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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended December 31, 2004 .



OR



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



For the transition period from
 to



Commission file number 000-23084 .



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Integrated Silicon Solution, Inc.

(Exact name of registrant as specified in its charter)



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



(408) 969-6600.

Registrants telephone number, including area code



---



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



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



The number of outstanding shares of the registrants Common Stock as of February 4, 2005 was 36,614,630.



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##### Table of Contents

TABLE OF CONTENTS



|           |  |                                                                                                           |  |   
|---------- |  | --------------------------------------------------------------------------------------------------------- |  | --
|PART I     |  | Financial Information                                                                                     |  |   
|           |  |                                                                                                          
|Item 1.    |  | Financial Statements                                                                                      |  |   
|           |  |                                                                                                          
|           |  | Condensed Consolidated Statements of Operations Three months ended December 31, 2004 and 2003 (Unaudited) |  | 1 
|           |  |                                                                                                          
|           |  | Condensed Consolidated Balance Sheets December 31, 2004 (Unaudited) and September 30, 2004                |  | 2 
|           |  |                                                                                                          
|           |  | Condensed Consolidated Statements of Cash Flows Three months ended December 31, 2004 and 2003 (Unaudited) |  | 3 
|           |  |                                                                                                          
|           |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                          |  | 4 
|           |  |                                                                                                          
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  | 13
|           |  |                                                                                                          
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                |  | 34
|           |  |                                                                                                          
|Item 4.    |  | Controls and Procedures                                                                                   |  | 35
|           |  |                                                                                                          
|PART II    |  | Other Information                                                                                         |  |   
|           |  |                                                                                                          
|Item 1.    |  | Legal Proceedings                                                                                         |  | 35
|           |  |                                                                                                          
|Item 5.    |  | Other Information                                                                                         |  | 35
|           |  |                                                                                                          
|Item 6.    |  | Exhibits                                                                                                  |  | 35
|           | 
|Signatures |  | 36                                                                                                       



References in this
Report on Form 10-Q to we, us, our and ISSI mean Integrated Silicon Solution, Inc. and all entities owned or controlled by Integrated Silicon Solution, Inc.



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##### Table of Contents

Item 1. Financial Statements



Integrated Silicon Solution, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share
data)



|                                                                                                    |  |                                 |         |   |      |   |       
|--------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------
|                                                                                                    |  | Three Months Ended December 31,
|                                                                                                    |  | 2004                            |         |   | 2003
|Net sales (See Note 14)                                                                             |  | $                               | 30,575  |   |      | $ | 40,255
|Cost of sales                                                                                       |  |                                 | 36,351  |   |      |   | 31,303
|                                                                                                    |  |                                 |         |   |      |   |       
|Gross profit (loss)                                                                                 |  |                                 | (5,776  | ) |      |   | 8,952 
|                                                                                                    |  |                                 |         |   |      |   |       
|Operating Expenses:                                                                                 |  |                                 |         |   |      |   |       
|Research and development                                                                            |  |                                 | 5,090   |   |      |   | 4,540 
|Selling, general and administrative                                                                 |  |                                 | 4,221   |   |      |   | 3,891 
|                                                                                                    |  |                                 |         |   |      |   |       
|Total operating expenses                                                                            |  |                                 | 9,311   |   |      |   | 8,431 
|                                                                                                    |  |                                 |         |   |      |   |       
|Operating income (loss)                                                                             |  |                                 | (15,087 | ) |      |   | 521   
|Other income (expense), net                                                                         |  |                                 | 606     |   |      |   | 96    
|Gain on sale of other investments                                                                   |  |                                 | 2,370   |   |      |   |      
|                                                                                                    |  |                                 |         |   |      |   |       
|Income (loss) before income taxes, minority interest and equity in net loss of affiliated companies |  |                                 | (12,111 | ) |      |   | 617   
|Provision for income taxes                                                                          |  |                                 | 1       |   |      |   | 12    
|                                                                                                    |  |                                 |         |   |      |   |       
|Income (loss) before minority interest and equity in net loss of affiliated companies               |  |                                 | (12,112 | ) |      |   | 605   
|                                                                                                    |  |                                
|Minority interest in net loss of consolidated subsidiary                                            |  |                                 | 95      |   |      |   |      
|Equity in net income (loss) of affiliated companies                                                 |  |                                 | (1,314  | ) |      |   | 290   
|                                                                                                    |  |                                 |         |   |      |   |       
|Net income (loss)                                                                                   |  | $                               | (13,331 | ) |      | $ | 895   
|                                                                                                    |  |                                 |         |   |      |   |       
|Basic net income (loss) per share                                                                   |  | $                               | (0.37   | ) |      | $ | 0.03  
|                                                                                                    |  |                                 |         |   |      |   |       
|Shares used in basic per share calculation                                                          |  |                                 | 36,231  |   |      |   | 28,649
|                                                                                                    |  |                                 |         |   |      |   |       
|Diluted net income (loss) per share                                                                 |  | $                               | (0.37   | ) |      | $ | 0.03  
|                                                                                                    |  |                                 |         |   |      |   |       
|Shares used in diluted per share calculation                                                        |  |                                 | 36,231  |   |      |   | 31,935
|                                                                                                    |  |                                 |         |   |      |   |       



See accompanying notes
to condensed consolidated financial statements.



1



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##### Table of Contents

Integrated Silicon Solution, Inc.

Condensed Consolidated Balance Sheets

(In thousands)



|                                                       |  |                   |          |   |                    |   |         |  
|------------------------------------------------------ |  | ----------------- | -------- | - | ------------------ | - | ------- | -
|                                                       |  | December 31, 2004 |          |   | September 30, 2004 |  
|                                                       |  | (unaudited)       |          |   | (1)                |  
|ASSETS                                                 |  |                   |          |   |                    |   |         |  
|Current assets:                                        |  |                   |          |   |                    |   |         |  
|Cash and cash equivalents                              |  | $                 | 24,290   |   |                    | $ | 17,015  |  
|Restricted cash                                        |  |                   |         |   |                    |   | 1,500   |  
|Short-term investments                                 |  |                   | 102,150  |   |                    |   | 120,450 |  
|Accounts receivable                                    |  |                   | 15,691   |   |                    |   | 23,291  |  
|Accounts receivable from related parties (See Note 14) |  |                   | 3,443    |   |                    |   | 3,442   |  
|Inventories                                            |  |                   | 51,656   |   |                    |   | 44,718  |  
|Other current assets                                   |  |                   | 1,090    |   |                    |   | 1,541   |  
|                                                       |  |                   |          |   |                    |   |         |  
|Total current assets                                   |  |                   | 198,320  |   |                    |   | 211,957 |  
|Property, equipment, and leasehold improvements, net   |  |                   | 5,529    |   |                    |   | 5,622   |  
|Other assets                                           |  |                   | 91,724   |   |                    |   | 83,285  |  
|                                                       |  |                   |          |   |                    |   |         |  
|Total assets                                           |  | $                 | 295,573  |   |                    | $ | 300,864 |  
|                                                       |  |                   |          |   |                    |   |         |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                   |  |                   |          |   |                    |   |         |  
|Current liabilities:                                   |  |                   |          |   |                    |   |         |  
|Accounts payable                                       |  | $                 | 18,053   |   |                    | $ | 27,058  |  
|Accounts payable to related parties (See Note 14)      |  |                   | 13,039   |   |                    |   | 3,435   |  
|Accrued compensation and benefits                      |  |                   | 2,521    |   |                    |   | 2,431   |  
|Accrued expenses                                       |  |                   | 4,741    |   |                    |   | 4,903   |  
|                                                       |  |                   |          |   |                    |   |         |  
|Total current liabilities                              |  |                   | 38,354   |   |                    |   | 37,827  |  
|                                                       |  |                  
|Minority interest                                      |  |                   | 2,509    |   |                    |   |        |  
|                                                       |  |                  
|Stockholders' equity:                                  |  |                   |          |   |                    |   |         |  
|Common stock                                           |  |                   | 4        |   |                    |   | 4       |  
|Additional paid-in capital                             |  |                   | 337,075  |   |                    |   | 336,524 |  
|Accumulated deficit                                    |  |                   | (107,174 | ) |                    |   | (93,843 | )
|Unearned compensation                                  |  |                   | (195     | ) |                    |   | (218    | )
|Accumulated comprehensive loss                         |  |                   | 25,000   |   |                    |   | 20,570  |  
|                                                       |  |                   |          |   |                    |   |         |  
|Total stockholders' equity                             |  |                   | 254,710  |   |                    |   | 263,037 |  
|                                                       |  |                   |          |   |                    |   |         |  
|Total liabilities and stockholders' equity             |  | $                 | 295,573  |   |                    | $ | 300,864 |  
|                                                       |  |                   |          |   |                    |   |         |  

---

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



See accompanying notes to condensed consolidated financial statements.



2



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Integrated Silicon Solution, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)



|                                                                                   |  |                                 |         |   |      |   |        |  
|---------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                   |  | Three Months Ended December 31, |        
|                                                                                   |  | 2004                            |         |   | 2003 |  
|Cash flows from operating activities                                               |  |                                 |         |   |      |   |        |  
|Net income (loss)                                                                  |  | $                               | (13,331 | ) |      | $ | 895    |  
|Depreciation and amortization                                                      |  |                                 | 672     |   |      |   | 971    |  
|Amortization of intangibles and unearned compensation                              |  |                                 | 102     |   |      |   | 19     |  
|Gain on sale of shares of Semiconductor Manufacturing International Corp. ("SMIC") |  |                                 | (2,370  | ) |      |   |       |  
|Loss on embedded derivative                                                        |  |                                 | 22      |   |      |   | 59     |  
|Loss on disposal of asset                                                          |  |                                 | 154     |   |      |   |       |  
|Net foreign currency transaction gains                                             |  |                                 | (10     | ) |      |   | (5     | )
|Equity in net (income) loss of affiliated companies                                |  |                                 | 1,314   |   |      |   | (290   | )
|Minority interest in net loss of consolidated subsidiary                           |  |                                 | (95     | ) |      |   |       |  
|Net effect of changes in current and other assets and current liabilities          |  |                                 | 3,010   |   |      |   | 389    |  
|                                                                                   |  |                                 |         |   |      |   |        |  
|Cash provided by (used in) operating activities                                    |  |                                 | (10,532 | ) |      |   | 2,038  |  
|                                                                                   |  |                                
|Cash flows from investing activities                                               |  |                                 |         |   |      |   |        |  
|Capital expenditures                                                               |  |                                 | (612    | ) |      |   | (254   | )
|Proceeds from partial sale of SMIC equity securities                               |  |                                 | 4,519   |   |      |   |       |  
|Investment in Signia Technologies, Inc. ("Signia")                                 |  |                                 | (6,675  | ) |      |   |       |  
|Purchases of available-for-sale securities                                         |  |                                 | (64,800 | ) |      |   | (100   | )
|Sales of available-for-sale securities                                             |  |                                 | 83,100  |   |      |   |       |  
|                                                                                   |  |                                 |         |   |      |   |        |  
|Cash provided by (used in) investing activities                                    |  |                                 | 15,532  |   |      |   | (354   | )
|                                                                                   |  |                                
|Cash flows from financing activities                                               |  |                                 |         |   |      |   |        |  
|Proceeds from issuance of common stock                                             |  |                                 | 551     |   |      |   | 3,081  |  
|Decrease in restricted cash                                                        |  |                                 | 1,500   |   |      |   |       |  
|                                                                                   |  |                                 |         |   |      |   |        |  
|Cash provided by financing activities                                              |  |                                 | 2,051   |   |      |   | 3,081  |  
|                                                                                   |  |                                 |         |   |      |   |        |  
|Effect of exchange rate changes on cash and cash equivalents                       |  |                                 | 224     |   |      |   | (9     | )
|                                                                                   |  |                                 |         |   |      |   |        |  
|Net increase in cash and cash equivalents                                          |  |                                 | 7,275   |   |      |   | 4,756  |  
|Cash and cash equivalents at beginning of period                                   |  |                                 | 17,015  |   |      |   | 19,992 |  
|                                                                                   |  |                                 |         |   |      |   |        |  
|Cash and cash equivalents at end of period                                         |  | $                               | 24,290  |   |      | $ | 24,748 |  
|                                                                                   |  |                                 |         |   |      |   |        |  



See accompanying notes
to condensed consolidated financial statements.



3



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1. Basis of Presentation



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



Operating
results for the three months ended December 31, 2004 are not necessarily indicative of the results that may be expected for the year ending September 30, 2005 or for any other period. The financial statements included herein should be read in
conjunction with the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2004.



2. Stock-based Compensation



The Company applies the intrinsic-value method prescribed in APB Opinion No. 25, Accounting for Stock issued to Employees, in accounting for employee stock options. Accordingly compensation expense is generally recognized
only when options are granted with an exercise price less than fair value on the date of grant. Any resulting compensation expense would be recognized ratably over the associated service period, which is generally the option vesting term.



The Company has determined pro forma net loss and net loss per
share information as if the fair value method described in SFAS No. 123, Accounting for Stock Based Compensation, had been applied to its employee stock-based compensation. The proforma effect on net income (loss) and net income (loss)
per share is as follows for the three month periods ending December 31, 2004 and 2003 (in thousands, except per share data):



|                                                                                  |  |                                 |         |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                  |  | Three Months Ended December 31, |        
|                                                                                  |  | 2004                            |         |   | 2003 |  
|Net income (loss)  as reported                                                   |  | $                               | (13,331 | ) |      | $ | 895    |  
|Intrinsic value method expense included in reported net income (loss), net of tax |  |                                 | 22      |   |      |   |       |  
|Fair value method expense, net of tax                                             |  |                                 | (1,236  | ) |      |   | (1,208 | )
|                                                                                  |  |                                 |         |   |      |   |        |  
|Net loss  pro forma                                                              |  | $                               | (14,545 | ) |      | $ | (313   | )
|                                                                                  |  |                                 |         |   |      |   |        |  
|Basic and diluted net income (loss) per share  as reported                       |  | $                               | (0.37   | ) |      | $ | 0.03   |  
|Basic and diluted net income (loss) per share  pro forma                         |  | $                               | (0.40   | ) |      | $ | (0.01  | )



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



3. Concentrations



In the three months ended December 31, 2004, revenue recognized for
one distributor accounted for 13% of total net sales. In the three months ended December 31, 2003, no single customer accounted for over 10% of net sales.



4. Cash, Cash Equivalents and Short-term Investments



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



|                         |  |                   |         |                    |   |        
|------------------------ |  | ----------------- | ------- | ------------------ | - | -------
|                         |  | (In thousands)   
|                         |  | December 31, 2004 |         | September 30, 2004
|Cash                     |  | $                 | 17,327  |                    | $ | 13,251 
|Money market instruments |  |                   | 6,860   |                    |   | 3,764  
|Certificates of deposit  |  |                   | 103     |                    |   | 1,500  
|Municipal bonds          |  |                   | 102,150 |                    |   | 120,450
|                         |  |                   |         |                    |   |        
|                         |  | $                 | 126,440 |                    | $ | 138,965
|                         |  |                   |         |                    |   |        



All debt securities
held at December 31, 2004 are due in less than one year.



5. Inventories



The following is a summary of inventories by major
category:



|                     |  |                   |        |                    |   |       
|-------------------- |  | ----------------- | ------ | ------------------ | - | ------
|                     |  | (In thousands)   
|                     |  | December 31, 2004 |        | September 30, 2004
|Purchased components |  | $                 | 18,645 |                    | $ | 16,178
|Work-in-process      |  |                   | 2,277  |                    |   | 3,463 
|Finished goods       |  |                   | 30,734 |                    |   | 25,077
|                     |  |                   |        |                    |   |       
|                     |  | $                 | 51,656 |                    | $ | 44,718
|                     |  |                   |        |                    |   |       



During the three
months ended December 31, 2004, the Company recorded inventory write-downs of $9.6 million. The inventory write-downs were predominately for lower of cost or market and excess and obsolescence issues on certain of its products.



6. Other Assets



Other assets consisted of the following:



|                                         |  |                   |        |                    |   |       
|---------------------------------------- |  | ----------------- | ------ | ------------------ | - | ------
|                                         |  | (In thousands)   
|                                         |  | December 31, 2004 |        | September 30, 2004
|Investment in ICSI common stock          |  | $                 | 15,125 |                    | $ | 16,114
|Investment in ICSI convertible debenture |  |                   | 3,591  |                    |   | 3,180 
|Investment in SMIC                       |  |                   | 61,043 |                    |   | 59,701
|Other equity investments                 |  |                   | 2,885  |                    |   | 3,962 
|Other                                    |  |                   | 9,080  |                    |   | 328   
|                                         |  |                   |        |                    |   |       
|                                         |  | $                 | 91,724 |                    | $ | 83,285
|                                         |  |                   |        |                    |   |       



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



The market value of the Companys investment in the
common stock and convertible debentures of ICSI at December 31, 2004 was approximately $25.3 million and $3.6 million, respectively, based on quoted market prices. Since ICSI is accounted for under the equity method of accounting, the carrying value
of the Companys investment in ICSIs common stock differs from the market value. The Companys total carrying value for ICSI common stock as of December 31, 2004 was approximately $19.5 million of which approximately $4.4 million is
included in other comprehensive income as accumulated foreign currency translation adjustment in the equity portion of the balance sheet.



On March 17, 2004, SMIC completed an initial public offering (IPO). SMICs ordinary shares are traded on the Hong Kong Stock
Exchange and SMIC American Depository Receipts (ADR) are traded on the New York Stock Exchange. Each SMIC ADR represents fifty (50) ordinary shares. The Company sold certain shares of its SMIC stock in the IPO, and recorded gross
proceeds of approximately $13.2 million in the March 2004 quarter resulting in a pre-tax gain of approximately $8.8 million. In the September 2004 quarter, the Company sold additional shares of SMIC and recorded gross proceeds of approximately $5.0
million and a pre-tax gain of approximately $2.1 million. In the December 2004 quarter, the Company sold additional shares of SMIC and recorded gross proceeds of approximately $4.5 million and a pre-tax gain of approximately $2.4 million. Since
SMICs IPO, the Company accounts for its shares in SMIC under the provisions of FASB 115 and has marked its investment to the market value as of December 31, 2004 by increasing other assets and by increasing accumulated comprehensive income in
the equity section of the balance sheet. The cost basis of the Companys shares in SMIC is approximately $32.5 million and the market value at December 31, 2004 was approximately $61.0 million. The market value of SMIC shares is subject to
fluctuations and the Companys carrying value will be subject to adjustments to reflect the current market value. The Companys shares in SMIC are subject to certain lockup restrictions and therefore are not freely tradable. These lockup
restrictions generally lapse at the rate of 15% of the Companys pre-offering shares every 180 days following the IPO. Thus all of the Companys shares in SMIC will be freely tradable 3 years and 180 days following the IPO.



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



7. Comprehensive Income (Loss)



Comprehensive
income (loss) includes net income (loss) as well as other comprehensive income (loss). The Companys other comprehensive income (loss) consists of changes in cumulative translation adjustment and unrealized gains and losses on investments.



Comprehensive income (loss), net of taxes, was as follows:



|                                                   |  |                                 |         |   |      |   |      |  
|-------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ---- | -
|                                                   |  | Three Months Ended December 31, |        
|                                                   |  | 2004                            |         |   | 2003 |  
|                                                   |  | (In thousands)                  |        
|Net income (loss)                                  |  | $                               | (13,331 | ) |      | $ | 895  |  
|Other comprehensive income (loss), net of tax:     |  |                                 |         |   |      |   |      |  
|Change in cumulative translation adjustment        |  |                                 | 3,894   |   |      |   | (234 | )
|Change in unrealized gains/(losses) on investments |  |                                 | 536     |   |      |   | 160  |  
|                                                   |  |                                 |         |   |      |   |      |  
|Comprehensive income (loss)                        |  | $                               | (8,901  | ) |      | $ | 821  |  
|                                                   |  |                                 |         |   |      |   |      |  



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



6



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



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



|                                                                                   |  |                   |        |   |                    |   |        |  
|---------------------------------------------------------------------------------- |  | ----------------- | ------ | - | ------------------ | - | ------ | -
|                                                                                   |  | December 31, 2004 |        |   | September 30, 2004 |  
|                                                                                   |  | (In thousands)    |       
|Accumulated foreign currency translation adjustments related to investment in ICSI |  | $                 | (4,372 | ) |                    | $ | (4,698 | )
|Other accumulated foreign currency translation adjustments                         |  |                   | 215    |   |                    |   | 5      |  
|Accumulated net unrealized gain on SMIC                                            |  |                   | 28,553 |   |                    |   | 25,063 |  
|Accumulated net unrealized gain (loss) on other available-for-sale investments     |  |                   | 604    |   |                    |   | 200    |  
|                                                                                   |  |                   |        |   |                    |   |        |  
|Total accumulated other comprehensive income (loss)                                |  | $                 | 25,000 |   |                    | $ | 20,570 |  
|                                                                                   |  |                   |        |   |                    |   |        |  



8. Income Taxes



The provision for income taxes for the three month period ended December 31,
2004 of $1,000 consists of foreign withholding taxes. The provision for income taxes for the three month period ended December 31, 2003 of $12,000 consists of alternative minimum taxes.



9. Per Share Data



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



|                                                             |  |                                 |         |   |      |   |       
|------------------------------------------------------------ |  | ------------------------------- | ------- | - | ---- | - | ------
|                                                             |  | Three Months Ended December 31,
|                                                             |  | 2004                            |         |   | 2003
|Numerator for basic and diluted net income (loss) per share: |  |                                 |         |   |      |   |       
|Net income (loss)                                            |  | $                               | (13,331 | ) |      | $ | 895   
|                                                             |  |                                 |         |   |      |   |       
|Denominator for basic net income (loss) per share:           |  |                                 |         |   |      |   |       
|Weighted average common shares outstanding                   |  |                                 | 36,231  |   |      |   | 28,649
|Dilutive stock options                                       |  |                                 |        |   |      |   | 3,286 
|                                                             |  |                                 |         |   |      |   |       
|Denominator for diluted net income (loss) per share          |  |                                 | 36,231  |   |      |   | 31,935
|                                                             |  |                                 |         |   |      |   |       
|Basic net income (loss) per share                            |  | $                               | (0.37   | ) |      | $ | 0.03  
|                                                             |  |                                 |         |   |      |   |       
|Diluted net income (loss) per share                          |  | $                               | (0.37   | ) |      | $ | 0.03  
|                                                             |  |                                 |         |   |      |   |       



The above diluted
calculation does not include approximately 3,345,000 and 412,000 shares attributable to options as of December 31, 2004 and 2003, respectively, as their impact would be anti-dilutive. Of the 3,345,000 shares excluded from the December 31, 2004
calculation, approximately 1,309,000 shares were in the money but excluded solely because the Company had a net loss for that period.



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



10. Use of Estimates



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



11. Impact of Recently Issued Accounting Standards



In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123) and supercedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after
June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. The Company is required to adopt SFAS 123R in the fourth quarter of
fiscal 2005, beginning July 1, 2005. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date
of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective
method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive methods would record compensation expense for all
unvested stock options and restricted stock beginning with the first period restated. The Company is evaluating the requirements of SFAS 123R and expects that the adoption of SFAS 123R will have a material impact on the Companys consolidated
results of operations and earnings per share. The Company has not yet determined the method of adoption or the effect of adopting SFAS 123R, and it has not determined whether the adoption will result in amounts that are similar to the current pro
forma disclosures under SFAS 123.



12. Commitments and Contingencies



Commitments to Wafer Fabrication Facilities and
Contract Manufacturers



The Company issues purchase orders
for wafers to various wafer foundries. These purchase orders are generally considered to be cancelable. However, to the degree that the wafers have entered into work-in-process, as a matter of practice it becomes increasingly difficult to cancel the
purchase order. As of December 31, 2004, the Company had approximately $4.0 million of purchase orders for which the related wafers had been entered into wafer work-in-process (manufacturing had begun). In addition, the Company had noncancelable
purchase commitments of approximately $2.4 million to ICSI for certain finished goods inventories for which ICSI is providing contract manufacturing services.



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



13. Geographic and Segment Information



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



|                             |  |                                 |        |                    |   |       
|---------------------------- |  | ------------------------------- | ------ | ------------------ | - | ------
|                             |  | Three Months Ended December 31,
|                             |  | 2004                            |        | 2003              
|                             |  | (In thousands)                 
|Net sales                    |  |                                 |        |                    |   |       
|United States                |  | $                               | 5,681  |                    | $ | 5,240 
|China                        |  |                                 | 4,875  |                    |   | 4,041 
|Hong Kong                    |  |                                 | 5,538  |                    |   | 7,958 
|Taiwan                       |  |                                 | 4,488  |                    |   | 9,493 
|Korea                        |  |                                 | 1,078  |                    |   | 3,121 
|Other Asia Pacific countries |  |                                 | 2,603  |                    |   | 4,468 
|Europe                       |  |                                 | 4,946  |                    |   | 5,637 
|Other North America          |  |                                 | 1,366  |                    |   | 297   
|                             |  |                                 |        |                    |   |       
|Total net sales              |  | $                               | 30,575 |                    | $ | 40,255
|                             |  |                                 |        |                    |   |       
|                             |  |                                
|                             |  | December 31, 2004               |        | September 30, 2004
|                             |  | (In thousands)                 
|Long-lived assets            |  |                                 |        |                    |   |       
|United States                |  | $                               | 3,292  |                    | $ | 3,633 
|Hong Kong                    |  |                                 | 50     |                    |   | 49    
|China                        |  |                                 | 1,574  |                    |   | 1,646 
|Taiwan                       |  |                                 | 613    |                    |   | 294   
|                             |  |                                 |        |                    |   |       
|                             |  | $                               | 5,529  |                    | $ | 5,622 
|                             |  |                                 |        |                    |   |       



14. Related Party Transactions



The Company sells and licenses memory products to ICSI.
At December 31, 2004, the Company had 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 purchases goods and contract manufacturing services from ICSI.
For the three months ended December 31, 2004 and December 31, 2003, purchases of goods and services were approximately $300,000 and $844,000, respectively. The Company also pays ICSI for certain product development costs, license fees and royalties.
For the three months ended December 31, 2004 and December 31, 2003, these charges totaled approximately $107,000 and $499,000, respectively.



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



The Company purchases goods from SMIC in which the Company has less than a 2% ownership interest. The Companys Chairman and CEO, Jimmy S.M. Lee, was
a director of SMIC until March 2004. Lip-Bu Tan, a director of the Company, has been a director of SMIC since January 2002. For the three months ended December 31, 2004 and December 31, 2003, purchases of goods from SMIC were approximately
$17,267,000 and $7,143,000, respectively.



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



The Company sells memory products to Flextronics. Lip-Bu Tan,
a director of the Company, has been a director of Flextronics since April 3, 2003. The Company had been doing business with Flextronics prior to Mr. Tan joining the board of directors of Flextronics.



The Company provides manufacturing support services to Signia Technologies
(Signia). The Company had less a than 50% ownship interest through November 2004. In December 2004, the Company increased its ownership interest to approximately 66% at which time the Company began consolidating Signias results of
operations. The Companys Chairman and CEO, Jimmy S.M. Lee, is a director of Signia. For the two months ended November 30, 2004 and the three months ended December 31, 2003, the Company provided services of approximately $382,000 and $304,000,
respectively, to Signia.



Accounts receivable from related
parties consisted of the following:



|            |  |                   |       |                    |   |      
|----------- |  | ----------------- | ----- | ------------------ | - | -----
|            |  | December 31, 2004 |       | September 30, 2004
|            |  | (In thousands)   
|Flextronics |  | $                 | 1,034 |                    | $ | 1,861
|ICSI        |  |                   | 2,409 |                    |   | 646  
|Signia      |  |                   |      |                    |   | 935  
|            |  |                   |       |                    |   |      
|Total       |  | $                 | 3,443 |                    | $ | 3,442
|            |  |                   |       |                    |   |      



The following table
shows net sales to related parties:



|                             |  |                                 |       |      |   |      
|---------------------------- |  | ------------------------------- | ----- | ---- | - | -----
|                             |  | Three months ended December 31,
|                             |  | 2004                            |       | 2003
|                             |  | (In thousands)                 
|Net sales to related parties |  |                                 |       |      |   |      
|Flextronics                  |  | $                               | 1,769 |      | $ | 534  
|ICSI                         |  |                                 | 1,085 |      |   | 188  
|Marubun USA                  |  |                                 |      |      |   | 2,053
|Others                       |  |                                 | 115   |      |   | 21   
|                             |  |                                 |       |      |   |      
|Total                        |  | $                               | 2,969 |      | $ | 2,796
|                             |  |                                 |       |      |   |      



Accounts payable to
related parties consisted of the following:



|      |  |                   |        |                    |   |      
|----- |  | ----------------- | ------ | ------------------ | - | -----
|      |  | December 31, 2004 |        | September 30, 2004
|      |  | (In thousands)   
|ICSI  |  | $                 | 618    |                    | $ | 782  
|SMIC  |  |                   | 12,421 |                    |   | 2,653
|      |  |                   |        |                    |   |      
|Total |  | $                 | 13,039 |                    | $ | 3,435
|      |  |                   |        |                    |   |      



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



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



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



|                                                |  |                   |        |                    |   |       
|----------------------------------------------- |  | ----------------- | ------ | ------------------ | - | ------
|                                                |  | December 31, 2004 |        | September 30, 2004
|                                                |  | (In thousands)   
|Current assets                                  |  | $                 | 88,773 |                    | $ | 90,191
|Property, plant, and equipment and other assets |  |                   | 34,457 |                    |   | 34,865
|Current liabilities                             |  |                   | 56,943 |                    |   | 57,545



|                  |  |                                 |        |   |      |   |       
|----------------- |  | ------------------------------- | ------ | - | ---- | - | ------
|                  |  | Three Months Ended December 31,
|                  |  | 2004                            |        |   | 2003
|                  |  | (In thousands)                 
|Net sales         |  | $                               | 26,842 |   |      | $ | 42,429
|Gross profit      |  |                                 | 1,420  |   |      |   | 6,620 
|Net income (loss) |  |                                 | (4,445 | ) |      |   | 1,015 



In the June 2002
quarter, the Company invested approximately $3.2 million in convertible debentures issued by ICSI. As a result of changes in ICSIs convertible debenture price, the Company has recorded an accumulated unrealized gain of approximately $604,000
related to the ICSI convertible debentures. The unrealized gain is included in accumulated other comprehensive loss. In addition, in the three months ended December 31, 2004, the Company recorded a charge of approximately $22,000 related to the
decline in the fair value of an embedded derivative associated with the ICSI convertible debenture. The charge associated with the embedded derivative is included in other income (expense). The market value of the Companys convertible
debentures at December 31, 2004 was approximately $3.6 million.



The Company accounts for investments in 50% or less owned companies over which it has the ability to exercise significant influence using the equity method of accounting. At December 31, 2004 and September 30, 2004, approximately $2.9
million and $4.2 million, respectively, of undistributed earnings of 50% or less owned companies accounted for using the equity method are included in consolidated retained earnings. The Company periodically reviews these investments for
other-than-temporary declines in market value and writes these investments to their fair value when an other-than-temporary decline has occurred.



16. Acquisition of Signia Technologies Inc. (Signia)



On December 14, 2004, the Company announced that it increased its ownership in Signia to approximately 66% of the outstanding shares. Signia is a
privately held wireless chipset company based in Taipei, Taiwan. The Company has held a minority equity interest in Signia for several years and has held a seat on the Signia board. The two companies have worked closely together in wireless joint
product development.



Signia has focused on RF chipsets for the
consumer electronics market. Signia has a family of Bluetooth  compliant, 2.4G RF devices and also proprietary 2.4G RF devices. One element of ISSIs strategy is to diversify into non-memory products. Increasing its stake in Signia furthers this strategy.



ISSI has increased its ownership to approximately 66% by buying common shares
from other shareholders. The cost of this additional investment was approximately $8.0 million in cash which includes $0.4 million in estimated transaction costs. Prior to this increase, the Company owned approximately 15% of the outstanding equity



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



of Signia and accounted for its investment on the cost basis. Since the Company increased its
ownership to 66%, beginning from December 1, 2004 the Company will consolidate Signias financial statements with its own. The total purchase price, including the previous investment of $1.0 million, is $9.0 million



The allocation of the purchase price of Signia is preliminary as the Company
has not completed its valuation of the acquired assets, including acquired intangibles. Although the Company has not completed its assessment, it believes that acquired intangibles include both developed technology as well as in-process research and
development (IPR&D). Any amounts allocated to IPR&D will be expensed as there is no guarantee of future value associated with these intangibles. Therefore, the Company anticipates recording a charge related to these amounts once
its estimate is complete. The Company expects to complete its preliminary purchase allocation in the March 2005 quarter.



17. Subsequent Event



On January 25, 2005, ISSI announced the execution on such date of a Merger Agreement (the Merger Agreement) between Integrated Silicon
Solution (Taiwan), Inc. (ISSI-Taiwan) and ICSI. ISSI-Taiwan is incorporated under the laws of the Republic of China and is a wholly-owned subsidiary of ISSI. ICSI is incorporated under the laws of the Republic of China and its common
stock is publicly traded in Taiwan. Prior to the transaction, ISSI owned approximately 29.1% of the outstanding shares of ICSI and approximately $3.6 million of convertible debentures of ICSI. Jimmy Lee and Hide Tanagami, directors of ISSI, are
members of the Board of Directors of ICSI. Pursuant to the Merger Agreement, ICSI will merge with ISSI-Taiwan with ISSI-Taiwan being the surviving company. The consideration to be paid by ISSI in connection with the merger is cash in the aggregate
amount of approximately $69 million (excluding the value of the shares of ICSI held by ISSI prior to the transaction). The Merger Agreement has been approved by the boards of directors of ISSI, ISSI-Taiwan and ICSI and is subject to approval of the
shareholders of ICSI, regulatory approvals and other customary closing conditions.



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS



We have made forward-looking statements in this report that are subject to
risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of our operations. Also, when we use words such as believes, expects, anticipates or similar
expressions, we are making forward-looking statements. You should note that an investment in our securities involves certain risks and uncertainties that could affect our future financial results. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain factors, including those set forth in Certain Factors Which May Affect Our Business or Future Operating Results and elsewhere in this report.



We believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risks described in Certain Factors Which May Affect Our Business or Future Operating Results included in this
report, as well as any cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.



All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the cautionary statements set forth in this report. Except as required by federal securities laws, we are under no obligation to update any forward-looking statement, whether as a result of new
information, future events, or otherwise.



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



Overview



We are a fabless semiconductor company that designs and markets high performance integrated circuits for the following key markets: (i) digital consumer
electronics, (ii) networking, (iii) mobile communications and (iv) automotive electronics. Our primary products are high speed and low power SRAM and low and medium density DRAM. We were founded in October 1988 and initially focused on high
performance, low cost SRAM for PC cache memory applications. In 1997, we introduced our first low and medium density DRAM products. Historically, our SRAM product family generated most of our revenue. However, in the year 2001, the high-end
networking and telecom markets slowed and this impacted our SRAM revenue. During this period, we increased our focus on the digital consumer electronics, mobile communications and automotive electronics markets. As a result of our success in the
digital consumer electronics market, sales of our low and medium density DRAM products have increased significantly and represented a majority of our net sales in fiscal 2004 and the first quarter of fiscal 2005.



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



As a fabless semiconductor company, our business model is less capital
intensive because we rely on third parties to manufacture, assemble and test our products. Because of our dependence on third-party wafer foundries, our ability to increase our unit sales volumes depends on our ability to increase our wafer capacity
allocation from current foundries, add additional foundries and improve yields of die per wafer.



Although average selling prices of our SRAM and DRAM products have generally declined over time, the selling prices are very sensitive to supply and
demand conditions in our target markets. While the average selling prices for certain of our products had increased during the first three quarters of fiscal 2004, the average selling prices for our products declined significantly in the fourth
quarter of fiscal 2004. We experienced further declines in the average selling



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prices for certain of our products in the December 2004 quarter. We expect average selling prices for our products to
decline in the future, principally due to increased market competition and an increased supply of competitive products in the market. Any future decreases in our average selling prices would have an adverse impact on our revenue growth rate, gross
margins and operating margins. Our ability to maintain or increase revenues will be highly dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products in quantities sufficient to compensate
for the anticipated declines in average selling prices of existing products. Declining average selling prices will adversely affect gross margins unless we are able to offset such declines with commensurate reductions in per unit costs or changes in
product mix in favor of higher margin products.



Revenue from
product sales to our direct customers is recognized upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed and determinable, title has transferred, collection of resulting receivables is reasonably assured,
there are no customer acceptance requirements and there are no remaining significant obligations. A portion of our sales is made to distributors under agreements that provide the possibility of certain sales price rebates and limited product return
privileges. Given the uncertainties associated with the levels of returns and other credits that will be issued to these distributors, we defer recognition of such sales until our products are sold by the distributors to their end customers. Revenue
from sales to distributors who do not have sales price rebates or product return privileges is recognized at the time our products are sold by us to the distributors.



We market and sell our products in Asia, the U.S. and Europe through our direct sales force, distributors and sales
representatives. The percentage of our revenues shipped outside the U.S. was approximately 70%, 87%, 87% and 81% in fiscal 2002, 2003 and 2004 and the first quarter of fiscal 2005, respectively. We measure revenue location by the shipping
destination, even if the customer is headquartered in the U.S. The increase in our revenues from Asia is due to our success in the digital consumer electronics market. We anticipate that sales to international customers will continue to represent a
significant percentage of our net sales. The percentages of our revenues by region are set forth in the following table:



|       |  |                                  |   |  |                                      |   |  |      |   |  |     |  
|------ |  | -------------------------------- | - |  | ------------------------------------ | - |  | ---- | - |  | --- | -
|       |  | Fiscal Years Ended September 30, |   |  | Three Months Ended December 31, 2004 |  
|       |  | 2002                             |   |  | 2003                                 |   |  | 2004 |   | 
|Asia   |  | 56                               | % |  | 77                                   | % |  | 75   | % |  | 61  | %
|Europe |  | 14                               |   |  | 10                                   |   |  | 11   |   |  | 16  |  
|U.S.   |  | 30                               |   |  | 13                                   |   |  | 13   |   |  | 19  |  
|Other  |  |                                 |   |  |                                     |   |  | 1    |   |  | 4   |  
|       |  |                                  |   |  |                                      |   |  |      |   |  |     |  
|Total  |  | 100                              | % |  | 100                                  | % |  | 100  | % |  | 100 | %
|       |  |                                  |   |  |                                      |   |  |      |   |  |     |  



Our sales are
generally made by purchase orders. Because industry practice allows customers to reschedule or cancel orders on relatively short notice, backlog is not a good indicator of our future sales. Cancellations of customer orders or changes in product
specifications could result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory and operating expenses.



Since a significant portion of our revenue is from the digital consumer electronics market, our business may be subject to seasonality, with increased
revenues in the third and fourth calendar quarters of each year, when customers place orders to meet year-end holiday demand. However, broad fluctuations in our overall business in the past several years makes it difficult for us to assess the
impact of seasonal factors on our business.



We hold equity
interests in a number of other companies. We acquired these interests for strategic reasons, such as developing a strong relationship with a third-party wafer foundry we rely on to manufacture our products. Our financial results for fiscal 2005 and
fiscal 2004 reflect accounting for Integrated Circuit Solution, Inc. (ICSI) on the equity basis and include our percentage share of the results of ICSIs operations. Our financial results for fiscal 2004 and fiscal 2005 through the period ended
November 30, 2004 reflect accounting for Signia Technologies Inc. (Signia) on the cost basis. Effective December 2004, our ownership of Signia became greater than 50% and we began consolidating the results of Signia. Our financial results for fiscal
2005 and fiscal 2004 reflect accounting for E-CMOS Technology Corporation (E-CMOS), GetSilicon, and NexFlash Technologies (NexFlash) on the cost basis. Our financial results for



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fiscal 2004 until their IPO in March 2004, reflect accounting for Semiconductor Manufacturing International Corporation (SMIC) on the cost basis. Since
SMICs IPO, we account for our shares in SMIC under the provisions of FASB 115 and have marked our investment to the market value as of December 31, 2004 by increasing other assets and by increasing accumulated comprehensive income in the
equity section of the balance sheet. ICSI is a Taiwan-based fabless memory supplier, E-CMOS is a Taiwan-based peripherals interface device company, GetSilicon is a semiconductor supply chain management software company, NexFlash is a Flash memory
supplier, Signia Technologies is a developer of wireless semiconductors, and SMIC is a China-based semiconductor foundry. At December 31, 2004, we owned approximately 29% of ICSI, approximately 11% of E-CMOS, approximately 16% of GetSilicon,
approximately 14% of NexFlash, approximately 66% of Signia Technologies and less than 2% of SMIC.



We are subject to the risks of conducting business internationally, including economic conditions in Asia, particularly Taiwan and China, changes in trade
policy and regulatory requirements, duties, tariffs and other trade barriers and restrictions, the burdens of complying with foreign laws and, possibly, political instability. All of our foundries and assembly and test subcontractors are located in
Asia. Although we transact business predominately in U.S. dollars, we do have some transactions in New Taiwan dollars, in Hong Kong dollars and in China Renminbi. Such transactions expose us to the risk of exchange rate fluctuations. We monitor our
exposure to foreign currency fluctuations, but have not to date adopted any hedging strategy. There can be no assurance that exchange rate fluctuations will not harm our business and operating results in the future.



Critical Accounting Policies



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



Our critical accounting policies which are impacted by our estimates are: (i)
the valuation of our inventory, which impacts cost of goods sold and gross profit; (ii) the valuation of our allowance for sales returns and allowances, which impacts net sales; (iii) the valuation of our allowance for doubtful accounts, which
impacts general and administrative expense; and (iv) the valuation of our non-marketable equity securities, which impacts gains and losses on equity securities when we record impairments. Each of these policies is described in more detail below. We
also have other key accounting policies that may not require us to make estimates and judgments that are as subjective or difficult, for instance, our policies with regard to revenue recognition, including the deferral of revenues on sales to
distributors with sales price rebates and product return privileges. These policies are described in the notes to our financial statements contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2004.



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



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



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



Valuation of non-marketable securities. Our ability to recover our strategic investments in equity securities that
are non-marketable and to earn a return on these investments is largely dependent on financial market conditions and the occurrence of liquidity events, such as initial public offerings, mergers or acquisitions, and private equity transactions. The
timing of when any of these events may occur is uncertain and very difficult to predict. In addition, under our accounting policy, we are required to periodically review all of our investments for impairment. In the case of non-marketable equity
securities, this requires significant judgment on our part, including an assessment of the investees financial condition, the existence of subsequent rounds of financing and the impact of any relevant equity preferences, as well as the
investees historical results of operations and projected results and cash flows. If the actual outcomes for the investees are significantly different from their forecasts, the carrying value of our non-marketable equity securities may be
overstated, and we may incur additional charges in future periods, which will decrease our profitability. At December 31, 2004, our strategic investments in non-marketable securities totaled $2.9 million.



Impact of Recently Issued Accounting Standards



In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123) and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period after June 15, 2005,
with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123, no longer will be an alternative to financial statement recognition. We are required to adopt SFAS 123R in our fourth quarter of fiscal 2005, beginning
July 1, 2005. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition
methods include prospective and retroactive adoption options. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that
compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive methods would record compensation expense for all unvested stock options and
restricted stock beginning with the first period restated. We are evaluating the requirements of SFAS 123R and we expect that the adoption of SFAS 123R will have a material impact on our consolidated results of operations and earnings per share. We
have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.



Three Months Ended December 31, 2004 Compared to Three Months Ended December 31, 2003



Net Sales. Net sales consist principally of
total product sales less estimated sales returns. Net sales decreased by 24% to $30.6 million in the three months ended December 31, 2004 from $40.3 million in the three months ended December 31, 2003. The decrease in sales was principally due to a
decrease in the average selling prices of our DRAM products, specifically our 64 and 128 Mb devices, in the three months ended December 31, 2004 compared to the three



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months ended December 31, 2003. The decline in unit shipments of our SRAM products in the three months ended December 31, 2004 compared to the three months
ended December 31, 2003, more than offset the increase in the average selling prices resulting in an overall decrease in SRAM revenue. We anticipate that the average selling prices of our existing products will generally decline over time, although
the rate of decline may fluctuate for certain products. There can be no assurance that any future price declines will be offset by higher volumes or by higher prices on newer products.



In the three months ended December 31, 2004, revenue recognized for one distributor accounted for 13% of our total net
sales. In the three months ended December 31, 2003, no single customer accounted for over 10% of net sales.



Gross profit (loss). Cost of sales includes die cost from the wafers acquired from foundries, subcontracted package, assembly and test costs, costs
associated with in-house product testing, quality assurance and import duties. Gross profit decreased by $14.7 million to $5.8 million gross loss in the three months ended December 31, 2004 from $9.0 million gross profit in the three months ended
December 31, 2003. Gross margin decreased to (18.9)% in the three months ended December 31, 2004 from 22.2% in the three months ended December 31, 2003. Our gross margin for the three months ended December 31, 2004 included inventory write-downs of
$9.6 million predominately for lower of cost or market accounting. Excluding the inventory write-downs in the three months ended December 31, 2004, the decrease in gross profit was principally due to a decrease in the average selling prices of our
DRAM products, specifically our 64 and 128 Mb devices, in the three months ended December 31, 2004 compared to the three months ended December 31, 2003. Reductions in the unit shipments of our SRAM products more than offset increases in the average
selling prices of such products in the three months ended December 31, 2004 compared to the three months ended December 31, 2003, resulting in a decrease in gross profit. We believe that the average selling prices of our products will decline over
time and, unless we are able to reduce our cost per unit to the extent necessary to offset such declines, the decline in average selling prices will result in a material decline in our gross margin. In addition, product unit costs could increase if
our suppliers raise prices, which could result in a material decline in our gross margin. In the past, foundries have raised wafer prices when demand for end products increases. Although we have product cost reduction programs in place that involve
efforts to reduce internal costs and supplier costs, there can be no assurance that product costs will be reduced or that such reductions will be sufficient to offset the expected declines in average selling prices. We do not believe that such cost
reduction efforts are likely to have a material adverse impact on the quality of our products or the level of service provided by us.



Research and Development. Research and development expenses increased by 12% to $5.1 million in the three months ended December 31, 2004 compared
to $4.5 million in the three months ended December 31, 2003. As a percentage of net sales, research and development expenses increased to 16.6% in the three months ended December 31, 2004 from 11.3% in the three months ended December 31, 2003. The
increase in absolute dollars was primarily the result of an increase in mask costs and other expenses associated with new product development. In addition, payroll related expenses increased in the three months ended December 31, 2004 as salary
reductions that were in place in the three months ended December 31, 2003 were no longer in effect. The acquisition of a majority interest in Signia and the resulting consolidation of their financial results also contributed to the increase in
research and development expenses. We expect that our research and development expenses will increase in the March 2005 quarter as a result of costs associated with the reduction in force announced in January 2005.



Selling, General and Administrative. Selling, general and
administrative expenses increased by 8% to $4.2 million in the three months ended December 31, 2004 from $3.9 million in the three months ended December 31, 2003. As a percentage of net sales, selling, general and administrative expenses increased
to 13.8% in the three months ended December 31, 2004 from 9.7% in the three months ended December 31, 2003. The increase in absolute dollars was the primarily result of a write-off of approximately $154,000 for software due to the cancellation of an
implementation program. In addition, payroll related expenses increased in the three months ended December 31, 2004 as salary reductions that were in place in the three months ended December 31, 2003 were no longer in effect. The acquisition of a
majority interest in Signia and the resulting consolidation of their financial results also contributed to the increase in selling, general and administrative expenses. This was partially offset by decreased selling commissions associated with lower
revenues in the three months ended December 31, 2004 compared to the three months ended December 31, 2003. Changes in corporate governance rules, in particular, complying with the internal control requirements of the Sarbanes-Oxley Act of 2002
Section 404, have and will continue to result in increased internal efforts, significantly higher fees from our independent accounting firm and significantly higher fees from third party contractors. As a result, we expect our selling, general and
administrative expenses will increase in absolute dollars in future quarters, although such expenses may fluctuate as a percentage of net sales.



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Other income (expense), net. Other income, net was $0.6 million in the three months ended December
31, 2004 compared to $0.1 million in the three months ended December 31, 2003. In the three months ended December 31, 2004, interest income increased by approximately $0.5 million compared to the three months ended December 31, 2003 as the result of
higher cash balances.



Gain on sale of investments. In
the three months ended December 31, 2004, we sold shares of SMIC for approximately $4.5 million which resulted in a pre-tax gain of $2.4 million. We did not sell any investments in the three months ending December 31, 2003.



Provision (benefit) for income taxes.The provision for income taxes
for the three month period ended December 31, 2004 of $1,000 consists of foreign withholding taxes. The provision for income taxes for the three month period ended December 31, 2003 of $12,000 consists of alternative minimum taxes.



Minority interest in net loss of consolidated subsidiary.In December
2004, we increased our ownership in Signia to approximately 66% of the outstanding shares from 15% at September 30, 2004. The cost of this additional investment was approximately $8.0 million in cash. Signia is a privately held wireless chipset
company based in Taipei, Taiwan. The results of their operations are included in our consolidated financial statements as of December 2004. The minority interest in net loss of consolidated subsidiary represents the minority shareholders
proportionate share of the net loss of Signia for the month of December 2004.



Equity in net income (loss) of affiliated companies.Equity in net income (loss) of affiliated companies was a $1.3 million loss in the three months ended December 31, 2004 compared to $0.3 million income in
the three months ended December 31, 2003. This primarily reflects a decline in ICSIs financial results in the three months ended December 31, 2004 compared to the three months ended December 31, 2003.



Liquidity and Capital Resources



As of December 31, 2004, our principal sources of liquidity included cash,
cash equivalents and short-term investments of approximately $126.4 million. During the three months ended December 31, 2004, operating activities used cash of approximately $10.5 million compared to $2.0 million generated in the three months ended
December 31, 2003. Cash used by operations was primarily due to net loss of $13.3 million adjusted for the gain on the sale of SMIC shares of $2.4 million, equity in net loss of affiliated companies of $1.3 million, depreciation of $0.7 million,
other non-cash items of $0.2 million and increases in inventories of $5.4 million, decreases in accounts payable of $0.7 million and decreases in accrued expenses of $0.3 million. This was partially offset by decreases in accounts receivables of
$8.6 million, and decreases in other assets of $0.8 million.



In the three months ended December 31, 2004, we generated $15.5 million from investing activities compared to $0.4 million used in the three months ended December 31, 2003. The cash generated from investing activities in the three months
ended December 31, 2004 primarily resulted from net sales of available-for-sale securities of $18.3 million. In addition, in the December 2004 quarter, we generated approximately $4.5 million from the sale of additional shares of SMIC, resulting in
a pre-tax gain of approximately $2.4 million. We used approximately $6.7 million for our additional investment in Signia which is comprised of cash used for the purchase of Signia shares of $7.6 million less cash acquired in consolidation of Signia
of $0.9 million. The cash used for investing activities in the three months ended December 31, 2003 partially resulted from net purchases of available-for-sale securities of $0.1million.



In the three months ended December 31, 2004, we made capital expenditures of approximately $0.6 million for test equipment
and engineering tools. We expect to spend approximately $2.0 million to $5.0 million to purchase capital equipment during the next twelve months, principally for the purchase of design and engineering tools, additional test equipment, and computer
software and hardware.



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We generated $2.1 million from financing activities during the three months ended December 31, 2004
compared to $3.1 million in the three months ended December 31, 2003. The source of financing for the current quarter was a decrease in restricted cash of $1.5 million and proceeds from the issuance of common stock of $0.6 million from stock option
exercises. The primary source of financing for the three months ended December 31, 2003 was proceeds from the issuance of common stock of $3.1 million from stock option exercises.



We lease our facilities including our headquarters in Santa Clara, California, our field sales offices in the U.S. and
Europe, and sales and engineering offices in Asia. Our leases expire at various dates through 2007. Our outstanding commitments under these leases are approximately $4.1 million.



We generally warrant our products against defects in materials and workmanship for a period of 12 months. Liability for a
stated warranty period is usually limited to replacement of defective items or return of amounts paid. Warranty expense has historically been immaterial to our financial statements.



On January 25, 2005, we announced the execution on such date of a Merger Agreement (the Merger Agreement)
between Integrated Silicon Solution (Taiwan), Inc. (ISSI-Taiwan) and ICSI. Prior to the transaction, we owned approximately 29.1% of the outstanding shares of ICSI and approximately $3.6 million of convertible debentures of ICSI. The
consideration to be paid by us in connection with the merger is cash in the aggregate amount of approximately $69 million (excluding the value of the shares of ICSI held by us prior to the transaction). The Merger Agreement has been approved by the
boards of directors of ISSI, ISSI-Taiwan and ICSI and is subject to approval of the shareholders of ICSI, regulatory approvals and other customary closing conditions. We anticipate that the merger will be completed in the June 2005 quarter.



Our contractual cash obligations at December 31, 2004 are
outlined in the table below:



|                                          |  |                        |        |                  |   |           |  |           |       |                   |   |     |  |   |  
|----------------------------------------- |  | ---------------------- | ------ | ---------------- | - | --------- |  | --------- | ----- | ----------------- | - | --- |  | - | -
|                                          |  | Payments Due by Period
|Contractual Obligations                   |  | Total                  |        | Less than 1 year |   | 1-3 years |  | 3-5 years |       | More than 5 years
|                                          |  | (In thousands)        
|Operating leases                          |  | $                      | 4,080  |                  | $ | 1,424     |  | $         | 1,864 |                   | $ | 792 |  | $ | 
|Purchase obligations with wafer foundries |  |                        | 4,040  |                  |   | 4,040     |  |           |      |                   |   |    |  |   | 
|Non-cancelable purchase commitments       |  |                        | 2,355  |                  |   | 2,355     |  |           |      |                   |   |    |  |   | 
|                                          |  |                        |        |                  |   |           |  |           |       |                   |   |     |  |   |  
|Total contractual cash obligations        |  | $                      | 10,475 |                  | $ | 7,819     |  | $         | 1,864 |                   | $ | 792 |  | $ | 
|                                          |  |                        |        |                  |   |           |  |           |       |                   |   |     |  |   |  



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



Off-Balance Sheet
Arrangements



As of December 31, 2004, we did not have any
significant off-balance sheet arrangements, as defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.



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Certain Factors Which May Affect Our Business or Future Operating Results



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



We incurred a loss of $13.3 million in the first quarter of fiscal 2005, which included an inventory write-down of $9.6 million. Though we were profitable in the first three quarters of fiscal 2004, we incurred a loss
of $15.6 million in the fourth quarter of fiscal 2004, which included an inventory write-down of $12.1 million. We incurred losses in the ten consecutive quarters ended September 30, 2003 totaling $124.0 million. We expect to incur a loss in the
March 2005 quarter and may incur losses in subsequent quarters. Our ability to achieve and maintain profitability on a quarterly or fiscal year basis in the future will depend on a variety of factors, including our ability to increase net sales,
maintain or expand gross margins, introduce new products on a timely basis, secure sufficient wafer fabrication capacity and control operating expenses. Adverse developments with respect to these or other factors could result in quarterly or annual
operating losses in the future.



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



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



| |  |  | the cyclicality of the semiconductor industry;
| | - |  | ----------------------------------------------



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



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



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



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



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



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



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



| |  |  | cancellation of existing orders or the failure to secure new orders;
| | - |  | --------------------------------------------------------------------



| |  |  | our failure to introduce new products and to implement technologies on a timely basis;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | market acceptance of ours and our customers products;
| | - |  | ------------------------------------------------------



| |  |  | economic slowness and low end-user demand;
| | - |  | ------------------------------------------



| |  |  | our failure to anticipate changing customer product requirements;
| | - |  | -----------------------------------------------------------------



| |  |  | fluctuations in manufacturing yields at our suppliers;
| | - |  | ------------------------------------------------------



| |  |  | our failure to deliver products to customers on a timely basis;
| | - |  | ---------------------------------------------------------------



| |  |  | the timing of significant orders;
| | - |  | ---------------------------------



| |  |  | increased expenses associated with new product introductions, masks or process changes;
| | - |  | ---------------------------------------------------------------------------------------



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| |  |  | the ability of customers to make payments to us; and
| | - |  | ----------------------------------------------------



| |  |  | the commencement of, or developments with respect to, any litigation or future antidumping proceedings.
| | - |  | -------------------------------------------------------------------------------------------------------



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



Approximately 94% of our net sales are derived
from the sale of DRAM and SRAM products, which are subject to unit volume fluctuations and declines in average selling prices that could harm our business. For example, in fiscal 2004, we experienced a sequential decline in revenue from $58.1
million in our June 2004 quarter to $31.1 million in our September 2004 quarter. This decline was a result of a decrease in unit shipments of our products due to lower demand for electronic products that use our devices, as well as a decline in the
average selling prices of our products. We may not be able to offset any future price declines by higher volumes or by higher prices on newer products. Historically, average selling prices for semiconductor memory products have declined, and we
expect that average selling prices for our products will decline in the future. In this regard, we anticipate a decline in the average selling prices for our DRAM and certain of our SRAM products in the March 2005 quarter compared to the December
2004 quarter. Our ability to maintain or increase revenues will depend upon our ability to increase unit sales volume of existing products and introduce and sell new products that compensate for the anticipated declines in the average selling prices
of our existing products.



Any future downturn in the markets we serve would
harm our business and financial results.



Substantially
all of our products are incorporated into products for the digital consumer electronics, networking, mobile communications and automotive electronics markets. Historically, these markets have experienced cyclical depressed business conditions, often
in connection with, or in anticipation of, a decline in general economic conditions or due to adverse supply and demand conditions in such markets. For example, our sales declined significantly in the fourth quarter of fiscal 2004 compared to the
third quarter of fiscal 2004 due to an oversupply of DRAM devices in the market and a general softness in SRAM demand. As a result, our sales in the digital consumer and networking markets declined significantly in the September 2004 quarter and
they remained at a lower level in the December 2004 quarter. We are unable to predict when or to what extent the digital consumer and networking markets will recover. Industry downturns have resulted in reduced demand and declining average selling
prices for our products which adversely affected our business. We expect that our industry will remain cyclical, but are unable to predict when any upturn or downturn will occur or how long they will last.



Shifts in industry-wide capacity may cause our results to fluctuate. These shifts may
occur quickly with little or no advance notice. Such shifts have resulted in significant inventory write-downs.



The semiconductor industry is highly cyclical and is subject to significant downturns resulting from excess capacity, overproduction, reduced demand or
technological obsolescence. Shifts in industry-wide capacity from shortages to oversupply or from oversupply to shortages may result in significant fluctuations in our quarterly or annual operating results. These shifts in industry conditions can
occur quickly with little or no advance notice to us. Adverse changes in industry conditions are likely to result in a decline in average selling prices and the stated value of inventory. In fiscal 2003, fiscal 2004 and the first quarter of fiscal
2005, we recorded inventory write-downs of $4.1 million, $17.3 million and $9.6 million, respectively. The inventory write-downs were predominately for lower of cost or market accounting on our products, and to a lesser extent, excess inventory.



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



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We believe that six months is an appropriate period because it is difficult to accurately forecast for a
specific product beyond this time frame due to the potential introduction of products by competitors, technology obsolescence or fluctuations in demand. Future additional inventory write-downs may occur due to lower of cost or market accounting,
excess inventory or inventory obsolescence.



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



If we are unable to obtain an adequate supply of wafers from our current suppliers or any alternative sources in a timely manner, our business will be harmed. Our principal manufacturing relationships are with SMIC, Taiwan Semiconductor
Manufacturing Corporation, or TSMC, Chartered Semiconductor Manufacturing, ProMOS Technologies and Powerchip Semiconductor. Each of our wafer foundries also supplies wafers to other semiconductor companies, including certain of our competitors.
Although we are allocated specific wafer capacity from our suppliers, we may not be able to obtain such capacity in periods of tight supply. If any of our suppliers experience manufacturing failures or yield shortfalls, choose to prioritize capacity
for other uses, or reduce or eliminate deliveries to us, we may not be able to obtain enough wafers to meet the market demand for our products which would adversely affect our revenues. In particular, our supply of wafers, especially from SMIC, in
the June 2004 quarter was lower than our needs, which adversely impacted our results for such period. Once a product is in production at a particular foundry, it is time consuming and costly to have such product manufactured at a different foundry.
In addition, we may not be able to qualify additional manufacturing sources for existing or new products in a timely manner and we cannot be certain that other manufacturing sources would be able to deliver an adequate supply of wafers to us.



Our gross margins may decline even in periods of increasing revenue.



Our gross margin is affected by a variety of factors
including our mix of products sold, average selling prices for our products and cost of wafers. Even when our revenues are increasing, our gross margin may be adversely affected if such increased revenue is from products with lower margins or
declining average selling prices. During periods of strong demand, wafer capacity is likely to be in short supply and we will likely have to pay higher prices for wafers which would adversely affect our gross margin unless we are able to increase
our product prices to offset such costs. To maintain our gross margins when average selling prices are declining, we must introduce new products with higher margins or reduce our cost per unit. There can be no assurance that we will be able to
increase unit sales volumes, introduce and sell new products or reduce our cost per unit.



We rely on third-party contractors to assemble and test our products and our failure to successfully manage our relationships with these contractors could damage our relationships with our customers, decrease our
sales and limit our growth.



We rely on third-party
contractors located in Asia to assemble and test our products. There are significant risks associated with our reliance on these third-party contractors, including:



| |  |  | reduced control over product quality;
| | - |  | -------------------------------------



| |  |  | potential price increases;
| | - |  | --------------------------



| |  |  | reduced control over delivery schedules;
| | - |  | ----------------------------------------



| |  |  | capacity shortages;
| | - |  | -------------------



| |  |  | their inability to increase production and achieve acceptable yields on a timely basis;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | absence of long-term agreements;
| | - |  | --------------------------------



| |  |  | limited warranties on products supplied to us; and
| | - |  | --------------------------------------------------



| |  |  | general risks related to conducting business internationally.
| | - |  | -------------------------------------------------------------



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If any of these risks are realized, our business and results of operations could be adversely affected until our subcontractor is able to remedy the problem
or until we are able to secure an alternative subcontractor.



The loss of a
significant customer or a reduction in orders from such a customer could adversely affect our operating results.



As sales to our customers are executed pursuant to purchase orders and no purchasing contracts typically exist, our customers can cease doing business
with us at any time. In the three months ended December 31, 2004, revenue recognized for one distributor accounted for 13% of our total net sales. In fiscal 2004, no single customer accounted for over 10% of our total net sales. In fiscal 2003,
sales to ATM Electronic Corporation, a distributor in Taiwan, accounted for approximately 10% of our total net sales. A substantial portion of our sales to ATM were for delivery to Ambit. During the September quarter of fiscal 2004, we experienced
cancelled or reduced orders from some of our larger customers that adversely impacted our operating results. We may not be able to retain our key customers, such customers may cancel or reschedule orders, and in the event of canceled orders, such
orders may not be replaced by other sales. In addition, sales to any particular customer may fluctuate significantly from quarter to quarter, and such fluctuating sales could harm our business and financial results.



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



In the three months ended December 31, 2004, approximately 19% of our net sales was attributable to customers located in the U.S., 16% was attributable to customers located in Europe and 61% was attributable to customers located

in Asia. In fiscal 2004, approximately 13% of our net sales was attributable to shipments in the U.S., 11% was attributable to shipments in Europe and 75% was
attributable to shipments in Asia. In fiscal 2003, approximately 13% of our net sales was attributable to shipments in the U.S., 10% was attributable to shipments in Europe and 77% was attributable to shipments in Asia. We anticipate that sales to
international sites will continue to represent a significant percentage of our net sales. In addition, all of our wafer foundries and assembly and test subcontractors are in Taiwan, China and Singapore.



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



| |  |  | global economic conditions, particularly in Taiwan and China;
| | - |  | -------------------------------------------------------------



| |  |  | duties, tariffs and other trade barriers and restrictions;
| | - |  | ----------------------------------------------------------



| |  |  | changes in trade policy and regulatory requirements;
| | - |  | ----------------------------------------------------



| |  |  | transportation delays;
| | - |  | ----------------------



| |  |  | the burdens of complying with foreign laws;
| | - |  | -------------------------------------------



| |  |  | foreign currency fluctuations;
| | - |  | ------------------------------



| |  |  | imposition of foreign currency controls;
| | - |  | ----------------------------------------



| |  |  | language barriers;
| | - |  | ------------------



| |  |  | difficulties in hiring experienced engineers in countries such as China;
| | - |  | ------------------------------------------------------------------------



| |  |  | difficulties in collecting foreign accounts receivable;
| | - |  | -------------------------------------------------------



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



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



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



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Our revenues and business would be harmed if we are not able to successfully develop, introduce and sell new products
and develop and implement new manufacturing technologies in a timely manner.



We operate in highly competitive, quickly changing markets which are characterized by rapid obsolescence of existing products. As a result, our future success depends on our ability to develop and introduce new
products that our customers choose to buy in significant quantities. If we fail to introduce new products in a timely manner or if our customers products do not achieve commercial success, our business and results of operations could be
seriously harmed. The design and introduction of new products is challenging as such products typically incorporate more functions and operate at faster speeds than prior products. Increasing complexity generally requires smaller features on a chip.
This makes developing new generations of products substantially more difficult than prior generations. Further, new products may not work properly in our customers applications. If we are unable to design, introduce, market and sell new
products successfully, our business and financial results would be seriously harmed.



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



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



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



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



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



We may be unable to effectively protect our intellectual property, which would negatively impact our ability to compete.



We believe that the protection of our intellectual proprietary rights will continue to be important to the success of our business. We rely on a
combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants and business
partners, and control access to and distribution of our documentation and other proprietary information. Despite these efforts, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology. Monitoring unauthorized
use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as do the
laws of the U.S. Many U.S. companies have encountered substantial



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infringement problems in foreign countries, including countries in which we design and sell our products. We do not currently hold any non-U.S. patents. We
cannot be certain that patents will be issued as a result of our pending applications nor can we be certain that any issued patents would protect or benefit us or give us adequate protection from competing products. For example, issued patents may
be circumvented or challenged and declared invalid or unenforceable. We also cannot be certain that others will not develop our unpatented proprietary technology or effective competing technologies on their own.



We have acquired equity positions for strategic reasons in other companies which may
significantly decrease in value.



Over the last few years,
we have acquired equity positions for strategic reasons in other technology companies and we may make similar equity purchases in the future. At December 31, 2004, our strategic investments in non-marketable securities totaled $2.9 million. These
equity securities may not increase in value and there is the possibility that they could decrease in value over time, even to the point of becoming completely worthless. These equity securities are tested for impairment on a recurring basis and any
reductions in the carrying value would lower our profitability. In this regard, we recorded approximately a $0.3 million impairment loss on one of our equity positions in fiscal 2004. In addition, we recorded approximately $0.4 million and $1.3
million in impairment losses during fiscal 2002 and fiscal 2003, respectively.



In addition, we own shares in SMIC with a cost basis of approximately $32.5 million and a market value at December 31, 2004 of approximately $61.0 million. The market value of SMIC shares is subject to fluctuation and
our carrying value will be subject to adjustments to reflect the current market value. Our shares in SMIC are subject to certain lockup restrictions and therefore are not freely tradable. These lockup restrictions generally lapse at the rate of 15%
of the Companys pre-offering shares every 180 days following the IPO. Thus all of our shares in SMIC will be freely tradable 3 years and 180 days following the IPO. As a result of these lockup restrictions and potential fluctuations in
SMICs stock price, we may be unable to realize the market value at December 31, 2004.



Our financial statements account for the results of our former subsidiary, ICSI, on the equity basis and fluctuations in ICSIs results will also impact our results.



We held approximately 29% of the equity of our former wholly-owned
subsidiary, ICSI, at December 31, 2004. Our financial results for the first quarter of fiscal 2005 and fiscal 2004 reflect accounting for ICSI on the equity basis and include our percentage share of the results of ICSIs operations. As a
result, our net income/loss will be impacted by the financial results of ICSI. We have limited visibility as to the future financial results of ICSI. Any unexpected fluctuations in ICSIs results would have an unexpected impact on our net
income which could be material to our financial results. On January 25, 2005 we announced our intent to acquire the remaining 71% of ICSI that we do not currently own. We believe that this transaction will be concluded in the June 2005 quarter at
which time we will consolidate ICSIs financial results with ours. ICSIs shares are publicly traded on the Taiwan stock exchange and its share price is subject to market fluctuations. The market value of our investment in the common stock
of ICSI at December 31, 2004 was approximately $25.3 million, based on quoted market prices. As our total carrying value of this investment as of December 31, 2004 was approximately $19.5 million, of which $15.1 million is included in other assets
and $4.4 million is included in other comprehensive income in the equity portion of our balance sheet, a significant decline in the stock price of ICSI may require us to record an impairment loss related to these shares.



Due to the potential value of our strategic investments, we could be determined to be an
investment company and, if such a determination were made, we would become subject to significant regulation that would adversely affect our business.



We are a fabless semiconductor company engaged in the design and marketing of high performance integrated circuits. We have acquired non-controlling
equity positions in SMIC and other companies for strategic, commercial reasons relating to our primary business. Most of our equity positions are in privately held entities that do not have a readily determinable market value. However, the shares we
hold in our former wholly-owned subsidiary, ICSI, are publicly traded in Taiwan and our shares in SMIC are publicly traded on the Hong Kong Stock Exchange and the New York Stock Exchange. These securities have significant value and may increase in
value in the future. In addition, our equity positions could be considered to be investment securities under the Investment Company Act of 1940 (1940



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Act), raising a question of whether we are an investment company required to register and be regulated under the 1940 Act. We believe that we are
primarily engaged in the semiconductor business and that any such securities we own are ancillary and strategically related to our semiconductor business. Accordingly, we do not believe that we are an investment company. If a court or the SEC
disagrees with this interpretation, we may be required to either dispose of a portion of the securities we own in SMIC and other companies to comply with the 1940 Act or register under the 1940 Act. If we choose to dispose of an additional portion
of our securities in SMIC, our ability to secure access to wafer capacity from SMIC may be adversely impacted. If we choose to register as an investment company, we will become subject to significant regulation under the 1940 Act which would
materially adversely affect our ability to operate as a semiconductor company.



Recently enacted and proposed changes in securities laws and regulations may increase our costs.



The Sarbanes-Oxley Act of 2002 that became law in July 2002, as well as new rules subsequently implemented by the Securities and Exchange Commission and
the Nasdaq Stock Market, have required, and will require, changes to some of our accounting and corporate governance practices, including a report on our internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002. We expect these
new rules and regulations to increase our accounting, legal and other costs, and to make some activities more difficult, time consuming and/or costly. In particular, complying with the internal control requirements of Sarbanes-Oxley Section 404 will
result in increased internal efforts, significantly higher fees from our independent accounting firm and significantly higher fees from third party contractors. We also expect these new rules and regulations to make it more difficult and more
expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These new rules and regulations could also make it more difficult for us
to attract and retain qualified executive officers and qualified members of our board of directors, particularly to serve on our audit committee.



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



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



Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with
our Annual Report on Form 10-K for the fiscal year ending September 30, 2005, we will be required to furnish a report by our management on our internal control over financial reporting. Such report will contain among other matters, an assessment of
the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of
any material weaknesses in our internal control over financial reporting identified by management. Such report must also contain a statement that our auditors have issued an attestation report on managements assessment of such internal
controls. Public Company Oversight Board Auditing Standard No. 2 provides the professional standards and related performance guidance for auditors to attest to, and report on, managements assessment of the effectiveness of internal control
over financial reporting under Section 404.



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



While we currently anticipate being able to satisfy the requirements of Section 404 in a timely fashion, we cannot be certain as to the timing of
completion of our evaluation, testing and any required remediation due in large part to the fact that there is no precedent available by which to measure compliance with the new Auditing Standard No. 2. If we are not able to comply with the
requirements of Section 404 in a timely manner or if our auditors are not able to



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complete the procedures required by Auditing Standard No. 2 to support their attestation report, we could lose investor confidence in the accuracy and
completeness of our financial reports, which would have an adverse effect on our stock price.



Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.



We prepare our financial statements in conformity with accounting principles generally accepted in the U.S. These accounting
principles are subject to interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate
accounting policies. A change in these policies or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. For example, while
current accounting rules allow us to exclude the expense of stock options from our financial statements, the Financial Accounting Standards Board (FASB) has issued changes to US GAAP that will require us to record a charge to earnings for employee
stock option grants for all awards unvested at and granted after July 1, 2005. This regulation will negatively impact our earnings. Technology companies generally, and our company, specifically, rely on stock options as a major component of our
employee compensation packages. If we are required to expense options, we may be less likely to sustain profitability or we may have to decrease or eliminate options grants. Decreasing or eliminating option grants may negatively impact our ability
to attract and retain qualified employees.



We may encounter difficulties in
effectively integrating acquired businesses.



From time to
time, we intend to acquire other companies that we believe to be complementary to our business. Acquisitions may result in use of our cash resources, potentially dilutive issuances of equity securities, incurrence of debt and contingent liabilities,
amortization expenses related to intangible assets, and the possible impairment of goodwill, which could harm our profitability. In addition, acquisitions involve numerous risks, including:



| |  |  | higher than estimated acquisition expenses;
| | - |  | -------------------------------------------



| |  |  | difficulties in successfully assimilating the operations, technologies and personnel of the acquired company;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | diversion of managements attention from other business concerns;
| | - |  | -----------------------------------------------------------------



| |  |  | risks of entering markets in which we have no, or limited, direct prior experience;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the risk that the markets for acquired products do not develop as expected; and
| | - |  | -------------------------------------------------------------------------------



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



In this regard, on December 14, 2004, we announced that we increased our ownership in Signia to approximately 66% of the
outstanding shares. The cost of this additional investment was approximately $8.0 million in cash. We may encounter difficulties in effectively working with Signia. Furthermore, we could be subject to charges for impairment if Signias business
materially declines. There is no assurance that Signia or any future acquisitions will contribute positively to our business or operating results.



Further, on January 25, 2005, we announced the execution on such date of a Merger Agreement (the Merger Agreement) between Integrated Silicon
Solution (Taiwan), Inc. (ISSI-Taiwan) and ICSI. Prior to the transaction, we owned approximately 29.1% of the outstanding shares of ICSI and approximately $3.6 million of convertible debentures of ICSI. The consideration to be paid by us
in connection with the merger is cash in the aggregate amount of approximately $69 million (excluding the value of the shares of ICSI held by us prior to the transaction). The Merger Agreement has been approved by the boards of directors of ISSI,
ISSI-Taiwan and ICSI and is subject to approval of the shareholders of ICSI, regulatory approvals and other customary closing conditions. We anticipate that the merger will be completed in the June 2005 quarter. We may encounter difficulties in
integrating ICSIs operations with ours.



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Furthermore, the costs of the combined operations may be higher than anticipated. There is no assurance that ICSI will contribute positively to our business
or operating results.



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



Our success
depends upon the continued service of our key technical and management personnel, including Jimmy S.M. Lee, our Chairman and Chief Executive Officer, and Gary L. Fischer, our President, Chief Operating Officer, and Chief Financial Officer. Several
of our important manufacturing and other subcontractor relationships are based on personal relationships between our senior executive officers and such parties. In particular, our Chairman and Chief Executive Officer has long-term relationships with
our key foundries. If we were to lose the services of any key executives, it may negatively impact the related business relationships since we have no long-term contractual agreements with such parties. Our success also depends on our ability to
continue to attract, retain and motivate qualified technical personnel, particularly experienced circuit designers and process engineers. The competition for such employees is intense. We have no employment contracts or key person life insurance
policies with or for any of our employees. The loss of the service of one or more of our key personnel could harm our business.



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



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



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



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



| |  |  | new or revised earnings estimates or guidance by us or industry analysts;
| | - |  | -------------------------------------------------------------------------

| |  |  | comments or recommendations issued by analysts who follow us, our competitors or the semiconductor industry;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | aggregate valuations and movement of stocks in the broader semiconductor industry;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | announcements of new products, strategic relationships or acquisitions by us or our competitors;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | increases or decreases in available wafer capacity;
| | - |  | ---------------------------------------------------



| |  |  | governmental regulations, trade laws and import duties;
| | - |  | -------------------------------------------------------



| |  |  | announcements related to future or existing litigation involving us or any of our competitors;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | announcements of technological innovations by us or our competitors;
| | - |  | --------------------------------------------------------------------



| |  |  | additions or departures of senior management; and
| | - |  | -------------------------------------------------



| |  |  | other events or factors, many of which are beyond our control.
| | - |  | --------------------------------------------------------------



In addition, stock markets have experienced extreme price and trading volume volatility in recent years. This volatility has had a substantial effect on
the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock. For
example, on March 24, 2003, our closing stock price was $2.26 per share, rose to $19.87 per share on January 13, 2004, and subsequently declined to $6.11 per share on January 27, 2005.



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Foundry capacity can be limited, and we may be required to enter into costly arrangements to secure foundry capacity.



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



| |  |  | purchases of equity or debt securities in foundries;
| | - |  | ----------------------------------------------------



| |  |  | joint ventures;
| | - |  | ---------------



| |  |  | process development relationships with foundries;
| | - |  | -------------------------------------------------



| |  |  | contracts that commit us to purchase specified quantities of wafers over extended periods;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | increased price for wafers;
| | - |  | ---------------------------



| |  |  | option payments or other prepayments to foundries; and
| | - |  | ------------------------------------------------------



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



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



Our foundries may experience lower than
expected yields which could adversely effect our business.



The manufacture of integrated circuits is a highly complex and technically demanding process. Production yields and device reliability can be affected by a large number of factors. As is typical in the semiconductor industry, our outside
foundries have from time to time experienced lower than anticipated manufacturing yields and device reliability problems, particularly in connection with the introduction of new products and changes in such foundrys processing steps. There can
be no assurance that our foundries will not experience lower than expected manufacturing yields or device reliability problems in the future, which could materially and adversely affect our business and operating results.



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



The semiconductor memory market is intensely competitive
and has been characterized by an oversupply of product, price erosion, rapid technological change, short product life cycles, cyclical market patterns, and heightened foreign and domestic competition. Many of our competitors offer broader product
lines and have greater financial, technical, marketing, distribution and other resources than us. In particular, a competitor with a materially smaller die size and lower cost could dramatically gain market share in a short period of time. We may
not be able to compete successfully against any of these competitors. Our ability to compete successfully in the memory market depends on factors both within and outside of our control, including:



| |  |  | the pricing of our products;
| | - |  | ----------------------------



| |  |  | the supply and cost of wafers;
| | - |  | ------------------------------



| |  |  | product design, functionality, performance and reliability;
| | - |  | -----------------------------------------------------------



| |  |  | successful and timely product development;
| | - |  | ------------------------------------------



| |  |  | the performance of our competitors and their pricing policies;
| | - |  | --------------------------------------------------------------



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| |  |  | wafer manufacturing over or under capacity;
| | - |  | -------------------------------------------



| |  |  | real or perceived imbalances in supply and demand for our products;
| | - |  | -------------------------------------------------------------------



| |  |  | the rate at which OEM customers incorporate our products into their systems;
| | - |  | ----------------------------------------------------------------------------



| |  |  | the success of our customers products and end-user demand;
| | - |  | -----------------------------------------------------------



| |  |  | access to advanced process technologies at competitive prices;
| | - |  | --------------------------------------------------------------



| |  |  | achievement of acceptable yields of functional die;
| | - |  | ---------------------------------------------------



| |  |  | the capacity of our third-party contractors to assemble and test our products;
| | - |  | ------------------------------------------------------------------------------



| |  |  | the gain or loss of significant customers; and
| | - |  | ----------------------------------------------



| |  |  | the nature of our competitors and general economic conditions.
| | - |  | --------------------------------------------------------------



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



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



Terrorist acts,
conflicts or wars (wherever located around the world), as well as future events occurring in response or connection to them, including future terrorist attacks against U.S. targets, rumors or threats of war, actual conflicts involving the U.S. or
its allies (such as the war in Iraq), conflict between China and Taiwan, or trade disruptions impacting our domestic or foreign suppliers or our customers, may impact our operations and may, among other things, cause delays or losses in the delivery
of wafers or other products to us and decreased sales of our products. More generally, these events have affected, and are expected to continue to affect, the general economy and customer demand for products sold by our customers. Any of these
occurrences could have a significant impact on our operating results, revenues and costs, which in turn may result in increased volatility in our common stock price and a decline in the price of our common stock.



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Item 3. Quantitative and Qualitative Disclosures about Market Risk



Our financial market risk includes risks associated with international operations and related foreign currencies. We anticipate that international sales
will continue to account for a significant portion of our consolidated revenue. Our international sales are largely denominated in U.S. dollars and therefore are not subject to material foreign currency exchange risk. We have operations in China,
Europe, Taiwan, Hong Kong, India and Korea. Expenses of our international operations are denominated in each countrys local currency and therefore are subject to foreign currency exchange risk; however, through December 31, 2004 we have not
experienced any significant negative impact on our operations as a result of fluctuations in foreign currency exchange rates. We do not currently engage in any hedging activities.



We had short-term investments of $102.2 million at December 31, 2004. The primary objective of our investment activities is
to preserve principal while at the same time maximizing yields without increasing risk. We invest primarily in high-quality, short-term debt instruments such as municipal auction rate certificates and instruments issued by high quality financial
institutions and companies, including money market instruments. A hypothetical one percentage point decrease in interest rates would result in approximately a $1.0 million decrease in our interest income.



We own approximately 29% of ICSI, a public company listed on the Taiwan Stock
Exchange. We account for this investment on the equity basis and our total carrying value of this investment as of December 31, 2004 was approximately $19.5 million of which $15.1 million is included in other assets and $4.4 million is included in
other comprehensive income in the equity portion of our balance sheet. The market value of our investment in the common stock of ICSI at December 31, 2004 was approximately $25.3 million, based on quoted market prices. The share price of ICSI is
subject to fluctuations. A significant decline in the stock price of ICSI may require us to record a loss related to this investment. In addition, we own approximately $3.6 million of ICSI convertible debentures. As a result of changes in
ICSIs convertible debenture price, as of December 31, 2004, we recorded an accumulated unrealized gain of approximately $604,000 related to the ICSI convertible debentures. This gain was included in other comprehensive income in the equity
portion of our balance sheet. In addition, in the three months ended December 31, 2004, we recorded a charge of approximately $22,000 related to the decline in the fair value of an embedded derivative associated with the ICSI convertible debenture.
The charge associated with the embedded derivative is included in other income (expense). Any future decline in ICSIs debenture price would result in additional losses.



We own less than 2% of SMIC. On March 17, 2004, SMIC completed its IPO. SMICs ordinary shares are traded on the Hong
Kong Stock Exchange and SMIC American Depository Receipts (ADR) are traded on the New York Stock Exchange. Each SMIC ADR represents fifty (50) ordinary shares. As a result of our sale of shares of SMIC in the IPO, we recorded gross
proceeds of approximately $13.2 million in the March 2004 quarter resulting in a pre-tax gain of approximately $8.7 million. In the September 2004 quarter, we sold additional shares of SMIC and recorded gross proceeds of approximately $5.0 million
and a pre-tax gain of approximately $2.1 million. In the December 2004 quarter, we sold additional shares of SMIC and recorded gross proceeds of approximately $4.5 million and a pre-tax gain of approximately $2.4 million. Since SMICs IPO, we
account for our shares in SMIC under the provisions of FASB 115 and have marked our investment to the market value as of December 31, 2004 by increasing other assets and by increasing accumulated comprehensive income in the equity section of the
balance sheet. The cost basis of our shares in SMIC is approximately $32.5 million and the market value at December 31, 2004 was approximately $61.0 million. The market value of SMIC shares is subject to fluctuations and our carrying value will be
subject to adjustments to reflect the current market value. Our shares in SMIC are subject to certain lockup restrictions and therefore are not freely tradable. These lockup restrictions generally lapse at the rate of 15% of our pre-offering shares
every 180 days following the IPO. Thus all of our shares in SMIC will be freely tradable 3 years and 180 days following the IPO. As a result of these lockup restrictions and potential fluctuations in SMICs stock price, we may be unable to
realize the market value at December 31, 2004.



We have
investments in equity securities of privately held companies for the promotion of business and strategic objectives of approximately $2.9 million at December 31, 2004. These investments are generally in companies in the semiconductor industry. These
investments are included in other assets and are accounted for using the cost method. For investments in which no public market exists, our policy is to review the operating performance, recent financing transactions and cash flow forecasts for such
companies in assessing the net realizable values of the securities of these



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companies. Impairment losses on equity investments are recorded when events and circumstances indicate that such assets are impaired and the decline in value
is other than temporary. In this regard, we recorded approximately a $0.3 million impairment loss on one of our equity positions in fiscal 2004. In addition, we recorded approximately a $1.3 million impairment loss on our investment in Signia
Technologies during fiscal 2003.



Item 4. Controls and Procedures



Our Chief Executive Officer and Chief Financial Officer, based on the evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) required by
paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that, as of December 31, 2004, our disclosure controls and procedures were effective to ensure that the information we are required to disclose in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. During the three months ended December 31, 2004, there was no change in our
internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.



Part II. OTHER INFORMATION



Item 1. Legal Proceedings



None.



Item 5. Other Information.



At our annual meeting of stockholders held on February 4, 2005 (2005 Annual Meeting), our stockholders approved an amendment to our 1993 Employee Stock Purchase Plan (ESPP) to increase the number of shares available
for issuance thereunder by 800,000, bringing the total number of shares issuable under the ESPP to 3,650,000. Employees of the Company, including our officers, are eligible to participate in the ESPP provided that such person satisfies the other
eligibility requirements set forth in the ESPP, a copy of which is provided as an exhibit to this report.



At our 2005 Annual Meeting, our stockholders also approved an amendment to our 1995 Director Stock Option Plan (Director Plan) to (i) increase
the shares reserved for issuance thereunder by 100,000 shares, bringing the total number of shares issuable under the Director Plan to 225,000 shares and (ii) extend the termination date of the plan from February 2, 2005 to February 2, 2015. Under
the Director Plan, as amended, a copy of which is provided as an exhibit to this report, each of our non-employee directors is automatically granted an option to purchase 10,000 shares of our common stock on the date on which such person first
becomes an outside director. In addition, each non-employee director is automatically granted a subsequent option to purchase 2,500 shares of our common stock on the date on which such person is re-elected by our stockholders as a director if on
such date he or she shall have served on the Companys Board of Directors for at least the preceding six months.



Item 6. Exhibits



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



|             |  |                                                                                                                         
|------------ |  | ------------------------------------------------------------------------------------------------------------------------
|Exhibit 10.1 |  | 1993 Employee Stock Purchase Plan, as amended.                                                                          
|             | 
|Exhibit 10.2 |  | 1995 Director Stock Option Plan, as amended.                                                                            
|             | 
|Exhibit 31   |  | Certification Pursuant to SEC Release No. 33-8238, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|             | 
|Exhibit 32   |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 



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SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                        |  |                                    
|----------------------- |  | -----------------------------------
|                        |  | Integrated Silicon Solution, Inc.  
|                        |  | (Registrant)                       
|                        | 
|Dated: February 9, 2005 |  | /s/ Gary L. Fischer                
|                        |  | Gary L. Fischer                    
|                        |  | President, Chief Operating Officer,
|                        |  | and Chief Financial Officer        
|                        |  | (Principal Financial and           
|                        |  | Accounting Officer)                



33