##### Table of Contents



FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




|                                                                            |  |                                                                                         
|--------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|(Mark One)                                                                 
|[ x ]                                                                       |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                                                           
|For the quarterly period ended December 31, 2002.                          
|                                                                           
|                                                                            |  | OR                                                                                      
|                                                                           
|[   ]                                                                       |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                           
|For the transition period from ____________________ to ____________________
|                                                                           
|Commission file number 000-23084.                                          

Integrated Silicon Solution, Inc.

---

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 77-0199971                          
|                                                               |  |                                     
|(State or other jurisdiction of
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 [   ]

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

Yes [   ] No [x]

The number of outstanding shares of the registrants Common Stock as of
February 6, 2003 was 27,769,397





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TABLE OF CONTENTS



|                                                        |                                                                                                 |  |  |  |  |  |  | 
|------------------------------------------------------- | ----------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Condensed Consolidated Statements of Operations        
|Condensed Consolidated Statements of Comprehensive Loss
|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                                                                
|                                                        | Item 4.   Controls and Procedures                                                              
|Part II. OTHER INFORMATION                             
|                                                        | Item 6.   Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                             
|EXHIBIT 99.1                                           



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

|                                                                             |                                     |                          |         |                    |        |      |        |       |        | 
|---------------------------------------------------------------------------- | ----------------------------------- | ------------------------ | ------- | ------------------ | ------ | ---- | ------ | ----- | ------ | 
|                                                                             |                                     |                          |         | Three Months Ended
|                                                                             |                                     |                          |         | December 31,      
|                                                                             |                                     |                          |         |                   
|                                                                             |                                     |                          |         | 2002               |        | 2001
|                                                                             |                                     |                          |         |                    |        |     
|Net sales (See Note 13)                                                      |                                     | $                        | 21,038  |                    |        | $    | 15,091 |      
|Cost of sales                                                                |                                     |                          | 22,260  |                    |        |      | 12,400 |      
|                                                                             |                                     |                          |         |                    |        |      |        |      
|Gross profit (loss)                                                          |                                     |                          | (1,222  | )                  |        |      | 2,691  |      
|                                                                             |                                     |                          |         |                    |        |      |        |      
|Operating Expenses:                                                          |                                     |                          |         |                    |        |      |        |      
|                                                                             | Research and development            |                          |         | 6,805              |        |      |        | 6,638 |       
|                                                                             | Selling, general and administrative |                          |         | 3,658              |        |      |        | 3,665 |       
|                                                                             |                                     |                          |         |                    |        |      |        |      
|                                                                             |                                     | Total operating expenses |         |                    | 10,463 |      |        |       | 10,303 | 
|                                                                             |                                     |                          |         |                    |        |      |        |      
|Operating loss                                                               |                                     |                          | (11,685 | )                  |        |      | (7,612 | )    
|Gain on sale of investments                                                  |                                     |                          |        |                    |        |      | 35     |      
|Other income (expense), net                                                  |                                     |                          | 18      |                    |        |      | 536    |      
|                                                                             |                                     |                          |         |                    |        |      |        |      
|Loss before minority interest
and equity in net loss of
affiliated companies |                                     |                          | (11,667 | )                  |        |      | (7,041 | )    
|Minority interest in net loss of
consolidated subsidiary                     |                                     |                          | 17      |                    |        |      | 9      |      
|Equity in net loss of
affiliated companies                                   |                                     |                          | (1,039  | )                  |        |      | (2,906 | )    
|                                                                             |                                     |                          |         |                    |        |      |        |      
|Net loss                                                                     |                                     | $                        | (12,689 | )                  |        | $    | (9,938 | )    
|                                                                             |                                     |                          |         |                    |        |      |        |      
|Basic and diluted net loss per share                                         |                                     | $                        | (0.46   | )                  |        | $    | (0.37  | )    
|                                                                             |                                     |                          |         |                    |        |      |        |      
|Shares used in basic and diluted per share calculation                       |                                     |                          | 27,565  |                    |        |      | 26,598 |      
|                                                                             |                                     |                          |         |                    |        |      |        |      

See accompanying notes to condensed consolidated financial statements.





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

|                                               |                                             |   |                    |      |      |   |         |      |  
|---------------------------------------------- | ------------------------------------------- | - | ------------------ | ---- | ---- | - | ------- | ---- | -
|                                               |                                             |   | Three Months Ended
|                                               |                                             |   | December 31,      
|                                               |                                             |   |                   
|                                               |                                             |   | 2002               |      | 2001
|                                               |                                             |   |                    |      |     
|Net loss                                       |                                             | $ | (12,689            | )    |      | $ | (9,938  | )   
|Other comprehensive income (loss), net of tax: |                                             |   |                    |      |      |   |         |     
|                                               | Change in cumulative translation adjustment |   |                    | 139  |      |   |         | (296 | )
|                                               | Change in unrealized loss on investments    |   |                    | (248 | )    |   |         |     |  
|                                               |                                             |   |                    |      |      |   |         |     
|Comprehensive loss                             |                                             | $ | (12,798            | )    |      | $ | (10,234 | )   
|                                               |                                             |   |                    |      |      |   |         |     

See accompanying notes to condensed consolidated financial statements.





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

|                                                     |                                                        |   |         |         |              |   |               |         |   |  | 
|---------------------------------------------------- | ------------------------------------------------------ | - | ------- | ------- | ------------ | - | ------------- | ------- | - |  | 
|                                                     |                                                        |   |         |         | December 31, |   | September 30,
|                                                     |                                                        |   |         |         | 2002         |   | 2002         
|                                                     |                                                        |   |         |         |              |   |              
|                                                     |                                                        |   |         |         | (unaudited)  |   | (1)          
|ASSETS                                              
|Current assets:                                      |                                                        |   |         |         |              |   |               |        
|                                                     | Cash and cash equivalents                              |   | $       | 17,484  |              |   | $             | 11,622  |  
|                                                     | Short-term investments                                 |   |         | 57,500  |              |   |               | 67,200  |  
|                                                     | Accounts receivable                                    |   |         | 8,636   |              |   |               | 7,445   |  
|                                                     | Accounts receivable from related parties (See
Note 13) |   |         | 699     |              |   |               | 946     |  
|                                                     | Inventories                                            |   |         | 12,437  |              |   |               | 17,665  |  
|                                                     | Other current assets                                   |   |         | 2,950   |              |   |               | 3,448   |  
|                                                     |                                                        |   |         |         |              |   |               |        
|Total current assets                                 |                                                        |   | 99,706  |         |              |   | 108,326       |        
|Property, equipment, and leasehold improvements, net |                                                        |   | 10,010  |         |              |   | 10,673        |        
|Other assets                                         |                                                        |   | 64,260  |         |              |   | 65,677        |        
|                                                     |                                                        |   |         |         |              |   |               |        
|Total assets                                         |                                                        | $ | 173,976 |         |              | $ | 184,676       |        
|                                                     |                                                        |   |         |         |              |   |               |        
|LIABILITIES AND STOCKHOLDERS EQUITY                
|Current liabilities:                                 |                                                        |   |         |         |              |   |               |        
|                                                     | Accounts payable                                       |   | $       | 15,892  |              |   | $             | 17,871  |  
|                                                     | Accounts payable to related parties (See Note 13)      |   |         | 7,269   |              |   |               | 3,905   |  
|                                                     | Accrued compensation and benefits                      |   |         | 3,368   |              |   |               | 3,394   |  
|                                                     | Accrued expenses                                       |   |         | 4,437   |              |   |               | 3,830   |  
|                                                     | Current portion of long-term obligations               |   |         | 116     |              |   |               | 158     |  
|                                                     |                                                        |   |         |         |              |   |               |        
|Total current liabilities                            |                                                        |   | 31,082  |         |              |   | 29,158        |        
|Minority interest                                    |                                                        |   | 78      |         |              |   | 95            |        
|Stockholders equity:                                |                                                        |   |         |         |              |   |               |        
|                                                     | Common stock                                           |   |         | 3       |              |   |               | 3       |  
|                                                     | Additional paid-in capital                             |   |         | 231,178 |              |   |               | 231,032 |  
|                                                     | Accumulated deficit                                    |   |         | (81,940 | )            |   |               | (69,251 | )
|                                                     | Unearned compensation                                  |   |         | (733    | )            |   |               | (778    | )
|                                                     | Accumulated comprehensive loss                         |   |         | (5,692  | )            |   |               | (5,583  | )
|                                                     |                                                        |   |         |         |              |   |               |        
|Total stockholders equity                           |                                                        |   | 142,816 |         |              |   | 155,423       |        
|                                                     |                                                        |   |         |         |              |   |               |        
|Total liabilities and stockholders equity           |                                                        | $ | 173,976 |         |              | $ | 184,676       |        
|                                                     |                                                        |   |         |         |              |   |               |        

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





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

|                                                             |                                                                                    |                                       |        |                    |        |      |        |        |        |  
|------------------------------------------------------------ | ---------------------------------------------------------------------------------- | ------------------------------------- | ------ | ------------------ | ------ | ---- | ------ | ------ | ------ | -
|                                                             |                                                                                    |                                       |        | Three Months Ended
|                                                             |                                                                                    |                                       |        | December 31,      
|                                                             |                                                                                    |                                       |        |                   
|                                                             |                                                                                    |                                       |        | 2002               |        | 2001
|                                                             |                                                                                    |                                       |        |                    |        |     
|Cash flows from operating activities                         |                                                                                    |                                       |        |                    |        |      |        |       
|                                                             | Net loss                                                                           |                                       | $      | (12,689            | )      |      | $      | (9,938 | )     
|                                                             | Depreciation and amortization                                                      |                                       |        | 1,246              |        |      |        | 871    |       
|                                                             | Amortization of intangibles and unearned compensation                              |                                       |        | 66                 |        |      |        |       |       
|                                                             | Gain on sale of investments                                                        |                                       |        |                   |        |      |        | (35    | )     
|                                                             | Loss on imbedded derivative                                                        |                                       |        | 277                |        |      |        |       |       
|                                                             | Loss on impairment of investment                                                   |                                       |        |                   |        |      |        | 150    |       
|                                                             | Net foreign currency transaction losses                                            |                                       |        | 17                 |        |      |        |       |       
|                                                             | Equity in net loss of affiliated companies                                         |                                       |        | 1,039              |        |      |        | 2,906  |       
|                                                             | Minority interest in net loss of consolidated subsidiary                           |                                       |        | (17                | )      |      |        | (9     | )     
|                                                             | Net effect of changes in current and other assets and current liabilities          |                                       |        | 6,681              |        |      |        | 5,023  |       
|                                                             |                                                                                    |                                       |        |                    |        |      |        |       
|                                                             |                                                                                    | Cash used in operating activities     |        |                    | (3,380 | )    |        |        | (1,032 | )
|Cash flows from investing activities                         |                                                                                    |                                       |        |                    |        |      |        |       
|                                                             | Capital expenditures                                                               |                                       |        | (583               | )      |      |        | (857   | )     
|                                                             | Purchases of available-for-sale securities                                         |                                       |        | (11,150            | )      |      |        | (6,600 | )     
|                                                             | Sales of available-for-sale securities                                             |                                       |        | 20,850             |        |      |        | 18,400 |       
|                                                             | Proceeds from sale of Integrated Circuit Solution, Inc. (ICSI)
equity securities |                                       |        |                   |        |      |        | 64     |       
|                                                             | Proceeds from minority shareholders of D2Code                                      |                                       |        |                   |        |      |        | 145    |       
|                                                             | Investment in Semiconductor Manufacturing International Corp. (SMIC)             |                                       |        |                   |        |      |        | (3,750 | )     
|                                                             | Other investments                                                                  |                                       |        |                   |        |      |        | (16    | )     
|                                                             |                                                                                    |                                       |        |                    |        |      |        |       
|                                                             |                                                                                    | Cash provided by investing activities |        |                    | 9,117  |      |        |        | 7,386  |  
|Cash flows from financing activities                         |                                                                                    |                                       |        |                    |        |      |        |       
|                                                             | Proceeds from issuance of common stock                                             |                                       |        | 146                |        |      |        | 400    |       
|                                                             | Principal payments on notes payable and long-term obligations                      |                                       |        | (42                | )      |      |        | (38    | )     
|                                                             |                                                                                    |                                       |        |                    |        |      |        |       
|                                                             |                                                                                    | Cash provided by financing activities |        |                    | 104    |      |        |        | 362    |  
|                                                             |                                                                                    |                                       |        |                    |        |      |        |       
|Effect of exchange rate changes on cash and cash equivalents |                                                                                    |                                       | 21     |                    |        |      | (65    | )     
|Net increase in cash and cash equivalents                    |                                                                                    |                                       | 5,862  |                    |        |      | 6,651  |       
|Cash and cash equivalents at beginning of period             |                                                                                    |                                       | 11,622 |                    |        |      | 19,309 |       
|                                                             |                                                                                    |                                       |        |                    |        |      |        |       
|Cash and cash equivalents at end of period                   |                                                                                    | $                                     | 17,484 |                    |        | $    | 25,960 |       
|                                                             |                                                                                    |                                       |        |                    |        |      |        |       

See accompanying notes to condensed consolidated financial statements.





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

1.   Basis of Presentation

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

Operating results for the three months ended December 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2003 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, 2002.

2.   Concentrations

In the three months ended December 31, 2002 and December 31, 2001, no
single customer accounted for over 10% of net sales. However, in the three
months ended December 31, 2001, shipments for Cisco Systems Inc. (Cisco)
directly, or indirectly through subcontractors, accounted for approximately 14%
of net revenue.

3.   Cash, Cash Equivalents and Short-term Investments

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

|                                         |  |                |        |              |  |   |        | 
|---------------------------------------- |  | -------------- | ------ | ------------ |  | - | ------ | 
|                                         |  | (In thousands)
|                                         |  | December 31    |        | September 30
|                                         |  | 2002           |        | 2002        
|                                         |  |                |        |             
|Cash                                     |  | $              | 12,435 |              |  | $ | 6,327  | 
|Money market instruments                 |  |                | 5,049  |              |  |   | 5,295  | 
|Municipal bonds due in more than 3 years |  |                | 57,500 |              |  |   | 67,200 | 
|                                         |  |                |        |              |  |   |        | 
|                                         |  | $              | 74,984 |              |  | $ | 78,822 | 
|                                         |  |                |        |              |  |   |        | 

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

4.   Inventories

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

|                     |  |             |        |              |  |   |        | 
|-------------------- |  | ----------- | ------ | ------------ |  | - | ------ | 
|                     |  | December 31 |        | September 30
|                     |  | 2002        |        | 2002        
|                     |  |             |        |             
|Purchased components |  | $           | 4,163  |              |  | $ | 4,436  | 
|Work-in-process      |  |             | 467    |              |  |   | 724    | 
|Finished goods       |  |             | 7,807  |              |  |   | 12,505 | 
|                     |  |             |        |              |  |   |        | 
|                     |  | $           | 12,437 |              |  | $ | 17,665 | 
|                     |  |             |        |              |  |   |        | 

In the three months ended December 31, 2002 and in fiscal 2002, the
Company recorded inventory write-downs of $4.1 million and $28.6 million,
respectively. The inventory write-downs were predominately for lower of cost
or market and excess and obsolescence issues on certain of its products.

5.   Other Assets

Other assets consisted of the following:

|                                         |  |                |        |              |  |   |        | 
|---------------------------------------- |  | -------------- | ------ | ------------ |  | - | ------ | 
|                                         |  | (In thousands)
|                                         |  | December 31    |        | September 30
|                                         |  | 2002           |        | 2002        
|                                         |  |                |        |             
|Investment in ICSI common stock          |  | $              | 14,694 |              |  | $ | 15,690 | 
|Investment in ICSI convertible debenture |  |                | 2,494  |              |  |   | 2,943  | 
|Investment in SMIC                       |  |                | 40,000 |              |  |   | 40,000 | 
|Other                                    |  |                | 7,072  |              |  |   | 7,044  | 
|                                         |  |                |        |              |  |   |        | 
|                                         |  | $              | 64,260 |              |  | $ | 65,677 | 

The market value of the Companys investment in the common stock and
convertible debentures of ICSI at December 31, 2002 was approximately
$26,970,000 and $2,494,000, respectively, based on quoted market prices.

6.   Accumulated Comprehensive Loss

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

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

|                                                                  |  |                |        |              |  |   |        |  
|----------------------------------------------------------------- |  | -------------- | ------ | ------------ |  | - | ------ | -
|                                                                  |  | December 31    |        | September 30
|                                                                  |  | 2002           |        | 2002        
|                                                                  |  |                |        |             
|                                                                  |  | (In thousands)
|Accumulated foreign currency translation adjustments              |  | $              | (5,206 | )            |  | $ | (5,345 | )
|Accumulated net unrealized loss on
available-for-sale investments |  |                | (486   | )            |  |   | (238   | )
|                                                                  |  |                |        |              |  |   |        |  
|Total accumulated other comprehensive loss                        |  | $              | (5,692 | )            |  | $ | (5,583 | )
|                                                                  |  |                |        |              |  |   |        |  

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

7.   Income Taxes

The Company recorded no provision for income taxes for the three month
periods ended December 31, 2002 and December 31, 2001 due to its net operating
loss position.

8.   Net Loss Per Share

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

|                                                      |  |                    |         |      |  |   |        |  
|----------------------------------------------------- |  | ------------------ | ------- | ---- |  | - | ------ | -
|                                                      |  | Three Months Ended
|                                                      |  | December 31,      
|                                                      |  |                   
|                                                      |  | 2002               |         | 2001
|                                                      |  |                    |         |     
|Numerator for basic and diluted net loss per share:   |  |                    |         |      |  |   |        |  
|Net loss                                              |  | $                  | (12,689 | )    |  | $ | (9,938 | )
|                                                      |  |                    |         |      |  |   |        |  
|Denominator for basic and diluted net loss per share: |  |                    |         |      |  |   |        |  
|Weighted average common shares outstanding            |  |                    | 27,565  |      |  |   | 26,598 |  
|                                                      |  |                    |         |      |  |   |        |  
|Basic and diluted net loss per share                  |  | $                  | (0.46   | )    |  | $ | (0.37  | )
|                                                      |  |                    |         |      |  |   |        |  

The above diluted calculation does not include approximately 6,188,000 and
4,730,000 shares attributable to options as of December 31, 2002 and 2001,
respectively, as their impact would be anti-dilutive.

9.   Use of Estimates

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

10.   Impact of Recently Issued Accounting Standards

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. The Company adopted
these standards as of October 1, 2002. The adoption of SFAS No. 144 did not
have a material effect on the Companys financial position and results of
operations.

7



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

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

In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, (FIN 45).
FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a
liability for the fair value of an obligation assumed under a guarantee. FIN 45
also requires additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with guarantees issued.
The recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company has adopted the disclosure requirements for the financial
statements included in this Form 10-Q. The adoption of FIN 45 did not have a
material effect on the Companys financial position, results of operations, or
cash flows.

In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure.
SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure requirements are
effective for interim and annual periods beginning after December 15, 2002.
The Company will adopt the disclosure requirements for the quarter ended March
31, 2003. The Company will continue to account for stock-based compensation
under the provisions of APB Opinion No. 25 using the intrinsic value method.
Accordingly, the adoption of SFAS No. 148 is not anticipated to have a material
effect on the Companys financial position, results of operations, or cash
flows.

11.   Commitments and Contingencies

Commitments to Wafer Fabrication Facilities

At December 31, 2002, the Company had a remaining non-cancelable purchase
commitment to a wafer foundry for approximately $609,000 by June 30, 2003. The
Company purchased approximately $603,000 under this commitment in the three
months ended December 31, 2002.

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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:

|          |                      |  |                    |        |      |  |   |        | 
|--------- | -------------------- |  | ------------------ | ------ | ---- |  | - | ------ | 
|          |                      |  | Three Months Ended
|          |                      |  | December 31,      
|          |                      |  |                   
|          |                      |  | 2002               |        | 2001
|          |                      |  |                    |        |     
|          |                      |  | (In thousands)    
|Net Sales |                      |  |                    |        |      |  |   |       
|          | United States        |  | $                  | 4,113  |      |  | $ | 6,928  | 
|          | China                |  |                    | 3,302  |      |  |   | 1,774  | 
|          | Hong Kong            |  |                    | 3,319  |      |  |   | 1,249  | 
|          | Taiwan               |  |                    | 3,657  |      |  |   | 1,652  | 
|          | Korea                |  |                    | 1,928  |      |  |   | 214    | 
|          | Asia / Pacific other |  |                    | 2,020  |      |  |   | 1,161  | 
|          | Europe               |  |                    | 2,683  |      |  |   | 2,113  | 
|          | Canada               |  |                    | 16     |      |  |   |       | 
|          |                      |  |                    |        |      |  |   |       
|          | Total net sales      |  | $                  | 21,038 |      |  | $ | 15,091 | 
|          |                      |  |                    |        |      |  |   |       

|                  |                         |   |                |       |               |   |        |       | 
|----------------- | ----------------------- | - | -------------- | ----- | ------------- | - | ------ | ----- | 
|                  |                         |   | December 31,   |       | September 30,
|                  |                         |   | 2002           |       | 2002         
|                  |                         |   |                |       |              
|                  |                         |   | (In thousands)
|Long-lived assets |                         |   |                |       |               |   |        |      
|                  | United States           |   | $              | 7,059 |               |   | $      | 7,942 | 
|                  | Hong Kong               |   |                | 667   |               |   |        | 691   | 
|                  | China                   |   |                | 2,044 |               |   |        | 1,771 | 
|                  | Other foreign locations |   |                | 240   |               |   |        | 269   | 
|                  |                         |   |                |       |               |   |        |      
|                  |                         | $ | 10,010         |       |               | $ | 10,673 |      
|                  |                         |   |                |       |               |   |        |      

13.   Related Party Transactions

For the three months ended December 31, 2002 and December 31, 2001, the
Company sold approximately $118,000 and $515,000, 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 December 31, 2002 and September 30, 2002,
the Company had an accounts receivable balance from ICSI of approximately
$503,000 and $560,000, respectively.

The Company purchases goods and contract manufacturing services from ICSI.
For the three months ended December 31, 2002 and December 31, 2001, purchases
of goods and services were approximately $15,000 and $259,000, respectively.
The Company also pays ICSI for certain product development costs, license fees
and royalties. For the three months ended December 31, 2002 and December 31,
2001, these charges totaled approximately $46,000 and $783,000, respectively.
At December 31, 2002 and September 30, 2002, the Company had an accounts
payable balance to ICSI of approximately $174,000 and $777,000, respectively.

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

The Company purchases services from NexFlash. The Company currently has
approximately a 14% ownership interest in NexFlash. The Companys Chairman and
CEO, Jimmy S.M. Lee, is a director of NexFlash. For the three months ended
December 31, 2002, purchases of services were approximately $11,000. At
December 31, 2002 and September 30, 2002, the Company had an accounts payable
balance to NexFlash of approximately $15,000 and $4,000, respectively.

The Company provides goods and services to GetSilicon in which the Company
currently has approximately a 17% ownership interest. The Companys Chairman
and CEO, Jimmy S.M. Lee, was the Chairman of GetSilicon until May 14, 2002 and
continues to serve as a director. For the three months ended December 31, 2002
and December 31, 2001, the Company provided goods and services of approximately
$19,000 and $44,000, respectively, to GetSilicon. At December 31, 2002 and
September 30, 2002, the Company had an accounts receivable balance from
GetSilicon of approximately $91,000 and $73,000, respectively.

The Company engages GetSilicon for business-to-business data exchange and
professional services. For the three months ended December 31, 2002 and
December 31, 2001, the purchase of services was approximately $0 and $170,000,
respectively. At December 31, 2002 and September 30, 2002, the Company had an
accounts payable balance to GetSilicon of approximately $181,000 and $317,000,
respectively.

For the three months ended December 31, 2002 and December 31, 2001, the
Company sold approximately $11,000 and $96,000, 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 December 31, 2002 and September 30, 2002, the Company
had an accounts receivable balance from E-CMOS of approximately $5,000 and
$12,000, respectively.

The Company receives administrative support services and reimburses E-CMOS
for expenses incurred on its behalf. At December 31, 2002 and September 30,
2002, the Company had an accounts payable balance to E-CMOS of approximately
$69,000 and $434,000, respectively.

For the three months ended December 31, 2002 and December 31, 2001, the
Company sold approximately $145,000 and $45,000, respectively, 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
December 31, 2002 and September 30, 2002, the Company had an accounts
receivable balance from Marubun of approximately $100,000 and $301,000,
respectively.

The Company purchases goods from SMIC in which the Company has less than a
4% ownership interest. The Companys Chairman and CEO, Jimmy S.M. Lee, is a
director of SMIC. For the three months ended December 31, 2002, purchases of
goods from SMIC were approximately $7,502,000. At December 31, 2002 and
September 30, 2002, the Company had an accounts payable balance to SMIC of
approximately $6,830,000 and $2,373,000, respectively.

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

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

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

|                                                |  |              |        |               |  |   |        | 
|----------------------------------------------- |  | ------------ | ------ | ------------- |  | - | ------ | 
|                                                |  | December 31, |        | September 30,
|                                                |  | 2002         |        | 2002         
|                                                |  |              |        |              
|Current assets                                  |  | $            | 70,150 |               |  | $ | 77,026 | 
|Property, plant, and equipment and other assets |  |              | 44,373 |               |  |   | 45,810 | 
|Current liabilities                             |  |              | 34,429 |               |  |   | 39,516 | 
|Long-term debt                                  |  |              | 18,710 |               |  |   | 18,664 | 

|                    |  |                    |        |      |  |   |        |  
|------------------- |  | ------------------ | ------ | ---- |  | - | ------ | -
|                    |  | Three Months Ended
|                    |  | December 31,      
|                    |  |                    |       
|                    |  | 2002               |        | 2001
|                    |  |                    |        |     
|Net sales           |  | $                  | 19,634 |      |  | $ | 14,625 |  
|Gross profit (loss) |  |                    | 439    |      |  |   | (5,511 | )
|Net loss            |  |                    | (3,771 | )    |  |   | (9,984 | )

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

As a result of a decline in ICSIs convertible bond price, the Company
recorded an unrealized loss of approximately $248,000 related to the ICSI
convertible debentures in the December 2002 quarter. The unrealized loss is
included in accumulated other comprehensive loss. In addition, in the December
2002 quarter, the Company recorded a charge of approximately $277,000 related
to the decline in the fair value of an embedded derivative associated with the
ICSI convertible debenture. The charge associated with the embedded derivative
is included in other income (expense). The market value of the Companys
convertible debentures at December 31, 2002 was approximately $2.5 million.

The Company accounts for investments in 50 percent or less owned companies
over which it has the ability to exercise significant influence using the
equity method of accounting. At December 31, 2002 and September 30, 2002,
approximately, $3.6 million and $4.6 million, respectively, of undistributed
earnings of 50% or less owned companies accounted for using the equity method
are included in consolidated retained earnings. The Company periodically
reviews these investments for other-than-temporary declines in market value and
writes these investments to their fair value when an other-than-temporary
decline has occurred.

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

Note 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.

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 months ended December 31, 2002
and December 31, 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                   
|                                                       |  | December 31,                         
|                                                       |  |                                      
|                                                       |  | 2002                                  |         | 2001
|                                                       |  |                                       |         |     
|                                                       |  | (In
thousands, except per share data)
|Net sales                                              |  | $                                     | 21,038  |      |  | $ | 15,091  |  
|                                                       |  |                                       |         |      |  |   |         |  
|Net loss                                               |  | $                                     | (12,689 | )    |  | $ | (10,519 | )
|                                                       |  |                                       |         |      |  |   |         |  
|Basic and diluted net loss per share                   |  | $                                     | (0.46   | )    |  | $ | (0.39   | )
|                                                       |  |                                       |         |      |  |   |         |  
|Shares used in basic and diluted per share calculation |  |                                       | 27,565  |      |  |   | 27,036  |  
|                                                       |  |                                       |         |      |  |   |         |  

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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.
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 memory products used in networking, Internet
infrastructure, telecommunications, wireless products, handheld devices,
computer peripherals, and automotive electronics. 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, portability
and bandwidth requirements of todays electronic products. Our objective is to
capitalize on major trends in electronic products and position ISSI as a key
supplier to leading companies in such markets. Our goal is to be a focused
supplier of high performance memories targeting the mobile communications,
networking/broadband, digital consumer, and automotive electronics 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. We are also an equity
investor and have a seat on the board of directors of Semiconductor
Manufacturing International Corporation (SMIC), the first eight-inch wafer
foundry in China. Through this 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 2003 and fiscal 2002 reflect accounting
for ICSI on the equity basis and include our percentage share of the results of
ICSIs operations. Our financial results for fiscal 2003 and fiscal 2002
reflect accounting for E-CMOS on the equity basis and include our share of
E-CMOSs results of operations on a one quarter lag. Our financial results for
fiscal 2003 and fiscal 2002 reflect accounting for GetSilicon, NexFlash and
SMIC on the cost basis. At December 31, 2002, we owned approximately 29% of
ICSI, approximately 14% of NexFlash, approximately 26% of E-CMOS, approximately
17% of GetSilicon and less than 4% of SMIC.

Critical Accounting Policies

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

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Our critical accounting policies which are impacted by estimates are: (i)
the valuation of our inventory, which impacts cost of goods sold and gross
profit; (ii) the valuation of our allowance for sales returns and allowances
(iii) the valuation of our allowance for doubtful accounts, which impacts
general and administrative expense; and (iv) the valuation of our
non-marketable equity securities, which impacts gains and losses on equity
securities when we record impairments. Each of these policies is described in
more detail below. We also have other key accounting policies that may not
require us to make estimates and judgments that are as subjective or difficult,
for instance, our policies with regard to revenue recognition, including the
deferral of revenues on sales to distributors. These policies are described in
the notes to our financial statements contained in this Annual Report on Form
10-K for the year ended September 30, 2002.

Valuation of inventory

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

Valuation of allowance for sales returns and allowances

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

Valuation of allowance for doubtful accounts

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

Valuation of non-marketable securities

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

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equity securities, this requires significant judgment on our part, including an
assessment of the investees financial condition, the existence of subsequent
rounds of financing and the impact of any relevant contractual equity
preferences, as well as the investees historical results of operations, and
projected results and cash flows. If the actual outcomes for the investees
are significantly different from their forecasts, the carrying value of our
non-marketable equity securities may be overstated, and we may incur additional
charges in future periods, which will decrease our profitability. At December
31, 2002, our strategic investments in non-marketable securities totaled $46.7
million of which $40.0 million was invested in SMIC.

Three Months Ended December 31, 2002 Compared to Three Months Ended December
31, 2001

Net Sales. Net sales consist principally of total product sales less
estimated sales returns. Net sales increased by 39% to $21.0 million in the
three months ended December 31, 2002 from $15.1 million in the three months
ended December 31, 2001. The increase in sales was principally due to an
increase in unit shipments of our DRAM products partially offset by declines in
the average selling prices in the three months ended December 31, 2002 compared
to the three months ended December 31, 2001. While SRAM units shipped increased
in the three months ended December 31, 2002 compared to the three months ended
December 31, 2001, the impact of the reduction in average selling prices
resulted in an overall reduction in SRAM revenue. We anticipate that the
average selling prices of our existing products will generally decline over
time, although the rate of decline may fluctuate for certain products. In this
regard, we experienced a decline in the average selling prices for certain of
our SRAM and DRAM products in the three months ended December 31, 2002 as
compared to the three months ended September 30, 2002. We anticipate further
price declines for certain of our SRAM and DRAM products in the March 2003
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 December 31, 2002 and December 31, 2001, no
single customer accounted for over 10% of net sales. However, in the three
months ended December 31, 2001, shipments for Cisco directly, or indirectly
through subcontractors, accounted for approximately 14% of net revenue. As
sales to our customers are executed pursuant to purchase orders and no
purchasing contract exists, our customers can cease doing business with us at
any time.

Gross Profit (loss). Cost of sales includes die cost from the wafers
acquired from foundries, subcontracted package costs, assembly costs and test
costs, costs associated with in-house product testing, quality assurance and
import duties. Gross profit decreased 145% to $(1.2) million in the three
months ended December 31, 2002 from $2.7 million in the three months ended
December 31, 2001. As a percentage of net sales, gross profit decreased to
(5.8)% in the three months ended December 31, 2002 from 17.8% in the three
months ended December 31, 2001. In the three months ended December 31, 2002, we
recorded inventory write-downs of $4.1 million predominately for lower of cost
or market accounting. Excluding the inventory write-downs in the three months
ended December 31, 2002, the decrease in gross profit was principally due to a
significant decline in the average selling prices of our products in the three
months ended December 31, 2002 compared to the three months ended December 31,
2001. Further, as we sell products that had previously been written-down to
lower of cost or market, we recognize minimal gross profit. Our margin for the
three months ended December 31, 2002 benefited from the sale of $0.6 million of
parts previously written down to zero carrying value. The decline in our gross
margin in fiscal 2002 was more significant for our SRAM products than for our
DRAM products. In addition, we were able to offset some of the decline in
average selling prices of our DRAM products with an increase in DRAM units
shipped. We believe that the average selling price of our products will
generally decline over time and, unless we are able to reduce our cost per unit
to the extent necessary to offset such declines, the decline in average selling
prices will result in a material decline in our gross margin. In this regard,
we experienced a decline in the average selling prices for certain of our SRAM
and DRAM products in the three months ended December 31, 2002 compared to the
three months ended September 30, 2002. We anticipate a further decline in the
average selling prices for certain of our SRAM and DRAM products in the three
months ending March 31, 2003. 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

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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 remained
relatively flat at $6.8 million in the three months ended December 31, 2002
compared to $6.6 million in the three months ended December 31, 2001. As a
percentage of net sales, research and development expenses decreased to 32.3%
in the three months ended December 31, 2002 from 44.0% in the three months
ended December 31, 2001. The increase in absolute dollars was the result our
acquisition of Purple Ray and the expansion of our research and development
activities in Asia, partially offset by a decline in contracted development
charges. While we have made efforts to reduce research and development expenses
through salary reductions, lay-offs and the transfer of some design and
engineering efforts to Asia, these reductions may be offset by increased costs
for the development of new products, which could result in our research and
development expenses increasing in absolute dollars in future periods.

Selling, General and Administrative. Selling, general and administrative
expenses were $3.7 million in both the three months ended December 31, 2002 and
December 31, 2001. As a percentage of net sales, selling, general and
administrative expenses decreased to 17.4% in the three months ended December
31, 2002 from 24.3% in the three months ended December 31, 2001. We have
controlled expenses through salary reductions, lay-offs and limiting
discretionary spending. We expect our selling, general and administrative
expenses may increase in future quarters although such expenses may fluctuate
as a percentage of net sales.

Gain on sale of investments.The gain on the sale of investments
decreased to $0 in the three months ended December 31, 2002 from $35,000 in the
three months ended December 31, 2001. In the three months ended December 31,
2001, we sold shares of ICSI for approximately $64,000 resulting in a pre-tax
gain of $35,000.

Other income (expense), net.Other income (expense), net decreased by $0.5
million to approximately $18,000 in the three months ended December 31, 2002
from $0.5 million in the three months ended December 31, 2001. The decrease
was primarily the result of decreased interest income as the result of lower
cash balances. In addition, in the three months ended December 31, 2002, we
recorded a charge of approximately $277,000 related to the decline in the fair
value of an embedded derivative associated with the ICSI convertible debenture.
We recorded a charge of $150,000 for the impairment of an investment during the
three months ended December 31, 2001.

Minority interest in net loss of consolidated subsidiary.In October
2001, we invested $3.0 million for a 95% interest in D2Code Co. Inc.
(D2Code), a subsidiary that we established in Korea to focus on semiconductor
design activities. The results of their operations are included in our
consolidated financial statements. The minority interest in net loss of
consolidated subsidiary, represents the minority shareholders proportionate
share of the net loss of D2Code. The minority interest in net loss of
consolidated subsidiary increased to $17,000 in the three months ended December
31, 2002 from $9,000 in the three months ended December 31, 2001.

Equity in net loss of affiliated companies.Equity in net loss of
affiliated companies decreased by $1.9 million to $1.0 million in the three
months ended December 31, 2002 from $2.9 million in the three months ended
December 31, 2001. This primarily reflects a decrease in the loss from our
percentage share of ICSIs financial results in the three months ended December
31, 2002 compared to the three months ended December 31, 2001.

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Liquidity and Capital Resources

As of December 31, 2002, our principal sources of liquidity included cash,
cash equivalents and short-term investments of approximately $75.0 million.
During the three months ended December 31, 2002, operating activities used cash
of approximately $3.4 million compared to $1.0 million in the three months
ended December 31, 2001. Cash used by operations was primarily due to net loss
of $12.7 million adjusted for depreciation of $1.2 million, equity in net loss
of affiliated companies of $1.0 million, other non-cash items of $0.3 million
and increases in accounts receivables of $0.9 million. This was partially
offset by decreases in inventories of $5.2 million primarily driven by
inventory write-downs, increases in accounts payable of $1.4 million, increases
in accrued expenses of $0.6 million and decreases in other assets of $0.4
million.

In the three months ended December 31, 2002, we generated $9.1 million
from investing activities compared to $7.4 million in the three months ended
December 31, 2001. The cash generated by investing activities in the three
months ended December 31, 2002 primarily resulted from net sales of
available-for-sale securities of $9.7 million. The cash generated from
investing activities in the three months ended December 31, 2001 was primarily
the result of net sales of available-for-sale securities of $11.8 million. In
addition, we invested $3.8 million in Semiconductor Manufacturing International
Corp (SMIC).

In the three months ended December 31, 2002, we made capital expenditures
of approximately $0.6 million for engineering tools and computer software. We
expect to spend approximately $2.0 million to $3.0 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 $0.1 million from financing activities during the three
months ended December 31, 2002 compared to $0.4 million in the three months
ended December 31, 2001. The source of financing for the current quarter was
proceeds from the issuance of common stock of $0.1 million from stock option
exercises.

In August 2000, we made a commitment for an equity investment in SMIC. In
fiscal 2002, we made investments totaling $21.2 million in SMIC, bringing our
total investment in this foundry as of December 31, 2002, to $40.0 million. We
have no further commitments to SMIC for additional equity investments at this
time. We have received certain capacity commitments from SMIC. In addition, we
have remaining non-cancelable purchase commitments to another wafer foundry for
approximately $0.6 million over the next 6 months.

In July 2002, we made a commitment for an equity investment in Signia
Technologies, Inc. (Signia), a development stage company focusing on
BlueTooth design. At December 31, 2002, our investment in Signia was $1.5
million. We were committed to invest an additional $1.5 million in Signia, if
Signia achieved certain milestones with respect to its BlueTooth product by
January 19, 2003. As Signia did not achieve the milestones by January 19,
2003, we are no longer obligated to this commitment.

We lease our facilities including our headquarters in Santa Clara,
California, our field sales offices in the U.S. and Europe and sales and
engineering offices in Asia. Our leases expire at various dates through 2007.
Our outstanding commitments under these leases are approximately $6.5 million.

Our contractual cash obligations at December 31, 2002 are outlined in the
table below:

|                                                        |  |                                       |       |             |  |   |                   |  |  |   |                   |  |  |   |       | 
|------------------------------------------------------- |  | ------------------------------------- | ----- | ----------- |  | - | ----------------- |  |  | - | ----------------- |  |  | - | ----- | 
|                                                        |  | Payments Due by Period (in thousands)
|                                                        |  |                                      
|                                                        |  | Total                                 |       | Fiscal 2003 |  |   | Fiscal2004 - 2005 |  |  |   | Fiscal2006 - 2007 | 
|                                                        |  |                                       |       |             |  |   |                   | 
|Contractual Obligations                                 |  |                                       |       |             |  |   |                   |  |  |   |                   |  |  |   |       | 
|Equipment lease debt                                    |  | $                                     | 116   |             |  | $ | 116               |  |  | $ |                  |  |  | $ |      | 
|Operating leases                                        |  |                                       | 6,485 |             |  |   | 1,056             |  |  |   | 3,216             |  |  |   | 2,213 | 
|Unconditional purchase
obligations with wafer foundries |  |                                       | 609   |             |  |   | 609               |  |  |   |                  |  |  |   |      | 
|                                                        |  |                                       |       |             |  |   |                   |  |  |   |                   |  |  |   |       | 
|Total contractual cash obligations                      |  | $                                     | 7,210 |             |  | $ | 2,083             |  |  | $ | 3,216             |  |  | $ | 2,213 | 
|                                                        |  |                                       |       |             |  |   |                   |  |  |   |                   |  |  |   |       | 

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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 also evaluate potential acquisitions and equity investments
complementary to our memory expertise and market strategy, including
investments in wafer fabrication foundries. To the extent we pursue such
transactions, any such transaction could require us to seek additional equity
or debt financing to fund such activities. There can be no assurance that any
such additional financing could be obtained on terms acceptable to us, if at
all.

Certain Factors Which May Affect Our Business or Future Operating Results

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

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



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

18



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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 seven consecutive quarters ended December
31, 2002 totaling $109.7 million. We expect to incur a loss in the March 2003
quarter and may incur losses in subsequent quarters. We were profitable for
fiscal 2001 and fiscal 2000. Our ability to achieve or maintain profitability
on a quarterly basis in the future will depend on a variety of factors,
including our ability to increase our net sales, introduce new products on a
timely basis, secure sufficient wafer fabrication capacity and control our
operating expenses. Adverse developments with respect to these or other factors
could result in quarterly or annual operating losses in the future.

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

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

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

A substantial majority of our net sales are derived from the sale of DRAM
and SRAM products, which are subject to unit volume fluctuations and declines
in average selling prices which could harm our business. For example, in the
three months ended September 30, 2001, our net sales decreased by 26% to $14.8
million from $20.0 million in the three months ended June 30, 2001, principally
due to a decline in average selling prices for our products including our SRAM
products. In addition, in the three months ended June 30, 2001, our net sales
decreased by 62% to $20.0 million from $52.0 million in the three months ended
March 31, 2001, and decreased 20% in the three months ended March 31, 2001 from
$65.2 million in the three months ended December 31, 2000, principally due to a
decrease in unit shipments of our SRAM products as a result of lower demand for
electronic products. While unit shipments of certain SRAM products increased
in the three months ended December 31, 2002 compared to the three months ended
September 30, 2002, declines in the average selling prices for our SRAM
products resulted in an overall decline in our SRAM revenue. We anticipate
further price declines for certain of our SRAM and DRAM products in the March
2003 quarter. There can be no assurance that such declines will be offset by
higher volumes or by higher prices on newer products.

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

Competitive pricing pressures due to an industry-wide oversupply of wafer
capacity as well as product inventory resulted in significant price decreases
for our products during fiscal 1996 through fiscal 1999. While we experienced
increases in average selling prices in fiscal 2000, historically, average
selling prices for semiconductor memory products have declined, and we expect
that average selling prices will decline in the future. In this regard, we
experienced a decline in the average selling prices for most of our products
during fiscal 2002, and in the most recent quarter ended December 31, 2002. We
anticipate a further decline in the average selling prices for certain of our
SRAM and DRAM products in the March 2003 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.

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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 December 31, 2002, in fiscal 2002 and in
fiscal 2001, we recorded inventory write-downs of $4.1 million, $28.6 million
and $38.3 million, respectively. The inventory write-downs were predominately
for lower of cost or market accounting on our products, and to a lesser extent,
excess inventory.

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

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

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

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

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

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



| |  |  | contracts that commit us to purchase specified quantities of silicon wafers over extended periods;
| | - |  | --------------------------------------------------------------------------------------------------
|
| |  |  | investments in foundries;                                                                         
|
| |  |  | joint ventures;                                                                                   
|
| |  |  | other partnership relationships with foundries;                                                   
|
| |  |  | option payments or other prepayments to foundries; or                                             

20



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| |  |  | nonrefundable deposits with or loans to foundries in exchange for capacity commitments.
| | - |  | ---------------------------------------------------------------------------------------

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

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

In the three months ended December 31, 2002, no single customer accounted
for over 10% of net sales. In fiscal 2002, no single customer accounted for
over 10% of net sales. However, in fiscal 2001, sales to Flextronics
International accounted for approximately 15% of net sales. Substantially all
of our sales to Flextronics were for products to be delivered to Cisco.
Shipments for Cisco directly, or indirectly through subcontractors, accounted
for approximately 18% of our net sales for fiscal 2001. Shipments for 3Com
directly, or indirectly through subcontractors, accounted for approximately 11%
of net sales for fiscal 2001. As sales to our customers are executed pursuant
to purchase orders and no purchasing contract exists, our 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;                                  

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

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

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

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

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

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

In the three months ended December 31, 2002, approximately 19% of our net
sales was attributable to customers located in the United States, 13% was
attributable to customers located in Europe and 68% was attributable to
customers located in Asia. In fiscal 2002, approximately 30% of our net sales
was attributable to customers located in the United States, 15% was
attributable to customers located in Europe and 55% was attributable to
customers located in Asia. In fiscal 2001, approximately 52% of our net sales
was attributable to customers located in the United States, 25% was
attributable to customers located in Europe and 23% was attributable to
customers located in Asia. Accordingly, our future operating results will
depend on general economic conditions in Asia, Europe, and the United States.
In addition, the markets for our products, which are highly cyclical, may not
continue to grow. We anticipate that sales to international customers will
continue to represent a significant percentage of net sales.

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



| |  |  | economic conditions in Europe and Asia, particularly in Taiwan and the Peoples Republic of China;
| | - |  | --------------------------------------------------------------------------------------------------
|
| |  |  | changes in trade policy and regulatory requirements;                                              
|
| |  |  | duties, tariffs and other trade barriers and restrictions;                                        
|
| |  |  | the burdens of complying with foreign laws;                                                       
|
| |  |  | foreign currency fluctuations;                                                                    
|
| |  |  | difficulties in collecting foreign accounts receivable; and                                       
|
| |  |  | political instability.                                                                            

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

Over the last few years, we have made several strategic equity investments
in other technology companies. At December 31, 2002, we had investments in
equity securities of privately held companies of approximately $46.7 million,
$40 million of which is in SMIC. There can be no assurance that these
investments will increase in value and there is the possibility that they could
decrease in value over time, even to the point of becoming completely
worthless. These investments are tested for impairment on a recurring basis
and any reductions in the carrying value would lower our profitability. In
this regard, we recorded approximately $397,000 in impairment losses during
fiscal 2002.

We may encounter difficulties in effectively integrating acquired businesses.

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

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

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

23



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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.

Our stock price is expected to be volatile.

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



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

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

24



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##### Table of Contents






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. We have
operations in China, Europe, Taiwan, Hong Kong, and Korea. Expenses of our
international operations are denominated in each countrys local currency and
therefore are subject to foreign currency exchange risk; however, through
December 31, 2002 we have not experienced any significant negative impact on
our operations as a result of fluctuations in foreign currency exchange rates.
We do not currently engage in any hedging activities, and our derivative
financial instruments were immaterial at December 31, 2002.

We had short-term investments of $57.5 million at December 31, 2002. The
primary objective of our investment activities is to preserve principal while
at the same time maximizing yields without increasing risk. We invest primarily
in high-quality, short-term debt instruments such as municipal auction rate
certificates and instruments issued by high quality financial institutions and
companies, including money market instruments. A hypothetical one percentage
point decrease in interest rates would result in approximately a $0.7 million
decrease in interest income.

We own approximately 29% of ICSI, a public company listed on the Taiwan
Stock Exchange. We account for this investment on the equity basis and our
investment balance as of December 31, 2002 was approximately $14.7 million.
The market value of our investment in the common stock of ICSI at December 31,
2002 was approximately $27.0 million, based on quoted market prices. The share
price of ICSI is subject to fluctuations. A significant decline in the stock
price of ICSI may require us to record a loss related to this investment. In
addition, we own approximately $2.5 million of ICSI convertible debentures.
As a result of a decline in ICSIs convertible bond price, the we recorded an
unrealized loss of approximately $248,000 related to the ICSI convertible
debentures in the December 2002 quarter. This loss was included in other
comprehensive loss in the equity portion of our balance sheet. In addition, in
the December 2002 quarter, the we recorded a charge of approximately $277,000
related to the decline in the fair value of an embedded derivative associated
with the ICSI convertible debenture. The charge associated with the embedded
derivative is included in other income (expense). Further deterioration in
ICSIs bond price would result in additional losses.

We have investments in equity securities of privately held companies for
the promotion of business and strategic objectives of approximately $42.9
million at December 31, 2002, of which $40.0 million is invested in SMIC. These
investments are generally in companies in the semiconductor industry. These
investments are included in other assets and are accounted for using the cost
method. In addition, we have an investment of $3.8 million that is accounted
for on the equity method. For investments in which no public market exists,
our policy is to review the operating performance, recent financing
transactions and cash flow forecasts for such companies in assessing the net
realizable values of the securities of these companies. Impairment losses on
equity investments are recorded when events and circumstances indicate that
such assets are impaired and the decline in value is other than temporary. We
recorded $397,000 in impairment losses during fiscal 2002.




Item 4.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our chief executive officer and our chief financial officer, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934) as of a date within 90 days of our filing of this quarterly report on
Form 10-Q (referred to as the Evaluation Date), have concluded that, as of
the Evaluation Date, our disclosure controls and procedures were adequate and
effective to ensure the timely collection, evaluation and disclosure of
information relating to us and our consolidated subsidiaries, if any, that
would potentially be subject to disclosure under the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.

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##### Table of Contents



Changes in Internal Controls

There were no significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the Evaluation
Date. No significant deficiencies or material weaknesses were identified in
the evaluation of our internal controls and therefore no corrective actions
have been taken.




Part II. OTHER INFORMATION




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.

The registrant did not file any reports on Form 8-K during the quarter ended December 31, 2002.

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##### 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: February 14, 2003 | /s/ Gary L. Fischer                                                                                                         
|
|                         | Gary L. Fischer
President, Chief Operating Officer,
and Chief Financial Officer
(Principal Financial and
Accounting Officer)

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##### Table of Contents



CERTIFICATION

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



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Integrated
Silicon Solution, Inc.;                                                                                                                                                                                                                                      
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   
|
| | 4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                     



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



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



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



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

Date: February 14, 2003



| | /s/ Jimmy S.M. Lee
Jimmy S.M. Lee
Chief Executive Officer
| | ---------------------------------------------------------

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##### Table of Contents



CERTIFICATION

I, Gary L. Fischer, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Integrated
Silicon Solution, Inc.;                                                                                                                                                                                                                                      
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   
|
| | 4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                     



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



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



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



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

Date: February 14, 2003



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

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##### Table of Contents



Exhibits Index

|             |  |                                                                                                                        
|------------ |  | -----------------------------------------------------------------------------------------------------------------------
|Exhibit No.  |  | Description                                                                                                            
|             |  |                                                                                                                        
|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