10-K/A

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K/A

(Mark One) 

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

For the fiscal year ended _____September 30, 1997_____

                                       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 0-23084

                        INTEGRATED SILICON SOLUTION, INC.
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

           DELAWARE                                    77-0199971
- -------------------------------             ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

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

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

Securities registered pursuant to Section 12(b) of the Act:
                                            Name of each exchange on which 
         Title of each class                            registered
COMMON STOCK, PAR VALUE $0.0001 PER SHARE         NASDAQ NATIONAL MARKET
- -----------------------------------------         ----------------------

           Securities registered pursuant to Section 12(g) of the Act:
                                      NONE
                               -------------------
                                (Title of Class)

        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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

        The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of such stock on November 28, 1997,
as reported by the Nasdaq National Market, was approximately $159.5 million.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.

        The number of outstanding shares of the registrant's Common Stock on
November 28, 1997 was 17,965,831.

                       DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting
of Stockholders to be held January 30, 1998 are incorporated by reference in
Part III of this Form 10-K.


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                                TABLE OF CONTENTS





PART I


                                                                                         
Item 1.    Business.........................................................................1

Item 2.    Properties.......................................................................9

Item 3.    Legal Proceedings................................................................9

Item 4.    Submission of Matters to a Vote of Security Holders..............................9


PART II


Item 5.    Market for the Registrant's Common Equity and Related Stockholder Matters.......10

Item 6.    Selected Consolidated Financial Data............................................11

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of
           Operations......................................................................11

Item 8.    Financial Statements and Supplementary Data.....................................20

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial
           Disclosure......................................................................43


PART III


Item 10.   Directors and Executive Officers of the Registrant..............................43

Item 11.   Executive Compensation..........................................................43

Item 12.   Security Ownership of Certain Beneficial Owners and Management..................43

Item 13.   Certain Relationships and Related Transactions..................................43


PART IV


Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K.................43


SIGNATURES ................................................................................46



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When used in this Report, the words "expects," "anticipates," "believes,"
"estimates" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements, which include statements concerning the timing
of new product introductions; the functionality and availability of products
under development; trends in the networking, telecommunications, personal
computer and instrumentation markets, in particular as they may affect demand
for or pricing of the Company's products; the percentage of export sales and
sales to strategic customers; the percentage of revenue by product line; and the
availability and cost of products from the Company's suppliers; are subject to
risks and uncertainties, including those set forth in Item 1 of Part I and in
Item 7 of Part II hereof entitled "Certain Factors Which May Affect the
Company's Business or Future Operating Results" and elsewhere in this Report,
that could cause actual results to differ materially from those projected in the
forward-looking statements. These forward-looking statements speak only as of
the date of this Report. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in the Company's expectations
with regard thereto or to reflect any change in events, conditions or
circumstances on which any such forward-looking statement is based, in whole or
in part.

                                     PART I

ITEM 1. BUSINESS

GENERAL

        Integrated Silicon Solution, Inc. ("ISSI" or the "Company") designs,
develops and markets high performance memory devices including static random
access memory ("SRAM"), nonvolatile memory ("NVM") and specialty dynamic random
access memory ("DRAM"). The Company's memory devices are used in networking
applications, telecommunications, personal computers ("PC"), disk drives, data
communications, office automation, instrumentation and consumer products. SRAM
products include both asynchronous and synchronous devices ranging in densities
from 64K to 4 megabit. Nonvolatile memory products include Flash memories,
EPROMs (erasable programmable read only memories) and EEPROMs (electrically
erasable programmable read only memories) The Company also designs, develops and
markets embedded memory devices which include voice recording chips and certain
microcontroller devices. The Company has its headquarters in Santa Clara,
California and markets its products on a worldwide basis.

        The primary function of SRAMs is to improve overall system performance
by compensating for the disparity in the speeds of other integrated circuits
within the system architecture. As a result, speed is a key performance
characteristic for SRAMs. In certain mobile or portable applications the need
for low power is also critical. In addition, when designing systems with SRAMs,
customers regard cost as a critical factor. For these reasons, in order to
continually improve product performance and reduce costs, the Company must have
access to state-of-the-art process technology for wafer manufacturing and be
able to implement design improvements, such as reduced geometries, quickly
through short product design cycles.

        The Company leverages its SRAM design and advanced complimentary metal
oxide semiconductor ("CMOS") process technology expertise to establish
collaborative manufacturing relationships with Asian semiconductor manufacturers
which use the Company's memory products as a vehicle for the development of
advanced process technology. The Company believes that these relationships
differentiate it from traditional fabless companies and allow it to secure
access to leading edge process technology and a committed source for wafer
processing. The Company's principal collaborative manufacturing relationship is
with Taiwan Semiconductor Manufacturing Corporation ("TSMC"), with which it
jointly develops process technology for producing the Company's SRAMs and
nonvolatile memories. The Company also has a collaborative program with
Chartered Semiconductor Manufacturing ("Chartered") in Singapore. In addition,
the Company has a manufacturing program with United Microelectronics Corporation
("UMC") in Taiwan. To further strengthen its manufacturing relationships, the
Company has made an equity investment in a joint venture with TSMC and an equity
investment in a joint venture with UMC.

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     ISSI was founded in 1988. The Company has its headquarters in Santa Clara,
California. This facility focuses on research and development, product
definition, quality assurance and marketing and sales. The Company has a wholly
owned subsidiary in Taiwan. This subsidiary, located in the Hsinchu
Science-Based Industrial Park and near several of the Company's wafer
manufacturing partners, focuses on manufacturing coordination, quality
assurance, product test and regional sales in the Asian market. The Company also
has smaller subsidiaries in Hong Kong and China.

PRODUCTS

        The Company designs and markets a family of high performance, low cost
SRAMs, as well as NVM products, including high speed EPROMS, serial EEPROMs,
FLASH and Voice EPROMs. In 1997 the Company began initial shipments of its high
speed DRAM and its first microcontroller. To date the Company has derived
substantially all of its revenues from the sale of SRAM products.

SRAMS

        The Company offers a family of CMOS SRAMs in various densities, speeds
and packaging configurations. SRAM densities include 64K (8K x 8), 256K (32K x
8), 512K (64K x 8 and 32K x 16), 1 megabit (128K x 8, 64K x 16, 32K x 32), 2
megabit (64K x 32) and 4 megabit (64K x 64). The Company produces both
asynchronous SRAMs and synchronous SRAMs. The Company's 2 megabit 64K x 32
synchronous SRAM currently achieves 5 nanosecond access time. Leading speeds for
the Company's asynchronous SRAMs vary according to density. The 1 megabit 128K x
8 SRAM currently achieves 10 nanoseconds. The 256K SRAM achieves as low as an 8
nanosecond access time.

     The Company's synchronous SRAMs are used primarily in PC cache
applications. The Company's asynchronous SRAMs are used in applications such as
modems, LANs, telecommunications, bridges, routers, multimedia products and
industrial instrumentation. Additional SRAM products are under development and
are expected to include performance-leading features in configuration, power
levels, density and packaging. In addition, in the first half of calendar 1998,
the Company expects to introduce embedded memory products, which will combine
certain logic functions with SRAM.

DRAMS

        The Company introduced its first DRAM products in April 1997. The
Company's DRAMs are specialty DRAMs and are not aimed at the main memory DRAM
market. The Company introduced two low density products, a 2 megabit and 4
megabit DRAM that operate at more than twice the normal speed for DRAM devices.
Initial applications for the Company's DRAMs are in the 3D graphics and disk
drive markets. Revenue to date from such products has been immaterial.

NONVOLATILE MEMORY PRODUCTS

        The Company's NVM products include high performance FLASH, EPROMS and
serial EEPROMs. FLASH and EPROMs are typically used in electronic systems which
require permanent storage of data or program control code since NVM devices do
not lose their memory content when power is turned off. In December 1995, the
Company entered into a cross license agreement for FLASH technology with Intel.
This enables the Company to design its own FLASH products and FLASH process
technology with Intel-compatible architecture. The Company produces a high speed
45 nanosecond 1-megabit FLASH and a 55 nanosecond 2 megabit FLASH. The Company's
EPROM development program focuses on high-speed products. The Company's 1
megabit EPROM achieves a read cycle of 30 nanoseconds. In addition to its 256K,
512K and 1 megabit EPROM, the Company is developing 2, 4 and 8 megabit EPROMs.
High-speed EPROM and FLASH applications include modems, printers, digital phones
and industrial instrumentation.

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        The Company's serial EEPROM devices are low density and are used in
applications that require nonvolatile storage of data or code and allow the
information to be modified during system operation. Applications for serial
EEPROMs include pagers, networking systems, modems, telephone sets, security
systems, smart cards, video games and other consumer products.

        In the third quarter of fiscal 1997, the Company began initial shipments
of a memory intensive 8051 microcontroller. Microcontrollers are used in a broad
array of electronic equipment for the command and control logic of appliances,
toys or cellular phones. The Company also produces a voice-recording chip that
combines voice algorithm technology in a Flash based recording chip. Initial
applications for this device are in consumer electronics such as voice recorded
greeting cards. Revenue from both of these products has, to date, been
immaterial.

DESIGN AND PROCESS TECHNOLOGY

        The Company has invested heavily in advanced process technology that
allows it to design at leading edge geometries such as .25 micron for SRAMs.
Memory products are particularly well suited for the development of advanced
process technology. The Company's technology development engineers work closely
with the Company's design engineers and manufacturing partners, such as TSMC, to
develop new process technologies, refine existing process technologies and to
reduce the circuit geometries of its products. During 1997, the Company and TSMC
began development of 0.30 micron and 0.25 micron, 3.3-volt high speed SRAM
process technology. The Company currently has several development programs with
TSMC for advanced SRAM process technology and for a high-speed FLASH memory
technology. The Company has a similar technology development program for SRAM
and Flash with Chartered Semiconductor.

        The Company's design efforts focus on product specification, memory cell
and array structure, logic and circuit design, simulation and layout. The
Company has invested in advanced computer aided design ("CAD") systems to ensure
that the design team has state-of-the-art design tools and employs innovative
and rigorous design methodologies. The Company leverages its memory expertise to
design embedded memory products that combine memory and logic. In addition, the
Company has developed proprietary product test software that allows it to test
products accurately and cost effectively in large volumes.

MANUFACTURING

        The Company combines its process technology expertise, foundry
partnership strategy and equity investment arrangements with TSMC and UMC to
form a hybrid of the fab and fabless business models which it calls
Fab-Lite(TM). The Company does not own or operate its own wafer foundry but
because memory products are particularly well suited for the development of
advanced process technology, the Company actively participates in developing and
refining the process technology used to manufacture its specific products. The
Company believes that this strategy enables it to achieve the early introduction
of advanced geometries for its high performance memory products which results in
increased performance and lowers manufacturing costs. To date, the Company's
principal manufacturing relationship has been with TSMC, whereby the Company
provides TSMC with design and process expertise in return for access to advanced
process technology and committed wafer capacity at TSMC's wafer fabrication
facilities. The Company also has a collaborative technology development
relationship with Chartered for SRAM and FLASH products.

        In 1995, the Company entered into a joint venture, "United Integrated
Circuits Corp." ("UICC") with UMC and other investors to build a wafer
fabrication facility in Hsinchu, Taiwan. The joint venture is now expected to
result in the delivery of wafers to the Company beginning in 1999. The joint
venture agreement requires an equity investment by the Company of approximately
$26 million (subject to fluctuations in the New Taiwanese Dollar) of which
approximately $20.0 million had been paid as of September 30, 1997. The UICC
facility was severely damaged by fire in October 1997 resulting in a delay in
wafer production of approximately 12 months. UICC has informed the Company that
the damages incurred are covered by insurance.

        In 1996, the Company entered into a joint venture agreement with Altera
Inc., Analog Devices Inc. and TSMC wherein TSMC, as the general partner, will
construct a wafer fabrication facility in the state of Washington. The
fabrication facility is intended to be a very advanced process technology
facility capable of 0.35, 0.25 and 0.18 

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micron process technology. The joint venture, named WaferTech LLC, is expected
to reach full production in approximately 1999/2000. The joint venture agreement
requires an equity investment by the Company of $31.2 million of which, at
September 30, 1997, $18.7 million had been paid.

        The manufacturing of the Company's products is coordinated by
ISSI-Taiwan, which is located in close proximity to TSMC and UMC in the Hsinchu
Science-Based Industrial Park, a government-sponsored technology development
zone. The Science Park location provides certain advantages, including close
communication with its manufacturing partners, streamlined customs
administration and preferential tax treatment.

        After receiving wafers from its independent wafer foundry partners, the
Company performs its own wafer probe testing, laser repair, and final testing in
its product test facility at ISSI-Taiwan, which operates on a multiple shift
basis. The Company's U.S. headquarters develops and debugs test programs and
tests procedures used in Taiwan. Both the Taiwan and U.S. facilities have clean
rooms that are equipped for the wafer probe segment of the testing process.
Packaging and assembly operations are performed by subcontractors, principally
in Taiwan. A comprehensive quality control program is in place in both
facilities. The Company has adopted ISO 9000 as its quality management standard.
The Company's U.S. facility has received certification under ISO 9001 standards
and the Company's Taiwan facility has received certification under ISO 9002
standards.

        Each of the Company's wafer suppliers also fabricates for other
integrated circuit companies, including certain of the Company's competitors. In
addition, UMC manufactures integrated circuits, including SRAMs, for its own
account. Although the Company has written commitments specifying wafer
capacities, if a wafer supplier chose to prioritize capacity for other use or
reduce or eliminate deliveries to the Company, there can be no assurance that
the Company could enforce fulfillment of the delivery commitments. The equity
investment arrangements and related purchase agreements by the Company with TSMC
and UMC will provide the Company with guaranteed capacity, and thus are expected
to mitigate this delivery risk in the future. However, these fabrication
facilities are not yet operational. Since the construction of a wafer
fabrication facility is a lengthy and complex endeavor, there can be no
assurance that the TSMC joint venture fabrication facility or the UMC joint
venture fabrication facility will be successfully completed and successfully
enter into production. In this regard, the UMC joint venture facility was
severely damaged by fire in October 1997 resulting in a delay in wafer
production of approximately 12 months.

     There can be no assurance that the Company's foundries will not encounter
construction or production difficulties or that they will allocate sufficient
wafer capacity to satisfy the Company's wafer requirements, especially in times
of wafer capacity shortages. Moreover, there can be no assurance that the
Company would be able to qualify additional manufacturing sources for existing
or new products in a timely manner or that such additional manufacturing sources
would be able to produce an adequate supply of wafers. If the Company were
unable to obtain an adequate supply of wafers from its current or any
alternative sources in a timely manner, its business and operating results would
be materially and adversely affected.

        Although the Company's policy is to work closely with its manufacturing
sources there are certain risks associated with the use of independent
foundries, including the absence of a controlled source of supply, or delays in
obtaining adequate wafer supplies. In addition, the manufacture of integrated
circuits is a highly complex and technically demanding process. Production
yields can be affected by a large number of factors. As is typical in the
semiconductor industry, the Company's outside foundries have from time to time
experienced lower than anticipated manufacturing yields, particularly in
connection with the introduction of new products and changes in such foundry's
processing steps. There can be no assurance that the Company's foundries will
not experience lower than expected manufacturing yields in the future, which
could materially and adversely affect the Company's business and operating
results.

        The Company has certain minimum wafer purchasing commitments to its
foundry partners in exchange for wafer capacity commitments. The Company agreed
to make certain annual payments to TSMC for capacity increases. Additional
required payments to TSMC totaling approximately $26.4 million over the next
four years represent annual increases in capacity which must be purchased by the
Company. The Company has minimum purchase obligations with UICC and WaferTech
LLC. Although the Company has rights to re-schedule or assign capacity to
another party, there can be no assurance that such re-schedule or assignment
would be successfully 


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accomplished. Should the Company fail to re-schedule or assign unneeded
capacity, the Company's business and operating results could be adversely
affected.

CUSTOMERS AND MARKETING

        The Company's customers include a broad range of electronic system
manufacturers such as Cisco, 3Com, IBM, Motorola, and Seagate . The Company's
SRAM products are used primarily in high-speed modems, local area networks,
bridges and routers, PC cache, disk drives, cellular phones and adapter cards.
The Company's NVM products have a wide range of memory applications including
high-speed modems, local area networks, adaptor cards, cellular telephones and
electronic games. In fiscal 1997 and 1996, one customer, 3Com/U.S. Robotics,
accounted for approximately 19% and 22% of the Company's net sales,
respectively. In fiscal 1995 no customer accounted for more than 10% of net
sales.

        In the United States, the Company markets its products through a direct
sales force and independent sales representatives. The Company engaged a U.S.
distributor in 1995, and added a second U.S. distributor in 1996. The Company is
continuing to expand its marketing and sales activity in Europe. The Company has
sales offices in the United States, Europe, Japan, Hong Kong, Taiwan and the
Peoples Republic of China.

        The Company has a direct sales and marketing organization based in
Taipei, Taiwan that is primarily responsible for the Asian market. To date, a
majority of the Company's Asian sales have been to Taiwan customers. The Company
markets and distributes its products on a worldwide basis. In fiscal 1997,
approximately 45% of the Company's net sales were attributable to customers
located in the United States, 13% was attributable to customers located in
Europe and 42% was attributable to customers located in Asia. In fiscal 1996,
approximately 53% of the Company's net sales were attributable to customers
located in the United States, 10% was attributable to customers located in
Europe and 37% was attributable to customers located in Asia. In fiscal 1995,
approximately 35% of the Company's net sales were attributable to customers
located in the United States, 9% was attributable to customers located in Europe
and 56% was attributable to customers located in Asia. In fiscal 1997, 1996, and
1995, international sales (sales by ISSI-Taiwan and export sales by ISSI-U.S.)
comprised approximately 55%, 47% and 65% of the Company's net sales,
respectively. See Note 12 of Notes to Consolidated Financial Statements.

        The Company is subject to the risks of conducting business
internationally, including economic conditions in Asia, particularly Taiwan,
changes in trade policy and regulatory requirements, tariffs and other trade
barriers and restrictions, the burdens of complying with foreign laws and,
possibly, political instability. The Company anticipates that sales to
international customers will continue to represent a significant percentage of
net sales. The Company's Taiwan subsidiary employs over one-half of the
Company's total work force. In addition, substantially all of the Company's
foundries and assembly and test operations are located in Asia. The Company
transacts business predominately in U.S. and New Taiwan ("NT") dollars. Such
transactions expose the Company to the risk of exchange rate fluctuations. The
Company periodically monitors its exposure to foreign currency fluctuations, and
has from time to time taken action to hedge against such exposure, but has not
to date adopted any formal hedging strategy. Although the Company's business and
results of operations have not been materially and adversely impacted by
exchange rate fluctuations, there can be no assurance that exchange rate
fluctuations will not materially and adversely affect its business and operating
results in the future.

        The Company manufactures and markets primarily standard products that
are designed to provide advanced performance and features such as speed, power,
density or packaging. Sales are generally made pursuant to standard purchase
orders, which can be revised during the agreement term to reflect changes in the
customer's requirements. Generally, purchase orders and OEM agreements allow
customers to reschedule delivery dates and cancel purchase orders without
significant penalties. For these reasons, the Company believes that its backlog,
while useful for scheduling production, is not necessarily a reliable indicator
of future revenues.

COMPETITION

        The semiconductor memory market is intensely competitive and has been
characterized by price erosion, rapid technological change, short product life
cycles, cyclical market patterns and heightened foreign and domestic
competition. The ability of the Company to compete successfully in the high
performance memory market depends on factors both within and outside of its
control, including imbalances in supply and demand, product pricing, the 


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rate at which OEM customers incorporate the Company's products into their
systems, access to advance process technologies at competitive prices, product
functionality and performance, successful and timely product development, wafer
supply, wafer costs, achievement of acceptable yields of functional die, the
gain or loss of significant customers, the nature of its competitors and general
economic conditions. There can be no assurance that the Company will be able to
compete successfully in the future as to any of these factors. The failure of
the Company to compete successfully in these or other areas could materially and
adversely affect the Company's business and operating results. In addition, the
Company is vulnerable to technology advances utilized by competitors to
manufacture higher performance or lower cost products.

        The high performance SRAM market is generally a fragmented market and
specific competitors and competitive factors vary based on geographic regions
and market segments. In the high performance SRAM market, the Company competes
with several major domestic and international semiconductor companies including
Cypress Semiconductor, Integrated Device Technology ("IDT"), Mitsubishi,
Motorola, Samsung, Sony, Toshiba, UMC and Winbond. The Company also competes
with new and emerging companies which have recently entered or may in the future
enter the market. The Company also may face significant competition from other
domestic and foreign integrated circuit manufacturers which have advanced
technological capabilities but have not previously participated in the SRAM
market sector. There can be no assurance that the Company will be able to
compete successfully against any of these competitors.

     In the high speed DRAM area, the Company competes primarily with Silicon
Magic and Mosel-Vitelic. Other main memory DRAM companies could potentially
enter the high-speed market in the future. There can be no assurance that the
Company will be able to compete successfully against any of these competitors.

        In the nonvolatile memory market, the Company's primary competitors
include Advanced Micro Devices ("AMD"), Atmel, Intel and SGS-Thomson
Microelectronics. The Company also competes with many small to medium-sized
companies in one or more segments of the market. Certain of the Company's
competitors offer broader product lines and have greater financial, technical,
marketing, distribution and other resources than the Company. There can be no
assurance that the Company will be able to compete successfully against any of
these competitors.

        The process technology used by the Company's manufacturing sources,
including process technology that the Company has developed with its foundries,
can be used by such manufacturers to produce products for other companies,
including the Company's competitors. Although the Company believes that its
participation in the development of the processes provides it the advantage of
early access to such processes, there can be no assurance that the knowledge of
the manufacturer will not be used to benefit the Company's competitors.

PRODUCT WARRANTY

        Consistent with semiconductor memory industry practice, the Company
generally provides a limited warranty that its semiconductor memory devices are
in compliance with specifications existing at the time of delivery. Liability
for a stated warranty period is usually limited to replacement of defective
items or return of amounts paid.

RESEARCH AND DEVELOPMENT

        Rapid technological change and continuing price competition require
research and development efforts on both new products and advanced processes
employing smaller geometries. The Company's research and development activities
are focused primarily on the development of advanced process technologies and
new memory circuit designs. The Company currently designs most of its high
performance memory products and jointly develops advanced process technology
with its manufacturing partners from its headquarters in Santa Clara,
California. The Company's Taiwan and Hong Kong subsidiaries are responsible for
the development of the Company's microcontroller products, voice products and
certain EEPROM products.

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        The Company is currently designing new SRAM, DRAM, Embedded Memory and
NVM products. SRAM products under development include higher density products
such as the 4-megabit SRAM, low power SRAMs and specialty configurations. DRAM
products under development include higher density DRAMs such as the 8-megabit
and 16 megabit DRAM and synchronous graphics DRAMs. Nonvolatile memory programs
include the development of higher density FLASH and lower power products.
Several new product families are also under development. The Company's
technology and product development expenditures in fiscal 1997, 1996 and 1995
were $26.2 million, $21.4 million and $14.9 million, respectively.

PATENTS

        As of September 30, 1997, the Company held eight U.S. patents. These
patents expire between 2010 and 2014. The Company has approximately twenty
additional patent applications pending and expects to continue to file patent
applications where appropriate to protect its proprietary technologies. Although
patents are an important element of the Company's intellectual property, the
Company believes that its continued success depends primarily on factors such as
the technological skills and innovation of its personnel rather than on its
patents. The process of seeking patent protection can be expensive and time
consuming. There can be no assurance that patents will be issued from pending or
future applications or that, if patents are issued, they will not be challenged,
invalidated or circumvented, or that rights granted thereunder will provide
meaningful protection or other commercial advantage to the Company. Moreover,
there can be no assurance that any patent rights will be upheld in the future or
that the Company will be able to preserve any of its other intellectual property
rights.

        In the semiconductor industry it is typical for companies to receive
notices from time to time alleging infringement of patents or other intellectual
property rights of others. The Company has been, and may from time-to-time
continue to be, notified of claims that it may be infringing patents, maskwork
rights or copyrights owned by third parties. Although none of these companies
have pursued a claim against the Company, there is no assurance that these or
other companies will not in the future pursue claims against the Company with
respect to the alleged infringement of patents, maskwork rights, copyrights or
other intellectual property owned by third parties. If it appears necessary or
desirable, the Company may seek licenses under patents that it is alleged to be
infringing. Although patent holders commonly offer such licenses, there is no
assurance that any licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license
under a key patent or intellectual property right from a third party for
technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of the products utilizing the
invention or to attempt to develop non-infringing products, any of which could
materially and adversely affect the Company's business and operating results.
Furthermore, there can be no assurance that the Company will not become involved
in protracted litigation regarding the alleged infringement by the Company of
third party intellectual property rights or which may be necessary to protect
patents or other intellectual property rights of the Company. Any litigation
relating to patent infringement or other intellectual property matters could
result in substantial cost and diversion of resources by the Company which could
materially and adversely affect the Company's business and operating results.

ACQUISITION OF NEXCOM TECHNOLOGY, INC.

        On December 3, 1997, the Company completed its acquisition of Nexcom
Technology, Inc. ("Nexcom") in exchange for the issuance of 772,693 shares of
Common Stock and $500,000 in cash (total consideration of approximately $7.2
million). The Nexcom shareholders are also eligible to receive certain
contingent payments based on future license revenue. The transaction will be
accounted for as a purchase and is expected to result in an in-process
technology charge of approximately $6 to $7 million in the Company's December
31, 1997 quarter. Nexcom was formed in 1990 and has been engaged primarily in
the research and development of non-volatile flash memory technology. As a
result of the merger, the Company acquired 13 patents which were held by Nexcom.
Nexcom has approximately 30 employees and is located in Sunnyvale, California.

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EMPLOYEES

        As of September 30, 1997, the Company had approximately 450 employees,
of which 250 were based in Taiwan, 194 in the U.S., 7 in the People's Republic
of China and 19 in Hong Kong. The Company's future success will largely be
dependent on its ability to attract, retain and motivate highly qualified
technical and management personnel. The employment market for such personnel is
extremely competitive and there can be no assurance that the Company will
successfully staff all necessary positions. The Company's employees are not
represented by any collective bargaining agreements and the Company has never
experienced a work stoppage. The Company believes that its employee relations
are good.

EXECUTIVE OFFICERS

        The executive officers of the Company and their ages as of September 30,
1997 are as follows:



         Name             Age                           Position

                                                                            
Jimmy S.M. Lee            42     Chairman, Chief Executive Officer, President, and
                                 Director

Kong-Yeu Han              42     Executive Vice President, Office of the President,
                                 General Manager-Taiwan and Director

Gary L. Fischer           46     Executive Vice President, Office of the President and
                                 Chief Financial Officer


BACKGROUND OF EXECUTIVE OFFICERS

        Jimmy S.M. Lee has served as Chief Executive Officer, President and a
director of the Company since he co-founded the Company in October 1988. He has
also served as a director of ISSI-Taiwan since September 1990. From 1985 to
1988, Mr. Lee was engineering manager at International CMOS Technology, Inc., a
semiconductor company, and from 1983 to 1985, he was a design manager at
Signetics Corporation, a semiconductor company. Prior thereto, Mr. Lee was a
project manager at Toshiba Semiconductor Corporation and a design engineer at
National Semiconductor Corporation. Mr. Lee holds an M.S. degree in electrical
engineering from Texas Tech University and a B.S. degree in electrical
engineering from National Taiwan University.

        Kong-Yeu Han has served as the Company's Executive Vice President since
April 1995, as General Manager, ISSI-Taiwan since September 1990 and as a
director of the Company since he co-founded the Company in October 1988. He has
also served as a director of ISSI-Taiwan since September 1990. From October 1988
to September 1990, he also served as Vice President, Engineering of the Company.
From 1985 to 1988, Mr. Han was design engineering manager at Vitelic
Corporation, a semiconductor company, and from 1984 to 1985 he was a staff
engineer at Signetics Corporation. From 1980 to 1984, Mr. Han was a senior
engineer at AMD and its subsidiary Monolithic Memories, Inc. ("MMI"), both of
which are semiconductor companies. Mr. Han holds an M.S. degree in electrical
engineering from the University of California, Santa Barbara and a B.S. degree
in electrical engineering from National Taiwan University.

        Gary L. Fischer has served as the Company's Executive Vice President
since April 1995 and as Vice President and Chief Financial Officer since June
1993. He also served as Vice President, Finance and Administration from December
1993 to April 1995. From December 1992 to April 1993, Mr. Fischer was Vice
President, Finance and Chief Financial Officer of Shaman Pharmaceuticals, Inc.,
a pharmaceutical company. From January 1989 to December 1992, Mr. Fischer was
Chief Financial Officer of Synergy Semiconductor Corporation, a manufacturer of
high performance SRAM and logic integrated circuits. Mr. Fischer holds an M.B.A.
degree from the University of Santa Clara and a B.A. degree from the University
of California, Santa Barbara.

        Officers serve at the discretion of the Board and are appointed
annually. There are no family relationships between the directors or officers of
the Company.

                                       8
   11




ITEM 2. PROPERTIES

        The Company's U.S. headquarters occupies a two story building, totaling
approximately 93,400 square feet, in Santa Clara, California in which its
executive offices, technology, product development groups and some R&D testing
facilities are located. The lease on this building expires in February 2007. The
Company subleases approximately 24,000 square feet to a third party. The
sublease expires in March 2000. ISSI-Taiwan occupies two leased facilities
totaling approximately 48,000 square feet in the Hsinchu Science-Based
Industrial Park in Hsinchu, Taiwan. These leases expire in April and September
1998 and are subject to annual renewal. The Company also leases sales offices in
five states, Taipei, Taiwan and China and engineering offices in Hong Kong.

        The Company needs additional space in Taiwan to accommodate its growth.
In this regard, the Company has begun the construction of a building of
approximately 225,000 square feet in the Hsinchu Science-Based Industrial Park
to house its Taiwan operation at a cost of approximately $22 million. Occupancy
is expected to begin in mid 1998. The Company intends to sublease a portion of
the new building to other companies.

ITEM 3. LEGAL PROCEEDINGS

        On March 21, 1997, the U.S. Department of Commerce ("DOC") initiated an
antidumping investigation of SRAMs from Taiwan and Korea. The Company currently
imports a majority of its SRAMs from Taiwan. The Company is participating in
this investigation as an interested party and has been assigned a preliminary
duty deposit rate of 10.96 percent. A final report by the DOC is scheduled for
January 1998. There will be a subsequent investigation by the International
Trade Commission ("ITC") into the impact of imports of SRAMs from Taiwan and
Korea on the U.S. market, with a final decision likely in March or April 1998.
Affirmative final decisions by both the DOC and the ITC are required before an
antidumping duty deposit is applicable to imports of SRAMs by the Company from
either of these countries. If an affirmative decision is reached, the Company
would be required to post a duty deposit for SRAM wafers or devices imported
from Taiwan. This duty deposit could be subsequently returned to the Company or
forfeited as duty to the U.S. Customs depending on subsequent measurements, the
results of which are made available by the Department Of Commerce in the year
2000.

        The Company has retained legal counsel to defend its interests in the
antidumping proceedings before the DOC and the ITC. There can be no assurance,
however, that the government will not impose duties on the Company's imports of
SRAM products into the United States. Duties, if any, imposed by the government
could have a material adverse affect on the Company's gross margins and profits.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1997.


                                       9
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                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET FOR COMMON STOCK

        The Company's common stock has been quoted on the Nasdaq National Market
under the symbol ISSI since the Company's initial public offering on February 3,
1995 at $13.00 per share. Prior to such date, there was no public market for the
common stock. The following table sets forth, for the fiscal quarters indicated,
the high and low sale prices per share for the Common Stock as reported on the
Nasdaq National Market. These prices are over-the-counter market quotations
which reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.



         Fiscal Year ending September 30, 1997            High           Low
                                                         -----           ----
                                                                      
Fourth quarter                                      $    16.375       $  7.5625
Third quarter                                             9.875          6.50
Second quarter                                           10.625          8.03125
First quarter                                            12.375          8.00

         Fiscal Year ending September 30, 1996           High           Low
                                                         -----          ----
Fourth quarter                                      $    13.375       $  8.00
Third quarter                                            19.125         10.625
Second quarter                                           18.75          11.375
First quarter                                            38.00          15.00


HOLDERS OF RECORD

        As of December 1, 1997, there were approximately 10,900 beneficial
holders of the Company's common stock.

DIVIDENDS

        The Company has never declared or paid cash dividends. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying any cash dividends on its capital stock in the foreseeable
future. The Company is subject to legal restrictions related to distribution of
earnings of its Taiwan subsidiary. See Note 10 of Notes to Consolidated
Financial Statements.

RECENT SALES OF UNREGISTERED SECURITIES

        On December 3, 1997, in connection with the merger of Nexcom with and
into the Company, the Company issued an aggregate of 772,693 shares of its
Common Stock to the Nexcom shareholders. The shares were issued pursuant to
Section 4(2) and Rule 506 of Regulation D promulgated under the Securities Act
of 1933, as amended.

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   13




ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA



                                                            Fiscal Year Ended September 30,
                                         1997           1996            1995           1994           1993
                                     ---------       ---------        ---------      ---------      ---------
                                                         (in thousands, except per share data)

                                                                                          
Net sales                            $ 108,261       $ 132,039       $ 123,201      $  60,836      $  52,662
Gross margin                            32,156          31,855          62,252         20,553         15,671
Operating income (loss)                (10,776)         (4,683)         34,476          4,994          5,755
Net income (loss)                       (7,686)          1,015          29,653          4,612          5,782
Net income (loss) per share (1)          (0.43)           0.06            1.79           0.34             --

Working capital                         75,544         107,929         120,839         16,648         11,957
Total assets                           195,596         178,039         204,441         33,243         28,883
Total long-term obligations,
    notes payable, and current
    portion of long-term obligations    20,101          14,534          33,888          1,526          2,963
Stockholders' equity                   134,567         142,435         139,909         21,187         15,963
Dividends paid                              --              --              --             --             --


- ---------

(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the basis used to calculate net income (loss) per share. Prior to 1994,
Statements of Operations omit net income per share as it was not presented in
the Company's initial public offering registration statement. Pro forma income
per share is presented for fiscal 1994.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

RESULTS OF OPERATIONS

FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1996

        Net Sales. Net sales consist principally of total product sales less
estimated sales returns. Net sales decreased by 18% to $108.3 million in fiscal
1997 from $132.0 million in fiscal 1996. The decrease in sales was principally
due to significant deterioration in the average selling prices of the Company's
SRAM and nonvolatile memory products. The decreased revenue resulting from lower
average selling prices was partially offset by increased unit shipments of SRAM
products, specifically the Company's 256K, 512K, 1024K products, cache module
products, and nonvolatile memory products. The Company anticipates that the
average selling prices of its existing products will continue to decline over
time, although the rate of decline may fluctuate for certain products. There can
be no assurance that such declines will be offset by higher volumes or by higher
prices on newer products. See "Quarterly Fluctuations and Declines in Average
Selling Prices". Sales to one customer, 3Com/U.S. Robotics, accounted for
approximately 19% and 22% of total net sales for fiscal 1997 and fiscal 1996,
respectively. As sales to this customer are executed pursuant to purchase orders
and no purchasing contract exists, the customer can cease doing business with
the Company at any time.

        Gross Profit. The Company's cost of sales includes die cost from the
wafers acquired from foundries, subcontracted package and assembly costs and
costs associated with in-house product testing and quality assurance. Gross
profit increased 1% to $32.2 million in fiscal 1997 from $31.9 million in fiscal
1996. As a percentage of net sales, gross profit increased to 29.7% in fiscal
1997, from 24.1% in fiscal 1996. Fiscal 1996 included a $15.0 million write down
of inventory during the June quarter related to various SRAM products (primarily
8Kx8, 32Kx8 and 128Kx8) as well as some non volatile memory products (EPROM and
EEPROM) that the Company anticipated as being non-salable based on its six month
sales forecast. Excluding the $15.0 million inventory write-down, gross profit
was $46.9 million or 35.5% of net sales in fiscal 1996. Excluding the inventory
write-down in the 1996 period, the decrease in the fiscal 1997 gross profit was
primarily the result of significantly lower average selling prices for the
Company's SRAM and nonvolatile memory products in fiscal 1997 compared to fiscal
1996. Although product unit costs were lower in fiscal 1997 compared to 

                                       11


   14

fiscal 1996, such reductions did not offset the declines in average selling
prices, resulting in lower gross margins. Gross profit for fiscal 1997 reflects
a $13.9 million benefit related to inventory sold during 1997 that had been
written-down in June 1996. Gross margin would have been $18.2 million or 16.8 %
without the benefit from the sale of the previously written down product. Late
in the first quarter of fiscal 1997, the Company began to realize that, due to
changes in industry conditions, its estimate of the June 30, 1996 sales forecast
and inventory write-down may not have been accurate. Sales continued to decline
in the September 1996 quarter, but thereafter the Company experienced sequential
quarterly revenue growth throughout fiscal 1997 moving from $23.1 million for
the September 1996 quarter to $32.3 million for the September 1997 quarter. The
sales forecast used to estimate the June 1996 quarter write-down changed on a
quarterly basis throughout fiscal 1997 as demand for the written-down products
strengthened or was extended. This change was not attributable to any single
event, but rather an overall strengthening of demand in the industry. Revenues
for the product categories that were written down in June 1996, totaled
approximately $80.3 million in fiscal 1997 compared to approximately $118.7
million in fiscal 1996. The Company continues to sell these product categories,
but at prices that have declined significantly during the quarters. The Company
believes that six months is an appropriate period for sales forecasts and
inventory exposure calculations because it is difficult to accurately forecast
for a specific product beyond this time frame due to potential introduction of
products by competitors, technology obsolescence or fluctuations in demand, and
absent adjustments due to management's judgments for newer products, end of life
products or planned inventory increases, the Company believes it is appropriate
to write-down on hand inventory in excess of six (6) months estimated sales
volume to zero. The policy has resulted in inventory write-downs of
approximately $1.0 million, $15.0 million and $0 for fiscal year 1995, 1996 and
1997, respectively, and recoveries of written-down inventory of approximately
$150.000, $300,000 and $13.9 million in fiscal 1995, 1996 and 1997,
respectively. The Company believes that the average selling price of its
products will continue to decline and unless the Company is able to reduce its
cost per unit to the extent necessary to offset such declines, the decline in
average selling prices will result in a material decline in the Company's gross
margin. Although the Company has product cost reduction programs in place, 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.

        Research and Development. Research and development expenses increased by
23% to $26.2 million in fiscal 1997, from $21.4 million in fiscal 1996. As a
percentage of net sales, research and development expenses increased to 24.2% in
fiscal 1997, from 16.2% in fiscal 1996. These increases were primarily the
result of an increase in engineering personnel, increased payroll related
expenses and increased expenses related to the development of new products and,
to a lesser extent, the write-off of obsolete engineering equipment and
software. During fiscal 1997, the Company's development efforts principally
focused on wider bus width SRAMs such as the 64K x 32, 64K x 16 and 32K x 16
configurations, 2 megabit Flash memory, geometry reductions for its memory
products, EPROMs, and other memory related devices. In this regard, the Company
developed its initial DRAM devices, specialty high speed 4 megabit and 2 megabit
DRAMs. These products are currently being sampled by several customers. The
Company anticipates that its research and development expenses will increase in
absolute dollars in future periods, although such expenses may fluctuate as a
percentage of net sales.

        Selling, General and Administrative. Selling, general and administrative
expenses increased by 10% to $16.8 million in fiscal 1997 from $15.2 million in
fiscal 1996. As a percentage of net sales, selling, general and administrative
expenses increased to 15.5% in fiscal 1997, from 11.5% in fiscal 1996. These
increases were primarily the result of increases in bad debt reserves and legal
expenses associated with antidumping proceedings and increased payroll related
expenses from the addition of marketing and sales personnel, partially offset by
decreased selling commissions associated with lower revenues. The Company
expects its selling, general and administrative expenses to increase in absolute
dollars in future periods as it continues to expand its sales and marketing
efforts, although such expenses may fluctuate as a percentage of net sales.

        Interest and other income, Net. Interest and other income, net decreased
to $1.9 million in fiscal 1997 from $4.5 million in fiscal 1996, primarily due
to decreased net interest earnings as a result of lower cash and short-term
investment balances.

        Benefit for Income Taxes. The Company recorded a tax benefit of $1.1
million for fiscal 1997 which was primarily attributable to investment tax
credits generated by the Company's Taiwan subsidiary during the year ended
September 30, 1997. The Company recorded a tax benefit of $1.2 million for
fiscal 1996 which was 


                                       12


   15

primarily attributable to lower than expected profit before income taxes and tax
benefits relating to tax-exempt interest income and the dividends deduction. In
addition, the Company's Taiwan subsidiary generated significant investment tax
credits during the year ended September 30, 1996.

     As a result of its location in the Hsinchu Science-Based Industrial Park in
Taiwan, ISSI-Taiwan has received a tax exemption for taxable income beginning
October 1, 1992. This tax exemption is extended each time ISSI-Taiwan expands
its capital assets and uses the capital to purchase qualified machinery. The
precise amount of the exemption is calculated annually based upon the extent of
ISSI-Taiwan's net operating taxable income and measured by certain factors,
including use of qualified manufacturing equipment, self-manufacturing costs and
qualified sales revenue. The portion of ISSI-Taiwan's taxable income which is
not subject to exemption is taxed at a flat 20% tax rate. In addition, the
Company recognized benefits from investment tax credits in Taiwan of
approximately $968,000 in fiscal 1997. There can be no assurance that the
Company's current tax status in Taiwan will not change in the future due to
changes in the regulatory environment, the inability to qualify for exempt
status or other factors.

        Under Statement of Financial Accounting Standards No. 109 (FAS 109),
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company has established a valuation allowance
covering a portion of the gross deferred tax assets based on management's
expectations of future taxable income and the actual taxable income during the
three years ended September 30, 1997. Realization of deferred tax assets is
dependent on generating sufficient taxable income prior to expiration of the
carryforwards. Although realization is not assured, management believes that it
is more likely than not that the deferred tax asset will be realized. The amount
of the deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income during the carryforward
period are reduced Approximately $2.0 million of the valuation allowance at
September 30, 1997 is attributable to tax benefits of stock option deductions
which will be credited to paid in capital when realized.

        FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED
        SEPTEMBER 30, 1995

        Net Sales. Net sales increased by 7% to $132.0 million in fiscal 1996
from $123.2 million in fiscal 1995. The Company's SRAM product family accounted
for a substantial majority of total net sales in fiscal 1996 and 1995. During
fiscal 1996, there was a significant drop in the average selling prices of SRAM
products due to worldwide over capacity. Although the Company increased its unit
shipments of SRAM products in fiscal 1996 from fiscal 1995, this increase in
unit shipments was generally offset by lower average selling prices. The
increase in total sales of approximately 7% was primarily attributable to growth
in the Company's NVM product line sales which more than doubled in fiscal 1996
compared to fiscal 1995. During fiscal 1996 and 1995, the Company's 256K SRAM
products accounted for a majority of its net sales.

        Gross Profit. Gross profit decreased 49% to $31.9 million in fiscal 1996
from $62.3 million in fiscal 1995. As a percentage of net sales, gross profit
decreased to 24.1% for fiscal 1996 from 50.5% for fiscal 1995. The general
decrease in gross profit in 1996 was primarily the result of lower average
selling prices for the Company's SRAM products in fiscal 1996 compared to fiscal
1995. The Company experienced a significant drop in the average selling prices
of its SRAM products in fiscal 1996 and, to a lesser extent, a decline in the
average selling prices of its NVM products. Although product costs were also
generally lower in fiscal 1996, the significant drop in average selling prices
resulted in lower gross margins. During fiscal 1996, the Company's quarterly
revenue declined from $45 million in the December 1995 quarter to $36 million in
the March 1996 quarter to $28 million in the June 1996 quarter. It is the
Company's practice to write-down to zero carrying value inventory on hand in
excess of six months estimated sales volumes to cover estimated exposures unless
adjustments are made to the forecast based on management's judgments for newer
products, end of life products or planned inventory increases. In June 1996, due
to the severity of the Company's decrease in revenues (38% drop from the
December 1995 quarter), facing another expected decrease in revenues in the
September quarter (based on July sales) and with the extreme uncertainty
regarding when and if the market would recover, the Company's six months sales
forecast indicated a need for a write-down of $15 million of inventory to cover
the Company's estimated exposure. At the time of the write-down, the Company
expected that any inventory on hand for the written-down products (SRAM, EPROM
and EEPROM) in excess of six (6) months estimated sales volume had no value and,
accordingly, this inventory was written down to zero value. At the time of the
write-down, management did not expect any future 

                                       13


   16

cash flows from sales of the written-down products. This write-down is included
in cost of goods sold for fiscal 1996. Products that were written down included
SRAMs (8Kx8, 32Kx8 and 128Kx8) and non-volatile products (EPROM and EEPROM).
During the June 1996 quarter, the Company worked with its wafer fabrication
foundries to reduce the future supply of die related to the written down product
categories by slowing down wafers in production to the lowest possible level.
Further, in the June 1996 quarter, the Company internally discontinued the
assembly of die into packages. Late in the December 1996 quarter, the Company
again began the assembly and testing of wafer inventory as market demand began
to increase particularly for higher speed product in these configurations.
Revenue from these product categories for the first nine months ended June 30,
1996 totaled approximately $101.6 million and for the quarter ended September
30, 1996 revenue totaled approximately $17.1 million.

        Research and Development. Research and development expenses increased by
44% to $21.4 million in fiscal 1996 from $14.9 million in fiscal 1995. As a
percentage of net sales, research and development expenses increased to 16.2% in
fiscal 1996, from 12.1% in fiscal 1995. The increase was primarily the result of
an increase in engineering personnel and payroll related expenses and increased
expenses related to the development of new products. During fiscal 1996, the
Company's development efforts principally focused on geometry reductions for its
memory products, synchronous SRAMs, wider bus width SRAMs such as 64K x 32 and
32K x 16 configurations, Flash memories, Voice EPROMs, and other memory related
products.

        Selling, General and Administrative. Selling, general and administrative
expenses increased by 18% to $15.2 million in fiscal 1996 from $12.9 million in
fiscal 1995. As a percentage of net sales, selling, general and administrative
expenses increased to 11.5% in fiscal 1996, from 10.5% in fiscal 1995. The
increase was primarily the result of the addition of marketing and sales
personnel, payroll related expenses and increased selling commissions.

        Interest and other income, Net. Interest and other income, net increased
to $4.5 million in fiscal 1996 from $2.5 million in fiscal 1995, primarily due
to increased net interest earnings as a result of higher cash and short-term
investment balances.

        Benefit for Income Taxes. The Company recorded a tax benefit of
$1,158,000 for fiscal year 1996 which was primarily attributable to a net loss
before income taxes, the Company's Taiwan tax exemption and investment tax
credits earned in Taiwan.

        For fiscal 1996, the Company was able to reduce current taxes payable by
approximately $1,510,000 ($0.08 per share) related to the Company's Taiwan tax
exemption. In addition, the Company recognized benefits from investment tax
credits in Taiwan of approximately $1,018,000 in the fiscal 1996.

LIQUIDITY AND CAPITAL RESOURCES

        As of September 30, 1997, the Company's principal sources of liquidity
included cash, cash equivalents, restricted cash and short-term investments of
approximately $53.1 million, of which approximately $12.1 million was held by
ISSI-Taiwan. Approximately $5.2 million of the cash held by the Company is
restricted as of September 30, 1997 for purposes of securing available
short-term lines of credit and letters of credit. During fiscal 1997, operating
activities utilized cash of approximately $4.6 million. Cash utilized by
operations was primarily due to increases in inventories and accounts receivable
partially offset by an increase in accounts payable, a decrease in other assets
and net loss adjusted for depreciation and other non-cash items.

        The Company made capital expenditures of approximately $14.0 million in
fiscal 1997, of which approximately $6.0 million was for the construction of the
Company's facility in the Hsinchu Science-Based Industrial Park to house its
Taiwan operations and $8.0 million was for the purchase of test equipment and
design and engineering tools. The Company expects to spend approximately $12
million to purchase capital equipment during the next twelve months, principally
for the purchase of additional test equipment, design and engineering tools, and
computer hardware and software. Additionally, the Company expects to spend
approximately $16.0 million during the next twelve months for the construction
of its Taiwanese facility. A portion of this construction cost will be financed
through loans. The building is expected to be completed in mid 1998.

                                       14
   17

        In June 1996, the Company entered into a joint venture "WaferTech, LLC"
with TSMC, Altera, Analog Devices, and private investors to build a wafer
fabrication facility in Camas, Washington. The Company agreed to invest $31.2
million for a 4% equity interest in the venture and as of June 30, 1997, $18.7
million had been paid by the Company to WaferTech in this regard. The last
scheduled payment by the Company of $12.5 million was made in November 1997. In
fiscal 1995, the Company entered into an agreement with TSMC pursuant to which
the Company agreed to acquire specified wafer capacity through 2001. The Company
also agreed to make certain annual payments totaling approximately $26.4 through
2001 to TSMC for additional capacity above the annual base capacity. Wafer
purchases in any given year are first applied to the base capacity and then to
the Company's $26.4 million obligation. As a result, the $26.4 million may be
subject to forfeiture if the Company does not purchase the base capacity and the
additional capacity for which it has contracted. The Company has established a
letter of credit for $4.8 million covering a portion of this amount. The Company
also has minimum purchase obligations to TSMC related to WaferTech LLC. The
Company is obligated to purchase a minimum of 3.4% of WaferTech's installed
capacity. Initial wafer outs are expected in the second half of calendar 1998
and full capacity is expected in the year 2000. Additionally, in fiscal 1995,
the Company entered into a joint venture "United Integrated Circuits Corp"
("UICC") with UMC and other investors to build a wafer fabrication facility in
Hsinchu, Taiwan. The Company agreed to invest approximately $26 million (subject
to fluctuations in the New Taiwanese Dollar) for a 5% equity interest in the
venture of which UMC retains 55% ownership. As of September 30, 1997,
approximately $20.0 million has been paid by the Company to UICC in this regard.
The final payment of approximately $6.0 million is expected to be made in
December 1997. The UICC facility was severely damaged by fire in October 1997
resulting in a delay in wafer production of approximately 12 months. UICC has
informed the Company that the damages incurred are covered by insurance.

        The Company generated $9.2 million from financing activities during
fiscal 1997, which were derived primarily from $5.6 million in net borrowings
under short-term and long-term lines of credit. The Company has $28.4 million
available through a number of short-term lines of credit with various financial
institutions in Taiwan. As of September 30, 1997, the Company had borrowings of
approximately $6.2 million under these short-term lines of credit.

        The Company has a number of long-term lines of credit with the various
financial institutions in Taiwan to finance the purchase of machinery, equipment
and building construction in Taiwan. Total obligations related to these
borrowings as of September 30, 1997 were $13.9 million, of which $2.3 million is
included in the current portion of long-term obligations. These obligations bear
interest at rates from 6.45% to 8.45% and are payable in quarterly installments
through 2004. As of September 30, 1997, the Company had available long-term
lines of credit of approximately $15.4 million of which approximately $9.2
million is for the construction financing of the Company's new facility in the
Hsinchu Science-Based Industrial Park.

        On March 21, 1997, the U.S. Department of Commerce ("DOC") initiated an
antidumping investigation of SRAMs from Taiwan and Korea. The Company currently
imports a majority of its SRAMs from Taiwan. The Company is participating in
this investigation as an interested party and has been assigned a preliminary
duty deposit rate of 10.96 percent. A final report by the DOC is scheduled for
February 1998. There will be a subsequent investigation by the International
Trade Commission ("ITC") into the impact of imports of SRAMs from Taiwan and
Korea on the U.S. market, with a final decision likely in April 1998.
Affirmative final decisions by both the DOC and the ITC are required before an
antidumping duty deposit is applicable to imports of SRAMs by the Company from
either of these countries. If an affirmative decision is reached, the Company
would be required to post a duty deposit for SRAM wafers or devices imported
from Taiwan. This duty deposit could be subsequently returned to the Company or
forfeited as duty to the U.S. Customs depending on subsequent measurements, the
results of which will be made available by the DOC in the year 2000.

        The Company has retained legal counsel to defend its interests in the
antidumping proceedings before the DOC and the ITC. There can be no assurance,
however, that the government will not impose duties on the Company's imports of
SRAM products into the United States. Duties, if any, imposed by the government
could have a material adverse affect on the Company's gross margins and profits.

                                       15

   18

        The Company believes that its existing funds will satisfy the Company's
anticipated working capital and other cash requirements through at least the
next 12 months. The Company may also use bank borrowings and capital leases
depending on the terms available.

        The Company, from time to time, evaluates potential acquisitions and
equity investments complementary to its memory expertise and market strategy. To
the extent the Company pursues such transactions, any such transactions could
require the Company 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 the Company, if at all.


CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S BUSINESS OR FUTURE OPERATING
RESULTS

DEPENDENCE ON SRAM PRODUCTS; DECLINE IN AVERAGE SELLING PRICES FOR SRAM PRODUCTS

        In fiscal 1997, substantially all of the Company's net sales were
derived from the sale of SRAM products. The Company's net sales decreased by 18%
to $108.3 million in fiscal 1997 from $132.0 million in fiscal 1996. This
decrease in sales was principally due to significant deterioration in the
average selling prices of the Company's SRAM and nonvolatile memory products.
The Company anticipates that the average selling prices of its existing products
will continue to decline over time, although the rate of decline may fluctuate
for certain products. There can be no assurance that such declines will be
offset by higher volumes or by higher prices on newer products.


QUARTERLY FLUCTUATIONS IN OPERATING RESULTS

        The Company's future quarterly and annual operating results are subject
to fluctuations due to a wide variety of factors, many of which are outside of
its control, including declines in average selling prices of the Company's
products, oversupply of memory products in the market, failure to introduce new
products and to implement technologies on a timely basis, the timing and
announcement of new product introductions by the Company and its competitors,
market acceptance of the Company's and its customers' products, the failure to
anticipate changing customer product requirements, fluctuations in manufacturing
yield, disruption in delivery and order fulfillment and shortages in the supply
of wafers or assembly capacity. Other factors include changes in product mix,
seasonal fluctuations in customer demand for the Company's products, the timing
of significant orders, increased expenses associated with new product
introductions or process changes, the ability of customers to make payments to
the Company, increases in material costs, increases in costs associated with the
expansion of sales channels, increases in general and administrative expenses
and certain production and other risks associated with using independent
manufacturers. In this regard, the Company experienced quarterly sequential
declines in revenue in the quarters ending March, June and September, 1996
principally due to declines in the average selling prices of its products and
the inability to offset these declines by sufficient increases in unit
shipments. Although the Company has since experienced quarterly sequential
revenue growth, there can be no assurance that the Company will not experience
future declines in quarterly revenue. Such revenue declines have had a material
adverse impact on the Company's gross profit and net income. In fiscal 1997,
approximately 45% of the Company's net sales were attributable to customers
located in the United States, 13% was attributable to customers located in
Europe and 42% was attributable to customers located in Asia. In fiscal 1996,
approximately 53% of the Company's net sales were attributable to customers
located in the United States, 10% was attributable to customers located in
Europe and 37% was attributable to customers located in Asia. In fiscal 1997 and
1996, international sales (sales by ISSI-Taiwan and export sales by ISSI-U.S.)
comprised approximately 55% and 47% of the Company's net sales, respectively.
Accordingly, the Company's future operating results will also depend in part on
general economic conditions in Asia, the United States and its other markets. In
this regard, several Asian countries including 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. The Company is unable
to predict what effect, if any, these factors will have on its ability to
maintain or increase its sales in these markets. In addition, there can be no
assurance that the markets for the Company's products, which are highly
cyclical, will continue to grow.

                                       16

   19

DECLINES IN AVERAGE SELLING PRICES

        Competitive pricing pressures resulted in significant price decreases
for the Company's products during 1996 and 1997. Historically, average selling
prices for semiconductor memory products have declined and the Company expects
that average selling prices will decline in the future. Accordingly, the
Company's ability to maintain or increase revenues will be highly dependent upon
its ability to increase unit sales volume of existing products and introduce and
sell new products which compensate for the anticipated declines in the average
selling prices of its existing products. Declining average selling prices will
also adversely affect the Company's gross margins and profits unless the Company
is able to introduce new products with higher margins or reduce its cost per
unit to offset declines in average selling prices. There can be no assurance
that the Company will be able to increase unit sales volumes, introduce and sell
new products or reduce its cost per unit. In this regard, in fiscal 1996 the
Company implemented a cost reduction program in an attempt to reduce its cost
per unit for certain products. This program involved efforts to reduce internal
costs and supplier costs. The Company does not believe that such cost reduction
efforts are likely to have a material adverse impact on the quality of its
products or the level of service provided by the Company.

RISK OF INVENTORY WRITE-DOWNS

        Shifts in industry-wide capacity from shortages to oversupply or from
oversupply to shortages may result in significant fluctuations in the Company's
quarterly or annual operating results. The semiconductor industry is highly
cyclical and is subject to significant downturns resulting from excess capacity,
overproduction, reduced demand or technological obsolescence. These factors can
result in a decline in average selling prices and the stated value of inventory.
It is the Company's practice to write-down to zero carrying value inventory on
hand in excess of six months estimated sales volumes to cover estimated
exposures unless adjustments are made to the forecast based on management's
judgments for newer products, end of life products or planned inventory
increases. Management's judgments take into account the product life cycles
which can range from 6 to 24 months, the maturity of the product as to whether
it is newly introduced or is approaching its end of life, the impact of
competitor announcements and product introductions on the Company's products and
purchasing opportunities due to excess wafer capacity. The Company believes that
six months is an appropriate period because it is difficult to accurately
forecast for a specific product beyond this time frame due to potential
introduction of products by competitors, technology obsolescence or fluctuations
in demand. In this regard, in the June 1996 quarter, the Company recorded a $15
million write-down for various SRAM and non-volatile memory products that the
Company's forecast indicated would not be sold in the next six months. The
Company did not expect to sell the excess inventory at the time because the
volume and price declines from the December 1995 quarter to the June 1996
quarter resulted in a decrease in revenues of 38%. During this period, market
conditions were extremely uncertain. Furthermore, during the fourth fiscal
quarter of 1996 ended September 30, 1996, the Company experienced a continued
decline in revenue of 16% from the June 1996 quarter. While the Company
continued to focus on the selling of this product, sales reached the bottom of
its decline in the September 1996 quarter and stayed relatively flat in the
December 1996 quarter. Subsequently, as market conditions improved in the latter
part of the December 1996 quarter, the Company was able to sell certain of these
products. As a result, of improving market conditions during fiscal 1997, the
Company was able to sell $13.9 million of the written-off product. However, the
Company considers such sales unusual and there can be no assurance that in the
future written-off inventory can be sold. Historically, the Company has
consistently applied this practice in valuing inventory and, until the events
that transpired in the first through third quarters of fiscal 1996, had never
recorded material write-downs or recoveries. The Company believes that based on
the factors noted above, its six month write-off policy is still appropriate as
a method to identify and estimate inventory exposure. There can be no assurance
that in the future additional inventory write-downs will not occur.

PRODUCT CONCENTRATION AND DEPENDENCE ON PERSONAL COMPUTER INDUSTRY

        In fiscal 1997, substantially all of the Company's net sales were
derived from the sale of SRAM products. A majority of the Company's products are
incorporated into products such as modems, networking equipment, disk drives and
PC cache. In recent periods, the PC industry has experienced strong unit sales
growth, which has increased demand for integrated circuits, including memory
products offered by the Company. The PC and PC peripherals industry has from
time to time experienced cyclical, depressed business conditions, often in
connection with, or in anticipation of, a decline in general economic
conditions. Such industry downturns have resulted in 

                                       17


   20

reduced product demand and declining average selling prices. The Company's
business and operating results would be materially and adversely affected by any
future downturns in the peripherals industry or in PCs.

CUSTOMER CONCENTRATION

        The Company's sales are concentrated within a limited customer base. In
fiscal 1997 and 1996, one customer accounted for approximately 19% and 22% of
net sales, respectively. As sales to this customer are executed pursuant to
purchase orders and no purchasing contract exists, the customer can cease doing
business with the Company at any time. The Company expects a significant portion
of its future sales to remain concentrated within a limited number of strategic
customers. There can be no assurance that the Company will be able to retain its
strategic customers or that such customers will not otherwise cancel or
reschedule orders, or in the event of canceled orders, that such orders will be
replaced by other sales. In addition, sales to any particular customer may
fluctuate significantly from quarter to quarter. The occurrence of any such
events could have a material adverse effect on the Company's business and
operating results.

DEPENDENCE ON INDEPENDENT WAFER FOUNDRIES

        The Company has combined its fabless manufacturing strategy with
technology partnerships and equity investments. This hybrid approach, which the
Company calls "Fab-Lite(TM)", has provided advanced process technology and a
committed wafer supply. To date, the Company's principal manufacturing
relationship has been with TSMC, and in fiscal 1997, the Company obtained a
substantial majority of its wafers from TSMC. The Company also receives wafers
from Chartered Semiconductor and UMC. Each of the Company's wafer suppliers also
fabricates for other integrated circuit companies, including certain of the
Company's competitors. Although the Company has written commitments specifying
wafer capacities from its suppliers, if these suppliers experienced
manufacturing failures or yield shortfalls, chose to prioritize capacity for
other use or reduced or eliminated deliveries to the Company there can be no
assurance that the Company could enforce fulfillment of the delivery
commitments. There can be no assurance that the Company would be able to qualify
additional manufacturing sources for existing or new products in a timely manner
or that such additional manufacturing sources would agree to deliver an adequate
supply of wafers. If the Company were unable to obtain an adequate supply of
wafers from its current or any alternative sources in a timely manner, its
business and operating results would be materially and adversely affected.

        The Company has agreed to certain minimum wafer purchase commitments
with its foundry partners in exchange for wafer capacity commitments. The
Company also agreed to make certain annual payments to TSMC for capacity
increases. Additional required payments to TSMC totaling approximately $26.4
million over the next four years represent annual increases in capacity which
must be purchased by the Company. The Company also has minimum purchase
obligations for its joint venture with UMC and WaferTech LLC. Although the
Company has rights to re-schedule or assign capacity to another party, there can
be no assurance that such re-schedule or assignment would be successfully
accomplished. Should the Company fail to re-schedule or assign unneeded
capacity, the Company's business and operating results would be materially and
adversely affected.

CLAIMS REGARDING INTELLECTUAL PROPERTY

        In the semiconductor industry it is typical for companies to receive
notices from time to time alleging infringement of patents or other intellectual
property rights of others. The Company has been, and may from time to time
continue to be, notified of claims that it may be infringing patents, maskwork
rights or copyrights owned by third parties. Although none of these companies
have pursued a claim against the Company, there is no assurance that these or
other companies will not in the future pursue claims against the Company with
respect to the alleged infringement. If it appears necessary or desirable, the
Company may seek licenses under patents that it is alleged to be infringing.
Although patent holders commonly offer such licenses, there is no assurance that
any licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain a license under a key patent or
intellectual property right from a third party for technology used by the
Company could result in protracted, costly litigation and cause the Company to
incur substantial liabilities and to suspend the manufacture of the products
utilizing the invention or to attempt to develop non-infringing products, any of
which could materially and adversely effect the Company's business and operating
results.

                                       18
   21

MANAGEMENT OF GROWTH

        The Company has grown rapidly in certain years. This growth has resulted
in a significant increase in responsibilities for existing management which has
placed, and may continue to place, a significant strain on the Company's limited
personnel, MIS systems, product delivery systems and other resources. The
Company's ability to manage its growth effectively will require it to continue
to improve its operational, financial and management systems, to successfully
attract new employees and to properly train, motivate and manage its employees.
If the Company's management is unable to manage growth effectively, the
Company's business and operating results could be materially and adversely
affected.

RISK OF INCREASED TAXES

        The Company's tax rate could increase for a number of reasons. For
example, if the proportions of taxable income shifted such that a greater
proportion of taxable income is earned by U.S. operations, the Company's
effective tax rate may increase. It is possible that the Taiwan tax exemption
applicable to the earnings of ISSI-Taiwan could be modified by changes in law or
otherwise reduced. In addition, the Company's taxes would increase if all or a
portion of the earnings of ISSI-Taiwan were to become subject to U.S. tax as the
result of actual dividends or through U.S. rules for taxing controlled foreign
corporations. Further, if profits of ISSI-Taiwan are distributed to the Company
as dividends they become subject to Taiwan withholding tax as well as U.S. tax
(with an offset for underlying Taiwan taxes paid) and the tax rate would
increase. It is not the Company's intention to cause ISSI-Taiwan to distribute
dividends.

        ISSI-Taiwan is a controlled foreign corporation ("CFC") for U.S. income
tax purposes. Under U.S. rules for taxing CFCs, all or a portion of the earnings
of ISSI-Taiwan may become subject to U.S. tax as inclusions in the U.S. taxable
income of the Company (with a credit for foreign taxes paid by ISSI-Taiwan) if
one or more of a number of events occur. Such events include, but are not
limited to, ISSI-Taiwan lending funds to the Company or otherwise investing in
certain proscribed assets and ISSI-Taiwan engaging in various types of
transactions defined in the Subpart F provisions of the U.S. Internal Revenue
Code. The Company believes that its existing plans will minimize the impact of
the CFC rules for the immediate future, subject to such changes in U.S. tax laws
as may occur. However, over time the CFC rules may cause the Company's tax rate
to increase.

VOLATILITY OF STOCK PRICE

     The trading price of the Common Stock increased substantially after the
Company's initial public offering in February 1995, subsequently declined, and
could be subject to wide fluctuations in response to quarter-to-quarter
variations in operating results, future announcements by the Company or its
competitors, increases or decreases in wafer capacity, general conditions in the
semiconductor or computer industries, governmental regulations, trade laws and
import duties, litigation, new or revised earnings estimates, comments or
recommendations issued by analysts who follow the Company, its competitors or
the semiconductor industry and other events or factors. In addition, stock
markets have experienced extreme price and trading volume volatility in recent
years. This volatility has had a substantial effect on the market prices of
securities of many high technology companies for reasons frequently unrelated to
the operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock.


                                       19
   22



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements




                                                                         Page

                                                                      
Report of Independent Auditors............................................21

Financial Statements:
     Consolidated Statements of Operations
         For Fiscal Years Ended September 30, 1997,
         September 30, 1996, and September 30, 1995.......................22

     Consolidated Balance Sheets
         As of September 30, 1997, and September 30, 1996.................23

     Consolidated Statements of Stockholders' Equity
         For Fiscal Years Ended September 30, 1997,
         September 30, 1996, and September 30, 1995.......................24

     Consolidated Statements of Cash Flows
         For Fiscal Years Ended September 30, 1997........................25
         September 30, 1996, and September 30, 1995

     Notes to Consolidated Financial Statements...........................26



                                       20
   23




                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


The Board of Directors and Stockholders
Integrated Silicon Solution, Inc.

        We have audited the accompanying consolidated balance sheets of
Integrated Silicon Solution, Inc. as of September 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

        We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Integrated Silicon Solution, Inc. at September 30, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.




                                         ERNST & YOUNG LLP





San Jose, California 
October 27, 1997, 
except for Note 17 
as to which the date
is December 3, 1997


                                       21


   24

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



                                                      Years Ended September 30,
                                             -----------------------------------------
                                                1997            1996            1995
                                             ---------       ---------       ---------

                                                                          
Net sales                                     $108,261        $132,039        $123,201

Cost of sales (other than item below)           76,105          85,184          60,949
Inventory write-down                                --          15,000              --
                                              --------        --------        --------
Total cost of sales                             76,105         100,184          60,949
                                              --------        --------        --------
Gross profit                                    32,156          31,855          62,252
                                              --------        --------        --------

Operating expenses:
  Research and development                      26,179          21,350          14,852
  Selling, general and administrative           16,753          15,188          12,924
                                              --------        --------        --------
    Total operating expenses                    42,932          36,538          27,776
                                              --------        --------        --------

Operating income (loss)                        (10,776)         (4,683)         34,476
Interest and other income                        2,535           4,803           2,631
Interest expense                                  (607)           (335)            (88)
                                              --------        --------        --------
Income (loss) before income taxes and
  minority interest                             (8,848)           (215)         37,019
Provision (benefit) for income taxes            (1,144)         (1,158)          7,404
                                              --------        --------        --------

Income (loss) before minority interest          (7,704)            943          29,615
Minority interest in net loss of
  consolidated subsidiary                          (18)            (72)            (38)
                                              --------        --------        --------

Net income (loss)                             $ (7,686)       $  1,015        $ 29,653
                                              ========        ========        ========

Net income (loss) per share                   $  (0.43)       $   0.06        $   1.79
                                              ========        ========        ========

Shares used in per share calculation            17,748          18,356          16,534
                                              ========        ========        ========


        See the accompanying notes to consolidated financial statements

                                       22
   25



                        Integrated Silicon Solution, Inc.
                           Consolidated Balance Sheets
                      (In thousands, except per share data)




                                                                             September 30,
                                                                       -----------------------
                                                                         1997           1996
                                                                       --------       --------
                                     ASSETS
                                                                                       
Current assets:
    Cash and cash equivalents                                          $ 22,334       $ 12,237
    Restricted cash                                                       5,202          7,023
    Short-term investments                                               25,600         62,200
    Accounts receivable, net of allowance for doubtful
      accounts of $2,268 in 1997 and $2,002 in 1996                      18,478         11,316
    Inventories                                                          40,730         22,469
    Other current assets                                                  7,472         13,777
                                                                       --------       --------
Total current assets                                                    119,816        129,022
Property, equipment, and leasehold improvements, net                     27,693         30,795
Construction in progress                                                  6,343            334
Other assets                                                             41,744         17,888
                                                                       --------       --------
Total assets                                                           $195,596       $178,039
                                                                       ========       ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Notes payable                                                       $  6,152       $  3,617
   Accounts payable                                                      23,138          8,912
   Accrued compensation and benefits                                      3,424          3,994
   Accrued expenses                                                       8,725          3,298
   Income tax payable                                                       582            550
   Current portion of long-term obligations                               2,251            722
                                                                       --------       --------
Total current liabilities                                                44,272         21,093
Income tax payable - noncurrent                                           5,059          4,298
Long-term obligations                                                    11,698         10,195
Minority interest in consolidated subsidiary                                 --             18
Commitments and contingencies
Stockholders' equity:
   Preferred stock, $0.0001 par value: Authorized shares -
        5,000 in 1997 and 1996. No shares outstanding                        --             --
   Common stock, $0.0001 par value: Authorized shares -
        70,000 in 1997 and 1996.  Issued and outstanding shares -
        17,938 in 1997 and 17,607 in 1996                                     2              2
   Additional paid-in capital                                           106,769        104,788
   Retained earnings                                                     32,266         39,952
   Cumulative translation adjustment                                     (4,248)        (2,246)
   Unearned compensation                                                   (222)           (61)
                                                                       --------       --------
Total stockholders' equity                                              134,567        142,435
                                                                       --------       --------
Total liabilities and stockholders' equity                             $195,596       $178,039
                                                                       ========       ========


        See the accompanying notes to consolidated financial statements

                                       23
   26
                        Integrated Silicon Solution, Inc.
                 Consolidated Statements of Stockholders' Equity
                                 (In thousands)



                                             Convertible                                                                 
                                           Preferred Stock                 Common Stock       Additional
                                         ----------------------      ----------------------     Paid-In      Retained   
                                           Shares        Amount        Shares       Amount      Capital      Earnings   
                                         ---------     ---------     ---------    ---------    ---------     ---------   
                                                                                                    
Balance at September 30, 1994               31,314     $       3         4,797    $      --    $  11,838     $   9,284
   Stock options exercised                      --            --           517           --        1,008            --   
   Issuance of common stock in public
      offering and exercise of warrant          --            --         4,082            1       85,979            --   
   Conversion to common stock              (31,314)           (3)        7,829            1            2            --   
   Unearned compensation                        --            --            --           --          131            --   
   Amortization of unearned compensation        --            --            --           --           --            --   
   Cancellation of stock options                --            --            --           --          (30)           --   
   Tax benefits from sale of common stock       --            --            --           --        3,448            --   
   Translation adjustment                       --            --            --           --           --            --   
   Net income                                   --            --            --           --           --        29,653 
                                           -------     ---------     ---------    ---------    ---------     ---------   
Balance at September 30, 1995                   --            --        17,225            2      102,376        38,937   
   Stock options exercised                      --            --           253           --          952            --   
   Shares issued under stock purchase
      plan                                      --            --           129           --        1,357            --   
   Amortization of unearned
      compensation                              --            --            --           --           --            --   
   Tax benefits from sale of common
      stock                                     --            --            --           --          103            --   
   Translation adjustment                       --            --            --           --           --            --   
   Net income                                   --            --            --           --           --         1,015 
                                           -------     ---------     ---------    ---------    ---------     ---------   
Balance at September 30, 1996                   --            --        17,607            2      104,788        39,952   
   Stock options exercised                      --            --           197           --          665            --   
   Shares issued under stock purchase
      plan                                      --            --           134           --        1,112            --   
   Unearned compensation                        --            --            --           --          204            --   
   Amortization of unearned
      compensation                              --            --            --           --           --            --   
   Translation adjustment                       --            --            --           --           --            --   
   Net loss                                     --            --            --           --           --        (7,686)
                                           -------     ---------     ---------    ---------    ---------     ---------   
Balance at September 30, 1997                   --     $      --        17,938    $       2    $ 106,769     $  32,266   
                                           =======     =========     =========    =========    =========     =========   




                                                      
                                               Cumulative                      Total
                                               Translation    Unearned      Stockholders'
                                               Adjustment    Compensation      Equity
                                               -----------   ------------   -------------
                                                                          
Balance at September 30, 1994                   $      97     $     (35)     $  21,187
   Stock options exercised                             --            --          1,008
   Issuance of common stock in public
      offering  and exercise of warrant                --            --         85,980
   Conversion to common stock                          --            --             --
   Unearned compensation                               --          (131)            --
   Amortization of unearned compensation               --            32             32
   Cancellation of stock options                       --            30             --
   Tax benefits from sale of common stock              --            --          3,448
   Translation adjustment                          (1,399)           --         (1,399)
   Net income                                          --            --         29,653
                                                ---------     ---------      ---------
Balance at September 30, 1995                      (1,302)         (104)       139,909
   Stock options exercised                             --            --            952
   Shares issued under stock purchase plan             --            --          1,357
   Amortization of unearned compensation               --            43             43
   Tax benefits from sale of common stock              --            --            103
   Translation adjustment                            (944)           --           (944)
   Net income                                          --            --          1,015
                                                ---------     ---------      ---------
Balance at September 30, 1996                      (2,246)          (61)       142,435
   Stock options exercised                             --            --            665
   Shares issued under stock purchase plan             --            --          1,112
   Unearned compensation                               --          (204)            --
   Amortization of unearned compensation               --            43             43
   Translation adjustment                          (2,002)           --         (2,002)
   Net loss                                            --            --         (7,686)
                                                ---------     ---------      ---------
Balance at September 30, 1997                   $  (4,248)    $    (222)     $ 134,567
                                                =========     =========      =========


         See the accompanying notes to consolidated financial statements

                                       24


   27
                        Integrated Silicon Solution, Inc.
                      Consolidated Statements of Cash Flows
                                 (In thousands)




   
                                                                               Years Ended September 30,
                                                                        -------------------------------------
                                                                           1997         1996         1995
                                                                        ---------     ---------     ---------
                                                                                                 
Cash flows from operating activities:
   Net income (loss)                                                    $  (7,686)    $   1,015     $  29,653
      Adjustments to reconcile net income to net cash provided
        by (used in) operating activities:
        Depreciation and amortization                                      11,408         7,586         3,816
        Provision for losses on accounts receivable                           675           714         1,185
        Net foreign currency transaction (gains) losses                        17          (311)          225
        Minority interest in net loss of consolidated subsidiary              (18)          (72)          (38)
        Changes in operating assets and liabilities:
           Accounts receivable                                             (8,007)        6,581       (11,694)
           Inventories                                                    (19,446)      (11,592)       (3,725)
           Other assets                                                     4,328        (7,710)       (3,141)
           Accounts payable                                                13,939        (6,721)        7,288
           Accrued expenses                                                   227        (3,104)       13,367
                                                                        ---------     ---------     ---------
                 Net cash provided by (used in) operating activities       (4,563)      (13,614)       36,936
Cash flows from investing activities:
   Acquisition of property, equipment, and leasehold improvements         (13,985)      (20,423)      (17,411)
   Purchases of available-for-sale securities                            (174,400)     (197,800)     (184,650)
   Sales of available-for-sale securities                                 211,000       215,900       104,350
   Investment in WaferTech, LLC                                            (9,360)       (9,360)           --
   Investment in United Integrated Circuits Corp.                         (12,983)           --        (7,500)
   Proceeds from employees for UICC shares                                  5,345            --            --
                                                                        ---------     ---------     ---------
                 Net cash provided by (used in) investing activities        5,617       (11,683)     (105,211)
Cash flows from financing activities:
   Proceeds from issuance of stock                                          1,820         2,352        87,020
   Borrowings under notes payable and long-term obligations                28,659        28,018         4,317
   Principal payments of notes payable and long-term obligations          (23,092)      (16,172)       (3,155)
   Decrease (increase) in restricted cash                                   1,821        (6,037)          355
                                                                        ---------     ---------     ---------
                 Net cash provided by financing activities                  9,208         8,161        88,537
Effect of exchange rate changes on cash and cash equivalents                 (165)          (79)         (226)
                                                                        ---------     ---------     ---------
Net increase (decrease) in cash and cash equivalents                       10,097       (17,215)       20,036
Cash and cash equivalents at beginning of year                             12,237        29,452         9,416
                                                                        ---------     ---------     ---------
Cash and cash equivalents at end of year                                $  22,334     $  12,237     $  29,452
                                                                        =========     =========     =========

    


         See the accompanying notes to consolidated financial statements


                                       25
   28
                   Notes to Consolidated Financial Statements


NOTE 1.  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

        Integrated Silicon Solution, Inc. (the "Company") was incorporated in
California on October 27, 1988 and reincorporated in Delaware on August 9, 1993.

BASIS OF PRESENTATION

        The accompanying consolidated financial statements include the accounts
of Integrated Silicon Solution, Inc. and its majority owned subsidiaries, after
elimination of all significant intercompany accounts and transactions.

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

        The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.

        Under Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" all affected debt
securities must be classified as held-to-maturity, trading, or
available-for-sale and equity securities must be classified as trading or
available-for-sale. Management determines the appropriate classification of debt
and equity securities at the time of purchase and reevaluates such designation
as of each balance sheet date.

        At September 30, 1997 and 1996, all debt and equity securities were
designated as available-for-sale. Available-for-sale securities are carried at
fair value, with unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. The amortized cost for available-for-sale
debt securities is adjusted for the amortization of premiums and accretion of
discounts to maturity. Such amortization is included in investment income.
Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in investment
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in investment income. At September 30, 1997 and 1996, the cost of
these securities approximated the fair value and the amount of unrealized gain
or loss was not significant. There were no gains or losses on the sale of
securities for the twelve months ended September 30, 1997 and 1996.

INVENTORIES

        Inventories are stated at the lower of cost (first-in, first-out) or
market. The Company's inventory valuation process is done on a part-by-part
basis. Lower of cost to market adjustments, specifically identified on a
part-by-part basis, reduce the carrying value of the related inventory and take
into consideration reductions in sales prices, excess inventory levels and
obsolete inventory. Once established, these adjustments are considered permanent
and are not reversed until the related inventory is sold or disposed.

PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS

        Property, equipment, and leasehold improvements are stated at cost.
Equipment under capital leases is stated at the present value of minimum lease
payments at the beginning of the lease term. Depreciation and amortization are
computed using the straight-line method, based upon the shorter of the estimated
useful lives ranging from three to seven years, or the lease term of the
respective assets, if applicable.

                                       26
   29
                   Notes to Consolidated Financial Statements


REVENUE RECOGNITION

        The Company recognizes revenue to non-distributor customers upon
shipment. The Company provides for estimated sales returns on sales to these
customers. Sales made to distributors, under terms allowing certain rights of
return and price protection on unsold merchandise held by the distributor, are
deferred until the merchandise is sold by the distributor.

FOREIGN CURRENCY TRANSLATION

        The Company uses the local currency as its functional currency for all
foreign subsidiaries. Translation adjustments, which result from the process of
translating foreign currency financial statements into U.S. dollars, are
included as a separate component of stockholders' equity.

USE OF ESTIMATES

        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.

CONCENTRATION OF CREDIT RISK

        The Company operates in one business segment, which is to design,
develop, and market high performance SRAM and nonvolatile memory integrated
circuits. The Company markets and distributes its products on a worldwide basis,
primarily to original equipment manufacturers and personal computer motherboard
manufacturers. The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral. In fiscal 1997 and
1996, one customer accounted for approximately 19% and 22% of net sales,
respectively. In fiscal 1995, no customer exceeded 10% of total net sales.

        The Company maintains cash, cash equivalents, and short-term investments
with various financial institutions. The Company's investment policy is designed
to limit exposure to any one institution. The Company performs periodic
evaluations of the relative credit standing of those financial institutions that
are considered in the Company's investment strategy. To date, the Company has
not incurred losses related to these investments.

SEMICONDUCTOR INDUSTRY RISKS

        To date the Company has derived substantially all of its revenues from
the sale of SRAM products. The Company is undertaking efforts to diversify into
other product areas such as NVM products, speciality DRAMs and embedded
memories. If the market for SRAM products should decline and the Company has not
successfully diversified, such decline would have a material adverse affect on
the Company's financial performance.

        The semiconductor industry is characterized by rapid technological
change, intense competitive pressure and cyclical market patterns. The Company's
results of operations are affected by a wide variety of factors, including
declines in average selling prices of the Company's products, oversupply of
memory products in the market, failure to introduce new products and to
implement technologies on a timely basis, the timing and announcement of new
product introductions by the Company and its competitors, market acceptance of
the Company's and its customers' products, the failure to anticipate changing
customer product requirements and fluctuations in manufacturing yields. Other
factors include potential inventory write-downs, changes in product mix, changes
in customer demand for the Company's products, the timing of significant orders,
increased expenses associated with new product introductions or process changes,
the ability of customers to make payments to the Company, increases in material
costs, increases in costs associated with the expansion of sales channels,
increases in general and administrative expenses and 

                                       27


   30
                   Notes to Consolidated Financial Statements


certain production and other risks associated with using independent
manufacturers. As a result, the Company may experience substantial
period-to-period fluctuations in future operating results due to the factors
mentioned above or other factors.

NET INCOME (LOSS) PER SHARE

        Net income per share is computed using the weighted average number of
shares of common stock outstanding and common equivalent shares, when dilutive,
from convertible preferred stock (using the if-converted method) and from stock
options and warrants (using the treasury stock method). Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common equivalent
shares issued by the Company at prices below the initial public offering price
of the Company's common stock during the twelve-month period prior to the
Company's initial public offering in February 1995, have been included in the
calculation as if they were outstanding for all periods presented prior to the
initial public offering (using the treasury stock method at the initial public
offering price).

        Net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

        In March 1997, the Financial Accounting Standards Board (FASB) released
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (FAS
128), which is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements for
calculating primary net income per share (basic earnings per share), the
dilutive effect of stock options will be excluded. The Company's basic and
diluted earnings (loss) per share as calculated according to FAS 128 would have
been as follows:



                                            1997          1996          1995
                                            ----          ----          ----
                                                                 
Basic                                       $(0.43)       $0.06         $1.99
Diluted                                     $(0.43)       $0.06         $1.79


RECLASSIFICATION OF PRIOR YEAR BALANCES

        Certain reclassifications have been made to prior year's financial
statements to conform to the current year presentation.


                                       28
   31

                   Notes to Consolidated Financial Statements


NOTE 2.  CASH, CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS

     Cash, cash equivalents, restricted cash, and short-term investments
consisted of the following at September 30:



                                              1997       1996
                                            -------    -------
                                              (In thousands)

                                                   
Cash                                        $21,953    $ 9,989
Money market instruments                        480      3,189
Certificates of deposit                       5,103      6,082
Auction preferred stock                      13,200     42,500
Municipal bonds due in more than 3 years     12,400     19,700
                                            -------    -------
    Total                                   $53,136    $81,460
                                            =======    =======


NOTE 3.  INVENTORIES

    Inventories consisted of the following at September 30:



                          1997       1996
                        -------    -------
                          (In thousands)

                                 
Purchased components    $10,444    $10,123
Work-in-process          10,199      2,826
Finished goods           20,087      9,520
                        -------    -------
                        $40,730    $22,469
                        =======    =======


        During the third quarter of fiscal 1996, the Company recorded an
inventory write-down of $15.0 million.

NOTE 4.  OTHER CURRENT ASSETS AND OTHER ASSETS

    Other current assets and other assets consisted of the following at
September 30:



                                                                  1997       1996
                                                                -------    -------
                                                                  (In thousands)

                                                                         
Advance payment TSMC (see Note 7)                               $    --    $ 2,326
Deferred tax asset                                                1,137      4,615
Other                                                             6,335      6,836
                                                                -------    -------
                                                                $ 7,472    $13,777
                                                                =======    =======

Investment in United Integrated Circuits Corp. (see Note 13)    $19,012    $ 6,821
Investment in WaferTech LLC.  (see Note 13)                      18,720      9,360
Other                                                             4,012      1,707
                                                                -------    -------
                                                                $41,744    $17,888
                                                                =======    =======



                                       29
   32
                   Notes to Consolidated Financial Statements



NOTE 5.  PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS

        Property, equipment, and leasehold improvements consisted of the
following at September 30:



                                                    1997       1996
                                                  -------    -------
                                                     (In thousands)
                                                           
Machinery and equipment                           $49,463    $43,209
Furniture and fixtures                              1,409      1,174
Leasehold improvements                              2,050      1,763
                                                  -------    -------
                                                   52,922     46,146
Less accumulated depreciation and amortization     25,229     15,351
                                                  -------    -------
                                                  $27,693    $30,795
                                                  =======    =======


NOTE 6.  ACCRUED EXPENSES

        Accrued liabilities consisted of the following at September 30:



                              1997      1996
                             ------    ------
                              (In thousands)
                                    
UICC shares due employees    $5,345    $   --
Other                         3,380     3,298
                             ------    ------
                             $8,725    $3,298
                             ======    ======


        The Company has an equity investment commitment of approximately $26
million (subject to fluctuations in the New Taiwanese Dollar) in UICC, a wafer
fabrication joint venture led by UMC. Through September 30, 1997, the Company
had invested approximately $20 million of such amount. In fiscal 1997, the
Company elected to re-sell a portion of this investment to its employees at
cost, which approximates fair value, generating a cash inflow to the Company of
approximately $5,345,000. The UICC shares will be transferred to the employees
pending final approval by UICC and the government of the Republic of China.

NOTE 7.  NOTES PAYABLE AND LONG-TERM OBLIGATIONS

        At September 30, 1997, ISSI-Taiwan had short-term lines of credit with
various financial institutions whereby it could borrow in aggregate up to
approximately $28,385,000 denominated in a combination of U.S. and New Taiwan
dollars. As of September 30, 1997, the Company had borrowings of approximately
$6,152,000 outstanding under these lines of credit. These lines of credit expire
at various times through August 1998. These lines of credit are secured by time
deposits of approximately $402,000, which are recorded as restricted cash.
Commitment fees relating to these lines are not material. At September 30, 1997,
the weighted average interest rate on borrowing under these lines was 7.1%.

        In fiscal 1995, the Company's primary foundry partner, TSMC, committed
to provide the Company with annual wafer capacity increases for each year
through 2001. For wafer increases over 1994, the base year, the Company is
obligated to pay a portion of the cost for the increased number of wafers even
if the allocated annual increase is not purchased in that year. The Company's
future commitments for the years 1998-2001 are approximately $26.4 million. The
Company has established a letter of credit for $4.8 million covering a portion
of this amount.

                                       30
   33

                   Notes to Consolidated Financial Statements


Long-term obligations consisted of the following at September 30:



                                                          1997      1996
                                                        -------    -------
                                                          (In thousands)
                                                                 
Notes payable to bank, due in quarterly installments
  through 2004 with interest at 6.45% to 8.45% and
  secured by the Company's property and equipment       $13,949    $10,917
Less current portion                                      2,251        722
                                                        -------    -------
                                                        $11,698    $10,195
                                                        =======    =======


        At September 30, 1997, future minimum principal payments on notes
payable and long-term obligations were as follows (in thousands):
                     
      1998          $ 2,251
      1999            2,834
      2000            2,511
      2001            2,408
      2002            2,408
      Thereafter      1,537
                    -------
      Total         $13,949
                    =======




        Interest of $280,000, $235,000 and $136,000 was capitalized in 1997,
1996 and 1995, respectively, and is included in fixed assets.

NOTE 8.  CAPITAL STOCK

        The Company's Restated Certificate of Incorporation provides for
70,000,000 authorized shares of Common Stock and 5,000,000 authorized shares of
preferred stock. The terms of the preferred stock may be fixed by the Board of
Directors, who have the right to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders of the Company. The rights of the
holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that may be issued in the future.

NOTE 9.  STOCK PLANS

1989 STOCK OPTION PLAN

        During 1989, the Company adopted a stock option plan (the "Plan") that
provides for incentive stock options for employees and nonstatutory stock
options for employees, consultants and nonemployee directors of the Company.

        Incentive stock options and nonstatutory options granted under the Plan
have five or ten-year terms. All incentive stock option grants and nonstatutory
stock option grants must be at prices of at least 100% and 85%, respectively, of
the fair market value of the stock on the date of grant, as determined by the
Board of Directors.


                                       31
   34
                   Notes to Consolidated Financial Statements


        The options are exercisable as determined by the Board of Directors.
Generally, the stock options vest ratably over a four-year period. The options
expire upon the earlier of five or ten years from the date of grant or 30 days
following termination of employment. Options to purchase 1,164,000 shares,
791,000 shares and 432,000 shares were exercisable as of September 30, 1997,
1996, and 1995, respectively.

        In the event of certain changes in control of the Company, the Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation; however, if such successor refuses to
assume the then outstanding options, the Plan provides for the full acceleration
of the exercisability of all outstanding options.

1996 STOCK OPTION PLAN

     On October 18, 1996, the Company adopted a stock option plan (the "1996
Plan") that provides for non-statutory stock options for non-executive employees
and consultants of the Company.

        Under the terms of the plan, the exercise price and exercise period of
non-statutory stock option grants is determined by the Board of Directors on the
date of grant. Generally, the stock options vest ratably over a four year
period. The options expire upon the earlier of ten years from the date of grant
or 30 days following termination of employment or consultantcy. Options to
purchase 33,000 shares were exercisable as of September 30, 1997.

     In the event of certain changes in control of the Company, the 1996 Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation; however, if such successor refuses to
assume the then outstanding options, the 1996 Plan provides for the full
acceleration of the exercisability of all outstanding options.

1995 DIRECTOR STOCK OPTION PLAN

        The Board of Directors and stockholders approved the 1997 Director Stock
Option Plan ("Director Plan") in December 1995 and January 1996, respectively.
Under the terms of the Plan, 50,000 shares of Common Stock were authorized for
issuance. Each director who has been a non-employee director for at least six
months will automatically receive a non-statutory option to purchase 2,500
shares of Common Stock upon such director's annual reelection to the Board by
the stockholders. Options to purchase 13,000 shares and 6,000 shares were
exercisable at September 30, 1997 and 1996, respectively.


                                       32
   35

                   Notes to Consolidated Financial Statements


    The following table summarizes activity of the 1989, 1996 and Director
Plans:



                                                                            Options Outstanding
                                                          ------------------------------------------------------
                                          Options          Number                                   Weighted-
                                         Available           Of                    Price             Average
                                         For Grant         Shares                Per Share        Exercise Price
                                         ---------        ---------           --------------      --------------
                                                               (In thousands, except per share data)
                                         ---------        ---------           --------------      --------------
                                                                                      
Balance at September 30, 1994               646              1,764             $0.12-$ 4.00            $ 2.85
      Authorized                            500                 --                       --                --
      Granted                              (929)               929             $5.00-$59.50             30.63
      Exercised                              --               (517)            $0.12-$ 9.00              1.95
      Canceled                              125               (125)            $0.20-$13.00              4.56
                                         ------             ------            -------------            ------
Balance at September 30, 1995               342              2,051             $0.20-$59.50             15.56
      Authorized                          1,050                 --                       --                --
      Granted                            (1,609)             1,609            $9.625-$26.00             18.73
      Exercised                              --               (253)            $0.20-$13.00              3.76
      Canceled                              907               (907)            $0.28-$59.50             33.42
                                         ------             ------            -------------            ------
Balance at September 30, 1996               690              2,500             $0.20-$27.50             12.31
      Authorized                            775                 --                       --                --
      Granted                            (2,340)             2,340             $5.00-$10.12              8.72
      Exercised                              --               (197)            $0.20-$12.25              3.37
      Canceled                            1,095             (1,095)            $0.20-$27.50             19.98
                                         ------             ------            -------------            ------
Balance at September 30, 1997               220              3,548             $0.28-$26.00            $ 8.07
                                         ======             ======            =============            ======



        For certain options granted in 1997, 1995 and 1994, the Company
recognized as unearned compensation the excess of the deemed value for
accounting purposes of the common stock issuable upon exercise of such options
over the aggregate price of such options. The deemed value for accounting
purposes represents the fair value at the date of grant. The compensation
expense is being amortized ratably over the vesting period of the option.
Compensation expense amounting to $43,000, $43,000 and $32,000 was recognized
for the years ending September 30, 1997, 1996, and 1995, respectively.

        Outstanding and exercisable options presented by price range at
September 30, 1997 are as follows:



                                  Options Outstanding               Options Exercisable
                    -------------------------------------------------------------------------
                     Number of    Wtd. Average                    Number of
     Range of         Options    Remaining Life   Wtd. Average     Options      Wtd. Average
 Exercise Prices    Outstanding     (Years)      Exercise Price  Exercisable   Exercise Price
- ----------------    -----------  --------------  --------------  -----------   --------------
                                                                        
$   0.28- 5.00         797,000       3.68           $ 3.56          645,000       $  3.32
    7.13- 8.56         795,000       9.69             8.02            1,000          7.13
    9.00- 9.38       1,231,000       9.16             9.22          269,000          9.23
    9.63-14.50         720,000       8.51            11.03          293,000         11.16
         26.00           5,000       8.04            26.00            2,000         26.00
- --------------       ---------     ------           ------        ---------       -------
$   0.28-26.00       3,548,000       7.91           $ 8.07        1,210,000       $  6.58
==============       =========     ======           ======        =========       =======



                                       33
   36

                   Notes to Consolidated Financial Statements


EMPLOYEE STOCK PURCHASE PLAN

        In March 1993, the Company adopted an Employee Stock Purchase Plan
("Purchase Plan") under Section 423 of the Internal Revenue Code. Under the
Company's Purchase Plan, eligible employees may purchase shares of the Company's
common stock through payroll deductions. The shares are purchased at a price
equal to 85% of the lesser of the fair value of the Company's common stock as of
the first day of the 24-month offering period or the last day of each six-month
purchase period. A total of 450,000 shares of common stock is reserved for
issuance under the plan, of which 263,000 had been issued as of September 30,
1997.

STOCK-BASED COMPENSATION

        As permitted under FAS 123, the Company has elected to follow APB 25 and
related Interpretations, in accounting for stock-based awards to employees.
Under APB 25, the Company generally recognized no compensation expense with
respect to such awards.

        Pro forma information regarding net income (loss) and earnings (loss)
per share is required by FAS 123 for awards granted or modified after September
30, 1995 as if the Company had accounted for its stock-based awards to employees
under the fair value method of FAS 123. The fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
pricing model. The Black-Scholes model requires the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock-based awards to employees have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair value
of the Company's stock-based awards to employees was estimated assuming no
expected dividends and the following weighted-average assumptions:


                                Stock Options           ESPP
                                -------------           ----
                               1997      1996       1997       1996
                               ----      ----       ----       ----
                                                  
Expected life (years)          5.0       5.0        0.5       0.5
Expected volatility             .70       .70        .53       .73
Risk-free interest rate        6.43      6.11       5.50      5.34


        The weighted-average fair value of options granted at market value
during fiscal 1997 and 1996 was $4.02 and $9.75 per share, respectively. The
weighted-average fair value of employee stock purchase rights during fiscal 1997
and 1996 was $5.33 and $5.20 per share, respectively.

        For proforma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period
(for options) and the six-month purchase period (for stock purchases under the
ESPP). The Company's pro forma information for the years ended September 30, is
as follows (in thousands, except for income (loss) per share information):


                                     1997             1996
                                  ----------       ---------
                                             
Net income (loss):
     As reported                   $ (7,686)        $ 1,015
     Pro forma                     $(14,814)        $(4,754)

Net income (loss) per share:
     As reported                   $  (0.43)        $  0.06
     Pro forma                     $  (0.83)        $ (0.27)



                                       34
   37
                   Notes to Consolidated Financial Statements


        Because FAS 123 is applicable only to awards granted subsequent to
September 30, 1995, its pro forma effect will not be fully reflected until
fiscal 1999 and is not expected to be indicative of the effects on net income
(loss) and net income (loss) per share in future years.

NOTE 10.  STOCKHOLDERS' EQUITY

        The Company is subject to legal restrictions related to its distribution
of ISSI-Taiwan earnings. In accordance with the Corporate Law of the Republic of
China, before ISSI-Taiwan declares any part of net income as dividends and/or
bonuses, ISSI-Taiwan must transfer 10% of its statutory net income to a legal
reserve until such reserve is equal to ISSI-Taiwan's capital. At September 30,
1997, such restricted equity amounted to approximately $4,503,000. The legal
reserve is not available for distribution; however, when the reserve exceeds 50%
of ISSI-Taiwan's capital, 50% of the legal reserve in excess of 50% of
ISSI-Taiwan's capital may be distributed in the form of stock. The reserve may
be utilized at any time to offset a deficit. In addition, any distribution of
equity of ISSI-Taiwan must allocate 1% of the related distribution to employees
of ISSI-Taiwan.

NOTE 11.  INCOME TAXES

    The provision (benefit) for income taxes consisted of the following for the
years ended September 30:



                                 1997           1996           1995
                               --------       --------       --------
                                           (In thousands)
                                                         
Current:
  Federal                      $ (2,558)      $  3,137       $  7,989
  State                               1            335          1,411
  Foreign                           116            200            693
                               --------       --------       --------
Total current                  $ (2,441)      $  3,672       $ 10,093

Deferred:
  Federal                         2,584         (3,062)        (2,257)
  State                              --           (614)          (432)
  Foreign                        (1,287)        (1,154)            --
                               --------       --------       --------
Total deferred                    1,297         (4,830)        (2,689)
                               --------       --------       --------
Total provision (benefit)      $ (1,144)      $ (1,158)      $  7,404
                               ========       ========       ========


     Pretax income from foreign operations was approximately $9,207,000,
$153,000 and $28,320,000 for 1997, 1996, and 1995, respectively.

                                       35

   38
                   Notes to Consolidated Financial Statements



     The Company's provision (benefit) for income taxes differs from the amount
computed by applying the U.S. federal statutory rate of (35%) to income before
taxes and minority interest as follows for the years ended September 30:



                                                 1997           1996           1995
                                               --------       --------       --------
                                                          (In thousands)
                                                                         
Income taxes computed at the U.S. federal
  statutory rate                               $ (3,097)      $    (75)      $ 12,957
Valuation of deferred tax assets                  6,546          1,104         (1,153)
Lower effective income tax rate of Taiwan        (4,368)        (1,006)        (4,392)
Tax exempt interest income                         (328)          (694)          (470)
State tax (net of federal effect)                     1           (184)           636
Other individually immaterial items                 102           (303)          (174)
                                               --------       --------       --------
                                               $ (1,144)      $ (1,158)      $  7,404
                                               ========       ========       ========


     As of September 30, 1997, the Company has federal and state net operating
loss carryforwards of approximately $16,000,000 and $12,000,000, respectively.
The Company has federal research and development credit carryforwards and
alternative minimum tax credit carryforwards of approximately $1,130,000 and
$350,000, respectively. The Company also has state manufacturers' investment tax
credit carryforwards of approximately $500,000. The net operating losses,
research credit carryforwards and state manufacturers' investment tax credit
carryforwards will expire at various dates beginning in 2002 through 2012, if
not utilized. In addition, ISSI-Taiwan has investment tax credit carryforwards
of approximately $4,480,000 that will expire at various dates beginning in 1999
through 2001, if not utilized.

     Utilization of the net operating loss carryforwards and credits may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operating losses and credits before utilization.

     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred taxes consisted of the following at September 30:



                                                                 1997           1996
                                                               --------       --------
                                                                     (In thousands)
                                                                             
Deferred tax assets:
       Depreciation                                            $    607       $    321
       Inventory and other valuation reserves                     3,159          6,319
       Accrued expenses                                           2,053          2,509
       Taiwan - investment tax credit carryforwards               4,480          3,516
       Federal and state credit carryforwards                     2,040             --
       Federal and state net operating loss carryforwards         6,236             --
       Other, net                                                    13            525
                                                               --------       --------
Total deferred tax assets                                        18,588         13,190
       Valuation allowance                                      (13,858)        (7,163)
                                                               --------       --------
Net deferred tax assets                                        $  4,730       $  6,027
                                                               ========       ========



                                       36

   39
                   Notes to Consolidated Financial Statements

     Management has determined, based on the Company's history of prior
operating earnings and its expectations of future taxable income, that a partial
valuation allowance for deferred tax assets should be provided. The valuation
allowance for deferred tax asset increased $6,695,000 during 1997 and $7,163,000
during 1996. Realization of deferred tax assets is dependent on generating
sufficient taxable income prior to expiration of the carryforwards. Although
realization is not assured, management believes that it is more likely than not
that the deferred tax asset will be realized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
Approximately $2,010,000 of the valuation allowance is attributable to tax
benefits of stock option deductions which will be credited to paid in capital
when realized.

     As a result of its Hsinchu Science-based Industrial park in Taiwan,
ISSI-Taiwan has received a tax exemption for taxable income beginning October 1,
1992. ISSI-Taiwan continuously extends this 4 year exemption each time it
expands its capital assets and uses the capital to purchase qualified machinery.
The precise amount of the exemption is calculated annually based upon the extent
of ISSI-Taiwan's net operating taxable income and measured by certain factors,
including use of qualified manufacturing equipment, self-manufacturing costs and
qualified sales revenue. The portion of ISSI-Taiwan's taxable income which is
not subject to exemption is taxed at a flat 20% tax rate. In addition, the
Company recognized benefits from investment tax credits in Taiwan of
approximately $968,000 in the current fiscal year.

        Cumulative net undistributed earnings of ISSI-Taiwan for which no income
taxes have been provided aggregated approximately $24,000,000 at September 30,
1997. These earnings are considered to be permanently invested in non-U.S.
operations. Upon distribution of those earnings in the form of dividends or
otherwise, the Company would be subject to both U.S. income taxes and
withholding tax payable to the foreign country. Determination of the amount of
unrecognized deferred U.S. tax liability is not practical because of the
complexities associated with its hypothetical calculation. However, a U.S.
foreign tax credit for the withholding tax payable on the distribution would be
available to reduce U.S. taxes.

                                       37
   40
                   Notes to Consolidated Financial Statements



NOTE 12.  GEOGRAPHIC AND SEGMENT INFORMATION

        The Company operates in one business segment, which is to design,
develop, and market high-performance SRAM and nonvolatile memory integrated
circuits. The following table summarizes the Company's operations in different
geographic areas:


                                                          Year Ended September 30, 1997
                                             ---------------------------------------------------------
                                                                            Adjustments/
                                              United States   Taiwan        Eliminations  Consolidated
                                             ---------------------------------------------------------
                                                                  (In thousands)
                                                                                     
Sales to unaffiliated customers              $  63,247       $  45,014       $     --      $ 108,261
Transfers between geographic areas               3,586          69,795        (73,381)            --
                                             ---------       ---------       --------      ---------
Total net sales                              $  66,833       $ 114,809       $(73,381)     $ 108,261
                                             =========       =========       ========      =========
Operating income (loss)                      $ (20,504)      $   8,995       $    733      $ (10,776)
                                             =========       =========       ========      =========
Identifiable assets                          $ 115,477       $ 123,676       $(43,557)     $ 195,596
                                             =========       =========       ========      =========
Cash, cash equivalents, restricted cash
    and short-term investments               $  40,737       $  12,399       $     --      $  53,136
                                             =========       =========       ========      =========
Accounts receivable from third-party
    customers                                $  10,705       $   7,773       $     --      $  18,478
                                             =========       =========       ========      =========

                                                          Year Ended September 30, 1996
                                             ---------------------------------------------------------
                                                                          Adjustments/
                                              United States   Taiwan      Eliminations    Consolidated
                                             ---------------------------------------------------------
                                                                  (In thousands)
Sales to unaffiliated customers              $  85,676       $  46,363       $     --      $ 132,039
Transfers between geographic areas               6,250          70,450        (76,700)            --
                                             ---------       ---------       --------      ---------
Total net sales                              $  91,926       $ 116,813       $(76,700)     $ 132,039
                                             =========       =========       ========      =========

Operating loss                               $  (3,751)      $    (615)      $   (317)     $  (4,683)
                                             =========       =========       ========      =========

Identifiable assets                          $ 115,331       $  76,976       $(14,268)     $ 178,039
                                             =========       =========       ========      =========
Cash, cash equivalents, restricted cash
    and short-term investments               $  74,498       $   6,962       $     --      $  81,460
                                             =========       =========       ========      =========
Accounts receivable from third-party
    customers                                $   6,910       $   4,406       $     --      $  11,316
                                             =========       =========       ========      =========



                                       38
   41
                        Notes to Consolidated Statements



                                                      Year Ended September 30, 1995
                                        -----------------------------------------------------
                                         United       Taiwan       Adjustments/
                                         States                     Eliminations   Consolidated
                                        --------      --------      -----------      --------
                                                        (In thousands)
                                                                              
Sales to unaffiliated customers         $ 59,677      $ 63,524      $        --      $123,201
Transfers between geographic areas         1,648        35,487          (37,135)           --
                                        --------      --------      -----------      --------
Total net sales                         $ 61,325      $ 99,011      $   (37,135)     $123,201
                                        ========      ========      ===========      ========
Operating income (loss)                 $ 10,462      $ 24,470      $      (456)     $ 34,476
                                        ========      ========      ===========      ========

Identifiable assets                     $116,604      $ 98,286      $   (10,449)     $204,441
                                        ========      ========      ===========      ========
Cash, cash equivalents and
   restricted cash                      $ 93,083      $ 17,655      $        --      $110,738
                                        ========      ========      ===========      ========
Accounts receivable from
   third-party customers                $ 11,220      $  7,526      $        --      $ 18,746
                                        ========      ========      ===========      ========


        Transfers between geographic areas are accounted for at amounts which
are generally above cost and consistent with rules and regulations of governing
tax authorities. Such transfers are eliminated in the consolidated financial
statements.

        Identifiable assets by geographic area are those assets used in the
Company's operations in each area.

        Total assets and liabilities for ISSI-Taiwan amounted to approximately
$123,676,000 and $70,801,000, respectively, at September 30, 1997. Included in
the assets and liabilities of ISSI-Taiwan were intercompany receivables
amounting to approximately $21,236,000 at September 30, 1997. Pre-tax income for
ISSI-Taiwan for the year ended September 30, 1997 was approximately $8,669,000.

        Export sales by the U.S. operating company were approximately
$14,125,000, $15,741,000, and $17,854,000 for the years ended September 30,
1997, 1996, and 1995, respectively.

        Net foreign currency transaction gains (losses) of approximately
$(17,000), $311,000, and $(225,000) for the years ended September 30, 1997, 1996
and 1995, respectively, were primarily the result of the settlement of
intercompany transactions and are included in the determination of net income.

NOTE 13.  COMMITMENTS AND CONTINGENCIES

PATENTS AND LICENSES

        In the semiconductor industry it is typical for companies to receive
notices from time to time alleging infringement of patents or other intellectual
property rights of others. The Company has been and may from time to time
continue to be notified of claims that it may be infringing patents, mask work
rights or copyrights owned by third parties. Although none of these companies
have pursued a claim against the Company, there is no assurance that these or
other companies will not in the future pursue claims against the Company with
respect to the alleged infringement of patents, mask work rights, copyrights or
other intellectual property owned by third parties. If it appears necessary or
desirable, the Company may seek licenses under patents that it is alleged to be
infringing. Although patent holders commonly offer such licenses, there is no
assurance that any licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license
under a key patent or intellectual property right from a third party for
technology used by the Company could cause the Company 

                                       39


   42
                        Notes to Consolidated Statements



to incur substantial liabilities and to suspend the manufacture of the products
utilizing the invention or to attempt to develop non-infringing products, any of
which could materially and adversely affect the Company's business and operating
results. Furthermore, there can be no assurance that the Company will not become
involved in protracted litigation regarding the alleged infringement by the
Company of third party intellectual property rights or which may be necessary to
protect patents or other intellectual property rights of the Company. Any
litigation relating to patent infringement or other intellectual property
matters could result in substantial cost and diversion of resources by the
Company which could materially and adversely affect the Company's business and
operating results.

LITIGATION

        On March 21, 1997, the U.S. Department of Commerce ("DOC") initiated an
antidumping investigation of SRAMs from Taiwan and Korea. The Company currently
imports a majority of its SRAMs from Taiwan. The Company is participating in
this investigation as an interested party and has been assigned a preliminary
duty deposit rate of 10.96 percent. A final report by the DOC is scheduled for
January 1998. There will be a subsequent investigation by the International
Trade Commission ("ITC") into the impact of imports of SRAMs from Taiwan and
Korea on the U.S. market, with a final decision likely in March or April 1998.
Affirmative final decisions by both the DOC and the ITC are required before an
antidumping duty deposit is applicable to imports of SRAMs by the Company from
either of these countries. If an affirmative decision is reached, the Company
would be required to post a duty deposit for SRAM wafers or devices imported
from Taiwan. This duty deposit could be subsequently returned to the Company or
forfeited as duty to the U.S. Customs depending on subsequent measurements, the
results of which are made available by the Department Of Commerce in the year
2000.

        The Company has retained legal counsel to defend its interests in the
antidumping proceedings before the DOC and the ITC. There can be no assurance,
however, that the government will not impose duties on the Company's imports of
SRAM products into the United States. Duties, if any, imposed by the government
could have a material adverse affect on the Company's gross margins and profits.

LEASES

        The Company leases its facilities and the land upon which it is
constructing its new Taiwan facility under operating lease agreements that
expire at various dates through 2016. The Company entered into a ten year lease
effective December 1, 1996 for its headquarters facility in Santa Clara,
California. The Company has subleased approximately 25% of the Santa Clara
facility and the sublease expires in March 2000. Minimum rental commitments
under these leases are as follows (in thousands):

                                                                    
1998  (net of sublease income of $300)                           $   1,103
1999  (net of sublease income of $308)                               1,063
2000  (net of sublease income of $156)                               1,273
2001                                                                 1,384
2002                                                                 1,440
Thereafter                                                           7,960
                                                                  ---------
Total minimum rental commitments                                  $ 14,223
                                                                  =========



        Total rental expense for the years ended September 30, 1997, 1996, and
1995 was approximately $1,372,000 (net of sublease income of $148,000), $637,000
and $620,000, respectively.

                                       40
   43
                        Notes to Consolidated Statements



COMMITMENTS TO WAFER FABRICATION FACILITIES

        In June 1996, the Company entered into a joint venture "WaferTech, LLC"
with TSMC, Altera, Analog Devices and private investors for the construction of
a wafer fabrication facility in Camas, Washington. Under the terms of the
agreement, the Company agreed to invest $31.2 million for a 4% equity interest
in the venture and will receive access to wafers manufactured using advanced
process technology. As of September 30, 1997, $18.7 million had been paid by the
Company to WaferTech. The last scheduled payment by the Company of $12.5 million
was made in November 1997. The Company is accounting for this investment on the
cost basis.

        In 1995, the Company entered into a joint venture "United Integrated
Circuits Corp." ("UICC") with United Microelectronics Corporation ("UMC") and
other investors to build a wafer fabrication facility in Hsinchu, Taiwan. The
Company agreed to invest approximately $26 million (subject to fluctuations in
the New Taiwanese Dollar) for a 5% equity interest in the manufacturing venture
of which UMC retains 55% ownership. As of September 30, 1997, approximately
$20.0 million has been paid to UICC in this regard. The next payment of
approximately $6.0 million is expected to be made in December 1997. The Company
is accounting for this investment on the cost basis. The UICC facility was
severely damaged by fire in October 1997. UICC has informed the Company that the
damages incurred are covered by insurance.

        The Company has certain minimum wafer purchasing commitments to its
foundry partners in exchange for wafer capacity commitments. The Company agreed
to make certain annual payments to TSMC for capacity increases. Additional
required payments to TSMC totaling approximately $26.4 million over the next
four years represent annual increases in capacity which must be purchased by the
Company. The Company has minimum purchase obligations with UICC and WaferTech
LLC. Although the Company has rights to re-schedule or assign capacity to
another party, there can be no assurance that such re-schedule or assignment
would be successfully accomplished. Should the Company fail to re-schedule or
assign unneeded capacity, the Company's business and operating results could be
adversely affected.

NOTE 14.  EMPLOYEE BENEFIT PLAN

        In August 1992, the Company established a defined contribution
retirement plan with 401(k) plan features. The plan covers all United States
employees 18 years and older. Employees may make contributions by a percentage
reduction in their salaries, up to $9,500 for 1997. The Company elected to make
no contributions during the years ended September 30, 1997, 1996 and 1995.
Administrative expenses relating to the plan are insignificant.

NOTE 15.  SUPPLEMENTAL CASH FLOW INFORMATION



                                                     Years Ended September 30,
                                              1997          1996            1995
                                           ---------      --------       --------
                                                        (In thousands)
                                                                     
Cash paid for interest                     $  1,431       $    478       $    214
Cash paid (refunded) for income taxes        (5,004)         8,603              7
Notes payable issued for other assets            --        (31,200)        31,200
Tax benefit from sale of common stock            --            103          3,448



                                       41
   44

                        Notes to Consolidated Statements


NOTE 16.  RELATED PARTY TRANSACTIONS

        For the year ended September 30, 1995, the Company sold approximately
$605,000 of SRAM products to Wearnes Automation and Wearnes affiliates, whose
vice chairman is a member of the Company's Board of Directors. At September 30,
1995, the Company had a trade receivables balance from Wearnes and its
affiliates of approximately $49,000.

        For the years ended September 30, 1996 and 1995, the Company purchased
approximately $1,342,000 and $2,985,000, respectively, of services from Taicera
Electronics Company, an assembly plant that is an affiliate of the Fu Sheng
Industrial Group, whose chairman was a member of the Company's Board of
Directors until April 1997. At September 30, 1996 and 1995, the Company owed
Taicera Electronics Company approximately $0 and $558,000, respectively.

NOTE 17.  SUBSEQUENT EVENT

        On December 3, 1997, the Company completed its acquisition of Nexcom
Technology, Inc. ("Nexcom") in exchange for the issuance of 772,693 shares of
Common Stock and $500,000 in cash (total consideration of approximately $7.2
million). The Nexcom shareholders are also eligible to receive certain
contingent payments based on future license revenue. The transaction will be
accounted for as a purchase and is expected to result in an in-process
technology charge of approximately $6 to $7 million in the Company's December
31, 1997 quarter. Nexcom was formed in 1990 and has been engaged primarily in
the research and development of non-volatile flash memory technology.

NOTE 18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

        The following is a summary of the quarterly results of operations for
the years ended September 30, 1997 and 1996.



                                   Dec. 31        Mar. 31        June 30         Sept. 30
                                   -------        -------        -------         --------
                                         (In thousands, except per share data)
                                                                         
1997

Net sales                          $ 23,610       $ 25,794       $ 26,509       $ 32,348
Gross profit                          6,639          7,569          8,244          9,704
Operating loss                       (2,597)        (2,269)        (4,153)        (1,757)
Net loss                             (1,662)        (1,488)        (3,919)          (617)

  Net loss per share               $  (0.09)      $  (0.08)      $  (0.22)      $  (0.03)


                                                                                    1996

Net sales                          $ 45,051       $ 36,353       $ 27,579       $ 23,056
Gross profit (loss)                  21,128         14,963         (5,756)         1,520
Operating income (loss)              12,149          5,662        (14,994)        (7,500)
Net income (loss)                    10,294          5,064        (10,550)        (3,793)

  Net income (loss) per share      $   0.56       $   0.28       $  (0.60)      $  (0.22)




                                       42

   45


ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
           FINANCIAL DISCLOSURE

      None.

                                    PART III

      Certain information required by Part III is omitted from this Report on
Form 10-K/A in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders to be held on January 30, 1998, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      (a)  Executive Officers - See the section entitled "Executive Officers" in
           Part I, Item 1 hereof.

      (b)  Directors - The information required by this Item is incorporated by
           reference to the section entitled "Election of Directors" in the
           Proxy Statement

      The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.

ITEM 11.   EXECUTIVE COMPENSATION

      The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" in the Proxy Statement.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information required by this Item is incorporated by reference to the
sections entitled "Principal Share Ownership" and "Security Ownership of
Management" in the Proxy Statement.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.

                                     PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

      (a) List of documents filed as part of this Report.


                                       43
   46



      1.   FINANCIAL STATEMENTS

      The following consolidated financial statements of Integrated Silicon
Solution, Inc. are contained in Part II, Item 8 of this Report on Form 10-K/A:

Report of Ernst & Young LLP, Independent Auditors
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements

      2.   FINANCIAL STATEMENT SCHEDULE

      The following financial statement schedule of Integrated Silicon Solution,
Inc. is contained in Part IV, Item 14(d) of this report on Form 10-K/A:

Schedule II-Valuation and Qualifying Accounts

      All other schedules for which provision is made in the Applicable
Accounting Regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.

      3.   EXHIBITS



      Exhibit
      Number          Description of Document
      ------          -----------------------
                   
++++++   2.1          Agreement and Plan of Reorganization dated November 5,
                      1997 by and among the Company, Nexcom Technology, Inc. and
                      certain shareholders of Nexcom Technology, Inc.

++       3.1          Restated Certificate of Incorporation of Registrant.

+        3.3          Bylaws of Registrant.

+        4.2          Form of Common Stock Certificate.

+        10.1         Form of Indemnification Agreement.

+        10.2***      Form of 1993 Employee Stock Purchase Plan, as amended, and
                      form of Subscription Agreement.

+        10.3***      Form of 1989 Stock Plan, as amended, and form of Stock 
                      Option Agreements.

+        10.4         Information and Registration Rights Agreement dated as of
                      March 17, 1993 among the Registrant and certain holders of
                      the Registrant's Common Stock, as amended.

+        10.5*        Letter Agreement dated September 14, 1994 between Taiwan
                      Semiconductor Manufacturing Company, Ltd. ("TSMC") and the
                      Registrant.

+        10.6*        Joint Development Contract between TSMC and the Registrant
                      dated February 5, 1993.

+        10.7*        Joint Development Contract between TSMC and the Registrant
                      dated October , 1992.

+        10.8*        Agreement for Contract Manufacturing dated July 12, 1993
                      between Mitsui Plastics Inc., Rohm Co., Ltd. and the
                      Registrant.

+        10.9         Lease for ISSI-Taiwan facilities at No. 10 Prosperity 
                      dated November 8, 1993.

+        10.10        Facility Lease Agreement for second ISSI-Taiwan facility
                      located at No. 9 Prosperity I Road, Hsinchu, Taiwan.

+        10.11        Wafer Production Agreement between TSMC and the Registrant
                      dated November 8, 1993.

+        10.12*       Joint Development Contract of 0.45(mu) process between
                      TSMC and the Registrant dated November 15, 1994.

+        10.13*       Joint Development Contract between Chartered Semiconductor
                      Manufacturing Pte. Ltd. and the Registrant dated July 21,
                      1994.


                                       44
   47

                                                            
+        10.14        Subscription and Shareholders Agreement Relating to Valery
                      Limited dated March 30, 1994.

+        10.15        Long term line of credit between Bank of Communication and
                      Registrant.

+        10.16        Short term line of credit between International Commercial
                      Bank of China and Registrant.

+        10.17***     1995 Director Stock Option Plan.

++       10.18*       Option I Agreement between the Registrant and TSMC dated
                      April 21, 1995.

++       10.19*       Option II Agreement between the Registrant and TSMC dated
                      April 21, 1995.

+++      10.20*       UMC/ISSI-Taiwan Foundry Venture Agreement dated August 31,
                      1995.

+++      10.21*       UMC/ISSI-Taiwan Fabven Foundry Capacity Agreement dated
                      August 31, 1995.

++++     10.22**      Amended and Restated Limited Liability Company Agreement
                      of WaferTech, LLC, dated as of August 9, 1996.

++++     10.23**      Purchase Agreement by and between Taiwan Semiconductor
                      Manufacturing Corporation, as Seller, and Analog Devices,
                      Inc., Altera Corporation and Integrated Silicon Solution,
                      Inc., as Buyers.

+++++    10.24*       Amendment to Option I and Option II Agreement between the
                      Company and TSMC dated September 23, 1996.

+++++    10.25        Sublease Agreement for facility located at 2231 Lawson
                      Lane, Santa Clara, California.

++++++   11.1         Statements of Computation of Earnings Per Share

+        21.1         Subsidiaries of the Registrant

         23.1         Consent of Ernst & Young LLP, Independent Auditors 

++++++   24.1         Power of Attorney (see page 43).

++++++   27.1         Financial Data Schedule




- ----------


       
*         Confidential treatment granted for certain portions of this exhibit.
**        Confidential treatment requested for certain portions of this exhibit.
          The portions of this exhibit for which confidential treatment is being
          requested have been blacked out in the copies filed with the related
          report and the confidential portions so omitted have been filed
          separately with the Securities and Exchange Commission.

***       Management contract or compensatory plan or arrangement required to be
          filed as an exhibit to this Report on Form 10-K pursuant to form 14(c)
          of this report.

+         Incorporated by reference to the Company's Registration Statement on
          Form S-1, as amended (file no. 33-72960).

++        Incorporated by reference to the Company's Registration Statement on
          Form S-1, as amended (file no. 33-91520).

+++       Incorporated by reference to the Company's Annual Report on Form 10-K
          for the period ended September 30, 1995.

++++      Incorporated by reference to the Company's Quarterly Report on Form
          10-Q for the period ended June 30, 1996.

+++++     Incorporated by reference to the Company's Annual Report on Form 10-K
          for the period ended ended September 30, 1996.

++++++    Incorporated by reference to the Company's Annual Report on Form 10-K
          for the period ended ended September 30, 1997.

          (b)  Reports on Form 8-K
               The registrant did not file any Reports on Form 8-K during the 
               quarter ended September 30, 1997.

          (c)  Exhibits
               See (a) above

          (d)  Financial statement schedules
               See (a) above



                                       45
   48
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K/A
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Santa Clara, State of California, on the 14th day of April, 1998.


                                    INTEGRATED SILICON SOLUTION, INC.

                                    By      /s/ Gary L. Fischer
                                            ------------------------------------
                                            Gary L. Fischer
                                            Executive Vice President,
                                            Office of the President and
                                            Chief Financial Officer


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K/A has been signed below on April 14, 1998 by the
following persons on behalf of the Registrant and in the capacities indicated.



             Signature                                      Title
- -------------------------------------      -------------------------------------------------
                                         
/s/ Jimmy S.M. Lee *                       Chairman of the Board, Chief Executive Officer,
- -------------------------------------      and President (Principal Executive Officer)
(Jimmy S.M. Lee)                           

/s/ Kong-Yeu Han *                         Executive Vice President, General Manager,
- -------------------------------------      Taiwan and Director
(Kong-Yeu Han)                             

/s/ Gary L. Fischer                        Executive Vice President, Office of the President
- -------------------------------------      and Chief Financial Officer (Principal Financial
(Gary L. Fischer)                          and Accounting Officer)
                                           
/s/ Diosdado P. Banatao *                  Director
- -------------------------------------
(Diosdado P. Banatao)

/s/ Pauline L. Alker *                     Director
- -------------------------------------
(Pauline L. Alker)

/s/ Lip-Bu Tan *                           Director
- -------------------------------------
(Lip-Bu Tan)

/s/ Chun Win Wong *                        Director
- -------------------------------------
(Chun Win Wong)

                                           Director
- -------------------------------------
(Hide Tanigami)



*  By:  /s/ Gary L. Fischer
        -----------------------------
        Gary L. Fischer
        Attorney-in-Fact


                                       46
   49


ITEM 14(d).  FINANCIAL STATEMENT SCHEDULE


                        INTEGRATED SILICON SOLUTION, INC.
                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)



                                                   Addition
                                       Balance at  Charged to                   Balance
                                       Beginning   Costs and                    at End
                                       of Period    Expenses    Deductions     of Period
                                      -----------  ----------  -----------     ----------
                                                                     
Year ended September 30, 1995:
  Allowance for doubtful accounts ....    504       1,185        (392)(1)       1,297
  Sales returns reserve ..............    545       2,851        (695)          2,701
Year ended September 30, 1996:
  Allowance for doubtful accounts ....  1,297         714          (9)(1)       2,002
  Sales returns reserve ..............  2,701         665      (1,133)          2,233
Year ended September 30, 1997:
  Allowance for doubtful accounts ....  2,002         675        (409)(1)       2,268
  Sales returns reserve ..............  2,233       1,713      (1,510)          2,436


(1)      Uncollectible accounts written off, net of recoveries


                                       47
   50

                                 EXHIBIT INDEX



      Exhibit
      Number       Description of Document
      ------       -----------------------

                
++++++2.1          Agreement and Plan of Reorganization dated November 5,
                   1997 by and among the Company, Nexcom Technology, Inc. and
                   certain shareholders of Nexcom Technology, Inc.

++    3.1          Restated Certificate of Incorporation of Registrant.

+     3.3          Bylaws of Registrant.

+     4.2          Form of Common Stock Certificate.

+     10.1         Form of Indemnification Agreement.

+     10.2***      Form of 1993 Employee Stock Purchase Plan, as amended, and
                   form of Subscription Agreement.

+     10.3***      Form of 1989 Stock Plan, as amended, and form of Stock 
                   Option Agreements.

+     10.4         Information and Registration Rights Agreement dated as of
                   March 17, 1993 among the Registrant and certain holders of
                   the Registrant's Common Stock, as amended.

+     10.5*        Letter Agreement dated September 14, 1994 between Taiwan
                   Semiconductor Manufacturing Company, Ltd. ("TSMC") and the
                   Registrant.

+     10.6*        Joint Development Contract between TSMC and the Registrant
                   dated February 5, 1993.

+     10.7*        Joint Development Contract between TSMC and the Registrant
                   dated October , 1992.

+     10.8*        Agreement for Contract Manufacturing dated July 12, 1993
                   between Mitsui Plastics Inc., Rohm Co., Ltd. and the
                   Registrant.

+     10.9         Lease for ISSI-Taiwan facilities at No. 10 Prosperity 
                   dated November 8, 1993.

+     10.10        Facility Lease Agreement for second ISSI-Taiwan facility
                   located at No. 9 Prosperity I Road, Hsinchu, Taiwan.

+     10.11        Wafer Production Agreement between TSMC and the Registrant
                   dated November 8, 1993.

+     10.12*       Joint Development Contract of 0.45(mu) process between
                   TSMC and the Registrant dated November 15, 1994.

+     10.13*       Joint Development Contract between Chartered Semiconductor
                      Manufacturing Pte.Ltd. and the Registrant dated July 21,
                      1994.


                                       
   51

                                                         
+     10.14        Subscription and Shareholders Agreement Relating to Valery
                   Limited dated March 30, 1994.

+     10.15        Long term line of credit between Bank of Communication and
                   Registrant.

+     10.16        Short term line of credit between International Commercial
                   Bank of China and Registrant.

+     10.17***     1995 Director Stock Option Plan.

++    10.18*       Option I Agreement between the Registrant and TSMC dated
                   April 21, 1995.

++    10.19*       Option II Agreement between the Registrant and TSMC dated
                   April 21, 1995.

+++   10.20*       UMC/ISSI-Taiwan Foundry Venture Agreement dated August 31,
                   1995.

+++   10.21*       UMC/ISSI-Taiwan Fabven Foundry Capacity Agreement dated
                   August 31, 1995.

++++  10.22**      Amended and Restated Limited Liability Company Agreement
                   of WaferTech, LLC, dated as of August 9, 1996.

++++  10.23**      Purchase Agreement by and between Taiwan Semiconductor
                   Manufacturing Corporation, as Seller, and Analog Devices,
                   Inc., Altera Corporation and Integrated Silicon Solution,
                   Inc., as Buyers.

+++++ 10.24*       Amendment to Option I and Option II Agreement between the
                   Company and TSMC dated September 23, 1996.

+++++ 10.25        Sublease Agreement for facility located at 2231 Lawson
                   Lane, Santa Clara, California.

++++++11.1         Statements of Computation of Earnings Per Share

+     21.1         Subsidiaries of the Registrant

      23.1         Consent of Ernst & Young LLP, Independent Auditors 

++++++24.1         Power of Attorney (see page 43).

++++++27.1         Financial Data Schedule




- ----------


*         Confidential treatment granted for certain portions of this exhibit.
**        Confidential treatment requested for certain portions of this exhibit.
          The portions of this exhibit for which confidential treatment is being
          requested have been blacked out in the copies filed with the related
          report and the confidential portions so omitted have been filed
          separately with the Securities and Exchange Commission.

***       Management contract or compensatory plan or arrangement required to be
          filed as an exhibit to this Report on Form 10-K pursuant to form 14(c)
          of this report.

+         Incorporated by reference to the Company's Registration Statement on
          Form S-1, as amended (file no. 33-72960).

++        Incorporated by reference to the Company's Registration Statement on
          Form S-1, as amended (file no. 33-91520)

+++       Incorporated by reference to the Company's Annual Report on Form 10-K
          for the period ended September 30, 1995.

++++      Incorporated by reference to the Company's Quarterly Report on Form
          10-Q for the period ended June 30, 1996.

+++++     Incorporated by reference to the Company's Annual Report on Form 10-K
          for the period ended ended September 30, 1996.

++++++    Incorporated by reference to the Company's Annual Report on Form 10-K
          for the period ended ended September 30, 1997.

EX-23.1

   1
                                                                    EXHIBIT 23.1



               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



We consent to the incorporation by reference in the Registration Statements on
Form S-8 (including registration of shares for resale by means of a Form S-3
prospectus) Nos. 33-95282 and 333-3438 and 333-26135 pertaining to the 1993
Employee Stock Purchase Plan, the 1995 Director Stock Option Plan, the 1989
Stock Plan and the Nonstatutory Stock Plan of Integrated Silicon Solution, Inc.
of our report dated October 27, 1997, except for Note 17 as to which the date is
December 3, 1997, with respect to the consolidated financial statements and
schedule of Integrated Silicon Solution, Inc. included in its Annual Report
(Form 10-K/A) for the year ended September 30, 1997.



San Jose, California
April 14, 1998