##### Table of Contents



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark One)



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

For the quarterly period ended March 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 |  | (I.R.S Employer    
|incorporation or organization)  |  | Identification No.)

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

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

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

The number of outstanding shares of the registrants Common Stock as of
April 30, 2002 was 27,243,799





---

TABLE OF CONTENTS



|                           |                                                                                               |                                                           |  |  |  |  |  | 
|-------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|                           |                                                                                               | Condensed Consolidated Statements of Operations          
|                           |                                                                                               | Condensed Consolidated Statements of Comprehensive Income
|                           |                                                                                               | Condensed Consolidated Balance Sheets                    
|                           |                                                                                               | Condensed Consolidated Statements of Cash Flows          
|                           |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS     
|                           | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                           | Item 3. Financial Market Risk                                                                
|Part II. OTHER INFORMATION
|                           | Item 1. Legal Proceedings                                                                    
|                           | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                           | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                



---



##### Table of Contents






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

|                                                                                                             |                                     |                          |         |                    |        |                  |        |       |        |      |         |        |        |   |         |        |        | 
|------------------------------------------------------------------------------------------------------------ | ----------------------------------- | ------------------------ | ------- | ------------------ | ------ | ---------------- | ------ | ----- | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                                             |                                     |                          |         | Three Months Ended |        | Six Months Ended
|                                                                                                             |                                     |                          |         | March 31,          |        | March 31,       
|                                                                                                             |                                     |                          |         |                    |        |                 
|                                                                                                             |                                     |                          |         | 2002               |        | 2001             |        | 2002  |        | 2001
|                                                                                                             |                                     |                          |         |                    |        |                  |        |       |        |     
|Net sales (See Note 13)                                                                                      |                                     | $                        | 16,638  |                    |        | $                | 52,023 |       |        | $    | 31,729  |        |        | $ | 117,252 |       
|Cost of sales                                                                                                |                                     |                          | 13,634  |                    |        |                  | 48,564 |       |        |      | 26,034  |        |        |   | 91,618  |       
|                                                                                                             |                                     |                          |         |                    |        |                  |        |       |        |      |         |        |        |   |         |       
|Gross Profit                                                                                                 |                                     |                          | 3,004   |                    |        |                  | 3,459  |       |        |      | 5,695   |        |        |   | 25,634  |       
|                                                                                                             |                                     |                          |         |                    |        |                  |        |       |        |      |         |        |        |   |         |       
|Operating Expenses:                                                                                          |                                     |                          |         |                    |        |                  |        |       |        |      |         |        |        |   |         |       
|                                                                                                             | Research and development            |                          |         | 7,161              |        |                  |        | 6,612 |        |      |         | 13,799 |        |   |         | 13,329 |       
|                                                                                                             | Selling, general and administrative |                          |         | 4,303              |        |                  |        | 5,888 |        |      |         | 7,968  |        |   |         | 12,118 |       
|                                                                                                             | In-process technology charge        |                          |         | 4,689              |        |                  |        |      |        |      |         | 4,689  |        |   |         |       |       
|                                                                                                             |                                     |                          |         |                    |        |                  |        |       |        |      |         |        |        |   |         |       
|                                                                                                             |                                     | Total operating expenses |         |                    | 16,153 |                  |        |       | 12,500 |      |         |        | 26,456 |   |         |        | 25,447 | 
|                                                                                                             |                                     |                          |         |                    |        |                  |        |       |        |      |         |        |        |   |         |       
|Operating income (loss)                                                                                      |                                     |                          | (13,149 | )                  |        |                  | (9,041 | )     |        |      | (20,761 | )      |        |   | 187     |       
|Other income (expense), net                                                                                  |                                     |                          | 794     |                    |        |                  | 1,845  |       |        |      | 1,330   |        |        |   | 3,352   |       
|Gain on sale of investments                                                                                  |                                     |                          |        |                    |        |                  | 11,561 |       |        |      | 35      |        |        |   | 28,763  |       
|                                                                                                             |                                     |                          |         |                    |        |                  |        |       |        |      |         |        |        |   |         |       
|Income (loss) before income taxes, minority
interest and equity in net income (loss) of
affiliated companies |                                     |                          | (12,355 | )                  |        |                  | 4,365  |       |        |      | (19,396 | )      |        |   | 32,302  |       
|Provision (benefit) for income taxes                                                                         |                                     |                          | (3,223  | )                  |        |                  | 1,091  |       |        |      | (3,223  | )      |        |   | 8,076   |       
|                                                                                                             |                                     |                          |         |                    |        |                  |        |       |        |      |         |        |        |   |         |       
|Income (loss) before minority interest
and equity in net income (loss) of
affiliated companies               |                                     |                          | (9,132  | )                  |        |                  | 3,274  |       |        |      | (16,173 | )      |        |   | 24,226  |       
|Minority interest in net loss of
consolidated subsidiary                                                     |                                     |                          | 15      |                    |        |                  |       |       |        |      | 24      |        |        |   |        |       
|Equity in net income (loss) of
affiliated companies                                                          |                                     |                          | (1,529  | )                  |        |                  | 1,195  |       |        |      | (4,435  | )      |        |   | 5,318   |       
|                                                                                                             |                                     |                          |         |                    |        |                  |        |       |        |      |         |        |        |   |         |       
|Net income (loss)                                                                                            |                                     | $                        | (10,646 | )                  |        | $                | 4,469  |       |        | $    | (20,584 | )      |        | $ | 29,544  |       
|                                                                                                             |                                     |                          |         |                    |        |                  |        |       |        |      |         |        |        |   |         |       
|Basic net income (loss) per share                                                                            |                                     | $                        | (0.39   | )                  |        | $                | 0.17   |       |        | $    | (0.77   | )      |        | $ | 1.14    |       
|                                                                                                             |                                     |                          |         |                    |        |                  |        |       |        |      |         |        |        |   |         |       
|Shares used in basic per share calculation                                                                   |                                     |                          | 26,954  |                    |        |                  | 26,093 |       |        |      | 26,776  |        |        |   | 25,957  |       
|                                                                                                             |                                     |                          |         |                    |        |                  |        |       |        |      |         |        |        |   |         |       
|Diluted net income (loss) per share                                                                          |                                     | $                        | (0.39   | )                  |        | $                | 0.16   |       |        | $    | (0.77   | )      |        | $ | 1.07    |       
|                                                                                                             |                                     |                          |         |                    |        |                  |        |       |        |      |         |        |        |   |         |       
|Shares used in diluted per share calculation                                                                 |                                     |                          | 26,954  |                    |        |                  | 27,797 |       |        |      | 26,776  |        |        |   | 27,602  |       
|                                                                                                             |                                     |                          |         |                    |        |                  |        |       |        |      |         |        |        |   |         |       

See accompanying notes to condensed consolidated financial statements.

1



---



##### Table of Contents






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

|                                               |                                             |   |                    |     |                  |   |       |     |      |   |         |      |   |   |        |      |  
|---------------------------------------------- | ------------------------------------------- | - | ------------------ | --- | ---------------- | - | ----- | --- | ---- | - | ------- | ---- | - | - | ------ | ---- | -
|                                               |                                             |   | Three Months Ended |     | Six Months Ended
|                                               |                                             |   | March 31,          |     | March 31,       
|                                               |                                             |   |                    |     |                 
|                                               |                                             |   | 2002               |     | 2001             |   | 2002  |     | 2001
|                                               |                                             |   |                    |     |                  |   |       |     |     
|Net income (loss)                              |                                             | $ | (10,646            | )   |                  | $ | 4,469 |     |      | $ | (20,584 | )    |   | $ | 29,544 |     
|Other comprehensive income (loss), net of tax: |                                             |   |                    |     |                  |   |       |     |      |   |         |      |   |   |        |     
|                                               | Change in cumulative translation adjustment |   |                    | (36 | )                |   |       | 477 |      |   |         | (332 | ) |   |        | (534 | )
|                                               |                                             |   |                    |     |                  |   |       |     |      |   |         |      |   |   |        |     
|Comprehensive income (loss)                    |                                             | $ | (10,682            | )   |                  | $ | 4,946 |     |      | $ | (20,916 | )    |   | $ | 29,010 |     
|                                               |                                             |   |                    |     |                  |   |       |     |      |   |         |      |   |   |        |     

See accompanying notes to condensed consolidated financial statements.

2



---



##### Table of Contents






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

|                                                     |                                                        |   |             |         |               |   |         |         |  
|---------------------------------------------------- | ------------------------------------------------------ | - | ----------- | ------- | ------------- | - | ------- | ------- | -
|                                                     |                                                        |   | March 31,   |         | September 30,
|                                                     |                                                        |   | 2002        |         | 2001         
|                                                     |                                                        |   |             |         |              
|                                                     |                                                        |   | (unaudited) |         | (1)          
|ASSETS                                              
|Current assets:                                      |                                                        |   |             |         |               |   |         |        
|                                                     | Cash and cash equivalents                              |   | $           | 20,056  |               |   | $       | 19,309  |  
|                                                     | Short-term investments                                 |   |             | 91,750  |               |   |         | 103,550 |  
|                                                     | Accounts receivable                                    |   |             | 7,934   |               |   |         | 9,743   |  
|                                                     | Accounts receivable from related parties (See Note 13) |   |             | 413     |               |   |         | 597     |  
|                                                     | Inventories                                            |   |             | 31,678  |               |   |         | 45,179  |  
|                                                     | Other current assets                                   |   |             | 8,340   |               |   |         | 4,689   |  
|                                                     |                                                        |   |             |         |               |   |         |        
|Total current assets                                 |                                                        |   | 160,171     |         |               |   | 183,067 |        
|Property, equipment, and leasehold improvements, net |                                                        |   | 10,440      |         |               |   | 7,663   |        
|Other assets                                         |                                                        |   | 56,417      |         |               |   | 47,122  |        
|                                                     |                                                        |   |             |         |               |   |         |        
|Total assets                                         |                                                        | $ | 227,028     |         |               | $ | 237,852 |        
|                                                     |                                                        |   |             |         |               |   |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY                
|Current liabilities:                                 |                                                        |   |             |         |               |   |         |        
|                                                     | Accounts payable                                       |   | $           | 13,723  |               |   | $       | 7,285   |  
|                                                     | Accounts payable to related parties (See Note 13)      |   |             | 3,058   |               |   |         | 854     |  
|                                                     | Accrued compensation and benefits                      |   |             | 3,633   |               |   |         | 3,510   |  
|                                                     | Accrued expenses                                       |   |             | 5,320   |               |   |         | 7,801   |  
|                                                     | Income tax payable                                     |   |             | 70      |               |   |         | 3,651   |  
|                                                     | Current portion of long-term obligations               |   |             | 164     |               |   |         | 156     |  
|                                                     |                                                        |   |             |         |               |   |         |        
|Total current liabilities                            |                                                        |   | 25,968      |         |               |   | 23,257  |        
|Long-term obligations                                |                                                        |   | 74          |         |               |   | 158     |        
|Minority interest                                    |                                                        |   | 121         |         |               |   |        |        
|Stockholders equity:                                |                                                        |   |             |         |               |   |         |        
|                                                     | Common stock                                           |   |             | 3       |               |   |         | 3       |  
|                                                     | Additional paid-in capital                             |   |             | 229,713 |               |   |         | 221,502 |  
|                                                     | Accumulated deficit                                    |   |             | (22,295 | )             |   |         | (1,711  | )
|                                                     | Unearned compensation                                  |   |             | (867    | )             |   |         |        |  
|                                                     | Accumulated comprehensive loss                         |   |             | (5,689  | )             |   |         | (5,357  | )
|                                                     |                                                        |   |             |         |               |   |         |        
|Total stockholders equity                           |                                                        |   | 200,865     |         |               |   | 214,437 |        
|                                                     |                                                        |   |             |         |               |   |         |        
|Total liabilities and stockholders equity           |                                                        | $ | 227,028     |         |               | $ | 237,852 |        
|                                                     |                                                        |   |             |         |               |   |         |        




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

3



---



##### Table of Contents






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

|                                                             |                                                                           |                                       |        |                  |        |      |         |         |         |  
|------------------------------------------------------------ | ------------------------------------------------------------------------- | ------------------------------------- | ------ | ---------------- | ------ | ---- | ------- | ------- | ------- | -
|                                                             |                                                                           |                                       |        | Six Months Ended
|                                                             |                                                                           |                                       |        | March 31,       
|                                                             |                                                                           |                                       |        |                 
|                                                             |                                                                           |                                       |        | 2002             |        | 2001
|                                                             |                                                                           |                                       |        |                  |        |     
|Cash flows from operating activities                         |                                                                           |                                       |        |                  |        |      |         |        
|                                                             | Net income (loss)                                                         |                                       | $      | (20,584          | )      |      | $       | 29,544  |        
|                                                             | Depreciation and amortization                                             |                                       |        | 1,882            |        |      |         | 1,597   |        
|                                                             | Amortization of intangibles and unearned compensation                     |                                       |        | 52               |        |      |         |        |        
|                                                             | In-process technology charge                                              |                                       |        | 4,689            |        |      |         |        |        
|                                                             | Gain on sale of investments                                               |                                       |        | (35              | )      |      |         | (28,763 | )      
|                                                             | Loss on impairment of investment                                          |                                       |        | 150              |        |      |         |        |        
|                                                             | Equity in (net income) loss of affiliated companies                       |                                       |        | 4,435            |        |      |         | (5,318  | )      
|                                                             | Minority interest in net loss of consolidated subsidiary                  |                                       |        | (24              | )      |      |         |        |        
|                                                             | Net effect of changes in current and other assets and current liabilities |                                       |        | 12,489           |        |      |         | 4,209   |        
|                                                             |                                                                           |                                       |        |                  |        |      |         |        
|                                                             |                                                                           | Cash provided by operating activities |        |                  | 3,054  |      |         |         | 1,269   |  
|Cash flows from investing activities                         |                                                                           |                                       |        |                  |        |      |         |        
|                                                             | Capital expenditures                                                      |                                       |        | (3,929           | )      |      |         | (2,770  | )      
|                                                             | Purchases of available-for-sale securities                                |                                       |        | (13,050          | )      |      |         | (71,500 | )      
|                                                             | Sales of available-for-sale securities                                    |                                       |        | 24,850           |        |      |         | 17,100  |        
|                                                             | Proceeds from partial sale of Integrated Circuit Solution, Inc. (ICSI)  |                                       |        | 64               |        |      |         | 13,250  |        
|                                                             | Proceeds from joint venture partner                                       |                                       |        | 145              |        |      |         |        |        
|                                                             | Investment in Purple Ray                                                  |                                       |        | (192             | )      |      |         |        |        
|                                                             | Investment in Semiconductor Manufacturing International Corp. (SMIC)    |                                       |        | (11,352          | )      |      |         | (14,250 | )      
|                                                             | Proceeds from the sale of Wafertech                                       |                                       |        |                 |        |      |         | 40,669  |        
|                                                             | Proceeds from partial sale of NexFlash                                    |                                       |        |                 |        |      |         | 6,167   |        
|                                                             | Other investments                                                         |                                       |        | (16              | )      |      |         | (3,320  | )      
|                                                             |                                                                           |                                       |        |                  |        |      |         |        
|                                                             |                                                                           | Cash used in investing activities     |        |                  | (3,480 | )    |         |         | (14,654 | )
|Cash flows from financing activities                         |                                                                           |                                       |        |                  |        |      |         |        
|                                                             | Proceeds from issuance of common stock                                    |                                       |        | 1,332            |        |      |         | 1,993   |        
|                                                             | Principal payments on notes payable and long-term obligations             |                                       |        | (76              | )      |      |         | (68     | )      
|                                                             |                                                                           |                                       |        |                  |        |      |         |        
|                                                             |                                                                           | Cash provided by financing activities |        |                  | 1,256  |      |         |         | 1,925   |  
|                                                             |                                                                           |                                       |        |                  |        |      |         |        
|Effect of exchange rate changes on cash and cash equivalents |                                                                           |                                       | (83    | )                |        |      |        |        
|Net increase (decrease) in cash and cash equivalents         |                                                                           |                                       | 747    |                  |        |      | (11,460 | )      
|Cash and cash equivalents at beginning of period             |                                                                           |                                       | 19,309 |                  |        |      | 38,778  |        
|                                                             |                                                                           |                                       |        |                  |        |      |         |        
|Cash and cash equivalents at end of period                   |                                                                           | $                                     | 20,056 |                  |        | $    | 27,318  |        
|                                                             |                                                                           |                                       |        |                  |        |      |         |        

See accompanying notes to condensed consolidated financial statements.

4



---



##### Table of Contents






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



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

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

Operating results for the six months ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2002 or for any other period. The financial statements included
herein should be read in conjunction with the Companys Annual Report on Form
10-K for the fiscal year ended September 30, 2001.



|2. |  | Concentrations
|-- |  | --------------

In the three and six month periods ended March 31, 2002, no single
customer accounted for over 10% of net sales. Sales to Flextronics
International accounted for approximately 18% of total net sales for the three
months ended March 31, 2001 and approximately 16% of total net sales for the
six months ended March 31, 2001. Substantially all of the sales to Flextronics
were for products to be delivered to Cisco Systems, Inc.



|3. |  | Cash, Cash Equivalents and Short-term Investments
|-- |  | -------------------------------------------------

Cash, cash equivalents and short-term investments consisted of the
following: (In thousands)

|                                         |  |           |         |               |  |   |         | 
|---------------------------------------- |  | --------- | ------- | ------------- |  | - | ------- | 
|                                         |  | March 31, |         | September 30,
|                                         |  | 2002      |         | 2001         
|                                         |  |           |         |              
|Cash                                     |  | $         | 14,461  |               |  | $ | 14,280  | 
|Money market instruments                 |  |           | 5,595   |               |  |   | 5,029   | 
|Municipal bonds due in more than 3 years |  |           | 91,750  |               |  |   | 103,550 | 
|                                         |  |           |         |               |  |   |         | 
|                                         |  | $         | 111,806 |               |  | $ | 122,859 | 
|                                         |  |           |         |               |  |   |         | 



|4. |  | Inventories
|-- |  | -----------

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

|                     |  |          |        |               |  |   |        | 
|-------------------- |  | -------- | ------ | ------------- |  | - | ------ | 
|                     |  | March 31 |        | September 30,
|                     |  | 2002     |        | 2001         
|                     |  |          |        |              
|Purchased components |  | $        | 11,695 |               |  | $ | 12,350 | 
|Work-in-process      |  |          | 875    |               |  |   | 594    | 
|Finished goods       |  |          | 19,108 |               |  |   | 32,235 | 
|                     |  |          |        |               |  |   |        | 
|                     |  | $        | 31,678 |               |  | $ | 45,179 | 
|                     |  |          |        |               |  |   |        | 

5



---



##### Table of Contents



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



|5. |  | Other Assets
|-- |  | ------------

Other assets consisted of the following: (In thousands)

|                   |  |           |        |               |  |   |        | 
|------------------ |  | --------- | ------ | ------------- |  | - | ------ | 
|                   |  | March 31, |        | September 30,
|                   |  | 2002      |        | 2001         
|                   |  |           |        |              
|Investment in ICSI |  | $         | 18,169 |               |  | $ | 22,805 | 
|Investment in SMIC |  |           | 30,202 |               |  |   | 18,850 | 
|Other              |  |           | 8,046  |               |  |   | 5,467  | 
|                   |  |           |        |               |  |   |        | 
|                   |  | $         | 56,417 |               |  | $ | 47,122 | 
|                   |  |           |        |               |  |   |        | 



|6. |  | Income Taxes
|-- |  | ------------

The benefit for income taxes for the six month period ended March 31, 2002
reflects a benefit for alternative minimum taxes provided for the fiscal year
ended September 30, 2001 which can be recovered based on changes in the tax
law. The provision for income taxes for the six month period ended March 31,
2001 is principally comprised of taxes on U.S. earnings and to a lesser extent
taxes on foreign earnings. The effective tax rate of 25% for the six months
ended March 31, 2001 differs from the federal statutory rate as a result of
the reversal of valuation allowances previously established.



|7. |  | Net Income (Loss) Per Share
|-- |  | ---------------------------

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

|                                                             |                                            |   |                    |        |                  |   |        |        |      |   |         |        |  |   |        |        | 
|------------------------------------------------------------ | ------------------------------------------ | - | ------------------ | ------ | ---------------- | - | ------ | ------ | ---- | - | ------- | ------ |  | - | ------ | ------ | 
|                                                             |                                            |   | Three Months Ended |        | Six Months Ended
|                                                             |                                            |   | March 31,          |        | March 31,       
|                                                             |                                            |   |                    |        |                 
|                                                             |                                            |   | 2002               |        | 2001             |   | 2002   |        | 2001
|                                                             |                                            |   |                    |        |                  |   |        |        |     
|Numerator for basic and diluted net income (loss)
per share: |                                            |   |                    |        |                  |   |        |        |      |   |         |        |  |   |        |       
|Net income (loss)                                            |                                            | $ | (10,646            | )      |                  | $ | 4,469  |        |      | $ | (20,584 | )      |  | $ | 29,544 |       
|                                                             |                                            |   |                    |        |                  |   |        |        |      |   |         |        |  |   |        |       
|Denominator for basic net income (loss) per share:           |                                            |   |                    |        |                  |   |        |        |      |   |         |        |  |   |        |       
|                                                             | Weighted average common shares outstanding |   |                    | 26,954 |                  |   |        | 26,093 |      |   |         | 26,776 |  |   |        | 25,957 | 
|Dilutive stock options                                       |                                            |   |                   |        |                  |   | 1,704  |        |      |   |        |        |  |   | 1,609  |       
|Dilutive warrants                                            |                                            |   |                   |        |                  |   |       |        |      |   |        |        |  |   | 36     |       
|                                                             |                                            |   |                    |        |                  |   |        |        |      |   |         |        |  |   |        |       
|Denominator for diluted net income (loss) per
share          |                                            |   | 26,954             |        |                  |   | 27,797 |        |      |   | 26,776  |        |  |   | 27,602 |       
|                                                             |                                            |   |                    |        |                  |   |        |        |      |   |         |        |  |   |        |       
|Basic net income (loss) per share                            |                                            | $ | (0.39              | )      |                  | $ | 0.17   |        |      | $ | (0.77   | )      |  | $ | 1.14   |       
|                                                             |                                            |   |                    |        |                  |   |        |        |      |   |         |        |  |   |        |       
|Diluted net income (loss) per share                          |                                            | $ | (0.39              | )      |                  | $ | 0.16   |        |      | $ | (0.77   | )      |  | $ | 1.07   |       
|                                                             |                                            |   |                    |        |                  |   |        |        |      |   |         |        |  |   |        |       

The above diluted calculation for the three months ended March 31, 2002
and March 31, 2001 does not include approximately 4,739,000 and 904,000 shares
attributable to options as of March 31, 2002 and 2001, respectively, as their
impact would be anti-dilutive. The above diluted calculation for the six months
ended March 31, 2002 and 2001, does not include approximately 4,740,000 and
912,000 shares attributable to options as of March 31, 2002 and 2001,
respectively, as their impact would be anti-dilutive.

6



---



##### Table of Contents



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



|8. |  | Use of Estimates
|-- |  | ----------------

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



|9. |  | Impact of Recently Issued Accounting Standards
|-- |  | ----------------------------------------------

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



|10. |  | Litigation
|--- |  | ----------

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

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

As a result of the termination of the antidumping case, the Company
reversed amounts previously expensed to cost of goods sold of approximately
$5.2 million of which approximately $3.6 million had been cash payments and
$1.6 million was accrued as a liability. At March 31, 2002, approximately $2.5
million of cash deposits had yet to be refunded and is included in other
current assets.

7



---



##### Table of Contents



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



|11. |  | Long Term Obligations
|--- |  | ---------------------

The Company leases certain of its equipment under a capital lease. The
lease is collateralized by the underlying assets. At March 31, 2002, property
and equipment with a cost of $600,000 was subject to this financing
arrangement. Related accumulated amortization at March 31, 2002 amounted to
$350,000. Under the terms of the lease, the Company owes monthly payments of
$15,108 through September 1, 2003. Remaining principle and interest payments
were $238,000 and $19,000, respectively, at March 31, 2002.



|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:

|          |                 |  |                  |        |      |  |   |         | 
|--------- | --------------- |  | ---------------- | ------ | ---- |  | - | ------- | 
|          |                 |  | Six months ended
|          |                 |  | March 31,       
|          |                 |  |                 
|          |                 |  | 2002             |        | 2001
|          |                 |  |                  |        |     
|          |                 |  | (In thousands)  
|Net Sales |                 |  |                  |        |      |  |   |        
|          | United States   |  | $                | 12,200 |      |  | $ | 63,416  | 
|          | China           |  |                  | 4,610  |      |  |   | 4,372   | 
|          | Taiwan          |  |                  | 3,758  |      |  |   | 439     | 
|          | Hong Kong       |  |                  | 2,908  |      |  |   | 8,539   | 
|          | Asia other      |  |                  | 3,437  |      |  |   | 10,173  | 
|          | Europe          |  |                  | 4,522  |      |  |   | 29,637  | 
|          | Other           |  |                  | 294    |      |  |   | 676     | 
|          |                 |  |                  |        |      |  |   |        
|          | Total net sales |  | $                | 31,729 |      |  | $ | 117,252 | 
|          |                 |  |                  |        |      |  |   |        

|                  |                         |  |                |        |               |  |   |       | 
|----------------- | ----------------------- |  | -------------- | ------ | ------------- |  | - | ----- | 
|                  |                         |  | March 31,      |        | September 30,
|                  |                         |  | 2002           |        | 2001         
|                  |                         |  |                |        |              
|                  |                         |  | (In thousands)
|Long-lived assets |                         |  |                |        |               |  |   |      
|                  | United States           |  | $              | 9,070  |               |  | $ | 6,634 | 
|                  | Hong Kong               |  |                | 507    |               |  |   | 566   | 
|                  | China                   |  |                | 567    |               |  |   | 463   | 
|                  | Other foreign locations |  |                | 296    |               |  |   |      | 
|                  |                         |  |                |        |               |  |   |      
|                  | Total long-lived assets |  | $              | 10,440 |               |  | $ | 7,663 | 
|                  |                         |  |                |        |               |  |   |      



|13. |  | Related Party Transactions
|--- |  | --------------------------

For the six months ended March 31, 2002 and March 31, 2001, the Company
sold approximately $819,000 and $185,000, 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 March 31, 2002 and
September 30, 2001, the Company had an accounts receivable balance from
ICSI of approximately $136,000 and $327,000, respectively.

8



---



##### Table of Contents



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

The Company purchases goods and contract manufacturing services from ICSI.
For six months ended March 31, 2002 and March 31, 2001, purchases of goods and
services were approximately $1,537,000 and $11,049,000, respectively. The
Company also pays ICSI for certain product development costs and license fees.
At March 31, 2002 and September 30, 2001, the Company had an accounts payable
balance to ICSI of approximately $2,787,000 and $551,000, respectively.

The Company provides NexFlash various administrative support services for
which it is reimbursed. In addition, the Company received approximately $83,000
in sublease income from NexFlash in the six months ended March 31, 2001. The
Company currently has approximately a 14% ownership interest in NexFlash. The
Companys Chairman and CEO, Jimmy S.M. Lee, is a director of NexFlash. At March
31, 2002 and September 30, 2001, the Company had an accounts receivable balance
from NexFlash of approximately $4,000 and $81,000, respectively.

The Company provides goods and services to GetSilicon in which the Company
currently has approximately a 20% ownership interest. The Companys Chairman
and CEO, Jimmy S.M. Lee, is the Chairman of GetSilicon. For the six months
ended March 31, 2002 and March 31, 2001, the Company provided goods and
services of approximately $78,000 and $302,000, respectively, to GetSilicon. At
March 31, 2002 and September 30, 2001, the Company had an accounts receivable
balance from GetSilicon of approximately $11,000 and $30,000, respectively.

The Company engages GetSilicon for business-to-business data exchange and
professional services. For the six months ended March 31, 2002 and March
31,2001, the purchase of services was approximately $229,000 and $110,000,
respectively. At March 31, 2002 and September 30, 2001, the Company had an
accounts payable balance to GetSilicon of approximately $0 and $32,000,
respectively.

For the six months ended March 31, 2002, the Company sold approximately
$214,000 of memory products to E-CMOS in which the Company currently has
approximately a 22% ownership interest. The Companys Chairman and CEO, Jimmy
S.M. Lee, is the Chairman of E-CMOS. At March 31, 2002 and September 30, 2001,
the Company had an accounts receivable balance from E-CMOS of approximately
$61,000 and $159,000, respectively.

The Company receives administrative support services and reimburses E-CMOS
for expenses incurred on its behalf. At both March 31, 2002 and September 30,
2001, the Company had an accounts payable balance to E-CMOS of approximately
$271,000.

For the six months ended March 31, 2002, the Company sold approximately
$254,000 of memory products to Marubun USA Corporation (Marubun). Hide L.
Tanigami, a director of the Company, is the president and chief executive
officer of Marubun. At March 31, 2002, the Company had an accounts receivable
balance from Marubun of approximately $201,000.

9



---



##### Table of Contents



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



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

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

|                                                |  |           |        |               |  |   |        | 
|----------------------------------------------- |  | --------- | ------ | ------------- |  | - | ------ | 
|                                                |  | March 31, |        | September 30,
|                                                |  | 2002      |        | 2001         
|                                                |  |           |        |              
|Current assets                                  |  | $         | 62,070 |               |  | $ | 76,624 | 
|Property, plant, and equipment and other assets |  |           | 48,423 |               |  |   | 51,345 | 
|Current liabilities                             |  |           | 36,499 |               |  |   | 34,181 | 
|Long-term debt                                  |  |           | 5,442  |               |  |   | 9,352  | 

|                    |  |                  |         |      |  |   |        | 
|------------------- |  | ---------------- | ------- | ---- |  | - | ------ | 
|                    |  | Six Months Ended
|                    |  | March 31,       
|                    |  |                 
|                    |  | 2002             |         | 2001
|                    |  |                  |         |     
|Net sales           |  | $                | 33,638  |      |  | $ | 82,059 | 
|Gross profit (loss) |  |                  | (7,058  | )    |  |   | 28,705 | 
|Net income (loss)   |  |                  | (14,265 | )    |  |   | 16,965 | 

The Company accounts for investments in 50 percent or less owned companies
over which it has the ability to exercise significant influence using the
equity method of accounting. The Company periodically reviews these
investments for other-than-temporary declines in market value and writes these
investments to their fair value when an other-than-temporary decline has
occurred.

10



---



##### Table of Contents



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



|15. |  | Acquisition of Purple Ray
|--- |  | -------------------------

On February 13, 2002, the Company acquired 100 percent of the outstanding
shares of Purple Ray, Inc. (Purple Ray) through a merger of Purple Ray with
and into ISSI pursuant to the terms of an Agreement and Plan of Reorganization
dated January 23, 2002. The results of Purple Rays operations have been
included in the consolidated financial statements since that date.

Purple Ray was a privately held research and development stage company
developing network search engine and content addressable memory integrated
circuits. We acquired Purple Ray primarily to diversify our product offerings
and by acquiring an existing design team rather than trying to develop our own
capability internally, we have shortened the time to market for the new
products. Purple Ray designs integrated circuits that enable network systems
to retrieve data bytes on a simultaneous basis, with up to four simultaneous
addressable searches per cycle. Current network search engines typically
retrieve data bytes at a rate of one search per cycle. The new Purple Ray
search engines are expected to achieve up to 533 million searches per second,
which is sufficient to support OC192 and beyond data communication equipment.
Potential customers for these search products include all of the major network
system manufactures. The search products are synergistic to our existing SRAM
and DRAM products and are expected to be value-added, sole-source products
designed in collaboration with our customers, which should allow them to
command high gross margins and will deepen our relationships with targeted
customers and potentially provide opportunities to supply other of our products
to these same customers.

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

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

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

11



---



##### Table of Contents



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

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

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

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

Pro forma Financial Information

The pro forma financial information
presented below is presented as if the acquisition of Purple Ray had
occurred at the beginning of fiscal 2001. The pro forma statements of
operations for the three and six months ended March 31, 2002 and
2001, include the historical results of the Company and Purple Ray
plus the effect of recurring amortization of the related intangibles
and unearned compensation. Such pro forma results do not purport to
be indicative of what would have occurred had the acquisition been
made as of those dates or the results which may occur in the future.
The pro forma financial results are as follows:

|                                             |  |                    |        |                  |  |      |        |      |  |   |         |   |  |   |         | 
|-------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | 
|                                             |  | Three Months Ended |        | Six Months Ended
|                                             |  | March 31,          |        | March 31,       
|                                             |  |                    |        |                 
|                                             |  | 2002               |        | 2001             |  | 2002 |        | 2001
|                                             |  |                    |        |                  |  |      |        |     
|                                             |  | (In thousands)    
|Net sales                                    |  | $                  | 16,638 |                  |  | $    | 52,023 |      |  | $ | 31,729  |   |  | $ | 117,252 | 
|Net income (loss)                            |  | $                  | (6,391 | )                |  | $    | 3,965  |      |  | $ | (16,970 | ) |  | $ | 28,724  | 
|                                             |  |                    |        |                  |  |      |        |      |  |   |         |   |  |   |         | 
|Basic net income (loss) per share            |  | $                  | (0.24  | )                |  | $    | 0.15   |      |  | $ | (0.63   | ) |  | $ | 1.09    | 
|                                             |  |                    |        |                  |  |      |        |      |  |   |         |   |  |   |         | 
|Shares used in basic per share calculation   |  |                    | 27,163 |                  |  |      | 26,531 |      |  |   | 27,100  |   |  |   | 26,395  | 
|                                             |  |                    |        |                  |  |      |        |      |  |   |         |   |  |   |         | 
|Diluted net income (loss) per share          |  | $                  | (0.24  | )                |  | $    | 0.14   |      |  | $ | (0.63   | ) |  | $ | 1.02    | 
|                                             |  |                    |        |                  |  |      |        |      |  |   |         |   |  |   |         | 
|Shares used in diluted per share calculation |  |                    | 27,163 |                  |  |      | 28,235 |      |  |   | 27,100  |   |  |   | 28,040  | 
|                                             |  |                    |        |                  |  |      |        |      |  |   |         |   |  |   |         | 

12



---



##### Table of Contents






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

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

Background

Integrated Silicon Solution, Inc. was founded in October 1988. We design,
develop and market high performance memory semiconductors used in Internet
access devices, networking equipment, telecom and mobile communications
equipment, computer peripherals and other applications. Our high speed and low
power SRAMs, our low to medium density DRAMs, and our family of EEPROMs enable
customers to design products that meet the demanding connectivity and
portability requirements of the wireless communications, data communications,
and internet infrastructure markets. Our objective is to capitalize on major
trends such as the proliferation of wireless devices, the expansion of the
communications and Internet infrastructure, and other trends in electronics
technologies. Our goal is to be a focused supplier of high performance memories
targeting the connectivity and communications 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. Through this
collaborative strategy, we have been at the forefront in utilizing the most
advanced process technology for memories and in securing access to wafer
capacity. We believe that ISSI is a technology leader and that our ability to
design and develop high performance, cost-effective products, and our
collaborative development with our manufacturing partners utilizing
state-of-the-art process technology, gives us a competitive advantage.

Results of Operations

Our financial results for fiscal 2002 and fiscal 2001 reflect accounting
for Integrated Circuit Solution, Inc. (ICSI) on the equity basis and include
our percentage share of the results of their operations. Our financial results
for fiscal 2002 and fiscal 2001 reflect accounting for E-CMOS Technology
Corporation (E-CMOS) on the equity basis and include our share of their
results of operations on a one quarter lag. Effective October 2001, we account
for GetSilicon, Inc. (GetSilicon) on the cost basis as our ownership became
less than 20%. Our financial results for fiscal 2001 reflect accounting for
GetSilicon on the equity basis and include our percentage share of the results
of their operations. Our financial results for fiscal 2001 through the period
ended January 31, 2001 reflect accounting for NexFlash Technologies, Inc.
(NexFlash) on the equity basis and include our percentage share of the
results of NexFlashs operations. Effective February 2001, our ownership of
NexFlash became less than 20%, and we began accounting for NexFlash on the cost
basis. At March 31, 2002, we owned approximately 29% of ICSI, approximately 14%
of NexFlash, approximately 22% of E-CMOS and approximately 20% of GetSilicon.

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

Net Sales. Net sales consist principally of total product sales less
estimated sales returns. Net sales decreased by 68% to $16.6 million in the
three months ended March 31, 2002 from $52.0 million in the three months ended
March 31, 2001. The decrease in sales was principally due to a decrease in unit
shipments of our SRAM products, specifically our 32K x 32, 256K and 64K x 16
SRAM products, as well as decreased unit shipments of 2 and 8 megabit DRAM
products. In addition, there was a significant decline in the average selling
prices of our products in the three months ended March 31, 2002 compared to the
three months ended March 31,

13



---



##### Table of Contents



2001. We anticipate that the average selling
prices of our existing products will generally decline over time, although the
rate of decline may fluctuate for certain products. In this regard, we also
experienced a decline in the average selling prices for certain of our products
in the three months ended March 31, 2002 compared to the three months ended
December 31, 2001. 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 March 31, 2002, no single customer accounted for
over 10% of net sales. Sales to Flextronics International accounted for
approximately 18% of total net sales for the three months ended March 31, 2001.
Substantially all of the sales to Flextronics were for products to be delivered
to Cisco Systems, Inc. Shipments for Cisco directly, or indirectly through
subcontractors, accounted for approximately 21% of total net sales for the
three months ended March 31, 2001. Sales to 3Com accounted for approximately 6%
of total net sales for the three months ended March 31, 2001. Shipments for
3Com directly, or indirectly through subcontractors, accounted for
approximately 11% of total net sales for the three months ended March 31, 2001.
As sales to these customers are executed pursuant to purchase orders and no
purchasing contract exists, these customers can cease doing business with us at
any time.

Gross Profit. Cost of sales includes die cost from the wafers acquired
from foundries, subcontracted package costs, assembly costs and test costs,
costs associated with in-house product testing, and quality assurance. Gross
profit decreased 13% to $3.0 million in the three months ended March 31, 2002
from $3.5 million in the three months ended March 31, 2001. As a percentage of
net sales, gross profit increased to 18.1% in the three months ended March 31,
2002 from 6.6% in the three months ended March 31, 2001. As a result of the
termination of the antidumping case, our gross margin for the three months
ended March 31, 2002, benefited from the reversal of approximately $5.2 million
in antidumping duties previously charged to cost of sales. In addition in the
three months ended March 31, 2002, we recorded an inventory write-down of
approximately $4.4 million predominately for lower of cost or market accounting
on certain of our DRAM and SRAM products. In the three months ended March 31,
2001, we recorded an inventory write-down of $11.7 million predominately for
lower of cost or market accounting on certain of our products, primarily DRAMs
and low power SRAMs. Excluding the inventory write-downs and the benefit of the
reversal of antidumping duties, the decrease in gross profit was principally
due to a decrease in unit shipments of our SRAM products, specifically our 32K
x 32, 256K and 64K x 16 SRAM products, as well as decreased unit shipments of 2
and 8 megabit DRAM products.
In addition, as we sell products that had previously been written-down to lower
of cost or market, we recognize minimal gross profit. We believe that the
average selling 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 products in the three months
ended March 31, 2002 compared to the three months ended December 31, 2001. In
addition, product unit costs could increase if our suppliers raise prices,
which could result in a material decline in our gross margin. Although we have
product cost reduction programs in place for certain products that involve
efforts to reduce internal costs and supplier costs, there can be no assurance
that product costs will be reduced or that such reductions will be sufficient
to offset the expected declines in average selling prices. We do not believe
that such cost reduction efforts are likely to have a material adverse impact
on the quality of our products or the level of service provided by us.

Research and Development. Research and development expenses increased by
8% to $7.2 million in the three months ended March 31, 2002 from $6.6 million
in the three months ended March 31, 2001. As a percentage of net sales,
research and development expenses increased to 43.0% in the three months ended
March 31, 2002 from 12.7% in the three months ended March 31, 2001. The
increase in absolute dollars was primarily the result of increases resulting
from the acquisition of Purple Ray and the expansion of our research and
development activities in Asia. We anticipate that our research and development
expenses will increase in absolute dollars in future periods, although such
expenses may fluctuate as a percentage of net sales.

Selling, General and Administrative. Selling, general and administrative
expenses decreased by 27% to $4.3 million in the three months ended March 31,
2002 from $5.9 million in the three months ended March 31, 2001. As a
percentage of net sales, selling, general and administrative expenses increased
to 25.9% in the three
months ended March 31, 2002 from 11.3% in the three months ended March 31,
2001. The decrease in absolute dollars was primarily the result of decreased
selling commissions associated with lower revenues in the

14



---



##### Table of Contents



three months ended
March 31, 2002 compared to the three months ended March 31, 2001. We expect our
selling, general and administrative expenses may increase in future quarters
although such expenses may fluctuate as a percentage of net sales.

In-process Technology. On February 13, 2002, we acquired Purple Ray, Inc.,
a privately held research and development stage company developing network
search engine and content addressable memory integrated circuits. The assets
of Purple Ray consisted primarily of intellectual property. The transaction
was accounted for using the purchase method of accounting. The total estimated
purchase price of $7.1 million consisted of the fair market value of ISSIs
common stock issued of $5.2 million, the fair value of options to purchase
Purple Ray common stock assumed by ISSI of $1.7 million and estimated
transaction costs of $0.2 million. The transaction resulted in an in-process
technology charge of $4.7 million in our March 31, 2002 quarter.

Gain on sale of investments.The gain on sale of investments decreased by
$11.6 million to $0 in the three months ended March 31, 2002 from $11.6 million
in the three months ended March 31, 2001. In the three months ended March 31,
2001, we recorded gross proceeds of approximately $8.1 million and a gain of
approximately $6.3 million in connection with the sale of shares of ICSI and
gross proceeds of approximately $6.2 million and a gain of approximately $5.3
million in connection with the sale of shares of NexFlash.

Other income (expense), net.Other income (expense), net decreased by $1.0
million to approximately $0.8 million in the three months ended March 31, 2002
from $1.8 million in the three months ended March 31, 2001. The decrease was
primarily the result of decreased interest income as the result of the decline
in interest rates.

Provision (benefit) for income taxes.The benefit for income taxes for the
three month period ended March 31, 2002 reflects a benefit for alternative
minimum taxes provided for the fiscal year ended September 30, 2001 which can
be recovered based on changes in the tax law. The provision for income taxes
for the three month period ended March 31, 2001 is principally comprised of
taxes on U.S. earnings. The effective tax rate of 25% for the three months
ended March 31, 2001 differs from the federal statutory rate as a result of the
reversal of valuation allowances previously established.

Equity in net income (loss) of affiliated companies.Equity in net income
(loss) of affiliated companies decreased by $2.7 million to $(1.5) million in
the three months ended March 31, 2002 from $1.2 million in the three months
ended March 31, 2001. This primarily reflects a decrease in income from our
percentage share of ICSIs financial results in the three months ended March
31, 2002 compared to the three months ended March 31, 2001.

Six Months Ended March 31, 2002 Compared to Six Months Ended March 31, 2001

Net Sales. Net sales decreased by 73% to $31.7 million in the six months
ended March 31, 2002, from $117.3 million in the six months ended March 31,
2001. The decrease in sales was principally due to a decrease in unit shipments
of our SRAM products, specifically our 256K, 32K x 32, 64K x 16, and 1024K SRAM
products, as well as decreased unit shipments of 8 and 16 megabit DRAM
products. In addition, the average selling prices of our SRAM and DRAM products
declined significantly in the six months ended March 31, 2002 compared to the
six months ended March 31, 2001. We anticipate that the average selling prices
of our existing products will generally decline over time, although the rate of
decline may fluctuate for certain products. In this regard, we also experienced
a decline in the average selling prices for certain of our products in the
three months ended March 31, 2002 compared to the three months ended December
31, 2001. There can be no assurance that such declines will be offset by higher
volumes or by higher prices on newer products.

In the six months ended March 31, 2002, no single customer accounted for
over 10% of net sales. Sales to Flextronics International accounted for
approximately 16% of total net sales for the six months ended March 31, 2001.
Substantially all of the sales to Flextronics were for products to be delivered
to Cisco Systems, Inc.
Shipments for Cisco directly, or indirectly through subcontractors,
accounted for approximately 18% of total net sales for the six months ended
March 31, 2001. Sales to one customer, 3Com, accounted for approximately 8% of
total net sales for the six months ended March 31, 2001. Shipments for 3Com
directly, or

15



---



##### Table of Contents



indirectly through subcontractors, accounted for approximately 12%
of total net sales for the six months ended March 31, 2001. As sales to these
customers are executed pursuant to purchase orders and no purchasing contract
exists, these customers can cease doing business with us at any time.

Gross Profit. Gross profit decreased 78% to $5.7 million in the six
months ended March 31, 2002, from $25.6 million in the six months ended March
31, 2001. As a percentage of net sales, gross profit decreased to 17.9% in the
six months ended March 31, 2001 from 21.9% in the six months ended March 31,
2001. As a result of the termination of the antidumping case, our gross margin
for the three months ended March 31, 2002, benefited from the reversal of
approximately $5.2 million in antidumping duties previously charged to cost of
sales. In addition in the three months ended March 31, 2002, we recorded an
inventory write-down of approximately $4.4 million predominately for lower of
cost or market accounting on certain of our DRAM and SRAM products. In the
three months ended March 31, 2001, we recorded an inventory write-down of $11.7
million predominately for lower of cost or market accounting on certain of our
products, primarily DRAMs and low power SRAMs. Excluding the inventory
write-downs and the benefit of the reversal of antidumping duties, the decrease
in gross profit was principally due to a decrease in unit shipments of our SRAM
products, specifically our 256K, 32K x 32, 64K x 16, and 1024K SRAM products,
as well as decreased unit shipments of 8 and 16 megabit DRAM products. In
addition, as we sell products that had previously been written-down to lower of
cost or market, we recognize minimal gross profit. We believe that the average
selling 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 products in the three months ended
March 31, 2002 compared to the three months ended December 31, 2001. In
addition, product unit costs could increase if our suppliers raise prices,
which could result in a material decline in our gross margin. Although we have
product cost reduction programs in place for certain products that involve
efforts to reduce internal costs and supplier costs, there can be no assurance
that product costs will be reduced or that such reductions will be sufficient
to offset the expected declines in average selling prices. We do not believe
that such cost reduction efforts are likely to have a material adverse impact
on the quality of our products or the level of service provided by us.

Research and Development. Research and development expenses increased by
4% to $13.8 million in the six months ended March 31, 2002, from $13.3 million
in the six months ended March 31, 2001. As a percentage of net sales, research
and development expenses increased to 43.5% in the six months ended March 31,
2002, from 11.4% in the six months ended March 31, 2001. The increase in
absolute dollars was the result of increased expenses related to the
development of new products, the acquisition of Purple Ray and the expansion of
our research and development activities in Asia partially offset by decreases
in payroll related expenses.

Selling, General and Administrative. Selling, general and administrative
expenses decreased by 34% to $8.0 million in the six months ended March 31,
2002 from $12.1 million in the six months ended March 31, 2001. As a
percentage of net sales, selling, general and administrative expenses increased
to 25.1% in the six months ended March 31, 2002, from 10.3% in the six months
ended March 31, 2001. The decrease in absolute dollars was primarily the result
of decreased selling commissions associated with lower revenues in the six
months ended March 31, 2002 compared to the six months ended March 31, 2001.
In addition, payroll related expenses decreased in the six months ended March
31, 2002 compared to the six months ended March 31, 2001 as a result of salary
reductions and reductions in headcount.

In-process Technology. On February 13, 2002, we acquired Purple Ray, Inc.
The assets of Purple Ray consisted primarily of intellectual property. The
transaction was accounted for using the purchase method of accounting. The
total estimated purchase price of $7.1 million consisted of the fair market
value of ISSIs common stock issued of $5.2 million, the fair value of options
to purchase Purple Ray common stock assumed by ISSI of $1.7 million and
estimated transaction costs of $0.2 million. The transaction resulted in an
in-process technology charge of $4.7 million in our March 31, 2002 quarter.

Gain on sale of investments.The gain on sale of investments decreased by
$28.7 million to $35,000 in the six
months ended March 31, 2002 from $28.8
million in the six months ended March 31, 2001. In the six

16



---



##### Table of Contents



months ended March
31, 2002, we sold shares of ICSI for approximately $64,000 resulting in a
pre-tax gain of $35,000. In the six months ended March 31, 2001 we sold our
interest in WaferTech to TSMC for approximately $40.7 million, which resulted
in a pre-tax gain of $17.2 million. We recorded gross proceeds of approximately
$8.1 million and a gain of approximately $6.3 million in connection with the
sale of shares of ICSI and gross proceeds of approximately $6.2 million and a
gain of approximately $5.3 million in connection with the sale of shares of
NexFlash.

Other income (expense), net. Other income (expense), net decreased by
$2.0 million to $1.3 million in the six months ended
March 31, 2002 from $3.4 million in the six months ended March 31, 2001. The decrease was primarily the
result of decreased interest income as the result of the decline in interest
rates.

Equity in net income (loss) of affiliated companies.Equity in net income
(loss) of affiliated companies decreased by $9.7 million to $(4.4) million in
the six months ended March 31, 2002 from $5.3 million in the six months ended
March 31, 2001. This primarily reflects a decrease in income from our
percentage share of ICSIs financial results in the six months ended March 31,
2002 compared to the six months ended March 31, 2001.

Provision (benefit) for Income Taxes.The benefit for income taxes for the
six month period ended March 31, 2002 reflects a benefit for alternative
minimum taxes provided for the fiscal year ended September 30, 2001 which can
be recovered based on changes in the tax law. The provision for income taxes
for the six month period ended March 31, 2001 is principally comprised of taxes
on U.S. earnings. The effective tax rate of 25% for the six months ended March
31, 2001 differs from the federal statutory rate as a result of the reversal of
valuation allowances previously established.

Liquidity and Capital Resources

As of March 31, 2002, our principal sources of liquidity included cash,
cash equivalents and short-term investments of approximately $111.8 million.
During the six months ended March 31, 2002, operating activities provided cash
of approximately $3.1 million. Cash provided by operations was primarily due to
net loss of $20.6 million adjusted for an in-process technology charge of $4.7
million, equity in net income of affiliated companies of $4.4 million,
depreciation of $1.9 million and other non-cash items of $0.1 million. In
addition, cash was provided by decreases in inventory of $13.5 million and
accounts receivable of $2.0 million and increases in accounts payable of $8.2
million. Cash was used for increases in other current assets of $3.6 million
and other assets of $1.6 million and decreases in income tax payable of $3.6
million and accrued liabilities of $2.5 million.

In the six months ended March 31, 2002, we used $3.5 million for investing
activities compared to $14.7 million in the six months ended March 31, 2001. In
the six months ended March 31, 2002 we made additional investments totaling
$11.4 million in Semiconductor Manufacturing International Corp (SMIC), a
foundry currently under construction in Shanghai, China. In addition, we had
net sales of available-for-sale securities of $11.8 million. The cash used for
investing activities during the six months ended March 31, 2001 was primarily
the result of net purchases of available-for-sale securities of $54.4 million.
In addition, we made investments of $14.3 million in SMIC and other investments
of $3.3 million including $2.8 million in E-CMOS. We generated $40.7 million
from the sale of our investment in WaferTech, $13.3 million from the sale of
shares of ICSI stock and $6.2 million from the sale of NexFlash shares.

In the six months ended March 31, 2002, we made capital expenditures of
approximately $3.9 million for engineering tools and computer software. In
addition, we acquired approximately $0.7 million in fixed assets with the acquisition
of Purple Ray. We expect to spend approximately $6.0 million to purchase
capital equipment during the next twelve months, principally for the purchase
of design and engineering tools, additional test equipment and computer
software and hardware.

We generated $1.3 million from financing activities during the six months
ended March 31, 2002 compared to $1.9 million in the six months ended March 31,
2001. Cash generated from financing activities for the six months
ended March 31, 2002 and March 31, 2001 was primarily the result of
proceeds from the issuance of common stock from option exercises and sales
under our employee stock purchase plan.

17



---



##### Table of Contents



In August 2000, we entered into a wafer fabrication facility investment
agreement with SMIC. Under the terms of this agreement, we committed to invest
$30.0 million. In April 2001, we committed to invest an additional $10.0
million. We have received certain wafer capacity commitments from SMIC. In the
six months ended March 31, 2002, we made investments totaling $11.4 million in
SMIC, bringing our total investment in this foundry as of March 31, 2002, to
$30.2 million. An additional $9.8 million is expected to be invested in fiscal
year 2002.

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

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

As a result of the termination of the antidumping case, we reversed
amounts previously expensed to cost of goods sold of approximately $5.2 million
of which approximately $3.6 million had been cash payments and $1.6 million was
accrued as a liability. At March 31, 2002, approximately $2.5 million of cash
deposits had yet to be refunded and is included in other current assets.

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

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;

18



---



##### Table of Contents





| |  |  | oversupply of memory products in the market;                                             
| | - |  | -----------------------------------------------------------------------------------------
|
| |  |  | our failure to introduce new products and to implement technologies on a timely basis;   
|
| |  |  | market acceptance of ours and our customers products;                                   
|
| |  |  | the failure to anticipate changing customer product requirements;                        
|
| |  |  | fluctuations in manufacturing yields;                                                    
|
| |  |  | failure to deliver products to customers on a timely basis;                              
|
| |  |  | disruption in the supply of wafers or assembly services;                                 
|
| |  |  | changes in product mix;                                                                  
|
| |  |  | the timing of significant orders;                                                        
|
| |  |  | increased expenses associated with new product introductions or process changes;         
|
| |  |  | the ability of customers to make payments to us; and                                     
|
| |  |  | the commencement of, or developments with respect to, any future antidumping proceedings.

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

We incurred losses of $10.6 million, $9.9 million, and $24.7 million in
the three months ended March 31, 2002, December 31, 2001 and September 30,
2001, respectively. We expect to incur a loss in the June 2002 quarter and may
incur losses in subsequent quarters. We were profitable for fiscal 2001 and
fiscal 2000. We incurred losses of $9.5 million and $50.6 million in fiscal
1999 and 1998, respectively. Our ability to achieve or maintain profitability
on a quarterly basis in the future will depend on a variety of factors,
including our ability to increase our net sales, introduce new products on a
timely basis, secure sufficient wafer fabrication capacity and control our
operating expenses. Adverse developments with respect to these or other factors
could result in quarterly or annual operating losses in the future.

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

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

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

A majority of our net sales are derived from the sale of SRAM products,
which are subject to unit volume fluctuations and declines in average selling
prices which could harm our business. For example, in the three
months ended September 30, 2001, our net sales decreased by
26% to $14.8
million from $20.0 million in the three months ended June 30, 2001, principally
due to a decline in average selling prices for our products including our SRAM
products. In addition, in the three months ended June 30, 2001, our net sales
decreased by

19



---



##### Table of Contents



62% to $20.0 million from $52.0 million in the three months ended
March 31, 2001, and decreased 20% in the three months ended March 31, 2001 from
$65.2 million in the three months ended December 31, 2000, principally due to a
decrease in unit shipments of our SRAM products as a result of lower demand for
electronic products. While average selling prices for certain SRAM products
declined in the three months ended March 31, 2002 compared to the three months
ended December 31, 2001, this was generally offset by an increase in units
shipped. We anticipate that the average selling prices of our existing products
will decline over time, although the rate of decline may fluctuate for certain
products. Such declines may not be offset by higher volumes or by higher prices
on newer products.

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

Competitive pricing pressures due to an industry-wide oversupply of wafer
capacity as well as product inventory resulted in significant price decreases
for our products during fiscal 1996 through fiscal 1999. While we experienced
increases in average selling prices in fiscal 2000, historically, average
selling prices for semiconductor memory products have declined, and we expect
that average selling prices will decline in the future. In that regard, we
experienced a decline in the average selling prices for certain of our products
in the three months ended March 31, 2002 compared to the three months ended
December 31, 2001. However, the decline in average selling prices was not as
significant in the March 2002 quarter as in the December 2001 quarter. Our
ability to maintain or increase revenues will depend upon our ability to
increase unit sales volume of existing products and introduce and sell new
products which compensate for the anticipated declines in the average selling
prices of our existing products.

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

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

Shifts in industry-wide capacity from shortages to oversupply or from
oversupply to shortages may result in significant fluctuations in our quarterly
or annual operating results. The semiconductor industry is highly cyclical and
is subject to significant downturns resulting from excess capacity,
overproduction, reduced demand or technological obsolescence. These factors can
result in a decline in average selling prices and the stated value of
inventory. In the three months ended March 31, 2002 and in fiscal 2001, we
recorded inventory write-downs of $4.4 million and $38.3 million, respectively.
The inventory write-downs were predominately for lower of cost or market
accounting on certain of our products, primarily DRAMs and low power SRAMs, 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 exposures, unless
adjustments are made to the forecast based on managements judgments for newer
products, end of life products or planned inventory increases. In making such
judgments to write down inventory, management takes into account the product
life cycles which can range from 6 to 30 months, the stage in the life cycle of
the product, the impact of competitors announcements and product introductions
on our products, and purchasing opportunities due to excess wafer capacity.

We believe that six months is an appropriate period because it is
difficult to accurately forecast for a specific product beyond this time frame
due to the potential introduction of products by competitors, technology
obsolescence or fluctuations in demand. Our policy regarding excess inventory
resulted in inventory write-downs for excess inventory of approximately $5.7
million 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

20



---



##### Table of Contents



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

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

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



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

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

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 six months ended March 31, 2002, no single customer accounted for
over 10% of net sales. Sales to Flextronics International accounted for
approximately 15% of net sales for fiscal 2001. Substantially all of our sales
to Flextronics were for products to be delivered to Cisco. Shipments for Cisco
directly, or indirectly through subcontractors, accounted for approximately 18%
of net sales for fiscal 2001. Sales to 3Com accounted for approximately 7% of
net sales for fiscal 2001. Shipments for 3Com directly, or indirectly through
subcontractors, accounted for approximately 11% of net sales for fiscal 2001.
In fiscal 2000, no single customer accounted for over 10% of net sales.
However, in fiscal 2000, shipments for Cisco directly, or indirectly through
subcontractors, accounted for approximately 13% of net revenue. As sales to
these customers are executed pursuant to purchase orders and no purchasing
contract exists, these customers can cease doing business with us at any time.
In this regard, we experienced order cancellations from these customers in the
March 2001 quarter. 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.

21



---



##### Table of Contents



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

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

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

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



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

22



---



##### Table of Contents



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 six months ended March 31, 2002 approximately 38% of our net sales
was attributable to customers located in the United States, 14% was
attributable to customers located in Europe and 46% was attributable to
customers located in Asia. In fiscal 2001, approximately 52% of our net sales
was attributable to customers located in the United States, 25% was
attributable to customers located in Europe and 23% was attributable to
customers located in Asia. Accordingly, our future operating results will
depend on general economic conditions in Asia, Europe, and the United States.
In addition, the markets for our products, which are highly cyclical, may not
continue to grow. We anticipate that sales to international customers will
continue to represent a significant percentage of net sales.

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



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

23



---



##### Table of Contents



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

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

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 will
issue up to 652,000 shares of our Common Stock in exchange for all outstanding
shares, warrants and options of Purple Ray. 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 key technical and
management personnel, including Jimmy S.M. Lee, Chairman and Chief Executive
Officer, and Gary L. Fischer, President and Chief Operating Officer, as well as
on our ability to continue to attract, retain and motivate qualified personnel,
particularly experienced circuit designers and process engineers. The
competition for such employees is intense. We have no employment contracts or
key person life insurance policies with or for any of our executive officers.
The loss of the service of one or more of our key personnel could materially
and adversely affect our business and operating results.

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

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

24



---



##### Table of Contents



Our stock price is expected to be volatile.

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



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

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




Item 3. Financial Market Risk

Our financial market risk includes risks associated with international
operations and related foreign currencies. We anticipate that international
sales will continue to account for a significant portion of our consolidated
revenue. Our international sales are largely denominated in U.S. dollars and
therefore are not subject to material foreign currency exchange risk. Expenses
of our international operations are denominated in each countrys local
currency and therefore are subject to foreign currency exchange risk; however,
through March 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 or use derivative
financial instruments.

We have short-term investments of $91.8 million at March 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 $1.1 million decrease in interest income.

25



---



##### Table of Contents



We own approximately 29% of ICSI a public company listed on the Taiwan
Stock Exchange. We account for this investment on the equity basis and our
investment balance as of March 31, 2002 was approximately $18.2 million. The
share price of ICSI is subject to fluctuations. A significant decline in the
stock price of ICSI may require us to record a loss related to this investment.

We have investments in equity securities of privately held companies for
the promotion of business and strategic objectives of approximately $31.7
million at March 31, 2002. These investments are generally in companies in the
semiconductor industry. These investments are included in other assets and are
accounted for using the cost method. In addition, we have an investment of
$3.0 million that is accounted for on the equity method. For investments in
which no public market exists, our policy is to review the operating
performance, recent financing transactions and cash flow forecasts for such
companies in assessing the net realizable values of the securities of these
companies. Impairment losses on equity investments are recorded when events
and circumstances indicate that such assets are impaired and the decline in
value is other than temporary. We recorded $150,000 in impairment losses
during the three months ended December 31, 2001.




Part II. OTHER INFORMATION




Item 1. Legal Proceedings

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

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

As a result of the termination of the antidumping case, we reversed
amounts previously expensed to cost of goods sold of approximately $5.2 million
of which approximately $3.6 million had been cash payments and $1.6 million was
in accrued liabilities. At March 31, 2002, approximately $2.5 million of cash
deposits had yet to be refunded and is included in other current assets.

26



---



##### Table of Contents






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

The Companys Annual Meeting of Stockholders was held on Wednesday, February 6,
2002 at 3:00 p.m., local time, in San Jose, California.

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

|                 |  |          |            |          |  |  |           | 
|---------------- |  | -------- | ---------- | -------- |  |  | --------- | 
|                 |  | Votes    |            | Votes   
|Name of Nominee  |  | in Favor |            | Withheld
|                 |  |          |            |         
|Jimmy S.M. Lee   |  |          | 20,868,599 |          |  |  | 3,628,121 | 
|Gary L. Fischer  |  |          | 20,895,080 |          |  |  | 3,601,640 | 
|Lip-Bu Tan       |  |          | 24,236,554 |          |  |  | 260,166   | 
|Hide L. Tanigami |  |          | 24,236,948 |          |  |  | 259,772   | 
|Chun Win Wong    |  |          | 24,236,514 |          |  |  | 260,206   | 

(b)  The Companys stockholders approved an amendment to the Companys 1993
Employee Stock Purchase Plan to increase by 300,000 shares to an aggregate of
2,250,000 shares the number of shares reserved for grant thereunder, with
23,903,326 votes in favor and 355,513 votes against.

(c)  The Companys stockholders the ratified the appointment of Ernst &
Young, LLP as independent auditors of the Company for the fiscal year ending
September 30, 2002, with 24,244,316 votes in favor, and 229,011 votes against.




Item 6. Exhibits and Reports on Form 8-K



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

27



---



##### 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: May 15, 2002 | By:                                            | /s/  Michael D. McDonald
Michael D. McDonald
Vice President Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)

28