<PAGE>
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                                UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                            Washington, DC. 20549
                            _____________________


                                 FORM 10-QSB


(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, 1998 
    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 0-23841
                          __________________________


                       INTEGRATED SENSOR SOLUTIONS, INC.
             (Exact name of registrant as specified in its charter)


              DELAWARE                                  77-0212047
  (State or other jurisdiction of                    (I.R.S. Employer
  Incorporation or organization)                    Identification No.)

            625 River Oaks Parkway, San Jose, California 95134
         (Address of principal executive offices)      (Zip code)
                           (408) 324-1044
           (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 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 [ ]


Outstanding shares of registrant's common stock, $.001 par value, as of 
February 12, 1998: 7,669,850



    This Report on Form 10-QSB includes 23 pages with the Index to Exhibits
    located on pages 19 to 20.



<PAGE>   1


                      INTEGRATED SENSOR SOLUTIONS, INC.
                            REPORT ON FORM 10-QSB
                     FOR QUARTER ENDED DECEMBER 31, 1998
                              TABLE OF CONTENTS



                                                                      Page
                                                                      ----

PART I.   FINANCIAL INFORMATION

    Item 1.  Financial Statements:

              Condensed Consolidated Balance Sheets - December 31,
                1998 (unaudited) and March 31, 1998..................   3

              Condensed Consolidated Statements of Operations - 
                Three and Nine  Months Ended December 31, 1998 and 
                1997 (unaudited) ....................................   4

              Condensed Consolidated Statements of Cash Flows - Nine  
                Months Ended December 31, 1998 and 1997 (unaudited)..   5


              Notes to Condensed Consolidated Financial Statements 
                (unaudited)..........................................   6


    Item 2.  Management's Discussion and Analysis of Financial 
              Condition and Results of Operations ...................  10


PART II.   OTHER INFORMATION

    Item 1.  Legal Proceedings ......................................  19

    Item 5.  Other Information ......................................  19

    Item 6.  Exhibits and Reports on Form 8-K .......................  19

             Signature ..............................................  21


                                      2

<PAGE>   2



ITEM 1.   FINANCIAL STATEMENTS

                      INTEGRATED SENSOR SOLUTIONS, INC.
<TABLE>
<CAPTION>
                    CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)

                                                  December 31,    March 31,
                                                      1998         1998 (1)
                                                  ------------   -----------
                                                  (Unaudited)

<S>                                                <C>            <C>
ASSETS

CURRENT ASSETS:
 Cash and cash equivalents                          $    782       $ 17,610
 Short-term investments                                9,274              -
 Accounts receivable, net                              5,166          3,720
 Accounts receivable from related parties              1,012            802
 Inventories                                           6,779          3,120
 Prepaid expenses and other current assets               538            255
                                                    --------       --------

   Total current assets                               23,551         25,507

PROPERTY AND EQUIPMENT, NET                            6,641          2,254

OTHER ASSETS                                             193              -
                                                    --------       --------

TOTAL ASSETS                                        $ 30,385       $ 27,761
                                                    ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
 Line of credit                                     $    400       $    900
 Accounts payable-trade                                4,315          3,279
 Accounts payable to related parties                   1,279          1,144
 Current portion of capital lease obligations            213            358
 Other current liabilities                               883            659
                                                    --------       --------

   Total current liabilities                           7,090          6,340

LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS           188            108
MINORITY INTEREST IN SUBSIDIARY                           49             78

STOCKHOLDERS' EQUITY:

 Common stock                                              8              7
 Additional paid-in capital                           33,941         31,064
 Accumulated deficit                                 (10,698)        (9,428)
 Cumulative translation adjustment                        95            (33)
 Deferred compensation                                  (288)          (375)
                                                    --------       --------

   Total stockholders' equity                         23,058         21,235
                                                    --------       --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY          $ 30,385       $ 27,761
                                                    ========       ========
</TABLE>

(1)  Derived from the March 31, 1998 audited balance sheet included in the 
     1998 Annual Report on Form 10-KSB of Integrated Sensor Solutions, Inc.

         See notes to condensed consolidated financial statements.

                                      3

<PAGE>   3


                      INTEGRATED SENSOR SOLUTIONS, INC.

<TABLE>
<CAPTION>
               CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                (Unaudited)
                  (in thousands, except per share amounts)

                                      Three Months Ended  Nine Months Ended
                                         December 31,        December 31,   
                                      ------------------  ------------------
                                         1998     1997       1998     1997  
                                       -------- --------   -------- --------

<S>                                  <C>      <C>        <C>      <C>  
REVENUES:
 Product revenue                      $  5,386 $  2,905   $ 14,627 $  7,873
 Contract revenue                          893    1,097      2,174    3,140
                                      -------- --------   -------- --------
  Total revenues (related party 
   revenues of $531, $498, $2,360 
   and $1,365 for the three and 
   nine months ended December 31,
   1998 and 1997, respectively)          6,279    4,002     16,801   11,013
                                      -------- --------   -------- --------

COST OF REVENUES:
 Cost of product revenue                 4,146    1,873     11,000    5,328
 Cost of contract revenue                  840      994      2,345    2,571
                                      -------- --------   -------- --------

  Total cost of revenues                 4,986    2,867     13,345    7,899
                                      -------- --------   -------- --------

GROSS PROFIT                             1,293    1,135      3,456    3,114
                                      -------- --------   -------- --------

OPERATING EXPENSES:
 Research and development                1,094      426      3,125    1,265
 Sales, general, and administrative        746      533      2,166    1,468
                                      -------- --------   -------- --------
  Total operating expenses               1,840      959      5,291    2,733
                                      -------- --------   -------- --------

  INCOME (LOSS) FROM OPERATIONS           (547)     176     (1,835)     381

INTEREST EXPENSE                           (27)     (54)      (101)    (159)
INTEREST INCOME                            160       -         554        -
OTHER INCOME (EXPENSE), NET                (45)     (76)       101       10)
MINORITY INTEREST IN NET (INCOME)
 LOSS OF CONSOLIDATED SUBSIDIARY            (3)     (55)        11     (117)
                                      -------- --------   -------- --------

NET INCOME (LOSS)                     $   (462) $    (9)  $ (1,270) $    95
                                      ======== ========   ======== ========

Basic and diluted net income (loss)
 per share (pro forma for 1997)       $  (0.06) $ (0.00)  $  (0.17) $  0.02
                                      ======== ========   ======== ========

Shares used in computing basic net
 income (loss) per share (pro forma
 for 1997)                               7,617    4,700      7,593    4,584
                                      ======== ========   ======== ========
Shares used in computing diluted 
 net income (loss) per share (pro
 forma for 1997)                         7,617    4,700      7,593    5,003
                                      ======== ========   ======== ========
</TABLE>

        See notes to condensed consolidated financial statements.


                                      4

<PAGE>   4


                      INTEGRATED SENSOR SOLUTIONS, INC.

<TABLE>
<CAPTION>
               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (Unaudited)
                               (in thousands)

                                                       Nine Months Ended 
                                                         December  31,   
                                                       ------------------
                                                         1998      1997  
                                                       --------  --------

<S>                                                   <C>       <C>
Operating activities
Net income (loss)                                      $ (1,270) $     95
Adjustments to reconcile net income (loss) to net
 cash used in operating activities:
 Depreciation and amortization                            1,037       633
 Amortization of deferred compensation                       87        87
 Minority interest in net income of subsidiary              (11)      116
 Foreign currency gains                                    (203)      (14)
 Changes in operating assets and liabilities:
  Accounts receivable, net                               (1,631)   (1,677)
  Inventories                                            (3,398)     (900)
  Prepaid expenses                                         (307)     (362)
  Accounts payable                                        1,144       480
  Accrued payroll and related expenses                       85        48
  Other accrued liabilities                                 130       555
                                                       --------  --------
 Net cash used in operating activities                   (4,337)     (939)
                                                       --------  --------

Investing activities
Purchases of short-term investments                      (9,274)        -
Purchase of property and equipment                       (5,233)    ( 721)
Proceeds from sale of property and equipment                  -        46
Investment in consolidated subsidiary                      (211)        -
                                                       --------  --------
 Net cash used in investing activities                  (14,718)     (675)
                                                       --------  --------

Financing activities
Payments on line of credit                                 (500)      300
Payments of principal on notes payable                        -      (432)
Payments of principal on capital lease obligations         (151)     (140)
Net proceeds from issuance of preferred
  and common stock                                        2,878       502
                                                       --------  --------
 Net cash provided by financing activities                2,227       230
                                                       --------  --------

Decrease in cash and cash equivalents                   (16,828)   (1,384)
Cash and cash equivalents at beginning of period         17,610     2,059
                                                       --------  --------
Cash and cash equivalents at end of period             $    782  $    675
                                                       ========  ========

Supplemental disclosure of cash flow information
Interest paid                                          $    101  $    100
                                                       ========  ========

Schedule of non-cash financing activities
Equipment acquired under capital leases                $     86  $     41
                                                       ========  ========
Accounts payable converted to capital leases           $     79  $      -
                                                       ========  ========
Issuance of preferred stock for payment of 
 notes payable                                         $      -  $    400
                                                       ========  ========
Issuance of preferred stock for payment of 
 interest on notes payable                             $      -  $     82
                                                       ========  ========
</TABLE>

        See notes to condensed consolidated financial statements


                                      5

<PAGE>   5


                      INTEGRATED SENSOR SOLUTIONS, INC.
            NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 (Unaudited)

1.    SIGNIFICANT  ACCOUNTING  POLICIES 

Interim Financial Information

     The accompanying condensed consolidated financial statements of 
Integrated Sensor Solutions, Inc. and its majority-owned subsidiary ("ISS" 
or the "Company") as of December 31, 1998 and for the three and nine months 
ended December 31, 1998 and 1997 are unaudited. In the opinion of 
management, the condensed consolidated financial statements include all 
adjustments (consisting only of normal recurring accruals) that management 
considers necessary for a fair presentation of its financial position, 
operating results and cash flows for the interim periods presented. 
Operating results and cash flows for interim periods are not necessarily 
indicative of results for the entire year.

     The preparation of financial statements in conformity with generally 
accepted accounting principles requires management to make estimates and 
assumptions that affect the amounts reported in the financial statements and 
accompanying notes. Actual results could differ from those estimates. 

     This financial data should be read in conjunction with the audited 
consolidated financial statements and notes thereto included in the 
Company's Annual Report on Form 10-KSB for the year ended March 31, 1998.


Major Customers and Concentration of Credit Risks

     Many of the Company's customers are primarily involved in the 
automotive market. The Company performs ongoing credit evaluations of its 
customers and generally does not require collateral. The Company maintains 
reserves for potential credit losses, and such losses have been within 
management's expectations. 

     Significant customers accounted for the following percentages of 
revenues: 

<TABLE>
                                                          Nine Months
                                                        Ended December 31,
                                                       -------------------

                                                          1998     1997  
                                                        -------- --------
    <S>                                                  <C>        <C>
     Robert Bosch GmbH                                      48%        30%
     Echlin Corporation                                     15%         -%
     Nagano Keiki Co., Ltd.                                 14%        12%
     Masco Tech                                              -%        25%
</TABLE>



2.    INVENTORIES

      Inventories consist of the following (in thousands):

<TABLE>
                                                  December 31,   March 31,
                                                      1998          1998  
                                                  ------------   ---------

    <S>                                            <C>          <C>
     Finished goods                                 $    724     $    310
     Work-in-process                                   2,955        1,166
     Raw materials                                     3,100        1,644
                                                    --------     --------
                                                    $  6,779     $  3,120
                                                    ========     ========
</TABLE>


                                      6

<PAGE>   6


                     INTEGRATED SENSOR SOLUTIONS, INC.
            NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 (Unaudited)


3.    LINE OF CREDIT/TERM LOAN

     The Company has a bank line of credit agreement, which expires on 
August 20, 1999.  The line allows the Company to borrow the lesser of 
$3,500,000 or 80% of eligible accounts receivable. Eligible accounts 
receivable are defined as those outstanding less than 90 days from date of 
invoice. Borrowings under the line of credit bear interest at the bank's 
prime rate plus 0.75% (8.50% at December 31, 1998) and are secured by the 
assets of the Company. As of December 31, 1998 and March 31, 1998, the 
Company had borrowings outstanding totaling $400,000 and $900,000, 
respectively, under the line of credit. The Company also has a $1,500,000 
term loan facility for equipment that bears interest at the bank's prime 
rate plus 1.50% (9.25% at December 31, 1998). As of December 31, 1998, the 
Company had borrowings outstanding of approximately $264,000 on its term 
loan which are included with capital leases on the balance sheet. These 
agreements require the Company to maintain certain financial covenants on a 
quarterly basis. 

4.    COMPREHENSIVE INCOME (LOSS)

     Effective April 1, 1998, the Company adopted Statement of Financial 
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." 
SFAS No. 130 requires an enterprise to report, by major components and as a 
single total, the change in net assets during the period from non-owner 
sources. Comprehensive income (loss) includes all changes in equity during a 
period except those resulting from investments by and distributions to the 
Company's stockholders. For the three and nine months ended December 31, 
1998, comprehensive income (loss), which was comprised of the Company's net 
income (loss) for the periods and cumulative translation adjustment, was 
approximately ($477,000) and ($1,142,000), respectively. For the comparable 
periods in 1997, comprehensive income (loss) was approximately ($74,000) and 
$181,000, respectively. 

5.    GEOGRAPHIC AND SEGMENT INFORMATION

     The Company operates in one business segment, which is to design, 
manufacture, and sell end-market specific integrated subsystems and perform 
nonrecurring engineering projects for the sensor control applications 
market. The following table summarizes the Company's operations in different 
geographic areas (in thousands):

<TABLE>
                                   Nine Months Ended December 31, 1998 
                             -----------------------------------------------
                                                   Adjustments/
                             United States Germany Eliminations Consolidated
                             ------------- ------- ------------ ------------

<S>                           <C>        <C>        <C>         <C>
Revenues to unaffiliated 
 customers                     $  7,095   $  9,706    $      -    $ 16,801
Transfers between geographic
 areas                            3,257      1,076      (4,333)          -
                               --------   --------    --------    --------
Total net revenues             $ 10,352   $ 10,782    $ (4,333)   $ 16,801
                               ========   ========    ========    ========
Loss from operations           $ (1,851)  $    (47)   $     63    $  (1835)
                               ========   ========    ========    ========
Identifiable assets            $ 26,552   $ 11,202    $ (7,369)   $ 30,385
                               ========   ========    ========    ========


                                   Nine Months Ended December 31, 1997 
                             -----------------------------------------------
                                                   Adjustments/
                             United States Germany Eliminations Consolidated
                             ------------- ------- ------------ ------------

<S>                           <C>        <C>        <C>         <C>

Revenues to unaffiliated 
 customers                     $  7,130   $  3,883    $      -    $ 11,013
Transfers between geographic 
 areas                            1,061        531      (1,592)          -
                               --------   --------    --------    --------
Total net revenues             $  8,191   $  4,414    $ (1,592)   $ 11,013
                               ========   ========    ========    ========
Income from operations         $    142   $    249    $    (10)   $    381
                               ========   ========    ========    ========
Identifiable assets            $  9,158   $  4,064    $ (2,800)   $ 10,422
                               ========   ========    ========    ========
</TABLE>


                                      7

<PAGE>   7


                      INTEGRATED SENSOR SOLUTIONS, INC.
            NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 (Unaudited)



<PAGE>   8


                      INTEGRATED SENSOR SOLUTIONS, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                (Unaudited)


     Export revenues consisting of sales from the Company's U.S. operations 
to nonaffiliated customers were as follows (in thousands): 

<TABLE>

                                        Three Months        Nine Months
                                     Ended December 31,  Ended December 31,
                                     ------------------  ------------------
                                       1998      1997      1998      1997  
                                     --------  --------  --------  --------

<S>                                 <C>       <C>       <C>       <C>
Canada                               $     29  $     49  $    190  $    289
Japan and Korea                           738       602     2,759     1,800
                                     --------  --------  --------  --------
Total                                $    767  $    651  $  2,949  $  2,089
                                     ========  ========  ========  ======= 
</TABLE>

6.      STOCKHOLDERS' EQUITY

     On March 13, 1998, the Company completed its initial public offering of 
stock through the issuance of 2,500,000 shares of common stock at a price of 
$8.00 per share, resulting in net proceeds to the Company of $17,661,000. On 
April 8, 1998, the Company's underwriters exercised their over-allotment 
option in full by purchasing 375,000 shares at $8.00 per share resulting in 
net proceeds to the Company of $2,790,000. 


7.    NET INCOME (LOSS) PER SHARE

     The Company follows the provisions of SFAS No. 128, "Earnings Per 
Share."  Basic net income per share is computed by dividing net income by 
the weighted average number of common shares outstanding during the period.  
Diluted net income per share is calculated using the weighted average number 
of outstanding shares of common stock plus dilutive common stock 
equivalents.

     Pro forma net loss per share has been computed as described above and 
also gives effect even if antidilutive to the conversion of convertible 
preferred shares not included above that automatically converted upon 
completion of the Company's initial public offering (using the if-converted 
method) from the original date of issuance. 

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

<TABLE>
                                        Three Months        Nine Months
                                     Ended December 31,  Ended December 31,
                                     ------------------  ------------------
                                       1998      1997      1998      1997  
                                     --------  --------  --------  --------
<S>                                 <C>       <C>       <C>       <C>
Numerator for basic and diluted
 net income (loss)                   $   (462) $     (9) $ (1,270) $     95
                                     ========  ========  ========  ========
Denominator:
 Weighted average common shares
  outstanding                           7,617     1,455     7,593     1,426
 Conversion of weighted average
  preferred stock outstanding
  (pro forma)                               -     3,245         -     3,158
                                     --------  --------  --------  --------
Denominator for basic net income
 (loss) per share (pro forma for
 1997)                                  7,617     4,700     7,593     4,584
                                     ========  ========  ========  ========
Effective dilutive securities:
 Employee stock options                     -         -         -       419
                                     ========  ========  ========  ========
Denominator for diluted net income
 (loss) per share                       7,617     4,700     7,593     5,003
                                     ========  ========  ========  ========
Basic and diluted net income (loss)
 per share (pro forma for 1997)      $  (0.06) $  (0.00) $  (0.17) $   0.02

                                     ========  ========  ========  ========
</TABLE>


                                      8
<PAGE>   8


                      INTEGRATED SENSOR SOLUTIONS, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                (Unaudited)


     Options to purchase 556,306 shares of common stock at prices ranging 
from $1.125 to $8.313 and warrants to purchase 58,566 shares of common stock 
at prices ranging from $6.125 to $6.375 were outstanding as of December 31, 
1998, but were not included in the computation of diluted earnings (loss) 
per share for the three and nine months ended December 31, 1998 because to 
do so would have been anti-dilutive.  On December 14, 1998, the Company 
repriced options to purchase 111,800 shares of common stock held by 
employees who were not executive officers at prices ranging  from $8.00 to 
$8.313 to the closing sale price of the Company's Common Stock as reported 
on the Nasdaq National Market on that date, $4.375 per share.  Officers of 
the Company did not participate in the repricing.  In exchange for the 
Company's offer to reprice options held by employees, the employees agreed 
to relinquish any rights that they may have had or may have acquired in the 
future under each canceled option. 


8.   INCREASED OWNERSHIP OF ISS-NAGANO

Effective November 30, 1998 the Company purchased an additional 7.50% 
ownership of ISS-Nagano, its German subsidiary, for approximately $211,000.  
As a result of the transaction, the Company's results of operations 
subsequent to the effective date reflect 81.5% of ISS-Nagano's net income 
(loss).


                                      9

<PAGE>   9


ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS

     This Management's Discussion and Analysis includes a number of forward-
looking statements which reflect the Company's current views with respect to 
future events and financial performance. These forward-looking statements 
are subject to certain risks and uncertainties, including those discussed in 
the "Factors that May Affect Operating Results" section of this Item 2 and 
elsewhere in this Form 10-QSB that could cause actual results to differ 
materially from historical results or those anticipated. In this report, the 
words "anticipates," "believes," "expects," "future," "intends," and similar 
expressions identify forward-looking statements. Readers are cautioned not 
to place undue reliance on these forward-looking statements, which speak 
only as of the date hereof.

Overview 

     ISS designs, manufactures and markets high performance, intelligent 
sensor products that are used in electronic control systems by customers in 
the automotive and industrial markets. The Company was incorporated in March 
1989 and was principally engaged in research and development activities 
through fiscal 1993. In fiscal 1991, the Company shipped its first product, 
an application specific integrated circuit ("ASIC") designed for use with a 
very low-pressure sensor used in industrial flow measurements. In fiscal 
1992, the Company introduced its first integrated sensor device ("ISD"), an 
after-market product for manifold absolute pressure ("MAP") sensor 
applications for General Motors automobile engines. The Company subsequently 
developed and introduced a variety of other ASICs and ISDs. Principally as a 
result of an increase in product sales, the Company's total revenues have 
increased to $6.3 million and $16.8 million for the three and nine months 
ended December 31, 1998 from approximately $4.0 million and $11.0 million 
for the comparable periods in 1997, respectively. The Company has 
experienced operating losses in each year since its inception and had an 
accumulated deficit of $10.7 million as of December 31, 1998. 

Results of Operations 

     The following table sets forth for the periods indicated selected 
consolidated statements of operations data as a percentage of total 
revenues: 

<TABLE>

                                        Three Months        Nine Months
                                     Ended December 31,  Ended December 31,
                                     ------------------  ------------------
                                       1998      1997      1998      1997  
                                     --------  --------  --------  --------

<S>                                 <C>       <C>       <C>       <C>
Revenues:
 Product revenue                      85.8%     72.6%     87.1%     71.5%
 Contract revenue                     14.2      27.4      12.9      28.5
                                     -----     -----     -----     -----
  Total revenues                     100.0     100.0     100.0     100.0
                                     -----     -----     -----     -----
Cost of revenues: 

 Cost of product revenue              66.0      46.8      65.4      48.4
 Cost of contract revenue             13.4      24.8      14.0      23.3
                                     -----     -----     -----     -----
  Total cost of revenues              79.4      71.6      79.4      71.7
                                     -----     -----     -----     -----
 Gross profit                         20.6      28.4      20.6      28.3
                                     -----     -----     -----     -----
Operating expenses:
 Research and development             17.4      10.7      18.6      11.5
 Sales, general and administration    11.9      13.3      12.9      13.3
                                     -----     -----     -----     -----
  Total operating expenses            29.3      24.0      31.5      24.8
                                     -----     -----     -----     -----
Income (loss) from operations         (8.7)      4.4     (10.9)      3.5
Interest expense                      (0.4)     (1.3)     (0.6)     (1.4)
Interest income                        2.5         -       3.2         -
Other income (expense), net           (0.7)     (1.9)      0.6      (0.1)
Minority interest in net (income)
 loss of consolidated subsidiary      (0.1)     (1.4)      0.1      (1.1)
                                     -----     -----     -----     -----
Net income (loss)                     (7.4)%    (0.2)%    (7.6)%     0.9%
                                     =====     =====     =====     =====
</TABLE>


                                      10

<PAGE>   10


ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS (continued)


Comparison of Three and Nine Months Ended December 31, 1998 and 1997

Revenues

     The Company derives its revenues from sales of ASICs and ISDs and from 
fees earned under product development contracts.  The Company recognizes 
revenues from product sales upon shipment.  Contract revenues are recognized 
only when applicable customer milestones, including deliverables, have been 
met, but not in excess of the amount that would be recognized using the 
percentage of completion method.  

     Total revenues increased for the three and nine months ended December 
31, 1998 as compared to the similar periods in 1997.  Total revenues were 
$6.3 million and $16.8 million for the three and nine months ended December 
31, 1998, respectively, increases of 57% and 53% over revenues of $4.0 
million and $11.0 million for the comparable 1997 periods. The growth in 
total revenues on a quarterly and year-to-date basis is due to higher 
product revenue. 

     Product Revenue:  Product revenue was $5.4 million for the three months 
ended December 31, 1998 which represented an increase of $2.5 million or 85% 
over the $2.9 million recognized for the comparable period in 1997. For the 
nine months ended December 31, 1998 product revenue was $14.6 million which 
represented an increase of approximately $6.7 million or 86% over the $7.9 
million for the comparable 1997 period. These increases were principally due 
to increased shipments of ISDs for Common Rail Diesel Injection and Vehicle 
Stability Control Systems. Reflecting the Company's long-term strategy, 
product revenue increased to 85.8% and 87.1% of total revenues for the three 
and nine months ended December 31, 1998 from 72.6% and 71.5% for the 
comparable periods in the prior year.  The Company believes that product 
revenue is likely to increase as a percentage of total revenue. 

     Contract Revenue:  Contract revenue decreased to approximately $900,000 
and $2.2 million for the three and nine months ended December 31, 1998 from 
$1.1 million and $3.1 million for the comparable periods in 1997.  This 
decrease was primarily due to the smaller number of development contracts 
and the completion of fewer contractual milestones during the three months 
and nine months ended December 31, 1998 as compared to the same periods in 
1997.  Contract revenue as a percentage of total revenues for the three and 
nine months ended December 31, 1998 decreased to 14.2% from 27.4% and to 
12.9% from 28.5% for the similar periods in 1997, respectively.  The Company 
expects contract revenue to continue to decrease as a percentage of total 
revenues. 

     International revenues (export revenues and revenues of the Company's 
majority-owned subsidiary, ISS-Nagano GmbH, ("ISS-Nagano")) for the three 
and nine months ended December 31, 1998 were $4.9 million and $12.7 million, 
increases of $2.6 million or 113% and $6.7 million or 112% over the three 
and nine months ended December 31, 1997.  As a percentage of total revenues, 
international sales increased to 78% from 58% and to 75% from 54% for the 
three and nine months ended December 31, 1998 compared to 1997, 
respectively.  These increases were primarily the result of increased sales 
of media compatible ISDs for Common Rail Diesel Injection and Vehicle 
Stability Control Systems in Germany.  All of the Company's sales in Europe 
are denominated in Deutsche Marks.  Accordingly, a portion of the Company's 
international revenues is subject to foreign currency fluctuation risks. 


Cost of Revenues

     Cost of Product Revenue:  The Company's product revenue gross margin 
decreased 12.5% to 23.0% for the three months ended December 31, 1998 from 
35.5% for the similar period in 1997. For the nine months ended December 31 
1998, the Company's product gross margin decreased 7.5% to 24.8% from 32.3% 
for the similar period in 1997. The decrease in product gross margin for the 
three months ended December 31, 1998 was primarily was due to certain 
manufacturing inefficiencies due to increased production levels of two products
in the Company's German facility as well as increased writedowns for slow
moving ASIC inventory. These manufacturing inefficiencies resulted from
competing production demands presented by manufacturing two products on one
line and are expected to be minimized by the transition to two manufacturing 
lines in calendar 1999. The decline in product gross margin for the nine months
ended December 31, 1998 was due, in part, to increased inventory writedowns and
manufacturing inefficiencies, coupled with yield issues associated with the 
production ramp-up of the Company's HVP and FDR media-compatible ISDs, which 
materially adversely affected gross margin and operating results. 


                                      11

<PAGE>   11


ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS (continued)


     Cost of Contract Revenue:  The Company's contract revenue gross margin 
decreased to 5.9% and (7.9%) for the three and nine months ended December 
31, 1998 from 9.4% and 18.1% for the similar periods in 1997. Cost of 
contract revenue declined to approximately $800,000 and $2.3 million for the 
three and nine months ended December 31, 1998 from $1.0 million and $2.6 
million for the similar periods in 1997, respectively.  The decrease in 
contract revenue margins was primarily due to the completion of fewer 
contractual milestones in the three and nine months ending December 31, 1998 
compared to the similar periods in 1997.  Expenses related to contracts are 
recorded as incurred, while recognition of revenues occurs when contractual 
milestones are reached.  The Company does not anticipate that the gross 
margin on contract revenues will grow or even be positive in future periods.


Operating Expenses

     Research and Development:  Research and development expense consists 
primarily of personnel expenses, including salary and benefits, and other 
product development related engineering expenses not associated with 
contract revenue.  Research and development expenses were $1.1 million and 
$3.1 million for the three and nine months ended December 31, 1998 as 
compared to approximately $400,000 and $1.3 million for the similar periods 
in 1997, respectively.  This higher level of expenses for the three and nine 
months ended December 31, 1998 reflects an overall increase in resources at 
its  ISS-Nagano operations.  Research and development expenses as a 
percentage of total revenues increased to 17.4% and 18.6% percent for the 
three and nine months ended December 31, 1998 from 10.7% and 11.5% for the 
similar periods in the prior year, respectively. The Company believes that 
research and development is essential to the Company's ability to increase 
revenues. The Company expects research and development expenses to increase 
in absolute dollars but expects such expenses to decrease as a percentage of 
total revenues.

     Sales, General and Administrative:  Sales, general and administrative  
expense consists primarily of personnel expenses, including salary and 
benefits, and professional fees.  Sales, general and administrative expenses 
were approximately $700,000 and $2.2 million for the three and nine months 
ended December 31, 1998 as compared to approximately $500,000 and $1.5 
million for the similar 1997 periods, respectively.  This higher level of 
expense reflects an increase in personnel and professional fees necessary to 
manage the financial, legal and administrative aspects of operating as a 
public company.  Sales, general and administrative expense declined slightly 
to 11.9% and 12.9% as a percentage of total revenues for the three and nine 
months ended December 31, 1998 as compared to 13.3% for both comparable 
periods in 1997. The Company expects sales, general and administrative 
expenses to increase in absolute dollars, reflecting growth in operations 
and costs associated with being a public entity, but to be stable or decline 
as a percentage of total revenues.   

Interest Expense

     Interest expense decreased to $27,000 and $101,000 for the three and 
nine months ended December 31, 1998 from $54,000 and $159,000 for the 
comparable periods in 1997, respectively, due to lower average borrowings 
resulting from the conversion and repayment of debt.  

Interest Income

     Interest income was $160,000 and $554,000 for the three and nine months 
ended December 31, 1998. The Company recorded no interest income during the 
three and nine months ended December 31, 1997. The increase in interest 
income was the result of higher interest-bearing cash balances resulting 
from the Company's initial public offering in March 1998.  

Other Income (Expense), Net

     Other income (expense), net was ($45,000) and $101,000 for the three 
and nine months ended December 31, 1998 compared to ($76,000) and ($10,000) 
for the similar periods in 1997. Other income changed primarily due to 
foreign currency exchange loss of $36,000 for the three months ended 
December 31, 1998 and a foreign currency exchange gain of $203,000 for the 
nine months ended December 31, 1998 related to Deutchmark denominated loans 
that the Company has with ISS-Nagano_.


                                      12

<PAGE>   12


ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS (continued)


Minority Interest in Net (Income) Loss of ISS-Nagano

     Minority interest in net income of ISS-Nagano for the three months 
ended December 31, 1998 was $3,000 compared to $55,000 of minority interest 
in net income of ISS-Nagano for the three months ended December 31, 1997. 
Minority interest in net loss of ISS-Nagano for the nine months ended 
December 31, 1998 was $11,000 compared to $117,000 of minority interest in 
net income of ISS-Nagano for similar period in 1997. Effective November 30, 
1998 the Company purchased an additional 7.50% ownership of ISS-Nagano, its 
German subsidiary, for approximately $211,000.  As a result of the 
transaction, the Company's results of operations, subsequent to the effective 
date, reflect 81.5% of ISS-Nagano's net income (loss).


Liquidity and Capital Resources

     Since inception, the Company has financed its operations principally 
through sales of equity securities, product revenues and contract revenues. 
At December 31, 1998, the Company had cash, cash equivalents and short-term 
investments of $10.1 million and working capital of $16.5 million.  The 
Company also has a $3.5 million bank line of credit agreement secured by the 
assets of the Company that permits borrowings of the lesser of $3.5 million 
or 80% of eligible accounts receivable.  Eligible accounts receivable are 
defined as those outstanding less than 90 days from date of invoice. 
Borrowings under the line of credit bear interest at the bank's prime rate 
plus 0.75%. At December 31, 1998, the Company also had a $1.5 million term 
loan facility for capital equipment that bears interest at the bank's prime 
rate plus 1.50%.  The bank line of credit agreement and term loan facility 
will expire August 21, 1999. At December 31, 1998, the Company had 
outstanding borrowings of $400,000 under the line of credit agreement and 
$401,000 under various capital equipment lease financing arrangements. At
December 31, 1998, the Company was not in compliance with its profitability
covenant and is in the process of obtaining a waiver through that date. 

     Net cash used in operating activities was approximately $4.3 million 
and $939,000 in the nine months ended December 31, 1998 and 1997, 
respectively. For the nine months ended December 31, 1998, net cash used in 
operations was primarily attributable to an increase in inventory levels and 
accounts receivable to support higher sales demand, partially offset by a 
decrease in accounts payable and the Company's net loss. For the nine months 
ended December 31, 1997, net cash used in operations was primarily 
attributable to an increase in inventory levels and an increase in accounts 
receivable. 

     Net cash used in investing activities was $14.7 million and $675,000 in 
the nine months ended December 31, 1998 and 1997, respectively. Cash used in 
investing activities for the nine months ended December 31, 1998 was related 
to the Company's purchase of $9.3 million in short-term investments and $5.2 
million in purchases of equipment. Cash used in investing activities for the 
nine months ended December 31, 1997 was entirely due to the purchase of 
equipment.

     Net cash provided by financing activities was $2.2 million and $230,000 
for the nine months ended December 31, 1998 and 1997, respectively.  Cash 
provided by financing activities was primarily due to the sale of common 
stock upon exercise of the over allotment option held by the underwriters of 
the Company's initial public offering and by employees who exercised their 
stock options.  The Company also repaid $500,000 outstanding


                                      13

<PAGE>   13


ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS (continued)

under its line of credit.  For the nine months ended December 31, 1997 the 
Company repaid $432,000 in notes payable. 

     To date, the Company has not invested in derivative securities or any 
other financial instruments that involve a high degree of risk.  The Company 
expects that, in the future, cash in excess of current requirements will be 
invested in short-term, investment grade, interest-bearing securities.

     The Company plans to finance its working capital and other capital 
resource needs with its current cash and cash equivalents, and cash 
generated from future operations, if any.  The Company believes that these 
resources will be sufficient to satisfy its working capital and other 
capital needs for at least the next 12 months. 




Factors That May Affect Operating Results

     The statements contained in this Report on Form 10-QSB that are not 
purely historical are forward looking statements within the meaning of 
Section 27A of the Securities Act of 1933 and Section 21E of the Securities 
Exchange Act of 1934, including statements regarding the Company's 
expectations, hopes, intentions or strategies regarding the future. Forward-
looking statements include but are not limited to: statements regarding 
future products or product development; statements regarding future research 
and development spending and the Company's product development strategy; 
statements regarding the levels of international sales; and statements 
regarding future expenditures. All forward-looking statements included in 
this document are based on information available to the Company on the date 
hereof, and the Company assumes no obligation to update any such forward-
looking statements. It is important to note that the Company's actual 
results could differ materially from those in such forward-looking 
statements. Some of the factors that could cause actual results to differ 
materially are set forth below.  In addition to the other information in 
this Form 10-QSB, the following factors should be considered carefully in 
evaluating the Company and its business.

     Limited Profitability; History of Operating Losses.  The Company was 
founded in 1989 and commenced shipments of its initial product in 1990. The 
Company has never achieved profitability on an annual basis. There can be no 
assurance that the Company will be profitable in the future on a quarterly 
basis or that it will achieve profitability on an annual basis. As of 
December 31, 1998, the Company had an accumulated deficit of approximately 
$10.7 million. 

     Implementation of New Automated Manufacturing Line. The Company is 
currently developing a new automated manufacturing line at its German 
facility for the manufacture of Vehicle Stability Control System ISDs which 
will involve existing technologies currently employed by the Company's 
Common Rail Diesel Injection ISD manufacturing line at the same facility. 
There can be no assurance that the transition of Vehicle Stability Control 
System ISDs processing to the new line will be achieved on schedule without 
encountering any delays in the process implementation. Nor can there be any 
assurance that the Company will achieve acceptable manufacturing yields or 
that the operating income margins on such products will be comparable to 
those realized in connection with the Company's current manufacturing line. 
Failure to achieve acceptable yields or margins could adversely affect the 
Company's financial condition and results of operations.

     Dependence on Customer Specific Products; Lengthy Sales and Development 
Cycle.  A substantial portion of the Company's products is designed to 
address the specific needs of individual customers. As a result, the sales 
and development cycle for these products can be lengthy, with the 
development cycle alone ranging up to thirty months for new products in new 
applications in the automotive industry and up to eighteen months for new 
products in new applications in the industrial market. Because customer 
specific products are developed for particular customers' applications, some 
of the Company's current and future customer specific products may never be 
produced in high volume, or at all, due to the Company's inability to 
introduce custom products in a timely manner, delays in the introduction of 
the Company's customers' products, the failure of the Company's customers' 
products to achieve and sustain commercial success or the discontinuation of 
a customer's product line. Any of these occurrences could have a material 
adverse effect on the Company's business, financial condition or operating 
results. 

     Fluctuations in Operating Results.  The Company's revenues and 
operating results have varied on a quarterly and an annual basis in the past 
and may vary significantly in the future. The Company's revenues and 
operating results are difficult to forecast and could be materially 
adversely affected by many factors, some of which are outside the control of 
the Company, including, among others, fluctuations in yields, the relatively 
long sales and development cycle for the Company's products, the ability to 
obtain product development contracts and the amount and timing of 
recognition of product development contract revenue and expense associated 
with such contracts, the Company's ability to introduce new products and 
technologies on a timely basis, market acceptance of the Company's and its 
customers' products, the timing, deferral or cancellation of customer orders 
and related shipments, competitive pressures on selling prices, availability 
of foundry capacity, availability of raw materials, changes in product mix, 
changes in the lead time required to ship products after receipt of an 
order, introduction of products and technologies by the Company's 
competitors and customers, quality control

                                      14

<PAGE>   14



ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS (continued)

of products sold, personnel changes and difficulties in attracting and
retaining qualified technical personnel, foreign currency exchange rates
and economic conditions generally and in the automotive and industrial markets.

     Variability of Manufacturing Yields.  Manufacturing yields of the 
Company's ASICs and ISDs may vary significantly depending on a variety of 
factors. ASIC yields can be adversely affected by the level of contaminants 
in the manufacturing environment, impurities in the materials used and the 
performance of fabrication personnel and equipment, all of which are outside 
the control of the Company. ISD yields can be adversely affected by 
defective sensing elements, component quality and performance of assembly 
personnel and equipment. Historically, the Company has experienced 
fluctuations in yields of its products, particularly during initial 
production of new products, which have adversely affected product gross 
margin.

     Significant Customer Concentration. Historically, a relatively small 
number of customers have accounted for a significant percentage of the 
Company's total revenues, and the Company expects that this trend will 
continue. In the nine months ended December 31, 1998, the Company had two 
customers which accounted for 15% and 14% of total revenues, respectively, 
and one customer, Bosch, which accounted for 48% of total revenues. In the 
nine months ended December 31, 1997, the Company had one customer that 
accounted for 12% of total revenues and two customers, Bosch and Masco Tech, 
which accounted for 30% and 25% of total revenues, respectively. As a 
result, any cancellation, reduction, rescheduling or delay in orders by or 
shipments to any customer or the discontinuation or redesign by any customer 
of its products which currently incorporate one or more of the Company's 
products would have a material adverse effect on the Company's business, 
financial condition or operating results.

     Dependence on Automotive Industry; Need to Penetrate New Markets. The 
Company has historically derived approximately 88% of its total revenues 
from products sold for applications in the automotive industry. Accordingly, 
improvement in the Company's future operating results will depend in part on 
its ability to increase its market share in the automotive industry and to 
penetrate new markets. Further, the Company believes that its operating 
results may be affected by the cyclical nature of the automotive industry. 
Any downturn in any customer's business or the economy in general may cause 
purchases of the Company's products to be deferred, reduced or canceled 
resulting in a material adverse effect on the Company's business, financial 
condition or operating results. If the Company were unable to successfully 
penetrate new markets or to expand its penetration of the automotive market, 
its business, financial condition or operating results would be materially 
adversely affected.

     Declining Average Selling Prices. The Company sells a substantial 
portion of its products pursuant to exclusive contracts which typically 
contain volume-pricing provisions that require the Company to reduce its per 
unit price as certain volume levels are achieved. If the Company is unable 
to make corresponding product cost reductions, the resulting decline in the 
average selling prices of the products sold pursuant to such contracts may 
reduce the Company's product gross margin. If the Company is unable to 
sufficiently reduce its costs on existing products or introduce new products
with higher margins in a timely manner, the Company's business, financial 
condition or operating results will be materially adversely affected.

     Dependence on Sensing Element Suppliers.  The Company is currently 
dependent upon a small number of third party vendors for substantially all 
of the sensing elements incorporated into its ISDs. For example, the Company 
currently purchases a pressure-sensing element incorporated in certain of 
its ISDs from a single source, Nagano Keiki Co., Ltd. ("Nagano"). The 
Company believes that Nagano is currently the only high volume supplier of 
this type of sensing element.  Any failure of the Company to maintain its 
existing relationships with sensing element suppliers or to identify and 
work with new sensing element suppliers could have a material adverse effect 
on the Company's business, financial condition or operating results. 

     Narrow Product Base.  The Company currently depends upon the sale and 
success of a limited number of product lines. Because the Company's primary 
source of revenue is dependent upon a narrow product base, any interruption 
or reduction in these sales due to production problems, lack of adequate 
demand, replacement by new technologies or other internal or external 
problems resulting in the failure of such product lines to win broad 
acceptance in the marketplace would have a material adverse effect on the 
Company's business, financial condition or operating results. 


                                      15


<PAGE>   15


ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS (continued)

     Rapid Technological Change; Need to Develop New Products.  The markets 
for the Company's products are characterized by rapid technological change 
as well as evolving industry standards that may render existing products 
obsolete. As a result, the success of new products depends on a variety of 
factors, including effective definition of products that meet evolving 
market needs, successful and timely completion of development and 
introduction of these products, successful design wins in new systems and 
the ability to offer products at competitive prices. A failure in any of 
these areas could have a material adverse effect on the Company's business, 
financial condition or operating results. 

     Competition.  The markets in which the Company competes are highly 
competitive and characterized by diverse industry requirements and severe 
pricing pressure in many applications. In the ASIC market, the Company 
competes with analog and mixed signal semiconductor companies such as 
Motorola, Inc. ("Motorola"), Texas Instruments Incorporated ("TI") and 
Analog Devices, Inc. The Company's products also compete indirectly with 
conventional hybrid circuits and standard analog and mixed signal ICs. In 
the ISD market, the Company competes with Delco, a subsidiary of General 
Motors ("GM"), Motorola, TI, Kavlico and Denso Corporation ("Denso"). These 
companies all have substantially greater financial, technical, 
manufacturing, marketing, distribution, personnel and other resources than 
the Company. 

     The Company also anticipates that additional competitors may enter the 
Company's markets, resulting in even greater competition. Many of the 
Company's current or prospective competitors own or have investments in 
wafer foundries, which provide dedicated capacity to these competitors and 
enable them to influence or control costs more effectively than the Company. 
There can be no assurance that the Company will be able to compete 
successfully with existing or new competitors. Increased competition could 
result in significant price reductions or the loss of current or potential 
customers or design wins which could materially adversely affect the 
Company's business, financial condition or operating results. 

     Dependence on Key Personnel; Need for Additional Technical Personnel.  
The Company is substantially dependent upon the services of its executive 
officers. The Company's future success depends on the continued 
contributions of such officers, including the maintenance, enhancement and 
establishment of key customer relationships and the management of 
operations. The loss of the services of any of these officers by the Company 
could have a material adverse effect on the Company's business, financial 
condition or operating results. Such officers have not entered into 
employment agreements with the Company. The Company believes that its future 
success will be heavily dependent upon its ability to attract and retain 
qualified design, technical and management personnel. There can be no 
assurance that the Company will be able to continue to attract and retain 
these personnel, and the failure to do so could have a material adverse 
effect on the Company's business, financial condition or operating results.


     Dependence on Sole Source Suppliers. Certain components of the 
Company's current products, such as fabricated wafers, sensing elements, 
packages and PC boards, are acquired from single source suppliers. The 
Company purchases these components on a purchase order basis and may not 
carry significant inventories. The Company currently has no supply contracts 
with any of its assembly contractors. 

     The Company's reliance on independent contractors to assemble and 
package its products involves significant risks, including reduced control 
over quality and delivery schedules, the potential lack of adequate capacity 
and discontinuance or phase-out of such contractors' assembly processes. 
Historically, due to a lack of significant volumes, the Company has 
experienced difficulty ensuring that independent assembly contractors would 
continue to assemble or package the Company's products and that alternative 
independent assembly contractors would be available in such instances. 

     Dependence on Independent Wafer Suppliers.  The Company relies on a 
small number of independent foundries for the manufacture of all of its 
ASICs, including those incorporated into its ISDs. Although the Company has 
initiated efforts to qualify second sources for certain of its key 
components, none of the Company's ASICs is currently fabricated by more than 
one foundry. Although processed wafer capacity in the semiconductor industry 
is currently widely available, there can be no assurance that the Company's 
foundries will continue to provide the Company an adequate supply of wafers 
to meet its customers' demands. 

     The Company believes that as a result of fluctuations in demand and 
changing technologies, processed wafer capacity may become limited from time 
to time, resulting in greater difficulty in obtaining adequate supplies of 
wafers, increased prices and increased lead times. Any increase in the 
demand for processed wafers over expected levels or any 


                                      16
<PAGE>   16


ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS (continued)

failure of processed wafer supply in the industry to grow at anticipated rates
will magnify these shortages. There can be no assurance that the Company will
be able to complete qualification of products fabricated by Symbios, or any 
other new wafer supplier, in a timely manner or at all, and any such failure 
could have a material adverse effect on the Company's business, financial 
condition or operating results. 

     The use of independent wafer foundries entails certain other risks, 
including reduced control over manufacturing yields and production costs. 
The Company has from time to time experienced lower than anticipated 
manufacturing yields in connection with the introduction of new products. 
Yield losses could have a material adverse effect on the Company's operating 
results. There can be no assurance that the Company's wafer foundries will 
not produce wafers with lower than expected manufacturing yields in the 
future, which could materially adversely affect the Company's business, 
financial condition or operating results. 

     Dependence on Patents and Proprietary Rights.  The Company relies on a 
combination of patents, maskwork rights, trade secret laws, copyrights, 
trademarks and employee and third party non-disclosure agreements to protect 
its intellectual property rights. The Company has been issued four patents 
and has filed two additional patent applications in the United States and 
one foreign patent application relating to ASIC designs. In addition, the 
Company has filed one patent application in the United States relating to 
package design. There can be no assurance that any patents will issue from 
any of the Company's pending applications or that claims allowed from 
pending applications will be of sufficient scope or strength, or be issued 
in all countries where the Company's products can be sold, to provide 
meaningful protection or any commercial advantage to the Company. 

     The semiconductor industry is characterized by vigorous protection and 
pursuit of intellectual property rights or positions which have resulted in 
significant and often protracted and expensive litigation. Although there is 
currently no pending intellectual property litigation against the Company, 
the Company may from time to time be notified of claims that the Company may 
be infringing patents or other intellectual property rights owned by third 
parties. If it is necessary or desirable, the Company may seek licenses 
under such patents or other intellectual property rights. However, there can 
be no assurance that licenses will be offered or that the terms of any 
licenses will be acceptable to the Company. A failure to obtain a license 
from a third party for technology used by the Company could cause the 
Company to incur substantial liabilities and to suspend the manufacture of 
products requiring the technology. 


     Dependence on International Sales and Suppliers. The Company's sales to 
customers outside the United States are subject to a variety of risks, 
including those arising from fluctuations in currency exchange rates, 
tariffs, import restrictions and other trade barriers, unexpected changes in 
regulatory and governmental licensing requirements, longer accounts 
receivable payment cycles and potentially adverse tax consequences. Because 
a significant portion of the Company's international sales and in particular 
its European sales have to date been made through its German subsidiary and 
have been denominated in Deutsche Marks, fluctuations in the value of the 
Deutsche Mark relative to the U.S. Dollar or other currencies could 
adversely affect the pricing of the Company's products in foreign markets 
and make the Company's products relatively more expensive. In addition, 
fluctuations in the Deutsche Mark could adversely affect the profitability 
of sales made in Europe and therefore materially adversely affect the 
Company's business, financial condition or operating results. 

     Several Asian countries including South Korea, Japan and Thailand, have 
recently experienced significant economic downturns and significant declines 
in the value of their currencies relative to the U.S. dollar. Due to these 
conditions, it is possible that certain of the Company's customers will 
delay, reschedule or cancel significant current or future orders for the 
Company's products. If any such orders are delayed, rescheduled or canceled, 
the Company's business, financial condition and results of operations would 
be adversely affected. 

Year 2000 Compliance

     Many computer systems were not designed to properly handle dates beyond 
the year 1999.  Additionally, these systems may not properly handle certain 
dates in 1999.  Failure to process dates properly could result in failure or 
disruption of the Company's information systems and/or processing equipment.  
To be Year 2000 ("Y2K") compliant, computer systems must correctly process 
dates before and after the year 2000, recognize the year 2000 as a leap 
year, accept and display dates unambiguously and correctly process dates for 
non-date functions such as archiving.  Disruptions to the

                                      17

<PAGE>   17


ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS (continued)

Company's operations may also occur if key suppliers or customers experience 
disruptions in their ability to purchase, supply or transact with the 
Company due to Y2K issues.  The Company's global operations rely heavily on 
the infrastructures within the countries in which it does business.  The Y2K 
readiness within infrastructure suppliers (utilities, government agencies 
such as customs, and shipping organizations) will be critical to the 
Company's ability to avoid disruption of its operations.  The Company 
continues to assess its systems, equipment, facilities and processing to 
determine its Y2K readiness and has committed personnel and resources to 
resolve potential Y2K issues.  To date, the Company has confirmed the Y2K 
compliance of its domestic and international financial systems. Further, the 
Company is now focused on manufacturing system compliance and is in the 
process of contacting its critical suppliers to determine that the 
suppliers' operations and the products and services they provide are Y2K 
compliant.  The Company also is working with industry trade associations to 
evaluate the Y2K readiness of infrastructure suppliers.  In the event that 
suppliers are not Y2K compliant, it could have a material adverse effect on 
the Company's results or financial condition.  The Company plans to complete 
the assessment of its Y2K readiness by the end of the first quarter of 
calendar 1999.  

     The Company will perform remediation procedures concurrent with its 
assessment planning.  The Company currently believes that the remediation 
costs of the Y2K issue will not be material to the Company's results of 
operations or financial position.  Cumulatively through December 31, 1998 
the Company has incurred remediation expenses of less than $10,000.  While 
the Company currently expects that the Y2K issue will not pose significant 
operational problems, delays in adequately addressing Y2K issues, or a 
failure to fully identify all Y2K dependencies in the Company's systems and 
in the systems of its suppliers, customers and financial institutions, could 
have material adverse consequences, including delays in the production, 
delivery or sale of products.  Therefore, the Company is developing 
contingency plans for continuing operations in the event such problems 
arise.  The Company intends to complete the contingency planning phase of 
its Y2K readiness in the first half of calendar 1999. 

                                      18

<PAGE>   18


                       PART II.   OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     As of the date hereof, to the Company's knowledge, there are no legal 
proceedings in which the Company is involved or litigation pending against 
the Company. 


ITEM 5.  OTHER INFORMATION

Use of Proceeds

     The net proceeds to the Company from the sale of the 2,875,000 shares 
of Common Stock in the Company's initial public offering (Registration 
Statement No. 333-41351 and No. 333-47885), effective March 13, 1998, 
including the underwriter's exercise of their over-allotment on April 8, 
1998, were approximately $20,451,000 after deducting underwriting discounts 
and commissions, the Representatives' non-accountable expense allowance and 
other offering expenses. From the date of the closing of the initial public 
offering through December 31, 1998, the Company applied the net proceeds as 
follows: $766,347 was used to pay indebtedness to a related party, 
approximately $5,480,000 was used to purchase capital equipment, $801,275 
was used to pay indebtedness to another related party, $500,000 was used to 
pay down the line of credit at the bank, approximately $12.9 million was 
used for operating expenses and inventory purchases.

Stockholder Proposals

     Proposals of stockholders intended to be presented at the next Annual 
Meeting of the Stockholders of the Company (other than proposals made under 
Rule 14a-8 of the Securities Exchange Act of 1934, as amended) must be 
received by the Company at its principal executive offices at 625 River Oaks 
Parkway, San Jose, California by March 25, 1999. 


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)   Exhibits.
           ---------


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

           3.1****   Restated Certificate of Incorporation of Registrant
                     dated October 26, 1998.
           3.2**     Bylaws of Registrant.
           4.1*      Restated Registration Rights Agreement.
          10.1*      1989 Stock Option Plan and form of option agreement 
                     thereunder.
          10.2*      1997 Stock Option Plan and form of option agreement
                     thereunder.
          10.3***    1997 Employee Stock Purchase Plan and form of
                     subscription agreement thereunder.
          10.4**     Form of Indemnity Agreement for Officers and Directors.
          10.5+**    Development Agreement between ISS-GmbH and Robert
                     Bosch GmbH dated May 25, 1995.
          10.6+**    Development Agreement among ISS-Nagano GmbH, Integrated
                     Sensor Solutions, Inc. and Robert Bosch GmbH dated May
                     17, 1996.
          10.7+**    Supply Agreement between Integrated Sensor Solutions,
                     Inc. ISS-Nagano GmbH and Robert Bosch GmbH dated
                     November 18, 1996.
          10.8**     Lease between Montague Oaks Associates Phase III and
                     Integrated Sensor Solutions, Inc. dated June 2, 1994,
                     as amended.
          10.9**     Continuous Sales and Purchase Agreement by and between
                     Nagano Keiki Seisakusho, Ltd. and Integrated Sensor
                     Solutions, Inc. dated December 1, 1996.
          10.10**    Continuous Sales and Purchase Agreement by and between
                     Nagano Keiki Seisakusho, Ltd. and Integrated Sensor
                     Solutions, Inc. dated June 1, 1997.


                                      19

<PAGE>   19


          10.11**    Security Agreement by and between Integrated Sensor 
                     Solutions, Inc. and Silicon Systems, Inc. dated
                     December 1, 1995.
          10.12**    Credit Agreement between Integrated Sensor Solutions,
                     Inc. and Silicon Systems, Inc. dated December 1, 1995.
          10.13**    Loan and Security Agreement by and between Silicon
                     Valley Bank and Integrated Sensor Solutions, Inc. dated
                     July 10, 1996, as amended.
          10.14****  Loan Modification Agreement by and between the 
                     Registrant and Silicon Valley Bank dated August 21, 
                     1998 amending the Loan and Security Agreement dated 
                     July 10, 1996, as amended.
          10.15**    Lease Agreement between Geschaftsraum-Mietvertrag and 
                     ISS-Integrated Sensor Solutions GmbH dated September 
                     12, 1994.
          10.16*     Agreement relating to change in equity ownership of 
                     ISS-Nagano GmbH dated July 30, 1997.
          21.1**     List of Subsidiaries of the Registrant.
          24.1**     Power of Attorney (see page II-5).
          27.1       Financial Data Schedule.
          27.2       Restated Financial Data Schedule.

___________

*     Filed as an exhibit to Amendment No. 1 to Registration Statement
      on Form SB-2 (File No. 333-41351) on February 5, 1998.

**    Filed as an exhibit to Registration Statement on Form SB-2 (File No.
      333-41351) on December 2, 1997.

***   Filed as an exhibit to Annual Report on Form 10-KSB on June 30, 
      1998.

****  Filed as an exhibit to Quarterly Report on Form 10-QSB on September 30,
      1998.

+     Certain information in this exhibit has been omitted and filed 
      separately with the Securities and Exchange Commission pursuant to 
      orders for confidential treatment under 17 C.F.R. Sections 
      200.80(b)(4), 200.83 and 230.46. 


(b)   Reports on Form 8-K. The Company did not file any Reports on Form 8-K
      during the quarter ended December 31, 1998.


                                      20

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                                 SIGNATURE

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 SENSOR SOLUTIONS, INC.
                                      ---------------------------------
                                                 (Registrant)



Date: February 16, 1999          By:  /s/      DAVID SATTERFIELD      
                                      --------------------------------
                                               David Satterfield
                                   Vice President Finance & Administration,
                                              Corporate Secretary
                                            (Authorized Officer and 
                                Principal Financial  and Accounting Officer)



                                      21

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