |  |   |       



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



|                  |  |                |       |                    |   |      
|----------------- |  | -------------- | ----- | ------------------ | - | -----
|                  |  | March 31, 2005 |       | September 30, 2004
|                  |  | (In thousands)
|Long-lived assets |  |                |       |                    |   |      
|United States     |  | $              | 2,814 |                    | $ | 3,633
|Hong Kong         |  |                | 45    |                    |   | 49   
|China             |  |                | 1,567 |                    |   | 1,646
|Taiwan            |  |                | 571   |                    |   | 294  
|                  |  |                |       |                    |   |      
|                  |  | $              | 4,997 |                    | $ | 5,622
|                  |  |                |       |                    |   |      



14. Related Party Transactions



The Company sells and licenses memory products to ICSI.
At March 31, 2005, the Company had approximately a 41% ownership interest in ICSI. The Companys Chairman and Chief Executive Officer (CEO), Jimmy S.M. Lee, is a director of ICSI.



The Company purchases goods and contract manufacturing services from ICSI.
For the six months ended March 31, 2005 and March 31, 2004, purchases of goods and services were approximately $786,000 and $2,332,000, respectively. The Company also pays ICSI for certain product development costs, license fees and royalties. For
the six months ended March 31, 2005 and March 31, 2004, these charges totaled approximately $156,000 and $570,000, respectively.



The Company sold memory products to Marubun USA Corporation (Marubun USA) in the first quarter of fiscal 2004. Hide L. Tanigami, a director of
the Company, is the president and chief executive officer of Marubun USA. Effective January 1, 2004, the Company no longer sells products to Marubun USA.



The Company purchases goods from SMIC in which the Company has less than a 2% ownership interest. The Companys Chairman and CEO, Jimmy S.M. Lee, was
a director of SMIC until March 2004. Lip-Bu Tan, a director of the Company, has been a director of SMIC since January 2002. For the six months ended March 31, 2005 and March 31, 2004, purchases of goods from SMIC were approximately $29,021,000 and
$16,907,000, respectively.



The Company sells memory products
to Flextronics. Lip-Bu Tan, a director of the Company, has been a director of Flextronics since April 3, 2003. 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 Technologies
(Signia). The Company had less a than 50% ownership interest through November 2004. In December 2004, the Company acquired a majority ownership interest in Signia at which time the Company began consolidating Signias results of
operations. At March 31, 2005, the Company had approximately a 68% ownership interest in Signia. The Companys Chairman and CEO, Jimmy S.M. Lee, is a director of Signia. For the two months ended November 30, 2004 and the six months ended March
31, 2004, the Company provided services of approximately $382,000 and $1,863,000, respectively, to Signia.



10



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



Accounts receivable from related parties consisted of the
following:



|            |  |                |       |                    |   |      
|----------- |  | -------------- | ----- | ------------------ | - | -----
|            |  | March 31, 2005 |       | September 30, 2004
|            |  | (In thousands)
|Flextronics |  | $              | 558   |                    | $ | 1,861
|ICSI        |  |                | 5,160 |                    |   | 646  
|Signia      |  |                |      |                    |   | 935  
|            |  |                |       |                    |   |      
|Total       |  | $              | 5,718 |                    | $ | 3,442
|            |  |                |       |                    |   |      



The following table
shows net sales to related parties:



|                             |  |                            |       |      |   |      
|---------------------------- |  | -------------------------- | ----- | ---- | - | -----
|                             |  | Six months ended March 31,
|                             |  | 2005                       |       | 2004
|                             |  | (In thousands)            
|Net sales to related parties |  |                            |       |      |   |      
|Flextronics                  |  | $                          | 2,420 |      | $ | 1,124
|ICSI                         |  |                            | 2,003 |      |   | 879  
|Marubun USA                  |  |                            |      |      |   | 2,053
|Others                       |  |                            | 115   |      |   | 39   
|                             |  |                            |       |      |   |      
|Total                        |  | $                          | 4,538 |      | $ | 4,095
|                             |  |                            |       |      |   |      



Accounts payable to
related parties consisted of the following:



|      |  |                |        |                    |   |      
|----- |  | -------------- | ------ | ------------------ | - | -----
|      |  | March 31, 2005 |        | September 30, 2004
|      |  | (In thousands)
|ICSI  |  | $              | 853    |                    | $ | 782  
|SMIC  |  |                | 10,533 |                    |   | 2,653
|      |  |                |        |                    |   |      
|Total |  | $              | 11,386 |                    | $ | 3,435
|      |  |                |        |                    |   |      



15. Investment in Integrated
Circuit Solution Inc.



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



|                                                |  |                |        |                    |   |       
|----------------------------------------------- |  | -------------- | ------ | ------------------ | - | ------
|                                                |  | March 31, 2005 |        | September 30, 2004
|                                                |  | (In thousands)
|Current assets                                  |  | $              | 63,369 |                    | $ | 90,191
|Property, plant, and equipment and other assets |  |                | 26,418 |                    |   | 34,865
|Current liabilities                             |  |                | 50,206 |                    |   | 57,545



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



|                    |  |                            |         |   |      |   |       
|------------------- |  | -------------------------- | ------- | - | ---- | - | ------
|                    |  | Six Months Ended March 31,
|                    |  | 2005                       |         |   | 2004
|                    |  | (In thousands)            
|Net sales           |  | $                          | 51,058  |   |      | $ | 87,693
|Gross profit (loss) |  |                            | (13,653 | ) |      |   | 16,214
|Net income (loss)   |  |                            | (32,687 | ) |      |   | 5,812 



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 $733,000
related to the ICSI convertible debentures. The unrealized gain is included in accumulated other comprehensive loss. In addition, in the six months ended March 31, 2005, the Company recorded a charge of approximately $21,000 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
March 31, 2005 was approximately $3.8 million.



On January 25,
2005, ISSI announced the execution on such date of a Merger Agreement (the Merger Agreement) between Integrated Silicon Solution (Taiwan), Inc. (ISSI-Taiwan) and ICSI. ISSI-Taiwan is incorporated under the laws of the
Republic of China and is a wholly-owned subsidiary of ISSI. ICSI is incorporated under the laws of the Republic of China and its common stock is publicly traded in Taiwan. Prior to the transaction, ISSI owned approximately 29.1% of the outstanding
shares of ICSI and approximately $3.8 million of convertible debentures of ICSI. In the quarter ended March 31, 2005, the Company purchased additional shares of ICSI on the open market for approximately $11.8 million increasing its ownership
percentage to approximately 41% at March 31, 2005. These shares were recorded at their acquisition cost. The Company will account for its purchase these shares as part of a step-acquisition. The purchase price accounting will be recorded upon the
consolidation of ICSI. The additional consideration to be paid by the Company in connection with the merger is cash in the aggregate amount of approximately $58 million (excluding the value of the shares of ICSI held by the Company at March 31,
2005). The Merger Agreement has been approved by the boards of directors of ISSI, ISSI-Taiwan and ICSI and the shareholders of ICSI, and is subject to customary closing conditions. The Company currently anticipates this transaction will be completed
in the September 2005 quarter.



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. 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.



16. Acquisition of Signia Technologies Inc.



In December 2004, the Company acquired a majority ownership interest in Signia. Signia is a privately held wireless chipset company based in Taipei, Taiwan. Signia has focused on RF chipsets for the consumer
electronics market. Signia has a family of Bluetooth  compliant, 2.4G RF devices and also proprietary 2.4G RF devices. One element of ISSIs strategy is to diversify into non-memory products. Increasing its stake in Signia furthers this strategy.



ISSI has increased its ownership to approximately 68% by buying common shares
from other shareholders. The cost of this additional investment was approximately $8.1 million in cash which includes $0.4 million in estimated transaction costs. Prior to this increase, the Company owned approximately 15% of the outstanding equity
of Signia and accounted for its investment on the cost basis. Since the Company increased its ownership to 68%, beginning from December 1, 2004 the Company will consolidate Signias financial statements with its own. The total purchase price,
including the previous investment of $1.1 million, is $9.2 million.



12



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



In the December 2004 quarter, the Company consolidated Signia
based on preliminary valuation data. During the March 2005 quarter, the valuation data was refined and the Companys best estimate has been presented as of March 31, 2005. Management is continuing to assess the valuation of the acquisition and
potential adjustments could be made in the June 2005 quarter. The allocation of the purchase price of Signia includes both tangible assets and acquired intangibles including both developed technology as well as in-process research and development
(IPR&D). The amounts allocated to IPR&D were expensed in the Companys quarter ending March 31, 2005, as it was deemed to have no future value.



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



|                                          |  |   |        |  
|----------------------------------------- |  | - | ------ | -
|Net tangible assets                       |  | $ | 3,354  |  
|Intangible assets:                        |  |   |        |  
|In-process technology                     |  |   | 435    |  
|Developed technology                      |  |   | 1,626  |  
|Goodwill                                  |  |   | 5,630  |  
|Minority interest                         |  |   | (1,861 | )
|                                          |  |   |        |  
|Total estimated purchase price allocation |  | $ | 9,184  |  
|                                          |  |   |        |  



The developed
technology is being amortized over five years.



17. Subsequent Event



Effective May 1, 2005, the Companys Chairman
and Chief Executive Officer, Jimmy Lee, was appointed Chairman of ICSI and the ICSI board formally elected Mr. Lee as Chairman on May 6, 2005. The Company also agreed to loan $15.0 million to ICSI under loan documents executed on April 28, 2005, of
which $13.0 million had been funded as of May 9, 2005. ICSI agreed to collateralize the loan with a mortgage on its building in Taiwan and the lien documents were effective on April 28, 2005. As a result of these events, and changes in the
management reporting structure of ICSI (which were effective as of May 1, 2005), the Company will begin consolidating the financial results of ICSI with its results as of May 1, 2005 in accordance with generally accepted accounting
principles.



13



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##### Table of Contents

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 SRAM and low and medium density 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. Historically, our SRAM product family generated most of our revenue. However, in the year 2001, the high-end
networking and telecom markets slowed and this impacted our SRAM revenue. During this period, we increased our focus on the digital consumer electronics, mobile communications and automotive electronics markets. 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 2004 and the three and six months ended March 31, 2005.



In order to limit and control our operating expenses, in recent years, we
have reduced our headcount in the U.S. and transferred various functions to our subsidiary in Taiwan and our subsidiary in China. We believe this has enabled us to limit our operating expenses while simultaneously locating these functions closer to
our manufacturing partners and our customers. As a result of these efforts, we currently have more employees in Asia than we do in the U.S. Part of our outsourcing strategy includes licensing product designs. To control our R&D expenses, we
regularly license some of our SRAM and DRAM designs from Integrated Circuit Solution Inc. (ICSI), other companies or our foundries. We also license our own designs to ICSI or other companies. We intend to continue these strategies going forward.



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. Because 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. While the average selling prices for certain of our products increased during the first three quarters of fiscal 2004, the average selling prices for our products declined significantly in the fourth quarter
of fiscal 2004. We experienced further declines in the average selling



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prices for certain of our products in the first two quarters of fiscal 2005. We expect average selling prices for our
products to decline in the future, principally due to increased market competition and an increased supply of competitive products in the market. Any future decreases in our average selling prices would 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 shipped outside the U.S. was approximately 81%, 87%, 87% and 87% in the first six months of fiscal 2005, the first six months of fiscal 2004, fiscal 2004 and
fiscal 2003, respectively. We measure revenue location by the shipping destination, even if the customer is headquartered in the U.S. 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:



|       |  |                            |   |  |                                  |   |  |      |   |  |      |  
|------ |  | -------------------------- | - |  | -------------------------------- | - |  | ---- | - |  | ---- | -
|       |  | Six Months Ended March 31, |   |  | Fiscal Years Ended September 30, |  
|       |  | 2005                       |   |  | 2004                             |   |  | 2004 |   |  | 2003 |  
|Asia   |  | 67                         | % |  | 75                               | % |  | 75   | % |  | 77   | %
|Europe |  | 12                         |   |  | 11                               |   |  | 11   |   |  | 10   |  
|U.S.   |  | 19                         |   |  | 13                               |   |  | 13   |   |  | 13   |  
|Other  |  | 2                          |   |  | 1                                |   |  | 1    |   |  |     |  
|       |  |                            |   |  |                                  |   |  |      |   |  |      |  
|Total  |  | 100                        | % |  | 100                              | % |  | 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 the first six
months of fiscal 2005 and fiscal 2004 reflect accounting for ICSI on the equity basis and include our percentage share of the results of ICSIs operations. Our financial results for fiscal 2004 and fiscal 2005 through the period ended November
30, 2004 reflect accounting for Signia Technologies Inc. (Signia) on the cost basis. Effective December 2004, our ownership of Signia became greater than 50% and we began consolidating the results of Signia. Our financial results for the first six
months of fiscal 2005 and fiscal 2004 reflect accounting for E-CMOS Technology Corporation (E-CMOS), GetSilicon, and NexFlash Technologies (NexFlash) on the cost basis. Our financial results for fiscal 2004 until their IPO in March 2004, reflect
accounting for Semiconductor Manufacturing International



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Corporation (SMIC) on the cost basis. Since SMICs IPO, we account for our shares in SMIC under the provisions of
FASB 115 and have marked our investment to the market value as of March 31, 2005 by increasing other assets and by increasing accumulated comprehensive income in the equity section of the balance sheet. ICSI is a Taiwan-based fabless memory
supplier, 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 March 31, 2005, we owned approximately 41% of ICSI, approximately 11% of E-CMOS, approximately 14% of NexFlash, approximately 68% of Signia Technologies and less than 2% of SMIC.



On January 25, 2005, we announced the execution on such date of a Merger
Agreement (the Merger Agreement) between Integrated Silicon Solution (Taiwan), Inc. (ISSI-Taiwan) and ICSI. ISSI-Taiwan is incorporated under the laws of the Republic of China and is a wholly-owned subsidiary of ISSI. ICSI is
incorporated under the laws of the Republic of China and its common stock is publicly traded in Taiwan. Prior to the transaction, we owned approximately 29.1% of the outstanding shares of ICSI and approximately $3.8 million of convertible debentures
of ICSI. In the quarter ended March 31, 2005, we purchased additional shares of ICSI on the open market for approximately $11.8 million increasing our ownership percentage to approximately 41% at March 31, 2005. The additional consideration to be
paid by the us in connection with the merger is cash in the aggregate amount of approximately $58 million (excluding the value of the shares of ICSI held by us at March 31, 2005). The Merger Agreement has been approved by the boards of directors of
ISSI, ISSI-Taiwan and ICSI and the shareholders of ICSI, and is subject to customary closing conditions. We currently expect the merger to close in the September 2005 quarter. Prior to the closing of the merger, we may purchase additional shares of
ICSI on the open market. Effective May 1, 2005, our Chairman and Chief Executive Officer, Jimmy Lee, was appointed Chairman of ICSI and the ICSI board formally elected Mr. Lee as Chairman on May 6, 2005. We also agreed to loan $15.0 million to ICSI
under loan documents executed on April 28, 2005, of which $13.0 million had been funded as of May 9, 2005. ICSI agreed to collateralize the loan with a mortgage on its building in Taiwan and the lien documents were effective on April 28, 2005. As a
result of these events and changes in the management reporting structure of ICSI (which were effective as of May 1, 2005), we will begin consolidating the financial results of ICSI with our results as of May 1, 2005 in accordance with generally
accepted accounting principles.



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



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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, 2004.



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 historical sales volumes to cover estimated excess and obsolete exposures, unless adjustments are made based on our judgments for
newer products, end of life products or planned inventory increases. In making such judgments to write down inventory, we take into account the product life cycles which can range from 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 March 31, 2005, our strategic investments in non-marketable securities totaled $3.3 million.



Impact of Recently Issued Accounting Standards



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
123) and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements
based on their fair values. The pro forma disclosures previously permitted under SFAS 123, no longer will be an alternative to financial statement recognition. On April 14, 2005, the Securities and Exchange Commission (SEC) announced a delay in the



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effective date of the option-expensing requirements of SFAS 123R. We are now required and plan to adopt SFAS 123R in the
first quarter of fiscal 2006, beginning October 1, 2005. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be
used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The
prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive methods would record compensation expense for
all unvested stock options and restricted stock beginning with the first period restated. We are evaluating the requirements of SFAS 123R and we expect that the adoption of SFAS 123R will have a material impact on our consolidated results of
operations and earnings per share. We have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures
under SFAS 123.



Three Months Ended March 31, 2005 Compared to Three
Months Ended March 31, 2004



Net Sales. Net
sales consist principally of total product sales less estimated sales returns. Net sales decreased by 31% to $35.7 million in the three months ended March 31, 2005 from $51.5 million in the three months ended March 31, 2004. The decrease in sales
was principally due to a decrease in the average selling prices of our DRAM products, specifically our 64 and 128 Mb devices, in the three months ended March 31, 2005 compared to the three months ended March 31, 2004. In addition, both the average
selling prices and unit shipments of our 16 Mb DRAM products declined in the three months ended March 31, 2005 compared to the three months ended March 31, 2004. The decline in unit shipments of our SRAM products in the three months ended March 31,
2005 for such products compared to the three months ended March 31, 2004, more than offset the increase in the average selling prices resulting in an overall decrease 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. In this regard, we anticipate a decline in the average selling prices for our DRAM and certain of our SRAM products in the June 2005 quarter
compared to the March 2005 quarter. There can be no assurance that any future price declines will be offset by higher volumes or by higher prices on newer products.



Sales to ATM Electronic Corporation (ATM) accounted for approximately 10% of total net sales for the three months ended
March 31, 2005. Revenue recognized for Arrow Electronics accounted for approximately 10% of total net sales for the three months ended March 31, 2005. Sales to Asian Information Technology Inc. and ATM accounted for approximately 12% and 10%,
respectively, of our total net sales for the three months ended March 31, 2004. As sales to these customers are executed pursuant to purchase orders and no purchasing contract exists, these customers can cease doing business with us at any time.



Gross Profit. 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 decreased by $7.4 million to $4.5 million in the three months ended
March 31, 2005 from $11.9 million in the three months ended March 31, 2004. Our gross margin decreased to 12.7% in the three months ended March 31, 2005 from 23.1% in the three months ended March 31, 2004. Our gross margin for the three months ended
March 31, 2005 included inventory write-downs of $1.3 million predominately as a result of applying our lower-of-cost-or-market inventory valuation policy. The decrease in gross profit was principally due to a decrease in the average selling prices
of our DRAM products, specifically our 64 and 128 Mb products, in the three months ended March 31, 2005 compared to the three months ended March 31, 2004. In addition, declines in the average selling prices of our DRAM products more than offset
declines in the cost of our DRAM products in three months ended March 31, 2005 compared to three months ended March 31, 2004 resulting in a decline in our DRAM gross margin. Decreases in the units shipments of our SRAM products more than offset
increases in the average selling prices of such products in the three months ended March 31, 2005 compared to the three months ended March 31, 2004 resulting in a decrease in gross profit. However, increases in the average selling prices of our SRAM
products more than offset any increases in product costs resulting in higher gross margins for our SRAM products in three months ended March 31, 2005 compared to three months ended March 31, 2004. 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



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could result in a material decline in our gross margin. In the past, foundries have raised wafer prices when demand for
end products increases. 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 14% to $4.6 million in the three months ended March 31, 2005 compared to $5.4 million in the three months ended March 31, 2004. As a percentage of net sales, research and development expenses increased to 13.0% in the three months ended
March 31, 2005 from 10.4% in the three months ended March 31, 2004. The decrease in absolute dollars was primarily the result of a reduction in mask expenses as we limited the focus of our development efforts. In addition, depreciation expense
decreased in the three months ended March 31, 2005 compared to the three months ended March 31, 2004. This was partially offset by an increase in research and development expenses attributable to our consolidation of Signia beginning in December
2004 (see In-Process Research and Development below). Our research and development expenses could increase in absolute dollars in future periods due to increased costs associated with the development of new products.



Selling, General and Administrative. Selling, general and
administrative expenses increased by 29% to $5.4 million in the three months ended March 31, 2005 from $4.2 million in the three months ended March 31, 2004. As a percentage of net sales, selling, general and administrative expenses increased to
15.1% in the three months ended March 31, 2005 from 8.1% in the three months ended March 31, 2004. The increase in selling, general and administrative expenses was primarily due to the $1.1 million write-off of excess facility space in our Santa
Clara headquarters. In addition, there was an increase in selling, general and administrative expenses attributable to our consolidation of Signia beginning in December 2004. This was partially offset by decreased selling commissions associated with
lower revenues in the three months ended March 31, 2005 compared to the three months ended March 31, 2004. Changes in corporate governance rules, in particular, complying with the internal control requirements of the Sarbanes-Oxley Act of 2002
Section 404, have had and will continue to result in increased internal efforts, significantly higher fees from our independent accounting firm and significantly higher fees from third party contractors. As a result, excluding the impact of the $1.1
million write-off in the March 2005 quarter, 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.



In-process Research and Development. In December 2004, we acquired a
majority ownership in Signia. Signia is a privately held wireless chipset company based in Taipei, Taiwan. Signia has focused on RF chipsets for the consumer electronics market. Signia has a family of Bluetooth  compliant, 2.4G RF devices and also proprietary 2.4G RF devices. As of March 31, 2005,
we had increased our ownership to approximately 68% by buying common shares from other shareholders. The cost of this additional investment was approximately $8.1 million in cash which includes $0.4 million in estimated transaction costs. Prior to
this increase, we owned approximately 15% of the outstanding equity of Signia and accounted for our investment on the cost basis. Since we increased our ownership to 68%, beginning from December 1, 2004 we consolidate Signias financial
statements with our own. The total purchase price, including our previous investment of $1.1 million, is $9.2 million. In the December 2004 quarter, we consolidated Signia based on preliminary valuation data. During the March 2005 quarter, the
valuation data was refined and our best estimate has been presented as of March 31, 2005. Management is continuing to assess the valuation of the acquisition and potential adjustments could be made in the June 2005 quarter. The estimated allocation
of the purchase price of Signia includes both tangible assets and acquired intangibles including both developed technology as well as in-process research and development (IPR&D). The $0.4 million allocated to IPR&D was expensed
in our quarter ending March 31, 2005, as it was deemed to have no future value.



Other income, net. Other income, net was $0.8 million in the three months ended March 31, 2005 compared to $0.9 million in the three months ended March 31, 2004. In the three months ended March 31, 2005,
interest income increased by approximately $0.3 million compared to the three months ended March 31, 2004 as the result of higher interest rates. In the three months ended March 31, 2005, we recorded a gain of approximately $0.3 million from the
sale of fixed assets. In the three months ended March 31, 2004, we recorded a gain of approximately $0.3 million related to the increase in the fair value of the embedded derivative associated with the ICSI convertible debenture. In addition, in the
three months ended March 31, 2004, we recorded a gain of approximately $0.3 million in connection with the completion of the liquidation of our subsidiary D2Code in Korea.



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Gain on sale of investments. In the three months ended March 31, 2005, we sold shares of SMIC for
approximately $1.1 million which resulted in a pre-tax gain of $0.5 million. On March 17, 2004, SMIC completed an Initial Public Offering (IPO). SMICs ordinary shares are traded on the Hong Kong Stock Exchange and SMIC American
Depository Receipts (ADR) are traded on the New York Stock Exchange. Each SMIC ADR represents fifty (50) ordinary shares. As a result of our sale of certain shares of SMIC in the IPO, we recorded gross proceeds of approximately $13.2
million in the March 2004 quarter resulting in a pre-tax gain of approximately $8.7 million.



Provision for income taxes.The provision for income taxes for the three month period ended March 31, 2005 of $16,000 consists solely of foreign withholding taxes. We have a full valuation allowance against our
deferred tax assets due to our operating loss history and have not recorded any tax benefit for our deferred tax assets for the three month period ended March 31, 2005. The provision for income taxes for the three month period ended March 31, 2004
of $366,000 consists of alternative minimum taxes.



Minority
interest in net loss of consolidated subsidiary.In December 2004, we increased our ownership in Signia to approximately 68% of the outstanding shares from 15% at September 30, 2004. The cost of this additional investment was approximately $8.1
million in cash. The results of Signias operations are included in our consolidated financial statements as of December 2004. The minority interest in net loss of consolidated subsidiary represents the minority shareholders proportionate
share of the net loss of Signia for the three months ended March 31, 2005.



Equity in net income (loss) of affiliated companies. Equity in net income (loss) of affiliated companies was a $9.3 million loss in the three months ended March 31, 2005 compared to $0.9 million income in the
three months ended March 31, 2004. This primarily reflects a decline in ICSIs financial results as a result of inventory write-downs in the three months ended March 31, 2005 compared to the three months ended March 31, 2004. In addition, in
the three months ended March 31, 2005, we increased our ownership percentage in ICSI to approximately 41% from 29%.



Six Months Ended March 31, 2005 Compared to Six Months Ended March 31, 2004



Net Sales. Net sales decreased by 28% to $66.2 million in the six months ended March 31, 2005 from $91.8 million in
the six months ended March 31, 2004. The decrease in sales was principally due to a decrease in the average selling prices of our DRAM products, specifically our 64 and 128 Mb devices, in the six months ended March 31, 2005 compared to the six
months ended March 31, 2004. In addition, both the average selling prices and unit shipments of our 16 Mb DRAM products declined in the six months ended March 31, 2005 compared to the six months ended March 31, 2004. The decline in unit shipments of
our SRAM products in the six months ended March 31, 2005 compared to the six months ended March 31, 2004, more than offset the increase in the average selling prices resulting in an overall decrease 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. There can be no assurance that any future price declines will be offset by higher volumes or by higher prices
on newer products.



Revenue recognized for Arrow Electronics
accounted for approximately 11% of total net sales for the six months ended March 31, 2005. Sales to Asian Information Technology Inc. accounted for approximately 10% of our total net sales for the six months ended March 31, 2004. As sales to these
customers are executed pursuant to purchase orders and no purchasing contract exists, these customers can cease doing business with us at any time.



Gross Profit (loss). Gross profit decreased by $22.1 million to a $1.3 million gross loss in the six months ended March 31, 2005 from a $20.8
million gross profit in the six months ended March 31, 2004. Gross margin decreased to (1.9)% in the six months ended March 31, 2005 from 22.7% in the six months ended March 31, 2004. Our gross margin for the six months ended March 31, 2005 included
inventory write-downs of $10.9 million predominately as a result of applying our lower-of-cost-or-market inventory valuation policy. Excluding the inventory write-downs in the six months ended March 31, 2005, the decrease in gross profit was
principally due to a decrease in the average selling prices of our DRAM products, specifically our 16, 64 and 128 Mb devices, in the six months ended March 31, 2005 compared to the six months ended March 31, 2004. In addition, declines in the
average selling prices of our DRAM products more than offset declines in the cost of our DRAM products in six months ended March 31, 2005 compared to six months ended March 31, 2004 resulting in a decline in our DRAM gross margin. Decreases in the
unit shipments of our SRAM products more than offset increases in the average selling prices in the six months ended March 31, 2005 compared to the



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six months ended March 31, 2004 resulting in a decrease in gross profit. However, increases in the average selling prices
of our SRAM products more than offset any increases in product costs resulting in higher gross margins for our SRAM products in six months ended March 31, 2005 compared to six months ended March 31, 2004. 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. 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 2% to $9.7 million in the six months ended
March 31, 2005 from $9.9 million in the six months ended March 31, 2004. As a percentage of net sales, research and development expenses increased to 14.7% in the six months ended March 31, 2005 from 10.8% in the six months ended March 31, 2004. 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 reduction in mask costs. In addition, depreciation expense
decreased in the six months ended March 31, 2005 compared to the six months ended March 31, 2004. This was partially offset by an increase in research and development expenses attributable to our consolidation of Signia beginning in December 2004
(see In-process Research and Development below).



Selling,
General and Administrative. Selling, general and administrative expenses increased by 19% to $9.6 million in the six months ended March 31, 2005 from $8.1 million in the six months ended March 31, 2004. As a percentage of net sales, selling,
general and administrative expenses increased to 14.5% in the six months ended March 31, 2005, from 8.8% in the six months ended March 31, 2004. The increase in absolute dollars was primarily due to the $1.1 million write-off of excess facility
space in our Santa Clara headquarters. In addition, there was an increase in selling, general and administrative expenses attributable to our consolidation of Signia beginning in December 2004. This was partially offset by decreased selling
commissions associated with lower revenues in the six months ended March 31, 2005 compared to the six months ended March 31, 2004.



In-process Research and Development. In December 2004, we acquired a majority ownership in Signia. As of March 31, 2005, we had increased our
ownership to approximately 68% by buying common shares from other shareholders. The cost of this additional investment was approximately $8.1 million in cash which includes $0.4 million in estimated transaction costs. Prior to this increase, we
owned approximately 15% of the outstanding equity of Signia and accounted for our investment on the cost basis. Since we increased our ownership to 68%, beginning from December 1, 2004 we consolidate Signias financial statements with our own.
The total purchase price, including our previous investment of $1.1 million, is $9.2 million. In the December 2004 quarter, we consolidated Signia based on preliminary valuation data. During the March 2005 quarter, the valuation data was refined and
our best estimate has been presented as of March 31, 2005. Management is continuing to assess the valuation of the acquisition and potential adjustments could be made in the June 2005 quarter. The estimated allocation of the purchase price of Signia
includes both tangible assets and acquired intangibles including both developed technology as well as in-process research and development (IPR&D). The $0.4 million allocated to IPR&D was expensed in our quarter ending March 31,
2005, as it was deemed to have no future value.



Other income, net. Other income, net was $1.4 million in the six months ended March 31, 2005 compared to $1.0 million in the six months ended March 31, 2004. In the six months ended March 31, 2005, interest income increased by
approximately $0.8 million compared to the six months ended March 31, 2004 as the result of higher cash balances and interest rates. In the three months ended March 31, 2005, we recorded a gain of approximately $0.3 million from the sale of fixed
assets. In the six months ended March 31, 2004, we recorded a gain of approximately $0.4 million related to the increase in the fair value of the embedded derivative associated with the ICSI convertible debenture. In addition, in the six months
ended March 31, 2004, we recorded a gain of approximately $0.3 million in connection with the completion of the liquidation of our subsidiary D2Code in Korea.



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Gain on sale of investments. In the six months ended March 31, 2005, we sold shares of SMIC for
approximately $5.6 million which resulted in a pre-tax gain of $2.9 million. On March 17, 2004, SMIC completed its IPO. As a result of our sale of shares of SMIC in the IPO, we recorded gross proceeds of approximately $13.2 million in the March 2004
quarter resulting in a pre-tax gain of approximately $8.7 million.



Provision for Income Taxes.The provision for income taxes for the six month period ended March 31, 2005 of $17,000 consists solely of foreign withholding taxes. We have a full valuation allowance against our deferred tax assets due
to our operating loss history and have not recorded any tax benefit for our deferred tax assets for the six month period ended March 31, 2005. The provision for income taxes for the six month period ended March 31, 2004 of $378,000 consists of
alternative minimum taxes.



Minority interest in net
loss of consolidated subsidiary.In December 2004, we increased our ownership in Signia to approximately 68% of the outstanding shares from 15% at September 30, 2004. The cost of this additional investment was approximately $8.1 million in cash.
The results of Signias operations are included in our consolidated financial statements as of December 2004. The minority interest in net loss of consolidated subsidiary represents the minority shareholders proportionate share of the net
loss of Signia for the four months ended March 31, 2005.



Equity in net income (loss) of affiliated companies.Equity in net income (loss) of affiliated companies was a $10.6 million loss in the six months ended March 31, 2005 compared to $1.2 million income in the six months ended March
31, 2004. This primarily reflects a decline in ICSIs financial results as a result of inventory write-downs in the six months ended March 31, 2005 compared to the six months ended March 31, 2004. In addition, in the three months ended March
31, 2005, we increased our ownership percentage in ICSI to approximately 41% from 29%.



Liquidity and Capital Resources



As of March
31, 2005, our principal sources of liquidity included cash, cash equivalents, restricted cash and short-term investments of approximately $114.1 million. During the six months ended March 31, 2005, operating activities used cash of approximately
$12.3 million compared to $9.9 million used in the six months ended March 31, 2004. The principle uses of cash during the six months ended March 31, 2005 were our net loss of $27.2 million adjusted for non-cash items of $9.8 million (the gain on the
sale of SMIC shares of $2.9 million, equity in net loss of affiliated companies of $10.6 million, depreciation of $1.4 million, in-process research and development charge of $0.4 million, other non-cash items of $0.3 million) and decreases in
accounts payable of $10.8 million. These uses were partially offset by decreases in inventories of $10.2 million, decreases in accounts receivables of $4.4 million, decreases in other assets of $0.4 million and increases in accrued expenses of $0.9
million.



In the six months ended March 31, 2005, we generated
$30.5 million from investing activities compared to $81.7 million used in the six months ended March 31, 2004. The cash generated from investing activities in the six months ended March 31, 2005 primarily resulted from net sales of
available-for-sale securities of $44.8 million. In addition, in the six months ended March 31, 2005, we generated approximately $5.6 million from the sale of additional shares of SMIC, resulting in a pre-tax gain of approximately $2.9 million. We
used approximately $6.8 million, net of cash receipts, for our additional investment in Signia which is comprised of cash used for the purchase of Signia shares of $7.7 million less cash acquired as a result of our consolidation of Signia of $0.9
million. In the three months ended March 31, 2005, we used approximately $11.8 million for the purchase of additional shares of ICSI and approximately $0.5 million for the purchase of additional shares of NexFlash. The cash used for investing
activities in the six months ended March 31, 2004 primarily resulted from net purchases of available-for-sale securities of $94.7 million. We generated approximately $13.2 million from our sale of shares in the SMIC IPO in March 2004.



In the six months ended March 31, 2005, we made capital expenditures of
approximately $0.8 million for test equipment and engineering tools. 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 expect to fund our capital expenditures from our existing cash and cash equivalent balances.



We generated $2.9 million from financing activities during the six months ended March 31, 2005 compared to $99.1 million in
the six months ended March 31, 2004. The source of financing for the six months ended March 31,



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2005, was proceeds from the issuance of common stock of $1.7 million from stock option exercises and sales under our
employee stock purchase plan and a decrease in restricted cash of $1.2 million. In the three months ended March 31, 2004, we completed a follow-on public offering of our Common Stock whereby we sold 6,025,000 shares at a public offering price of
$16.50 per share. Proceeds from this offering, net of commissions, discounts and expenses, were $93.5 million. In addition, in the six months ended March 31, 2004, we generated $5.6 million from the issuance of common stock from option exercises and
sales under our employee stock purchase plan.



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 $3.2 million.



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.



On January 25, 2005,
we announced the execution on such date of a Merger Agreement between ISSI-Taiwan (our wholly owned subsidiary) and ICSI. Prior to the transaction, we owned approximately 29.1% of the outstanding shares of ICSI and approximately $3.8 million of
convertible debentures of ICSI. In the March 2005 quarter, we purchased additional shares of ICSI for approximately $11.8 million increasing our ownership percentage to approximately 41%. The additional consideration to be paid by us in connection
with the merger is cash in the aggregate amount of approximately $58 million (excluding the value of the shares of ICSI held by us at March 31, 2005). The Merger Agreement has been approved by the boards of directors of ISSI, ISSI-Taiwan and ICSI
and the shareholders of ICSI, and is subject to regulatory approvals and customary closing conditions. We anticipate that the merger will be completed in the September 2005 quarter. Prior to the closing of the merger, we may purchase additional
shares of ICSI on the open market. We also agreed to loan $15.0 million to ICSI under loan documents executed on April 28, 2005, of which $13.0 million had been funded as of May 9, 2005. ICSI agreed to collateralize the loan with a mortgage on its
building in Taiwan and the lien documents were effective on April 28, 2005.



Our contractual cash obligations at March 31, 2005 are outlined in the table below:



|                                          |       |                        |                  |  |           |       |           |   |                   |  |   |   |  |   |  
|----------------------------------------- | ----- | ---------------------- | ---------------- |  | --------- | ----- | --------- | - | ----------------- |  | - | - |  | - | -
|Contractual Obligations                   |       | Payments Due by Period
|                                          | Total |                        | Less than 1 year |  | 1-3 years |       | 3-5 years |   | More than 5 years
|                                          |       | (In thousands)        
|Operating leases                          |       | $                      | 3,165            |  | $         | 896   |           | $ | 2,269             |  | $ |  |  | $ | 
|Purchase obligations with wafer foundries |       |                        | 1,254            |  |           | 1,254 |           |   |                  |  |   |  |  |   | 
|Non-cancelable purchase commitments       |       |                        | 3,722            |  |           | 3,722 |           |   |                  |  |   |  |  |   | 
|                                          |       |                        |                  |  |           |       |           |   |                   |  |   |   |  |   |  
|Total contractual cash obligations        |       | $                      | 8,141            |  | $         | 5,872 |           | $ | 2,269             |  | $ |  |  | $ | 
|                                          |       |                        |                  |  |           |       |           |   |                   |  |   |   |  |   |  



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. 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.



Off-Balance Sheet Arrangements



As of March 31, 2005, we did not have any significant
off-balance sheet arrangements, as defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.



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Certain Factors Which May Affect Our Business or Future Operating Results



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



We incurred losses of $27.2 million in the first six months of fiscal 2005, which included inventory write-downs of $10.9 million and charges of $10.6 million related to our equity interest in ICSI. Though we were
profitable in the first three quarters of fiscal 2004, we incurred a loss of $15.6 million in the fourth quarter of fiscal 2004, which included an inventory write-down of $12.1 million. We incurred losses in the ten consecutive quarters ended
September 30, 2003 totaling $124.0 million. We expect to incur a loss in the June 2005 quarter and may incur losses in subsequent quarters. Our ability to achieve and maintain profitability on a quarterly or fiscal year basis in the future will
depend on a variety of factors, including the need for future inventory write-downs, our ability to increase net sales, maintain or 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.



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



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



| |  |  | inventory write-downs for lower of cost or market or excess and obsolete;
| | - |  | -------------------------------------------------------------------------



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



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



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



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



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



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



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



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| |  |  | 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.



In the six months ended March 31, 2005,
approximately 86% of our net sales were 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 2004, we experienced a
sequential decline in revenue from $58.1 million in our June 2004 quarter to $31.1 million in our September 2004 quarter. This decline was a result of a decrease in unit shipments of our products due to lower demand for electronic products that use
our devices, as well as a decline in the average selling prices of our products. We may not be able to offset any future price declines by higher volumes or by higher prices on newer products. Historically, average selling prices for semiconductor
memory products have declined, and we expect that average selling prices for our products will decline in the future. In this regard, we anticipate a decline in the average selling prices for our DRAM and certain of our SRAM products in the June
2005 quarter compared to the March 2005 quarter. 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.



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 declined significantly in the
fourth quarter of fiscal 2004 compared to the third quarter of fiscal 2004 due to an oversupply of DRAM devices in the market and a general softness in SRAM demand. As a result, our sales in the digital consumer and networking markets declined
significantly in the September 2004 quarter and they remained at a lower level in the December 2004 and March 2005 quarters. Industry downturns have resulted in reduced demand and declining average selling prices for our products which adversely
affected our business. We expect that our industry will remain cyclical, but are unable to predict when any upturn or downturn will occur or how long it will last.



Shifts in industry-wide capacity may cause our results to fluctuate. These shifts may occur quickly with little or no advance notice.
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 2003, fiscal 2004 and the first six months of fiscal 2005, we recorded inventory write-downs of $4.1 million, $17.3 million and $10.9
million, respectively. The inventory write-downs primarily related to valuing our inventory at the lower-of-cost-or-market, and to a lesser extent, adjusting our inventory valuation for certain excess and obsolete products.



We write down to zero carrying value of inventory on hand in excess of six
months historical sales volumes to cover estimated excess and obsolete exposures, unless adjustments are made 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.



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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. Future additional inventory write-downs may occur due to lower of cost or market accounting,
excess inventory or inventory obsolescence.



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



If we are unable to obtain an adequate supply of wafers from our current 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. In particular, our supply of wafers, especially from SMIC, in
the June 2004 quarter was lower than our needs, which adversely impacted our results for such period. 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 be able to deliver an adequate supply of wafers to us.



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



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| |  |  | 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. Sales to ATM Electronic Corporation accounted for approximately 10% of total net sales for the three months ended March 31, 2005. Revenue recognized for Arrow Electronics accounted for approximately 10% and 11% of total net
sales for the three and six months ended March 31, 2005, respectively. Sales to Asian Information Technology Inc. accounted for approximately 12% and 10% of total net sales for the three and six months ended March 31, 2004, respectively. Sales to
ATM Electronic Corporation accounted for approximately 10% and 9% of total net sales for the three months and six months ended March 31, 2004, respectively. During the September quarter of fiscal 2004, we experienced cancelled or reduced orders from
some of our larger customers that adversely impacted our operating results. We may not be able to retain our key customers, such customers may cancel or reschedule orders, and 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 six months ended March 31, 2005,
approximately 19% of our net sales was attributable to customers located in the U.S., 12% was attributable to customers located in Europe and 67% was attributable to customers located in Asia. In fiscal 2004, approximately 13% of our net sales was
attributable to shipments in the U.S., 11% was attributable to shipments in Europe and 75% was attributable to shipments in Asia. In fiscal 2003, approximately 13% of our net sales was attributable to shipments in the U.S., 10% was attributable to
shipments in Europe and 77% was attributable to shipments in Asia. We anticipate that sales to international sites 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;
| | - |  | -------------------------------------------------------------



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



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



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



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



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. Further, new products may not work properly in our customers applications. 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. Although we seek to limit our liability, 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 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.



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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 March 31, 2005, our strategic investments in non-marketable securities totaled $3.3 million. 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 $0.3 million impairment loss
on one of our equity positions in fiscal 2004. In addition, we recorded approximately $0.4 million and $1.3 million in impairment losses during fiscal 2002 and fiscal 2003, respectively.



In addition, we own shares in SMIC with a cost basis of approximately $31.9 million and a market value at March 31, 2005 of
approximately $53.9 million. The market value of SMIC shares is subject to fluctuation and our carrying value will be subject to adjustments to reflect the current market value. Our shares in SMIC are subject to certain lockup restrictions and
therefore all of such shares are not freely tradable. These lockup restrictions generally lapse at the rate of 15% of the Companys pre-offering shares every 180 days following the IPO. Thus, all of our shares in SMIC will be freely tradable 3
years and 180 days following the IPO. As a result of these lockup restrictions and potential fluctuations in SMICs stock price, we may be unable to realize the market value at March 31, 2005.



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 41% of the equity of our former wholly-owned subsidiary, ICSI, at March 31, 2005. Our financial results for the first six months of fiscal 2005 and fiscal 2004 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. For example, for the first six months of fiscal 2005, we incurred a loss of $10.6 million related to
our equity interest in ICSI. On January 25, 2005, we announced our intent to acquire the remaining 71% of ICSI that we did not then own. In the March 2005 quarter, we purchased additional shares of ICSI for approximately $11.8 million increasing our
ownership percentage to approximately 41%. We believe that our acquisition of all of ICSI will be concluded in the September 2005 quarter. Effective May 1, 2005, our Chairman and Chief Executive Officer, Jimmy Lee, was appointed Chairman of ICSI and
the ICSI board formally elected Mr. Lee as Chairman on May 6, 2005. We also agreed to loan $15.0 million to ICSI under loan documents executed on April 28, 2005, of which $13.0 million had been funded as of May 9, 2005. ICSI agreed to collateralize
the loan with a mortgage on its building in Taiwan and the



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lien documents were effective on April 28, 2005. As a result of these events, and changes in the management reporting
structure of ICSI (which were effective as of May 1, 2005), we will begin consolidating the financial results of ICSI with our results as of May 1, 2005 in accordance with generally accepted accounting principles. ICSIs shares are publicly
traded on the Taiwan stock exchange and its share price is subject to market fluctuations. The market value of our investment in the common stock of ICSI at March 31, 2005 was approximately $39.8 million, based on quoted market prices. Our total
carrying value of this investment as of March 31, 2005 was approximately $22.0 million, of which $17.2 million is included in other assets and $4.8 million is included in other comprehensive income in the equity portion of our balance sheet.



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. Most of our equity positions are in privately held entities that do not have a readily determinable market
value. However, the shares we hold in our former wholly-owned subsidiary, ICSI, are publicly traded in Taiwan and our shares in SMIC are publicly traded on the Hong Kong Stock Exchange and the New York Stock Exchange. 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 Securities and Exchange Commission 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 an additional portion 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.



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. In particular, complying with the internal control requirements of Sarbanes-Oxley Section 404 will result in increased internal efforts, significantly higher fees from our independent accounting firm and significantly higher fees from third
party contractors. 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.



We may experience difficulties and increased expenses in complying with
Sarbanes-Oxley Section 404.



While we believe we
currently have adequate internal control over financial reporting, we are required to evaluate our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor
confidence in our financial reports and have an adverse effect on our stock price.



Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-K for the fiscal year ending September 30, 2005, we will be required to furnish a report by our management on our
internal control over financial reporting. Such report will contain among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not
our



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internal control over financial reporting is effective. This assessment must include disclosure of any material
weaknesses in our internal control over financial reporting identified by management. Such report must also contain a statement that our auditors have issued an attestation report on managements assessment of such internal controls. Public
Company Oversight Board Auditing Standard No. 2 provides the professional standards and related performance guidance for auditors to attest to, and report on, managements assessment of the effectiveness of internal control over financial
reporting under Section 404.



While we currently believe our
internal control over financial reporting is effective, we are still performing the system and process documentation and evaluation needed to comply with Section 404, which is both costly and challenging. During this process, if our management
identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert such internal control is effective. If we are unable to assert that our internal control over financial reporting is effective
as of September 30, 2005 (or if our auditors are unable to attest that our managements report is fairly stated or they are unable to express an opinion on the effectiveness of our internal controls), we could lose investor confidence in the
accuracy and completeness of our financial reports, which would have an adverse effect on our stock price.



While we currently anticipate being able to satisfy the requirements of Section 404 in a timely fashion, we cannot be certain as to the timing of
completion of our evaluation, testing and any required remediation. If we are not able to comply with the requirements of Section 404 in a timely manner or if our auditors are not able to complete the procedures required by Auditing Standard No. 2
to support their attestation report, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price.



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, the Financial Accounting Standards Board (FASB) has issued
changes to US GAAP that will require us to record a charge to earnings for employee stock option grants for all awards unvested at and granted after October 1, 2005. This regulation will negatively impact our earnings. 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.



We may encounter difficulties in effectively integrating acquired businesses.



From time to time, we intend to acquire other companies that we believe to be complementary to our business. Acquisitions
may result in use of our cash resources, 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
| | - |  | -------------------------------------------------------------------------------



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| |  |  | the potential loss of key employees and customers as a result of the acquisition.
| | - |  | ---------------------------------------------------------------------------------



In this regard, in the six months ended March 31, 2005, we increased our ownership in Signia to approximately 68% of the
outstanding shares. The cost of this additional investment was approximately $8.1 million in cash. We may encounter difficulties in effectively working with Signia. Furthermore, we could be subject to charges for impairment if Signias business
materially declines. There is no assurance that Signia or any future acquisitions will contribute positively to our business or operating results.



Further, on January 25, 2005, we announced the execution on such date of a Merger Agreement between ISSI-Taiwan (our wholly owned subsidiary) and ICSI.
Prior to the transaction, we owned approximately 29.1% of the outstanding shares of ICSI and approximately $3.8 million of convertible debentures of ICSI. In the March 2005 quarter, we purchased additional shares of ICSI for approximately $11.8
million increasing our ownership percentage to approximately 41%. The additional consideration to be paid by us in connection with the merger is cash in the aggregate amount of approximately $58 million (excluding the value of the shares of ICSI
held by us at March 31, 2005). We anticipate that the merger will be completed in the September 2005 quarter. We may encounter difficulties in integrating ICSIs operations with ours. Furthermore, the costs of the combined operations may be
higher than anticipated and the revenues of the combined operations may be lower than expected. There is no assurance that ICSI will 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.



Our stock price is expected to be continue to be volatile.



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



| |  |  | quarter-to-quarter variations in our operating results;
| | - |  | -------------------------------------------------------



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



| |  |  | new or revised earnings estimates or guidance 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;
| | - |  | ----------------------------------------------------------------------------------------------



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| |  |  | 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 March 24, 2003, our closing stock price was $2.26 per share, rose to $19.87 per share on January 13, 2004, and subsequently declined to $5.76 per share on April 15, 2005.



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.



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



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



| |  |  | 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.



Terrorist acts,
conflicts or wars, 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 March 31, 2005 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 $75.7 million at March 31, 2005. The primary objective of our investment activities is to
preserve principal while at the same time maximizing yields without increasing risk. We invest primarily in high-quality, short-term debt instruments such as municipal auction rate certificates and instruments issued by high quality financial
institutions and companies, including money market instruments. A hypothetical one percentage point decrease in interest rates would result in approximately a $0.8 million decrease in our interest income.



We own approximately 41% 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 March 31, 2005 was approximately $22.0 million of which $17.2 million is included in other assets and $4.8 million is included in
other comprehensive income in the equity portion of our balance sheet. The market value of our investment in the common stock of ICSI at March 31, 2005 was approximately $39.8 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 $3.8 million of ICSI convertible debentures. As a result of changes in
ICSIs convertible debenture price, as of March 31, 2005, we recorded an accumulated unrealized gain of approximately $733,000 related to the ICSI convertible debentures. This gain was included in other comprehensive income in the equity
portion of our balance sheet. In addition, in the six months ended March 31, 2005, we recorded a charge of approximately $21,000 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 own less than 2% of SMIC. On March 17, 2004, SMIC completed its IPO. SMICs ordinary shares are traded on the Hong
Kong Stock Exchange and SMIC American Depository Receipts (ADR) are traded on the New York Stock Exchange. Each SMIC ADR represents fifty (50) ordinary shares. As a result of our sale of shares of SMIC in the IPO, we recorded gross
proceeds of approximately $13.2 million in the March 2004 quarter resulting in a pre-tax gain of approximately $8.7 million. In the September 2004 quarter, we sold additional shares of SMIC and recorded gross proceeds of approximately $5.0 million
and a pre-tax gain of approximately $2.1 million. In the December 2004 quarter, we sold additional shares of SMIC and recorded gross proceeds of approximately $4.5 million and a pre-tax gain of approximately $2.4 million. In the March 2005 quarter,
we sold additional shares of SMIC and recorded gross proceeds of approximately $1.1 million and a pre-tax gain of approximately $0.5 million. Since SMICs IPO, we account for our shares in SMIC under the provisions of FASB 115 and have marked
our investment to the market value as of March 31, 2005 by increasing other assets and by increasing accumulated comprehensive income in the equity section of the balance sheet. The cost basis of our shares in SMIC is approximately $31.9 million and
the market value at March 31, 2005 was approximately $54.0 million. The market value of SMIC shares is subject to fluctuation and our carrying value will be subject to adjustments to reflect the current market value. Our shares in SMIC are subject
to certain lockup restrictions and therefore all of such shares are not freely tradable. These lockup restrictions generally lapse at the rate of 15% of our pre-offering shares every 180 days following the IPO. Thus all of our shares in SMIC will be
freely tradable 3 years and 180 days following the IPO. As a result of these lockup restrictions and potential fluctuations in SMICs stock price, we may be unable to realize the market value at March 31, 2005.



We have investments in equity securities of privately held companies for the
promotion of business and strategic objectives of approximately $3.3 million at March 31, 2005. 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



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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 $0.3 million
impairment loss on one of our equity positions in fiscal 2004. In addition, we recorded approximately a $1.3 million impairment loss on our investment in Signia during fiscal 2003.



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 March 31, 2005, 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 March 31, 2005, 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



None



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



The Companys Annual Meeting of Stockholders was held on Friday, February 4, 2005 at 3:00 p.m., local time, in San Jose, California.



(a) The following nominees for Directors were elected. Each person elected as a Director will serve until the
next annual meeting of stockholders or until such persons successor is elected and qualified:



|                 |  |                |  |               
|---------------- |  | -------------- |  | --------------
|Name of Nominee  |  | Votes in Favor |  | Votes Withheld
|Jimmy S.M. Lee   |  | 29,282,086     |  | 3,465,115     
|Gary L. Fischer  |  | 29,218,954     |  | 3,528,247     
|Ping K. Ko       |  | 30,011,038     |  | 2,736,163     
|Lip-Bu Tan       |  | 24,463,765     |  | 8,283,436     
|Hide L. Tanigami |  | 25,218,012     |  | 7,529,189     
|Bruce A. Wooley  |  | 30,011,855     |  | 2,735,346     



(b) The Companys
stockholders approved an amendment to the Companys 1993 Employee Stock Purchase Plan to increase by 800,000 shares to an aggregate of 3,650,000 shares the number of shares reserved for grant thereunder with 14,592,079 votes in favor, 2,563,810
votes against, 922,897 votes abstaining and 14,668,415 broker non-votes.



(c) The Companys stockholders approved an amendment to the Companys 1995 Director Stock Option Plan to increase by 100,000 shares to an aggregate of 225,000 shares the number of shares reserved for grant
thereunder and to extend the termination date of such plan from February 2, 2005 to February 15, 2015, with 11,645,452 votes in favor, 5,513,703 votes against, 919,631 votes abstaining and 14,668,415 broker non-votes.



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(d) The Companys stockholders the ratified the appointment of Ernst & Young, LLP as independent
auditors of the Company for the fiscal year ending September 30, 2005, with 31,322,274 votes in favor, 1,392,435 votes against and 32,491 votes abstaining.



Item 6. Exhibits



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



|             |  |                                                                                                                         
|------------ |  | ------------------------------------------------------------------------------------------------------------------------
|Exhibit 10.1 |  | 1993 Employee Stock Purchase Plan, as amended. *                                                                        
|             | 
|Exhibit 10.2 |  | 1995 Director Stock Option Plan, as amended. *                                                                          
|             | 
|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. 

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|* | Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter ending December 31, 2004, filed on February 9, 2005.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------



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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: May 10, 2005 |  | /s/ Gary L. Fischer                
|                    |  | Gary L. Fischer                    
|                    |  | President, Chief Operating Officer,
|                    |  | and Chief Financial Officer        
|                    |  | (Principal Financial and           
|                    |  | Accounting Officer)                



38