##### Table of Contents



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

|                                              |  |                                                                                        
|--------------------------------------------- |  | ---------------------------------------------------------------------------------------
|(Mark One)                                    | 
|[x]                                           |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended June 30, 2002.
|OR                                           
|[   ]                                         |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 000-23084.

Integrated Silicon Solution, Inc.

(Exact name of registrant as specified in its charter)


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

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

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

Yes
[x]      No
[   ]


The number of outstanding shares of the registrants Common Stock as of
July 31, 2002 was 27,651, 074.





---

TABLE OF CONTENTS



|                           |                                                                                               |                                                           |  |  |  |  |  | 
|-------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|                           |                                                                                               | Condensed Consolidated Statements of Operations          
|                           |                                                                                               | Condensed Consolidated Statements of Comprehensive Income
|                           |                                                                                               | Condensed Consolidated Balance Sheets                    
|                           |                                                                                               | Condensed Consolidated Statements of Cash Flows          
|                           |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS     
|                           | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                           | Item 3. Financial Market Risk                                                                
|Part II. OTHER INFORMATION
|                           | Item 1. Legal Proceedings                                                                    
|                           | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                
|EXHIBIT INDEX             
|EXHIBIT 99.1              



---



##### Table of Contents






Integrated Silicon Solution, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)

|                                                                                               |                                     |                          |         |                    |        |                   |         |       |        |      |         |        |        |   |         |        |        | 
|---------------------------------------------------------------------------------------------- | ----------------------------------- | ------------------------ | ------- | ------------------ | ------ | ----------------- | ------- | ----- | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                               |                                     |                          |         | Three Months Ended |        | Nine Months Ended
|                                                                                               |                                     |                          |         | June 30,           |        | June 30,         
|                                                                                               |                                     |                          |         |                    |        |                  
|                                                                                               |                                     |                          |         | 2002               |        | 2001              |         | 2002  |        | 2001
|                                                                                               |                                     |                          |         |                    |        |                   |         |       |        |     
|Net sales (See Note 13)                                                                        |                                     | $                        | 18,532  |                    |        | $                 | 20,013  |       |        | $    | 50,261  |        |        | $ | 137,265 |       
|Cost of sales                                                                                  |                                     |                          | 31,563  |                    |        |                   | 23,513  |       |        |      | 57,597  |        |        |   | 115,131 |       
|                                                                                               |                                     |                          |         |                    |        |                   |         |       |        |      |         |        |        |   |         |       
|Gross profit (loss)                                                                            |                                     |                          | (13,031 | )                  |        |                   | (3,500  | )     |        |      | (7,336  | )      |        |   | 22,134  |       
|                                                                                               |                                     |                          |         |                    |        |                   |         |       |        |      |         |        |        |   |         |       
|Operating Expenses:                                                                            |                                     |                          |         |                    |        |                   |         |       |        |      |         |        |        |   |         |       
|                                                                                               | Research and development            |                          |         | 8,016              |        |                   |         | 6,375 |        |      |         | 21,815 |        |   |         | 19,704 |       
|                                                                                               | Selling, general and administrative |                          |         | 4,213              |        |                   |         | 4,399 |        |      |         | 12,181 |        |   |         | 16,517 |       
|                                                                                               | In-process technology charge        |                          |         |                   |        |                   |         |      |        |      |         | 4,689  |        |   |         |       |       
|                                                                                               |                                     |                          |         |                    |        |                   |         |       |        |      |         |        |        |   |         |       
|                                                                                               |                                     | Total operating expenses |         |                    | 12,229 |                   |         |       | 10,774 |      |         |        | 38,685 |   |         |        | 36,221 | 
|                                                                                               |                                     |                          |         |                    |        |                   |         |       |        |      |         |        |        |   |         |       
|Operating loss                                                                                 |                                     |                          | (25,260 | )                  |        |                   | (14,274 | )     |        |      | (46,021 | )      |        |   | (14,087 | )     
|Other income (expense), net                                                                    |                                     |                          | 853     |                    |        |                   | 1,350   |       |        |      | 2,183   |        |        |   | 4,702   |       
|Gain on sale of investments                                                                    |                                     |                          |        |                    |        |                   | 1,753   |       |        |      | 35      |        |        |   | 30,516  |       
|                                                                                               |                                     |                          |         |                    |        |                   |         |       |        |      |         |        |        |   |         |       
|Income (loss) before minority interest
and equity in net income (loss) of
affiliated companies |                                     |                          | (24,407 | )                  |        |                   | (11,171 | )     |        |      | (43,803 | )      |        |   | 21,131  |       
|Provision (benefit) for income taxes                                                           |                                     |                          | 3       |                    |        |                   | (9,163  | )     |        |      | (3,220  | )      |        |   | (1,087  | )     
|                                                                                               |                                     |                          |         |                    |        |                   |         |       |        |      |         |        |        |   |         |       
|Income (loss) before equity in
net income (loss) of affiliated
companies                       |                                     |                          | (24,410 | )                  |        |                   | (2,008  | )     |        |      | (40,583 | )      |        |   | 22,218  |       
|Minority interest in net (income) loss of
consolidated subsidiary                              |                                     |                          | (6      | )                  |        |                   |        |       |        |      | 18      |        |        |   |        |       
|Equity in net income (loss) of
affiliated companies                                            |                                     |                          | (511    | )                  |        |                   | (1,695  | )     |        |      | (4,946  | )      |        |   | 3,623   |       
|                                                                                               |                                     |                          |         |                    |        |                   |         |       |        |      |         |        |        |   |         |       
|Net income (loss)                                                                              |                                     | $                        | (24,927 | )                  |        | $                 | (3,703  | )     |        | $    | (45,511 | )      |        | $ | 25,841  |       
|                                                                                               |                                     |                          |         |                    |        |                   |         |       |        |      |         |        |        |   |         |       
|Basic net income (loss) per share                                                              |                                     | $                        | (0.91   | )                  |        | $                 | (0.14   | )     |        | $    | (1.69   | )      |        | $ | 0.99    |       
|                                                                                               |                                     |                          |         |                    |        |                   |         |       |        |      |         |        |        |   |         |       
|Shares used in basic per share
calculation                                                     |                                     |                          | 27,309  |                    |        |                   | 26,337  |       |        |      | 26,954  |        |        |   | 26,084  |       
|                                                                                               |                                     |                          |         |                    |        |                   |         |       |        |      |         |        |        |   |         |       
|Diluted net income (loss) per share                                                            |                                     | $                        | (0.91   | )                  |        | $                 | (0.14   | )     |        | $    | (1.69   | )      |        | $ | 0.93    |       
|                                                                                               |                                     |                          |         |                    |        |                   |         |       |        |      |         |        |        |   |         |       
|Shares used in diluted per share
calculation                                                   |                                     |                          | 27,309  |                    |        |                   | 26,337  |       |        |      | 26,954  |        |        |   | 27,699  |       
|                                                                                               |                                     |                          |         |                    |        |                   |         |       |        |      |         |        |        |   |         |       

See accompanying notes to condensed consolidated financial statements.

1



---



##### Table of Contents






Integrated Silicon Solution, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)

|                                               |                                             |   |                    |       |                   |   |        |        |      |   |         |     |  |   |        |        |  
|---------------------------------------------- | ------------------------------------------- | - | ------------------ | ----- | ----------------- | - | ------ | ------ | ---- | - | ------- | --- |  | - | ------ | ------ | -
|                                               |                                             |   | Three Months Ended |       | Nine Months Ended
|                                               |                                             |   | June 30,           |       | June 30,         
|                                               |                                             |   |                    |       |                  
|                                               |                                             |   | 2002               |       | 2001              |   | 2002   |        | 2001
|                                               |                                             |   |                    |       |                   |   |        |        |     
|Net income (loss)                              |                                             | $ | (24,927            | )     |                   | $ | (3,703 | )      |      | $ | (45,511 | )   |  | $ | 25,841 |       
|Other comprehensive income
(loss), net of tax: |                                             |   |                    |       |                   |   |        |        |      |   |         |     |  |   |        |       
|                                               | Change in cumulative
translation adjustment |   |                    | 1,111 |                   |   |        | (1,387 | )    |   |         | 779 |  |   |        | (1,921 | )
|                                               |                                             |   |                    |       |                   |   |        |        |      |   |         |     |  |   |        |       
|Comprehensive income (loss)                    |                                             | $ | (23,816            | )     |                   | $ | (5,090 | )      |      | $ | (44,732 | )   |  | $ | 23,920 |       
|                                               |                                             |   |                    |       |                   |   |        |        |      |   |         |     |  |   |        |       

See accompanying notes to condensed consolidated financial statements.

2



---



##### Table of Contents






Integrated Silicon Solution, Inc.
Condensed Consolidated Balance Sheets
(In thousands)

|                                                     |                                                        |   |             |         |               |   |         |         |  
|---------------------------------------------------- | ------------------------------------------------------ | - | ----------- | ------- | ------------- | - | ------- | ------- | -
|                                                     |                                                        |   | June 30,    |         | September 30,
|                                                     |                                                        |   | 2002        |         | 2001         
|                                                     |                                                        |   |             |         |              
|                                                     |                                                        |   | (unaudited) |         | (1)          
|ASSETS                                              
|Current assets:                                      |                                                        |   |             |         |               |   |         |        
|                                                     | Cash and cash equivalents                              |   | $           | 23,571  |               |   | $       | 19,309  |  
|                                                     | Short-term investments                                 |   |             | 80,550  |               |   |         | 103,550 |  
|                                                     | Accounts receivable                                    |   |             | 9,332   |               |   |         | 9,743   |  
|                                                     | Accounts receivable from related parties (See Note 13) |   |             | 753     |               |   |         | 597     |  
|                                                     | Inventories                                            |   |             | 20,026  |               |   |         | 45,179  |  
|                                                     | Other current assets                                   |   |             | 5,531   |               |   |         | 4,689   |  
|                                                     |                                                        |   |             |         |               |   |         |        
|Total current assets                                 |                                                        |   | 139,763     |         |               |   | 183,067 |        
|Property, equipment, and leasehold improvements, net |                                                        |   | 10,708      |         |               |   | 7,663   |        
|Other assets                                         |                                                        |   | 61,242      |         |               |   | 47,122  |        
|Total assets                                         |                                                        | $ | 211,713     |         |               | $ | 237,852 |        
|                                                     |                                                        |   |             |         |               |   |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY                
|Current liabilities:                                 |                                                        |   |             |         |               |   |         |        
|                                                     | Accounts payable                                       |   | $           | 22,787  |               |   | $       | 7,285   |  
|                                                     | Accounts payable to related parties (See Note 13)      |   |             | 2,965   |               |   |         | 854     |  
|                                                     | Accrued compensation and benefits                      |   |             | 3,587   |               |   |         | 3,510   |  
|                                                     | Accrued expenses                                       |   |             | 4,246   |               |   |         | 7,801   |  
|                                                     | Income tax payable                                     |   |             | 70      |               |   |         | 3,651   |  
|                                                     | Current portion of long-term obligations               |   |             | 168     |               |   |         | 156     |  
|                                                     |                                                        |   |             |         |               |   |         |        
|Total current liabilities                            |                                                        |   | 33,823      |         |               |   | 23,257  |        
|Long-term obligations                                |                                                        |   | 30          |         |               |   | 158     |        
|Minority interest                                    |                                                        |   | 127         |         |               |   |        |        
|Stockholders equity:                                |                                                        |   |             |         |               |   |         |        
|                                                     | Common stock                                           |   |             | 3       |               |   |         | 3       |  
|                                                     | Additional paid-in capital                             |   |             | 230,352 |               |   |         | 221,502 |  
|                                                     | Accumulated deficit                                    |   |             | (47,222 | )             |   |         | (1,711  | )
|                                                     | Unearned compensation                                  |   |             | (822    | )             |   |         |        |  
|                                                     | Accumulated comprehensive loss                         |   |             | (4,578  | )             |   |         | (5,357  | )
|                                                     |                                                        |   |             |         |               |   |         |        
|Total stockholders equity                           |                                                        |   | 177,733     |         |               |   | 214,437 |        
|                                                     |                                                        |   |             |         |               |   |         |        
|Total liabilities and stockholders equity           |                                                        | $ | 211,713     |         |               | $ | 237,852 |        
|                                                     |                                                        |   |             |         |               |   |         |        



---

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

See accompanying notes to condensed consolidated financial statements.

3



---



##### Table of Contents






Integrated Silicon Solution, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

|                                                             |                                                                           |                                                 |        |                   |       |      |         |         |         |  
|------------------------------------------------------------ | ------------------------------------------------------------------------- | ----------------------------------------------- | ------ | ----------------- | ----- | ---- | ------- | ------- | ------- | -
|                                                             |                                                                           |                                                 |        | Nine Months Ended
|                                                             |                                                                           |                                                 |        | June 30,         
|                                                             |                                                                           |                                                 |        |                  
|                                                             |                                                                           |                                                 |        | 2002              |       | 2001
|                                                             |                                                                           |                                                 |        |                   |       |     
|Cash flows from operating activities                         |                                                                           |                                                 |        |                   |       |      |         |        
|                                                             | Net income (loss)                                                         |                                                 | $      | (45,511           | )     |      | $       | 25,841  |        
|                                                             | Depreciation and amortization                                             |                                                 |        | 2,917             |       |      |         | 2,513   |        
|                                                             | Amortization of intangibles and unearned compensation                     |                                                 |        | 170               |       |      |         |        |        
|                                                             | In-process technology charge                                              |                                                 |        | 4,689             |       |      |         |        |        
|                                                             | Gain on sale of investments                                               |                                                 |        | (35               | )     |      |         | (30,516 | )      
|                                                             | Loss on impairment of investment                                          |                                                 |        | 150               |       |      |         |        |        
|                                                             | Equity in (net income) loss of affiliated companies                       |                                                 |        | 4,946             |       |      |         | (3,623  | )      
|                                                             | Minority interest in net loss of consolidated subsidiary                  |                                                 |        | (18               | )     |      |         |        |        
|                                                             | Net effect of changes in current and other assets and current liabilities |                                                 |        | 33,300            |       |      |         | (13,750 | )      
|                                                             |                                                                           |                                                 |        |                   |       |      |         |        
|                                                             |                                                                           | Cash provided by (used in) operating activities |        |                   | 608   |      |         |         | (19,535 | )
|Cash flows from investing activities                         |                                                                           |                                                 |        |                   |       |      |         |        
|                                                             | Capital expenditures                                                      |                                                 |        | (5,232            | )     |      |         | (5,151  | )      
|                                                             | Purchases of available-for-sale securities                                |                                                 |        | (19,600           | )     |      |         | (81,300 | )      
|                                                             | Sales of available-for-sale securities                                    |                                                 |        | 42,600            |       |      |         | 30,550  |        
|                                                             | Proceeds from partial sale of Integrated Circuit Solution, Inc. (ICSI)  |                                                 |        | 64                |       |      |         | 15,484  |        
|                                                             | Proceeds from joint venture partner                                       |                                                 |        | 145               |       |      |         |        |        
|                                                             | Investment in Purple Ray                                                  |                                                 |        | (192              | )     |      |         |        |        
|                                                             | Investment in Semiconductor Manufacturing International Corp. (SMIC)    |                                                 |        | (11,352           | )     |      |         | (14,250 | )      
|                                                             | Proceeds from the sale of Wafertech                                       |                                                 |        |                  |       |      |         | 40,669  |        
|                                                             | Proceeds from partial sale of NexFlash                                    |                                                 |        |                  |       |      |         | 6,167   |        
|                                                             | Other investments                                                         |                                                 |        | (4,815            | )     |      |         | (3,320  | )      
|                                                             |                                                                           |                                                 |        |                   |       |      |         |        
|                                                             |                                                                           | Cash provided by (used in) investing activities |        |                   | 1,618 |      |         |         | (11,151 | )
|Cash flows from financing activities                         |                                                                           |                                                 |        |                   |       |      |         |        
|                                                             | Proceeds from issuance of common stock                                    |                                                 |        | 1,971             |       |      |         | 2,759   |        
|                                                             | Principal payments on notes payable and long-term
obligations             |                                                 |        | (116              | )     |      |         | (104    | )      
|                                                             |                                                                           |                                                 |        |                   |       |      |         |        
|                                                             |                                                                           | Cash provided by financing activities           |        |                   | 1,855 |      |         |         | 2,655   |  
|                                                             |                                                                           |                                                 |        |                   |       |      |         |        
|Effect of exchange rate changes on cash and cash equivalents |                                                                           |                                                 | 181    |                   |       |      |        |        
|Net increase (decrease) in cash and cash equivalents         |                                                                           |                                                 | 4,262  |                   |       |      | (28,031 | )      
|Cash and cash equivalents at beginning of period             |                                                                           |                                                 | 19,309 |                   |       |      | 38,778  |        
|                                                             |                                                                           |                                                 |        |                   |       |      |         |        
|Cash and cash equivalents at end of period                   |                                                                           | $                                               | 23,571 |                   |       | $    | 10,747  |        
|                                                             |                                                                           |                                                 |        |                   |       |      |         |        

See accompanying notes to condensed consolidated financial statements.

4



---



##### Table of Contents






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

1. Basis of Presentation

The accompanying condensed financial statements include the accounts of
Integrated Silicon Solution, Inc. (the Company) and its consolidated majority
owned subsidiaries, 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 nine months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2002 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, 2001.

2. Concentrations

In the three and nine month periods ended June 30, 2002, no single
customer accounted for over 10% of net sales. Sales to Flextronics
International accounted for approximately 14% of total net sales for the nine
months ended June 30, 2001. Substantially all of the sales to Flextronics were
for products to be delivered to Cisco Systems, Inc.

3. Cash, Cash Equivalents and Short-term Investments

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

|                                         |  |                |         |               |  |   |         | 
|---------------------------------------- |  | -------------- | ------- | ------------- |  | - | ------- | 
|                                         |  | (In thousands)
|                                         |  | June 30,       |         | September 30,
|                                         |  | 2002           |         | 2001         
|                                         |  |                |         |              
|Cash                                     |  | $              | 18,276  |               |  | $ | 14,280  | 
|Money market instruments                 |  |                | 5,295   |               |  |   | 5,029   | 
|Municipal bonds due in more than 3 years |  |                | 80,550  |               |  |   | 103,550 | 
|                                         |  |                |         |               |  |   |         | 
|                                         |  | $              | 104,121 |               |  | $ | 122,859 | 
|                                         |  |                |         |               |  |   |         | 

4. Inventories

The following is a summary of inventories by major category: (In
thousands)

|                     |  |          |        |               |  |   |        | 
|-------------------- |  | -------- | ------ | ------------- |  | - | ------ | 
|
|                     |  | June 30, |        | September 30,
|                     |  | 2002     |        | 2001         
|                     |  |          |        |              
|Purchased components |  | $        | 7,754  |               |  | $ | 12,350 | 
|Work-in-process      |  |          | 3,370  |               |  |   | 594    | 
|Finished goods       |  |          | 8,902  |               |  |   | 32,235 | 
|                     |  |          |        |               |  |   |        | 
|                     |  | $        | 20,026 |               |  | $ | 45,179 | 
|                     |  |          |        |               |  |   |        | 

5



---



##### Table of Contents



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

5. Other Assets

Other assets consisted of the following: (In thousands)

|                                         |  |          |        |               |  |   |        | 
|---------------------------------------- |  | -------- | ------ | ------------- |  | - | ------ | 
|                                         |  | June 30, |        | September 30,
|                                         |  | 2002     |        | 2001         
|                                         |  |          |        |              
|Investment in ICSI                       |  | $        | 18,434 |               |  | $ | 22,805 | 
|Investment in ICSI convertible debenture |  |          | 3,180  |               |  |   |       | 
|Investment in SMIC                       |  |          | 30,202 |               |  |   | 18,850 | 
|Other                                    |  |          | 9,426  |               |  |   | 5,467  | 
|                                         |  |          |        |               |  |   |        | 
|                                         |  | $        | 61,242 |               |  | $ | 47,122 | 
|                                         |  |          |        |               |  |   |        | 

6. Income Taxes

The benefit for income taxes for the nine month period ended June 30, 2002
reflects a benefit for alternative minimum taxes provided for the fiscal year
ended September 30, 2001 which can be recovered based on changes in the tax
law. The Company recorded a benefit for income taxes of $1.1 million for the
nine months ended June 30, 2001. The benefit for income taxes for the nine
months ended June 30, 2001 included a benefit of approximately $5.0 million for
the reversal of taxes accrued for foreign operations for which the statute had
expired. Excluding this benefit, the Company recorded a tax expense of 18.5%
for the nine months ended June 30, 2001. This tax expense reflected foreign
taxes on profits in foreign jurisdictions and the reversal of valuation
allowances previously established.

7. Net Income (Loss) Per Share

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

|                                                             |                                            |   |                    |        |                   |   |        |        |      |   |         |        |  |   |        |        | 
|------------------------------------------------------------ | ------------------------------------------ | - | ------------------ | ------ | ----------------- | - | ------ | ------ | ---- | - | ------- | ------ |  | - | ------ | ------ | 
|                                                             |                                            |   | Three Months Ended |        | Nine Months Ended
|                                                             |                                            |   | June 30,           |        | June 30,         
|                                                             |                                            |   |                    |        |                  
|                                                             |                                            |   | 2002               |        | 2001              |   | 2002   |        | 2001
|                                                             |                                            |   |                    |        |                   |   |        |        |     
|Numerator for basic and diluted net income (loss)
per share: |                                            |   |                    |        |                   |   |        |        |      |   |         |        |  |   |        |       
|Net income (loss)                                            |                                            | $ | (24,927            | )      |                   | $ | (3,703 | )      |      | $ | (45,511 | )      |  | $ | 25,841 |       
|                                                             |                                            |   |                    |        |                   |   |        |        |      |   |         |        |  |   |        |       
|Denominator for basic net income (loss) per share:           |                                            |   |                    |        |                   |   |        |        |      |   |         |        |  |   |        |       
|                                                             | Weighted average common shares outstanding |   |                    | 27,309 |                   |   |        | 26,337 |      |   |         | 26,954 |  |   |        | 26,084 | 
|Dilutive stock options                                       |                                            |   |                   |        |                   |   |       |        |      |   |        |        |  |   | 1,592  |       
|Dilutive warrants                                            |                                            |   |                   |        |                   |   |       |        |      |   |        |        |  |   | 23     |       
|                                                             |                                            |   |                    |        |                   |   |        |        |      |   |         |        |  |   |        |       
|Denominator for diluted net income (loss) per
share          |                                            |   | 27,309             |        |                   |   | 26,337 |        |      |   | 26,954  |        |  |   | 27,699 |       
|                                                             |                                            |   |                    |        |                   |   |        |        |      |   |         |        |  |   |        |       
|Basic net income (loss) per share                            |                                            | $ | (0.91              | )      |                   | $ | (0.14  | )      |      | $ | (1.69   | )      |  | $ | 0.99   |       
|                                                             |                                            |   |                    |        |                   |   |        |        |      |   |         |        |  |   |        |       
|Diluted net income (loss) per share                          |                                            | $ | (0.91              | )      |                   | $ | (0.14  | )      |      | $ | (1.69   | )      |  | $ | 0.93   |       
|                                                             |                                            |   |                    |        |                   |   |        |        |      |   |         |        |  |   |        |       

The above diluted calculation for the three months ended June 30, 2002 and
June 30, 2001 does not include approximately 4,771,000 and 4,154,000 shares
attributable to options as of June 30, 2002 and 2001, respectively, as their
impact would be anti-dilutive. The above diluted calculation for the nine
months ended June 30, 2002 and 2001, does not include approximately 4,741,000
and 826,000 shares attributable to options as of June 30, 2002 and 2001,
respectively, as their impact would be anti-dilutive.

6



---



##### Table of Contents



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

8. 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.

9. Impact of Recently Issued Accounting Standards

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

In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. While SFAS No. 144 supersedes FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of, it retains many of the fundamental provisions of that
Statement. SFAS No. 144 also supersedes the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment
of a business. However, it retains the requirement in Opinion No. 30 to report
separately discontinued operations and extends that reporting to a component of
an entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The Company is currently reviewing and
assessing the impact of SFAS No. 144 on its financial position and results of
operations.

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

7



---



##### Table of Contents



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

10. Litigation

In April 1998, the U.S. Department of Commerce (DOC) published an
antidumping duty order on imports of SRAMs from Taiwan, from where the Company
currently imports a majority of its SRAMs. As a consequence of this antidumping
duty order, the Company was required to post a cash deposit on imports of
Taiwan fabricated SRAM wafers or devices at the ad valorem rate of 7.56%. These
amounts were expensed to cost of goods sold.

The Company retained legal counsel to defend its interests in the
antidumping proceedings. In addition, respondents (including ISSI) challenged
certain aspects of the antidumping determination in federal court proceedings.
On August 29, 2000, pursuant to an appeal by ISSI and other respondents, the
U.S. Court of International Trade affirmed the International Trade Commission
(ITC) decision to reverse the ITCs earlier ruling supporting the imposition
of antidumping duties and rule instead in favor of the respondents. This
decision by the Court of International Trade was appealed to the U.S. Court of
Appeals for the Federal Circuit (CAFC). On September 21, 2001, the Federal
Circuit upheld the Court of International Trade. On January 14, 2002, the DOC
published a notice revoking the antidumping order and instructing the U.S.
Customs to refund all cash deposits. In March 2002, the time to appeal the case
to the Supreme Court expired and the case terminated.

As a result of the termination of the antidumping case, the Company
reversed amounts previously expensed to cost of goods sold of approximately
$5.2 million of which approximately $3.6 million had been cash payments and
$1.6 million was accrued as a liability. At June 30, 2002, all refunds due the
Company had been received.

11. Long Term Obligations

The Company leases certain of its equipment under a capital lease. The
lease is collateralized by the underlying assets. At June 30, 2002, property
and equipment with a cost of $600,000 was subject to this financing
arrangement. Related accumulated amortization at June 30, 2002 amounted to
$387,500. Under the terms of the lease, the Company owes monthly payments of
$15,108 through September 1, 2003. Remaining principle and interest payments
were $198,000 and $13,000, respectively, at June 30, 2002.

8



---



##### Table of Contents



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

12. Geographic and Segment Information

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

|          |                 |  |                   |        |      |  |   |         | 
|--------- | --------------- |  | ----------------- | ------ | ---- |  | - | ------- | 
|          |                 |  | Nine months ended
|          |                 |  | June 30,         
|          |                 |  |                  
|          |                 |  | 2002              |        | 2001
|          |                 |  |                   |        |     
|          |                 |  | (In thousands)   
|Net Sales |                 |  |                   |        |      |  |   |        
|          | United States   |  | $                 | 16,746 |      |  | $ | 72,990  | 
|          | China           |  |                   | 9,199  |      |  |   | 8,233   | 
|          | Taiwan          |  |                   | 5,794  |      |  |   | 785     | 
|          | Hong Kong       |  |                   | 5,054  |      |  |   | 9,864   | 
|          | Singapore       |  |                   | 2,724  |      |  |   | 6,276   | 
|          | Asia other      |  |                   | 2,704  |      |  |   | 5,093   | 
|          | Europe          |  |                   | 7,553  |      |  |   | 32,957  | 
|          | Other           |  |                   | 487    |      |  |   | 1,067   | 
|          |                 |  |                   |        |      |  |   |        
|          | Total net sales |  | $                 | 50,261 |      |  | $ | 137,265 | 
|          |                 |  |                   |        |      |  |   |        

|                  |                         |  |                |        |               |  |   |       | 
|----------------- | ----------------------- |  | -------------- | ------ | ------------- |  | - | ----- | 
|                  |                         |  | June 30,       |        | September 30,
|                  |                         |  | 2002           |        | 2001         
|                  |                         |  |                |        |              
|                  |                         |  | (In thousands)
|Long-lived assets |                         |  |                |        |               |  |   |      
|                  | United States           |  | $              | 8,472  |               |  | $ | 6,634 | 
|                  | Hong Kong               |  |                | 671    |               |  |   | 566   | 
|                  | China                   |  |                | 1,259  |               |  |   | 463   | 
|                  | Other foreign locations |  |                | 306    |               |  |   |      | 
|                  |                         |  |                |        |               |  |   |      
|                  | Total long-lived assets |  | $              | 10,708 |               |  | $ | 7,663 | 
|                  |                         |  |                |        |               |  |   |      

13. Related Party Transactions

For the nine months ended June 30, 2002 and June 30, 2001, the Company
sold approximately $819,000 and $189,000, respectively, of memory products to
ICSI. The Company currently has approximately a 29% ownership interest in ICSI.
The Companys Chairman and Chief Executive Officer (CEO), Jimmy S.M. Lee, is
a director of ICSI. The Company also provides services and licenses certain
products to ICSI. At June 30, 2002 and September 30, 2001, the Company had an
accounts receivable balance from ICSI of approximately $145,000 and $327,000,
respectively.

9



---



##### Table of Contents



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

The Company purchases goods and contract manufacturing services from ICSI.
For nine months ended June 30, 2002 and June 30, 2001, purchases of goods and
services were approximately $2,665,000 and $12,775,000, respectively. The
Company also pays ICSI for certain product development costs and license fees.
At June 30, 2002 and September 30, 2001, the Company had an accounts payable
balance to ICSI of approximately $2,460,000 and $551,000, respectively.

The Company provides NexFlash various administrative support services for
which it is reimbursed. In addition, the Company received approximately
$177,000 in sublease income from NexFlash in the nine months ended June 30,
2001. The Company currently has approximately a 14% ownership interest in
NexFlash. The Companys Chairman and CEO, Jimmy S.M. Lee, is a director of
NexFlash. At June 30, 2002 and September 30, 2001, the Company had an accounts
receivable balance from NexFlash of approximately $3,000 and $81,000,
respectively.

The Company provides goods and services to GetSilicon in which the Company
currently has approximately a 19% ownership interest. The Companys Chairman
and CEO, Jimmy S.M. Lee, was the Chairman of GetSilicon until May 14, 2002 and
continues to serve as a director. For the nine months ended June 30, 2002 and
June 30, 2001, the Company provided goods and services of approximately
$112,000 and $519,000, respectively, to GetSilicon. At June 30, 2002 and
September 30, 2001, the Company had an accounts receivable balance from
GetSilicon of approximately $45,000 and $30,000, respectively.

The Company engages GetSilicon for business-to-business data exchange and
professional services. For the nine months ended June 30, 2002 and June 30,
2001, purchases of such services were approximately $364,000 and $140,000,
respectively. At June 30, 2002 and September 30, 2001, the Company had an
accounts payable balance to GetSilicon of approximately $135,000 and $32,000,
respectively.

For the nine months ended June 30, 2002 and June 30, 2001, the Company
sold approximately $393,000 and $110,000, respectively, of memory products to
E-CMOS in which the Company currently has approximately a 26% ownership
interest. The Companys Chairman and CEO, Jimmy S.M. Lee, is the Chairman of
E-CMOS. At June 30, 2002 and September 30, 2001, the Company had an accounts
receivable balance from E-CMOS of approximately $169,000 and $159,000,
respectively.

The Company receives administrative support services and reimburses E-CMOS
for expenses incurred on its behalf. At June 30, 2002 and September 30, 2001,
the Company had an accounts payable balance to E-CMOS of approximately $370,000
and $271,000, respectively.

For the nine months ended June 30, 2002, the Company sold approximately
$650,000 of memory products to Marubun USA Corporation (Marubun). Hide L.
Tanigami, a director of the Company, is the president and chief executive
officer of Marubun. At June 30, 2002, the Company had an accounts receivable
balance from Marubun of approximately $391,000.

10



---



##### Table of Contents



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

14. Investment in Integrated Circuit Solution Incorporation (ICSI)

The following summarizes financial information for ICSI, an equity
investee. (In thousands)

|                                                |  |          |        |               |  |   |        | 
|----------------------------------------------- |  | -------- | ------ | ------------- |  | - | ------ | 
|                                                |  | June 30, |        | September 30,
|                                                |  | 2002     |        | 2001         
|                                                |  |          |        |              
|Current assets                                  |  | $        | 73,299 |               |  | $ | 76,624 | 
|Property, plant, and equipment and other assets |  |          | 48,491 |               |  |   | 51,345 | 
|Current liabilities                             |  |          | 32,714 |               |  |   | 34,181 | 
|Long-term debt                                  |  |          | 20,030 |               |  |   | 9,352  | 

|                    |  |                   |         |      |  |   |        | 
|------------------- |  | ----------------- | ------- | ---- |  | - | ------ | 
|                    |  | Nine Months Ended
|                    |  | June 30,         
|                    |  |                  
|                    |  | 2002              |         | 2001
|                    |  |                   |         |     
|Net sales           |  | $                 | 54,834  |      |  | $ | 99,898 | 
|Gross profit (loss) |  |                   | (5,649  | )    |  |   | 29,129 | 
|Net income (loss)   |  |                   | (16,808 | )    |  |   | 15,344 | 

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

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

11



---



##### Table of Contents



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

15. Acquisition of Purple Ray

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

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

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

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

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

The intangible assets, other than the in-process technology, are being
amortized over lives of three to five years.

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

The in-process technology acquired from Purple Ray was valued at $4.7
million. The write-off of the in-process technology acquired impacted the
Companys statement of operations in the quarter ended March 31, 2002.

12



---



##### Table of Contents



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

Pro forma Financial Information

The pro forma financial information presented below is presented as if the
acquisition of Purple Ray had occurred at the beginning of fiscal 2001. The
pro forma statements of operations for the three and nine months ended June 30,
2002 and 2001, include the historical results of the Company and Purple Ray
plus the effect of recurring amortization of the related intangibles and
unearned compensation. Such pro forma results do not purport to be indicative
of what would have occurred had the acquisition been made as of those dates or
the results which may occur in the future. The pro forma financial results are
as follows:

|                                             |  |                    |         |                   |  |                |        |      |  |   |         |   |  |   |         | 
|-------------------------------------------- |  | ------------------ | ------- | ----------------- |  | -------------- | ------ | ---- |  | - | ------- | - |  | - | ------- | 
|                                             |  | Three Months Ended |         | Nine Months Ended
|                                             |  | June 30,           |         | June 30,         
|                                             |  |                    |         |                  
|                                             |  | 2002               |         | 2001              |  | 2002           |        | 2001
|                                             |  |                    |         |                   |  |                |        |     
|                                             |  |                    |         |                   |  | (In thousands) |        |      |  |  
|Net sales                                    |  | $                  | 18,532  |                   |  | $              | 20,013 |      |  | $ | 50,261  |   |  | $ | 137,265 | 
|Net income (loss)                            |  | $                  | (24,927 | )                 |  | $              | (4,444 | )    |  | $ | (41,892 | ) |  | $ | 24,170  | 
|                                             |  |                    |         |                   |  |                |        |      |  |   |         |   |  |   |         | 
|Basic net income (loss) per share            |  | $                  | (0.91   | )                 |  | $              | (0.17  | )    |  | $ | (1.54   | ) |  | $ | 0.92    | 
|                                             |  |                    |         |                   |  |                |        |      |  |   |         |   |  |   |         | 
|Shares used in basic per share calculation   |  |                    | 27,309  |                   |  |                | 26,775 |      |  |   | 27,170  |   |  |   | 26,522  | 
|                                             |  |                    |         |                   |  |                |        |      |  |   |         |   |  |   |         | 
|Diluted net income (loss) per share          |  | $                  | (0.91   | )                 |  | $              | (0.17  | )    |  | $ | (1.54   | ) |  | $ | 0.86    | 
|                                             |  |                    |         |                   |  |                |        |      |  |   |         |   |  |   |         | 
|Shares used in diluted per share calculation |  |                    | 27,309  |                   |  |                | 26,775 |      |  |   | 27,170  |   |  |   | 28,137  | 
|                                             |  |                    |         |                   |  |                |        |      |  |   |         |   |  |   |         | 

13



---



##### Table of Contents






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

We have made forward-looking statements in this report on Form 10-Q that
are subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future results of our operations or
other matters. Also, when we use such words as believe, expect,
anticipate, or similar expressions, we are making forward-looking statements.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth below and elsewhere in this report on Form 10-Q.

Background

Integrated Silicon Solution, Inc. was founded in October 1988. We design,
develop and market high performance memory semiconductors used in Internet
access devices, networking equipment, telecom and mobile communications
equipment, computer peripherals, consumer electronics, automotive and other
applications. Our high speed and low power SRAMs, our low to medium density
DRAMs, and our family of EEPROMs enable customers to design products that meet
the demanding connectivity and portability requirements of the wireless
communications, data communications, internet infrastructure and automotive
markets. Our objective is to capitalize on major trends such as the
proliferation of wireless devices, the expansion of the communications and
Internet infrastructure, and other trends in electronics technologies. Our goal
is to be a focused supplier of high performance memories targeting the mobile
communications, networking, broadband, digital consumer and automotive markets.

We believe our close relationship with leading silicon wafer foundries
gives us access to the advanced wafer process technology required to design and
manufacture high performance memories. We entered into our first development
program with Taiwan Semiconductor Manufacturing Corporation (TSMC) in 1990
and with Chartered Semiconductor in 1994 and have also worked closely with
United Microelectronics Corporation (UMC) since 1995. Our latest such
development program is with Semiconductor Manufacturing International Corp
(SMIC), the first eight-inch wafer foundry in China. Through this
collaborative strategy, we have been at the forefront in utilizing the most
advanced process technology for memories and in securing access to wafer
capacity. We believe that ISSI is a technology leader and that our ability to
design and develop high performance, cost-effective products, and our
collaborative development with our manufacturing partners utilizing
state-of-the-art process technology, gives us a competitive advantage.

Results of Operations

Our financial results for fiscal 2002 and fiscal 2001 reflect accounting
for Integrated Circuit Solution, Inc. (ICSI) on the equity basis and include
our percentage share of the results of their operations. Our financial results
for fiscal 2002 and fiscal 2001 reflect accounting for E-CMOS Technology
Corporation (E-CMOS) on the equity basis and include our share of their
results of operations on a one quarter lag. Effective October 2001, we account
for GetSilicon, Inc. (GetSilicon) on the cost basis as our ownership became
less than 20%. Our financial results for fiscal 2001 reflect accounting for
GetSilicon on the equity basis and include our percentage share of the results
of their operations. Our financial results for fiscal 2001 through the period
ended January 31, 2001 reflect accounting for NexFlash Technologies, Inc.
(NexFlash) on the equity basis and include our percentage share of the
results of NexFlashs operations. Effective February 2001, our ownership of
NexFlash became less than 20%, and we began accounting for NexFlash on the cost
basis. At June 30, 2002, we owned approximately 29% of ICSI, approximately 14%
of NexFlash, approximately 26% of E-CMOS and approximately 19% of GetSilicon.

14



---



##### Table of Contents



Critical Accounting Policies

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
difficult and subjective estimates, judgments and assumptions 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 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 the
financial statements. We reevaluate our estimates and judgments on an ongoing
basis.

Our critical
accounting policies which are impacted by estimates are: (i) the
valuation of our
inventory, which impacts cost of goods sold and gross profit; (ii) the valuation
of our allowance for doubtful accounts, which impacts general and
administrative expense; and (iii) the valuation of our non-marketable
equity securities, which impacts gains and losses on equity securities when we
record impairments. Each of the policies is described in more detail
below. We also have other key accounting policies
that may not require us to make estimates and judgments that are as subjective
or difficult, for instance, our policies with regard to revenue recognition,
including the deferral of revenues on sales to distributors. These
policies are described in the notes to our financial statements
contained in our Annual Report on Form 10-K for the year ended
September 30, 2001.

Valuation of inventory

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

Valuation of allowance for doubtful accounts

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

Valuation of non-marketable securities

Our ability to recover our investments in equity and debt securities that
are non-marketable and to earn a return on these investments is largely
dependent on financial market conditions and the occurrence of liquidity
events, such as initial public offerings, mergers or acquisitions and private
party transactions. All of these events are difficult to predict, particularly
in the current economic environment. In addition, under our accounting policy,
we are required to periodically review all of our investments for impairment.
In the case of

15



---



##### Table of Contents



non-marketable securities, this requires significant judgment on our part,
including an assessment of the investees financial condition, the existence of
subsequent rounds of financing and the impact of any relevant contractual
equity preferences, as well as the investees historical results of operations,
and projected results and cash flows. If the actual outcomes for the
investees are significantly different from our 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 June 30, 2002, our strategic investments in non-marketable securities
totaled $36.4 million.

Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001

Net Sales. Net sales consist principally of total product sales less
estimated sales returns. Net sales decreased by 7% to $18.5 million in the
three months ended June 30, 2002 from $20.0 million in the three months ended
June 30, 2001. The decrease in sales was principally due to a significant
decrease in the average selling prices of our SRAM products in the three months
ended June 30, 2002 compared to the three months ended June 30, 2001. While
SRAM units shipped increased in the three months ended June 30, 2002 compared
to the three months ended June 30, 2001, the impact of the reduction in average
selling prices resulted in an overall reduction in SRAM revenue. In addition,
declines in the average selling prices of our DRAM products were offset by
increases in units shipped. We anticipate that the average selling prices of
our existing products will generally decline over time, although the rate of
decline may fluctuate for certain products. In this regard, we also experienced
a decline in the average selling prices for certain of our SRAM and DRAM
products in the three months ended June 30, 2002 compared to the three months
ended March 30, 2002. We anticipate further price declines for certain of our
SRAM and DRAM products in the September 2002 quarter. There can be no assurance
that such declines will be offset by higher volumes or by higher prices on
newer products.

In the three months ended June 30, 2002 and June 30, 2001, no single
customer accounted for over 10% of net sales.

Gross profit(loss). Cost of sales includes die cost from the wafers
acquired from foundries, subcontracted package costs, assembly costs and test
costs, costs associated with in-house product testing, and quality assurance.
Gross profit decreased to $(13.0) million in the three months ended June 30,
2002 from $(3.5) million in the three months ended June 30, 2001. As a
percentage of net sales, gross profit decreased to (70.3)% in the three months
ended June 30, 2002 from (17.5) % in the three months ended June 30, 2001. In
the three months ended June 30, 2002, we recorded an inventory write-down of
approximately $15.0 million predominately for lower of cost or market
accounting on our DRAM and SRAM products and to a lesser extent, excess
inventory. In the three months ended June 30, 2001, we recorded an inventory
write-down of $9.0 million, predominately for lower of cost or market
accounting on certain of our products, primarily DRAMs. Excluding the inventory
write-downs, gross profit for the three months ended June 30, 2002 was $2.0
million or 10.6% of net sales and for the three months ended June 31, 2001
gross profit was $5.5 million or 27.5% of net sales. Excluding the inventory
write-downs, the decrease in gross profit was principally due to the decrease
in the average selling prices of our SRAM products. In addition, as we sell
products that had previously been written-down to lower of cost or market, we
recognize minimal gross profit. We believe that the average selling prices of
our products will generally decline over time and, unless we are able to reduce
our cost per unit to the extent necessary to offset such declines, the decline
in average selling prices will result in a material decline in our gross
margin. In this regard, we experienced a decline in the average selling prices
for certain of our SRAM and DRAM products in the three months ended June 30,
2002 compared to the three months ended March 31, 2002. In addition, product
unit costs could increase if our suppliers raise prices, which could result in
a material decline in our gross margin. Although we have product cost reduction
programs in place for certain products that involve efforts to reduce internal
costs and supplier costs, there can be no assurance that product costs will be
reduced or that such reductions will be sufficient to offset the expected
declines in average selling prices. We do not believe that such cost reduction
efforts are likely to have a material adverse impact on the quality of our
products or the level of service provided by us.

16



---



##### Table of Contents



Research and Development. Research and development expenses increased by
26% to $8.0 million in the three months ended June 30, 2002 from $6.4 million
in the three months ended June 30, 2001. As a percentage of net sales,
research and development expenses increased to 43.3% in the three months ended
June 30, 2002 from 31.9% in the three months ended June 30, 2001. The increase
in absolute dollars was primarily the result of increases resulting from our
acquisition of Purple Ray and the expansion of our research and development
activities in Asia. We anticipate that our research and development expenses
will increase in absolute dollars in future periods, although such expenses may
fluctuate as a percentage of net sales.

Selling, General and Administrative. Selling, general and administrative
expenses decreased by 4% to $4.2 million in the three months ended June 30,
2002 from $4.4 million in the three months ended June 30, 2001. As a
percentage of net sales, selling, general and administrative expenses increased
to 22.7% in the three months ended June 30, 2002 from 22.0% in the three months
ended June 30, 2001. The decrease in absolute dollars was the result of overall
cost reductions during the three months ended June 30, 2002 compared to the
three months ended June 30, 2001. As a result of expense controls, such as
salary reductions, we expect our selling, general and administrative expenses
may decrease in future quarters although such expenses may fluctuate as a
percentage of net sales.

Gain on sale of investments.The gain on sale of investments decreased by
$1.8 million to $0 in the three months ended June 30, 2002 from $1.8 million in
the three months ended June 30, 2001. In the three months ended June 30, 2001,
we sold shares of ICSI in the public market in Taiwan and received gross
proceeds of approximately $2.3 million resulting in a pre-tax gain of
approximately $1.7 million.

Other income (expense), net.Other income (expense), net decreased by $0.5
million to approximately $0.9 million in the three months ended June 30, 2002
from $1.4 million in the three months ended June 30, 2001. The decrease was
primarily the result of decreased interest income as the result of the decline
in interest rates and lower cash balances.

Provision (benefit) for income taxes.The provision for income taxes for
the three month period ended June 30, 2002 of $3,000 consists of foreign
withholding taxes. We recorded a benefit for income taxes of $9.2 million for
the three months ended June 30, 2001. The benefit for income taxes for the
three months ended June 30, 2001 included a benefit of approximately $5.0
million for the reversal of taxes accrued for foreign operations for which the
statute of limitations had expired. Excluding this benefit, we recorded a tax
expense of 18.5% for the nine months ended June 30, 2001. This tax expense
reflected foreign taxes on profits in foreign jurisdictions and the reversal of
valuation allowances previously established.

Equity in net income (loss) of affiliated companies.Equity in net income
(loss) of affiliated companies increased by $1.2 million to $(0.5) million in
the three months ended June 30, 2002 from $(1.7) million in the three months
ended June 30, 2001. This primarily reflects a decrease in losses from our
percentage share of ICSIs financial results in the three months ended June 30,
2002 compared to the three months ended June 30, 2001.

Nine Months Ended June 30, 2002 Compared to Nine Months Ended June 30, 2001

Net Sales. Net sales decreased by 63% to $50.3 million in the nine months
ended June 30, 2002, from $137.3 million in the nine months ended June 30,
2001. The decrease in sales was principally due to a decrease in unit shipments
of our SRAM products, specifically our 256K, 1024K, 32K x 32, and 64K x 16 SRAM
products. In addition, the average selling prices of our SRAM and DRAM products
declined significantly in the nine months ended June 30, 2002 compared to the
nine months ended June 30, 2001. We were able to partially offset the decline
in DRAM revenue resulting from the decline in average selling prices with an
increase in DRAM units shipped. We anticipate that the average selling prices
of our existing products will generally decline over time, although the rate of
decline may fluctuate for certain products. In this regard, we also experienced
a decline in the average selling prices for certain of our products in the
three months ended June 30, 2002 compared to the three months ended March 31,
2002. There can be no assurance that such declines will be offset by higher
volumes or by higher prices on newer products.

17



---



##### Table of Contents



In the nine months ended June 30, 2002, no single customer accounted for
over 10% of net sales. Sales to Flextronics International accounted for
approximately 14% of total net sales for the nine months ended June 30, 2001.
Substantially all of the sales to Flextronics were for products to be delivered
to Cisco Systems, Inc. Shipments for Cisco directly, or indirectly through
subcontractors, accounted for approximately 16% of total net sales for the nine
months ended June 30, 2001. Sales to 3Com accounted for less than 10% of total
net sales for the nine months ended June 30, 2001. However, shipments for 3Com
directly, or indirectly through subcontractors, accounted for approximately 11%
of total net sales for the nine months ended June 30, 2001. As sales to these
customers are executed pursuant to purchase orders and no purchasing contract
exists, these customers can cease doing business with us at any time.

Gross profit (loss). Gross profit decreased 133% to $(7.3) million in the
nine months ended June 30, 2002, from $22.1 million in the nine months ended
June 30, 2001. As a percentage of net sales, gross profit decreased to (14.6)%
in the nine months ended June 30, 2002 from 16.1% in the nine months ended June
30, 2001. We recorded inventory write-downs of $19.4 million in the nine months
ended June 30, 2002. These write-downs were predominately for lower of cost or
market accounting on our DRAM and SRAM products and to a lesser extent, excess
inventory. We recorded inventory write-downs of $20.7 million in the nine
months ended June 30, 2001. These write-downs were predominately for lower of
cost or market accounting on certain of our products, primarily DRAMs and low
power SRAMs. As a result of the termination of the antidumping case, our gross
margin for the nine months ended June 30, 2002 benefited from the reversal of
approximately $5.2 million in antidumping duties previously charged to cost of
sales. Excluding the inventory write-downs and the benefit of the reversal of
antidumping duties, the decrease in gross profit was principally due to a
decrease in unit shipments of our SRAM products, specifically our 256K, 1024K,
32K x 32, and 64K x 16 SRAM products. In addition, the average selling prices
of our SRAM and DRAM products declined significantly in the nine months ended
June 30, 2002 compared to the nine months ended June 30, 2001. Further, as we
sell products that had previously been written-down to lower of cost or market,
we recognize minimal gross profit. We believe that the average selling prices
of our products will generally decline over time and, unless we are able to
reduce our cost per unit to the extent necessary to offset such declines, the
decline in average selling prices will result in a material decline in our
gross margin. In this regard, we experienced a decline in the average selling
prices for certain of our SRAM and DRAM products in the three months ended June
30, 2002 compared to the three months ended March 31, 2002. In addition,
product unit costs could increase if our suppliers raise prices, which could
result in a material decline in our gross margin. Although we have product cost
reduction programs in place for certain products that involve efforts to reduce
internal costs and supplier costs, there can be no assurance that product costs
will be reduced or that such reductions will be sufficient to offset the
expected declines in average selling prices. We do not believe that such cost
reduction efforts are likely to have a material adverse impact on the quality
of our products or the level of service provided by us.

Research and
Development. Research and development expenses increased by
11% to $21.8 million in the nine months ended June 30, 2002, from $19.7 million
in the nine months ended June 30, 2001. As a percentage of net sales, research
and development expenses increased to 43.4% in the nine months ended June 30,
2002, from 14.4% in the nine months ended June 30, 2001. The increase in
absolute dollars was the result of increased expenses related to the
development of new products, our acquisition of Purple Ray and the expansion of
our research and development activities in Asia partially offset by decreases
in payroll related expenses.

Selling, General
and Administrative. Selling, general and administrative
expenses decreased by 26% to $12.2 million in the nine months ended June 30,
2002 from $16.5 million in the nine months ended June 30, 2001. As a
percentage of net sales, selling, general and administrative expenses increased
to 24.2% in the nine months ended June 30, 2002, from 12.0% in the nine months
ended June 30, 2001. The decrease in absolute dollars was primarily the result
of decreased selling commissions associated with lower revenues in the nine
months ended June 30, 2002 compared to the nine months ended June 30, 2001. In
addition, payroll related expenses decreased in the nine months ended June 30,
2002 compared to the nine months ended June 30, 2001 as a result of salary
reductions and reductions in headcount.

In-process Technology. On February 13, 2002, we acquired Purple Ray, Inc.
The assets of Purple Ray consisted primarily of intellectual property. The
transaction was accounted for using the purchase method of accounting. The
total estimated purchase price of $7.1 million consisted of the fair market
value of ISSIs
18Table of Contents

common stock issued of $5.2 million, the fair value of options to purchase
Purple Ray common stock assumed by ISSI of $1.7 million and estimated
transaction costs of $0.2 million. The transaction resulted in an in-process
technology charge of $4.7 million in our March 31, 2002 quarter.

Gain on sale of investments.The gain on sale of investments decreased by
$30.5 million to $35,000 in the nine months ended June 30, 2002 from $30.5
million in the nine months ended June 30, 2001. In the nine months ended June
30, 2002, we sold shares of ICSI for approximately $64,000 resulting in a
pre-tax gain of $35,000. In the nine months ended June 30, 2001 we sold our
interest in WaferTech to TSMC for approximately $40.7 million, which resulted
in a pre-tax gain of $17.2 million. During the nine months ended June 30, 2001,
we also recorded gross proceeds of approximately $10.4 million and a gain of
approximately $8.0 million in connection with our sale of shares of ICSI and
gross proceeds of approximately $6.2 million and a gain of approximately $5.3
million in connection with our sale of shares of NexFlash.

Other income
(expense), net. Other income (expense), net decreased by
$2.5 million to $2.2 million in the nine months ended June 30, 2002 from $4.7
million in the nine months ended June 30, 2001. The decrease was primarily the
result of decreased interest income as the result of the decline in interest
rates and lower cash balances.

Provision (benefit) for Income Taxes.The benefit for income taxes of $3.2
million for the nine month period ended June 30, 2002 reflects a benefit for
alternative minimum taxes provided for the fiscal year ended September 30, 2001
which can be recovered based on changes in the tax law. We recorded a benefit
for income taxes of $1.1 million for the nine months ended June 30, 2001. The
benefit for income taxes for the nine months ended June 30, 2001 includes a
benefit of approximately $5.0 million for the reversal of taxes accrued for
foreign operations for which the statute of limitations has now expired.
Excluding this benefit, we recorded a tax expense of 18.5% for the nine months
ended June 30, 2001. This tax expense reflects foreign taxes on profits in
foreign jurisdictions and the reversal of valuation allowances previously
established.

Equity in net income (loss) of affiliated companies.Equity in net income
(loss) of affiliated companies decreased by $8.5 million to $(4.9) million in
the nine months ended June 30, 2002 from $3.6 million in the nine months ended
June 30, 2001. This primarily reflects a decrease in income from our percentage
share of ICSIs financial results in the nine months ended June 30, 2002
compared to the nine months ended June 30, 2001.

Liquidity and Capital Resources

As of June 30, 2002, our principal sources of liquidity included cash,
cash equivalents and short-term investments of approximately $104.1 million.
During the nine months ended June 30, 2002, operating activities provided cash
of approximately $0.6 million. Cash provided by operations was primarily due to
decreases in inventory of $25.2 million and accounts receivable of $0.3 million
and increases in accounts payable of $17.2 million. Cash was used for net loss
of $45.5 million adjusted for an in-process technology charge of $4.7 million,
equity in net income of affiliated companies of $4.9 million, depreciation of
$2.9 million and other non-cash items of $0.3 million. In addition, cash was
used for increases in other current assets of $0.8 million and other assets of
$1.4 million and decreases in income tax payable of $3.6 million and accrued
liabilities of $3.6 million.

In the nine months ended June 30, 2002, we generated $1.6 million from
investing activities compared to $11.2 million used in the nine months ended
June 30, 2001. In the nine months ended June 30, 2002, we had net sales of
available-for-sale securities of $23.0 million. In the nine months ended June
30, 2002 we made additional investments totaling $11.4 million in Semiconductor
Manufacturing International Corp (SMIC), a foundry in Shanghai, China and
other investments of $4.8 million including $3.2 million in ICSI convertible
debentures and $0.6 million in E-CMOS. The cash used for investing activities
during the nine months ended June 30, 2001 was primarily the result of net
purchases of available-for-sale securities of $50.8 million. In addition,
during the nine months ended June 30, 2001, we made investments of $14.3
million in SMIC and other investments of $3.3 million including $2.8 million in
E-CMOS. We also generated $40.7 million from the sale
19Table of Contents

of our investment in WaferTech, $15.5 million from the sale of shares of
ICSI stock and $6.2 million from the sale of NexFlash shares.

In the nine months ended June 30, 2002, we made capital expenditures of
approximately $5.2 million for test equipment, engineering tools and computer
software. In addition, we acquired approximately $0.7 million in fixed assets
with the acquisition of Purple Ray. We expect to spend approximately $4.0
million to $5.0 million to purchase capital equipment during the next twelve
months, principally for the purchase of design and engineering tools,
additional test equipment and computer software and hardware.

We generated $1.9 million from financing activities during the nine months
ended June 30, 2002 compared to $2.7 million in the nine months ended June 30,
2001. Cash generated from financing activities for the nine months ended June
30, 2002 and June 30, 2001 was primarily the result of proceeds from the
issuance of our common stock from option exercises and purchases under our
employee stock purchase plan.

In August 2000, we entered into a wafer fabrication facility investment
agreement with SMIC. Under the terms of this agreement, we committed to invest
$30.0 million. In April 2001, we committed to invest an additional $10.0
million. We have received certain wafer capacity commitments from SMIC. In the
nine months ended June 30, 2002, we made investments totaling $11.4 million in
SMIC, bringing our total investment in this foundry as of June 30, 2002, to
$30.2 million. An additional $9.8 million was invested in July 2002 and we
have no further commitments to SMIC at this time.

We lease our facilities including our headquarters in Santa Clara,
California and 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 $7 million.

In April 1998, the U.S. Department of Commerce (DOC) published an
antidumping duty order on imports of SRAMs from Taiwan, from where we currently
import a majority of our SRAMs. As a consequence of this antidumping duty
order, we were required to post a cash deposit on imports of Taiwan fabricated
SRAM wafers or devices at the ad valorem rate of 7.56%. These amounts were
expensed to cost of goods sold.

We retained legal counsel to defend our interests in the antidumping
proceedings. In addition, respondents (including ISSI) challenged certain
aspects of the antidumping determination in federal court proceedings. On
August 29, 2000, pursuant to an appeal by ISSI and other respondents, the U.S.
Court of International Trade affirmed the International Trade Commission
(ITC) decision to reverse the ITCs earlier ruling supporting the imposition
of antidumping duties and rule instead in favor of the respondents. This
decision by the Court of International Trade was appealed to the U.S. Court of
Appeals for the Federal Circuit. On September 21, 2001, the Federal Circuit
upheld the Court of International Trade. On January 14, 2002, the DOC
published a notice revoking the antidumping order and instructing U.S. Customs
to refund all cash deposits. In March 2002, the time to appeal the case to the
Supreme Court expired and the case terminated.

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

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

20



---



##### Table of Contents



Certain Factors Which May Affect Our Business or Future Operating Results

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

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



| |  |  | the cyclicality of the semiconductor industry;                                           
| | - |  | -----------------------------------------------------------------------------------------
|
| |  |  | decreases in the demand for our products;                                                
|
| |  |  | excess inventory levels at our customers;                                                
|
| |  |  | declines in average selling prices of our products;                                      
|
| |  |  | cancellation of existing orders or the failure to secure new orders;                     
|
| |  |  | oversupply of memory products in the market;                                             
|
| |  |  | our failure to introduce new products and to implement technologies on a timely basis;   
|
| |  |  | market acceptance of ours and our customers products;                                   
|
| |  |  | the failure to anticipate changing customer product requirements;                        
|
| |  |  | fluctuations in manufacturing yields;                                                    
|
| |  |  | failure to deliver products to customers on a timely basis;                              
|
| |  |  | disruption in the supply of wafers or assembly services;                                 
|
| |  |  | changes in product mix;                                                                  
|
| |  |  | the timing of significant orders;                                                        
|
| |  |  | increased expenses associated with new product introductions or process changes;         
|
| |  |  | the ability of customers to make payments to us; and                                     
|
| |  |  | the commencement of, or developments with respect to, any future antidumping proceedings.

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

We have incurred losses in the five consecutive quarters ended June 30,
2002 totaling $73.9 million. We expect to incur a loss in the September 2002
quarter and may incur losses in subsequent quarters. We were profitable for
fiscal 2001 and fiscal 2000. We incurred losses of $9.5 million and $50.6
million in fiscal 1999 and 1998, respectively. Our ability to achieve or
maintain profitability on a quarterly basis in the future will depend on a
variety of factors, including our ability to increase our net sales, introduce
new products on a timely basis, secure sufficient wafer fabrication capacity
and control our operating expenses. Adverse developments with respect to these
or other factors could result in quarterly or annual operating losses in the
future.

21



---



##### Table of Contents



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

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

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

A majority of our net sales are derived from the sale of SRAM products,
which are subject to unit volume fluctuations and declines in average selling
prices which could harm our business. For example, in the three months ended
September 30, 2001, our net sales decreased by 26% to $14.8 million from $20.0
million in the three months ended June 30, 2001, principally due to a decline
in average selling prices for our products including our SRAM products. In
addition, in the three months ended June 30, 2001, our net sales decreased by
62% to $20.0 million from $52.0 million in the three months ended March 31,
2001, and decreased 20% in the three months ended March 31, 2001 from $65.2
million in the three months ended December 31, 2000, principally due to a
decrease in unit shipments of our SRAM products as a result of lower demand for
electronic products. While average selling prices for certain SRAM products
declined in the three months ended June 30, 2002 compared to the three months
ended March 31, 2002, this was generally offset by an increase in units
shipped. We anticipate that the average selling prices of our existing products
will decline over time, although the rate of decline may fluctuate for certain
products. Such declines may not be offset by higher volumes or by higher prices
on newer products.

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

Competitive pricing pressures due to an industry-wide oversupply of wafer
capacity as well as product inventory resulted in significant price decreases
for our products during fiscal 1996 through fiscal 1999. While we experienced
increases in average selling prices in fiscal 2000, historically, average
selling prices for semiconductor memory products have declined, and we expect
that average selling prices will decline in the future. In this regard, we
experienced a decline in the average selling prices for certain of our products
in the three months ended June 30, 2002 compared to the three months ended
March 31, 2002. We anticipate a further decline in the average selling prices
for certain of our SRAM and DRAM products in the September 2002 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 which compensate for the anticipated declines in the average selling
prices of our existing products.

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

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

Shifts in industry-wide capacity from shortages to oversupply or from
oversupply to shortages may result in significant fluctuations in our quarterly
or annual operating results. The semiconductor industry is highly cyclical and
is subject to significant downturns resulting from excess capacity,
overproduction, reduced demand or technological obsolescence. These factors can
result in a decline in average selling prices and the stated value of
inventory. In the three months ended June 30, 2002, March 31, 2002 and in
fiscal 2001, we recorded inventory write-downs of $15.0 million, $4.4 million
and $38.3 million, respectively. The inventory write-downs were predominately
for lower of cost or market accounting on our products, and to a lesser extent,
excess inventory.

22



---



##### Table of Contents



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

We believe that six months is an appropriate period because it is
difficult to accurately forecast for a specific product beyond this time frame
due to the potential introduction of products by competitors, technology
obsolescence or fluctuations in demand. Our policy regarding excess inventory
resulted in inventory write-downs for excess inventory of approximately $5.7
million in the three months ended June 30, 2002 and $5.7 million for fiscal
year 2001. Future additional inventory write-downs may occur due to lower of
cost or market accounting, excess inventory or inventory obsolescence.

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

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

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

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



| |  |  | contracts that commit us to purchase specified quantities of silicon wafers over extended periods;
| | - |  | --------------------------------------------------------------------------------------------------
|
| |  |  | investments in foundries;                                                                         
|
| |  |  | joint ventures;                                                                                   
|
| |  |  | other partnership relationships with foundries;                                                   
|
| |  |  | option payments or other prepayments to foundries; or                                             
|
| |  |  | nonrefundable deposits with or loans to foundries in exchange for capacity commitments.           

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

23



---



##### Table of Contents



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

In the nine months ended June 30, 2002, no single customer accounted for
over 10% of net sales. Sales to Flextronics International accounted for
approximately 15% of net sales for fiscal 2001. Substantially all of our sales
to Flextronics were for products to be delivered to Cisco. Shipments for Cisco
directly, or indirectly through subcontractors, accounted for approximately 18%
of net sales for fiscal 2001. Sales to 3Com accounted for approximately 7% of
net sales for fiscal 2001. Shipments for 3Com directly, or indirectly through
subcontractors, accounted for approximately 11% of net sales for fiscal 2001.
In fiscal 2000, no single customer accounted for over 10% of net sales.
However, in fiscal 2000, shipments for Cisco directly, or indirectly through
subcontractors, accounted for approximately 13% of net revenue. As sales to
these customers are executed pursuant to purchase orders and no purchasing
contract exists, these customers can cease doing business with us at any time.
In this regard, we experienced order cancellations from these customers in the
March 2001 quarter which adversely impacted our operating results in subsequent
quarters. We expect a significant portion of our future sales to remain
concentrated within a limited number of strategic customers. We may not be able
to retain our strategic customers, such customers may cancel or reschedule
orders, or in the event of canceled orders, such orders may not be replaced by
other sales. In addition, sales to any particular customer may fluctuate
significantly from quarter to quarter, and such fluctuating sales could harm
our business.

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

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

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

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



| |  |  | real or perceived imbalances in supply and demand;                          
| | - |  | ----------------------------------------------------------------------------
|
| |  |  | product pricing;                                                            
|
| |  |  | the rate at which OEM customers incorporate our products into their systems;
|
| |  |  | the success of our customers products;                                     
|
| |  |  | access to advanced process technologies at competitive prices;              
|
| |  |  | product functionality, performance and reliability;                         

24



---



##### Table of Contents





| |  |  | successful and timely product development;                    
| | - |  | --------------------------------------------------------------
|
| |  |  | the supply and cost of wafers;                                
|
| |  |  | achievement of acceptable yields of functional die;           
|
| |  |  | the gain or loss of significant customers; and                
|
| |  |  | the nature of our competitors and general economic conditions.

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

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

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

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

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

In the nine months ended June 30, 2002 approximately 33% of our net sales
was attributable to customers located in the United States, 15% was
attributable to customers located in Europe and 51% was attributable to
customers located in Asia. In fiscal 2001, approximately 52% of our net sales
was attributable to customers located in the United States, 25% was
attributable to customers located in Europe and 23% was attributable to
customers located in Asia. Accordingly, our future operating results will
depend on general economic conditions in Asia, Europe, and the United States.
In addition, the markets for our products, which are highly cyclical, may not
continue to grow. We anticipate that sales to international customers will
continue to represent a significant percentage of net sales.

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



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

25



---



##### Table of Contents





| |  |  | foreign currency fluctuations;                             
| | - |  | -----------------------------------------------------------
|
| |  |  | difficulties in collecting foreign accounts receivable; and
|
| |  |  | political instability.                                     

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

Over the last few years, we have made several strategic equity investments
in other technology companies. There can be no assurance that these
investments will increase in value and there is the possibility that they could
decrease in value over time, even to the point of becoming completely
worthless. These investments are tested for impairment on a recurring basis
and any reductions in the carrying value would lower our profitability. In
this regard, we recorded $150,000 in impairment losses during the three months
ended December 31, 2001.

We may encounter difficulties in effectively integrating acquired businesses.

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

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

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

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

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

26



---



##### Table of Contents



Our stock price is expected to be volatile.

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



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

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




Item 3. Financial 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. Expenses
of our international operations are denominated in each countrys local
currency and therefore are subject to foreign currency exchange risk; however,
through June 30, 2002 we have not experienced any significant negative impact
on our operations as a result of fluctuations in foreign currency exchange
rates. We do not currently engage in any hedging activities or use derivative
financial instruments.

We had short-term investments of $80.6 million at June 30, 2002. The
primary objective of our investment activities is to preserve principal while
at the same time maximizing yields without increasing risk. We invest primarily
in high-quality, short-term debt instruments such as municipal auction rate
certificates and instruments issued by high quality financial institutions and
companies, including money market instruments. A hypothetical one percentage
point decrease in interest rates would result in approximately a $1.0 million
decrease in interest income.

27



---



##### Table of Contents



We own approximately 29% of ICSI, a public company listed on the Taiwan
Stock Exchange. We account for this investment on the equity basis and our
investment balance as of June 30, 2002 was approximately $18.4 million. 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 $3.2 million of ICSI convertible debentures.
A decline in the ICSIs convertible bond price may require us to record a
loss related to this investment.

We have investments in equity securities of privately held companies for
the promotion of business and strategic objectives of approximately $32.7
million at June 30, 2002. These investments are generally in companies in the
semiconductor industry. These investments are included in other assets and are
accounted for using the cost method. In addition, we have an investment of
$3.7 million that is accounted for on the equity method. For investments in
which no public market exists, our policy is to review the operating
performance,
recent financing transactions and cash flow forecasts for such companies
in assessing the net realizable values of the securities of these companies.
Impairment losses on equity investments are recorded when events and
circumstances indicate that such assets are impaired and the decline in value
is other than temporary. We recorded $150,000 in impairment losses during the
three months ended December 31, 2001.




Part II. OTHER INFORMATION




Item 1. Legal Proceedings

In April 1998, the U.S. Department of Commerce (DOC) published an
antidumping duty order on imports of SRAMs from Taiwan, from where we currently
import a majority of our SRAMs. As a consequence of this antidumping duty
order, we were required to post a cash deposit on imports of Taiwan fabricated
SRAM wafers or devices at the ad valorem rate of 7.56%. These amounts were
expensed to cost of goods sold.

We retained legal counsel to defend our interests in the antidumping
proceedings. In addition, respondents (including ISSI) challenged certain
aspects of the antidumping determination in federal court proceedings. On
August 29, 2000, pursuant to an appeal by ISSI and other respondents, the U.S.
Court of International Trade affirmed the International Trade Commission
(ITC) decision to reverse the ITCs earlier ruling supporting the imposition
of antidumping duties and rule instead in favor of the respondents. This
decision by the Court of International Trade was appealed to the U.S. Court of
Appeals for the Federal Circuit. On September 21, 2001, the Federal Circuit
upheld the Court of International Trade. On January 14, 2002, the DOC
published a notice revoking the antidumping order and instructing U.S. Customs
to refund all cash deposits. In March 2002, the time to appeal the case to the
Supreme Court expired and the case terminated.

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




Item 6. Exhibits and Reports on Form 8-K



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

|             |  |                                                                                                                        
|------------ |  | -----------------------------------------------------------------------------------------------------------------------
|Exhibit 99.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



| | (b) |  | Reports on Form 8-K.                                                                                                                                                                      
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | On April 26, 2002, the Company filed a report on Form 8-K/A updating
our Report on Form 8-K filed on February 28, 2002 disclosing the
acquisition on February 13, 2002 of Purple Ray, Inc.

28



---



##### Table of Contents






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: August 14, 2002 |  | /s/ Michael D. McDonald                                                                                            
|                       |  |                                                                                                                    
|                       |  | Michael D. McDonald
Vice President Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)

29



---



##### Table of Contents






EXHIBIT INDEX

|             |  |                                                                                                                        
|------------ |  | -----------------------------------------------------------------------------------------------------------------------
|Exhibit 99.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

30