10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the Quarter ended January 1, 2005

¨ 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: 0-19299

Integrated Circuit Systems, Inc.

(Exact name of registrant as specified in its charter)

Pennsylvania	23-2000174
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

2435 Boulevard of the Generals

Norristown, Pennsylvania 19403

(Address of principal executive offices)

(610) 630-5300

(Registrant’s telephone number including area code)

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

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

As of February 8, 2005, there were 73,019,911 shares of Common Stock; $0.01 par value, outstanding.

INTEGRATED CIRCUIT SYSTEMS, INC.

INDEX

		Page Number
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited):
	Consolidated Balance Sheets (Unaudited): January 1, 2005 and July 3, 2004	3
	Consolidated Statements of Operations (Unaudited): Three Months and Six Months Ended January 1, 2005 and December 27, 2003	4
	Consolidated Statements of Cash Flows (Unaudited): Six Months Ended January 1, 2005 and December 27, 2003	5
	Notes to Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22
PART II.	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 4.	Submission of Matters to a Vote of Security Holders	23
Item 6.	Exhibits	24

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PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands)

(Unaudited)

	January 1, 2005			July 3, 2004
ASSETS
Current Assets:
Cash and cash equivalents	$	115,977		$	68,973
Marketable securities		76,776			126,606
Accounts receivable, net		46,934			45,717
Inventory, net		20,880			18,772
Deferred income taxes		19,738			22,759
Prepaid assets		3,625			6,309
Other current assets		555			880
Total current assets		284,485			290,016
Property and equipment, net		21,096			19,254
Long term investments		5,000			5,000
Intangibles		43,187			27,842
Goodwill		35,422			35,422
Prepaid long-term maintenance contracts		4,400			—
Other assets		52			62
Total assets	$	393,642		$	377,596
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Lease payable	$	73		$	82
Accounts payable		15,559			17,557
Accrued salaries and bonus		375			2,811
Accrued expenses and other current liabilities		4,885			5,707
Income taxes payable		1,946			3,576
Total current liabilities		22,838			29,733
Deferred tax and other liabilities		11,846			11,638
Total liabilities		34,684			41,371
Commitments and contingencies
Shareholders’ equity:
Preferred Stock, authorized 5,000; none issued		—			—
Common stock, $0.01 par, authorized 300,000; Issued 73,020 and 72,701 shares, as of January 1, 2005 and July 3, 2004, respectively		731			727
Additional paid in capital		288,207			282,569
Retained earnings		131,269			107,140
Deferred compensation		(861	)		—
Treasury stock, at cost, 2,763 shares, as of January 1, 2005 and 2,475 shares, as of July 3, 2004		(60,388	)		(54,211	)
Total shareholders’ equity		358,958			336,225
Total liabilities and shareholders’ equity	$	393,642		$	377,596

See accompanying notes to consolidated financial statements.

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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands)

(Unaudited)

	Three Months Ended						Six Months Ended
	January 1, 2005			December 27, 2003			January 1, 2005			December 27, 2003
Revenue:	$	60,628		$	69,565		$	126,724		$	134,850
Cost and expenses:
Cost of sales		25,269			28,107			52,041			54,543
Research and development		9,426			10,014			19,613			19,322
Amortization of Video research and development costs		—			—			7,051			—
Selling, general and administrative		9,500			9,063			19,570			18,278
Amortization of intangibles		1,114			575			2,049			1,150
Operating income		15,319			21,806			26,400			41,557
Interest and other income		888			461			1,569			1,342
Interest expense		(15	)		(82	)		(30	)		(218	)
Income before income taxes		16,192			22,185			27,939			42,681
Income taxes		2,212			3,533			3,810			6,748
Net income	$	13,980		$	18,652		$	24,129		$	35,933
Basic income per share:
Net income	$	0.20		$	0.26		$	0.34		$	0.51
Diluted income per share:
Net income	$	0.20		$	0.26		$	0.34		$	0.49
Weighted average shares outstanding – basic		70,348			70,422			70,306			70,437
Weighted average shares outstanding – diluted		71,468			72,882			71,421			73,087

See accompanying notes to consolidated financial statements.

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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended
	January 1, 2005			December 27, 2003
Cash flows from operating activities:
Net income	$	24,129		$	35,933
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization Amortization of Video research & development costs		5,525 7,051			4,833 —
Gain on sale of assets		(734	)		(558	)
Tax benefit of stock options		1,389			8,258
Deferred income taxes		3,281			596
Changes in assets and liabilities:
Accounts receivable		(1,217	)		(6,979	)
Inventory		(2,108	)		(454	)
Other assets, net		2,983			772
Prepaid long-term maintenance contracts		(4,400	)		—
Accounts payable, accrued expenses and other current liabilities		(5,184	)		6,602
Restructuring costs		(72	)		(657	)
Accrued interest expense		—			(51	)
Income taxes payable		(1,630	)		(2,750	)
Net cash provided by operating activities		29,013			45,545
Cash flows from investing activities:
Purchases of marketable securities		(70,445	)		(124,550	)
Sales/Maturities of marketable securities		121,000			32,374
Capital expenditures		(5,293	)		(4,365	)
Video business unit asset purchase		(24,450	)		—
Other		153			39
Net cash used in investing activities		20,965			(96,502	)
Cash flows from financing activities:
Exercise of stock options		2,778			10,847
Shares purchased through stock purchase plan		510			438
Purchase of treasury stock		(6,177	)		(24,323	)
Repayment of long-term debt		—			(10,000	)
Capital lease payments		(85	)		(62	)
Net cash provided by financing activities		(2,974	)		(23,100	)
Net (decrease) increase in cash and cash equivalents		47,004			(74,057	)
Cash and cash equivalents:
Beginning of period	$	68,973		$	118,038
End of period	$	115,977		$	43,981

See accompanying notes to consolidated financial statements.

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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(1) INTERIM ACCOUNTING POLICY

The accompanying financial statements have not been audited. In the opinion of our management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position at January 1, 2005 and results of operations and cash flows for the interim periods presented.

Certain footnote information has been condensed or omitted from these financial statements. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended July 3, 2004. Results of operations for the three and six- months ended January 1, 2005 are not necessarily indicative of results to be expected for the full year.

Per SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” we have determined the critical principles by considering accounting policies that involve the most complex or subjective decisions or assessments. We state these accounting policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the consolidated financial statements contained in our Annual Report on Form 10-K for our fiscal year ended July 3, 2004. There were no significant changes to our critical accounting polices during the six months ended January 1, 2005.

Reporting Periods

Our fiscal year is a 52/53 week operating cycle that ends on the Saturday nearest June 30. Unless otherwise noted, all periods presented herein represent a 13-week operating cycle.

Stock Compensation

We have adopted the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure, and amendment to FASB Statement No. 123.” We continue to apply Accounting Principles Board Opinion (“APB”) No. 25 “Accounting for Stock Issued to Employees” and related interpretations in accounting for our stock compensation plans for employees and directors. Stock options granted to employees typically have an exercise price equal to the fair market value of our common stock and vest ratably over four years. Since the value of an option bears a direct relationship to our stock price, it is an effective incentive for management to create value for shareholders. We therefore view stock options as a critical component of our long-term performance-based compensation philosophy.

We apply APB No. 25 and related interpretations in accounting for stock option plans. Our policy is to grant stock options at the fair market value of the underlying stock at the date of grant. Accordingly, compensation expense is generally recognized only when options are granted with a discounted exercise price. Any resulting compensation expense is recognized ratably over the associated service period, which is generally the option vesting term. Had compensation cost been recognized consistent with SFAS No. 123, as amended by SFAS No. 148, our consolidated net earnings and earnings per share for the three-month and six-month periods ending January 1, 2005 and December 27, 2003 would have been as follows (in thousands except per share data):

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	Three Months Ended				Six Months Ended
	January 1, 2005		December 27, 2003		January 1, 2005		December 27, 2003
Net income, as reported	$	13,980	$	18,652	$	24,129	$	35,933
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects (1)		39		159		65		318
Less: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects		4,861		4,415		9,696		8,833
Net income, pro forma	$	9,158	$	14,396	$	14,498	$	27,418
Basic earnings per share:
As reported	$	0.20	$	0.26	$	0.34	$	0.51
Pro forma	$	0.13	$	0.20	$	0.21	$	0.39
Diluted earnings per share:
As reported	$	0.20	$	0.26	$	0.34	$	0.49
Pro forma	$	0.13	$	0.20	$	0.20	$	0.38
Diluted common shares:
As reported		71,468		72,882		71,421		73,087
Pro forma		71,161		71,453		71,119		71,468

(1) In the Company’s Form 10-Q for the three and six months ending December 27, 2003, the stock-based employee compensation expense included in reported net earnings was reported as $244,000 and $488,000, respectively. This amount has been adjusted as shown above to provide for the related tax effects.

SFAS No. 123 requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. Because the company’s employee stock options 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 the opinion of management, the existing models might not provide a reliable single measure of the fair value of employee stock options.

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004) – “Share-Based Payment” This standard supercedes APB No. 25, and requires recognition of expense in the financial statements of the cost of share based payment transactions, including stock options, based on the fair value of the award at the grant date. The provisions of this standard are effective for public companies for interim or annual periods beginning after June 15, 2005. We will adopt this statement beginning with our first quarter of fiscal year 2006. At this time we have not determined the transition method that will be used. We are currently evaluating the implementation of this standard and the impact on our calculation of stock option expense. The pro forma provided in

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footnote 1 “Stock Compensation” provides a reasonable estimate of the impact on our financial statements. However, our implementation of this standard based on the new guidelines could vary from the pro forma and have a material impact on our financial position.

In November 2004, the FASB issued SFAS No. 151 – “Inventory Costs – an amendment of ARB No. 43, Chapter 4.” This standard clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Currently this statement does not have an impact on our financial position. However, if in the future we were to experience such abnormal costs such as idle facility expense, handling costs and wasted material it could have a material impact on our operations.

In September 2004, the FASB approved issuance of Staff Position (“FSP”) EITF 03-1-1, “Effective Date of Paragraphs 10 through 20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”). FSP EITF 03-1-1 delays the effective date of paragraphs 10 through 20 of EITF 03-1 as they relate to recognition of other-than-temporary impairment for cost method and marketable investments. This deferral will extend until a Staff Position is issued to provide clarification of the guidance presented in paragraphs 10 through 20. Effective July 4, 2004, we adopted all other provisions of EITF Issue 03-1, including measurement guidance for evaluating whether an impairment has occurred for marketable securities and cost method investments. Adoption of these requirements did not have a material effect on the results of operations. Effective December 31, 2004, additional disclosures were also required for cost method investments. The effect of implementing the final provisions of paragraphs 10 through 20 cannot currently be estimated due to the pending implementation issues, but is not expected to be material to the results of future operations.

On October 22, 2004, the American Jobs Creation Act of 2004 was enacted by President Bush. We are currently evaluating the impact of this new law on our operations and effective tax rate. At this time, we are unable to determine the effects of this new law and will continue to analyze its potential impact as guidance is made available.

On October 4, 2004, President George W. Bush signed the “Working Families Tax Relief Act of 2004”, which retroactively reinstated the research tax credit to the June 30, 2004 expiration date. This change in the law will not have a material impact on the results of future operations.

(2) ACQUISITION

In the first quarter of fiscal year 2005 we acquired assets for a purchase price of $24.5 million and formed the Video business unit, which provides us with the technology and the capability to develop a family of high performance mixed signal products for the high definition and digital video/imaging market. The purchase consisted of intellectual property and a team of proven engineers. Some of these assets had a short useful life and resulted in $7.1 million of amortization expense in the first quarter of fiscal year 2005. The remaining assets consist of a database valued at $16.2 million with a useful life of 8 years and an assembled workforce valued at $1.2 million with a useful life of 9 years.

(3) MARKETABLE SECURITIES

Investments in marketable securities primarily consist of short-term commercial paper. During the six months ended January 1, 2005, proceeds from the maturities of marketable securities were used for the acquisition of intangible assets related to the Video business unit.

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(4) INVENTORY

Inventory is valued at the lower of cost or market. Cost is determined by the first in, first out (FIFO) method. The components of inventories are as follows (in thousands):

	January 1, 2005			July 3, 2004
Raw Materials	$	8,360		$	8,237
Work-in-process		8,781			7,953
Finished parts		10,848			9,296
Less: Obsolescence reserve		(7,109	)		(6,714	)
	$	20,880		$	18,772

A total of $0.8 million in inventory was scrapped in the six months ended January 1, 2005.

(5) DEBT

On March 1, 2004 we entered into a revolving credit loan agreement, which will terminate March 1, 2007. The revolving credit loan agreement allows us to draw down to a maximum balance of $20.0 million in increments of not less than $500,000. At our option, the unpaid balance shall bear interest at the available LIBOR Based Rate (as defined) or the Prime Based Rate (as defined). A commitment fee on the average daily-unused portion of the revolving credit loan balance will be due and payable on a quarterly basis. The commitment fee will be between .20% (.0020) and ..25% (.0025) based on the funded debt to EBITDA ratio calculated the previous quarter. There was no outstanding balance on our revolving credit loan agreement as of January 1, 2005.

Our revolving credit loan agreement requires the maintenance of specified financial ratios, including a fixed charge coverage ratio, a funded debt to EBITDA ratio, a liquidity ratio, a minimum tangible net worth, and it imposes financial limitations. The current revolving credit loan agreement also restricts our ability to pay dividends to the holders of our common stock. At January 1, 2005 we were in compliance with all of these covenants.

In connection with the acquisition of Micro Networks Corporation (“MNC)” in fiscal year 2002, we entered into a revolving credit and term loan facility dated December 31, 2001, which would have terminated December 31, 2004. The facility enabled us to draw down $45.0 million under the term loan and $10.0 million under the revolving credit facility. At our option, the interest rate under the term loan was either (1) an annual base rate, which is the higher of (i) a rate of interest announced from time to time by the lenders’ administrative agent as the base rate (“Base Rate”) or (ii) the sum of the federal funds rate plus 0.5% per annum or (2) London Interbank Offer Rate (“LIBOR”) plus 1.75%. At our option, the interest rate under the revolving credit facility was either (1) the Base Rate or (2) the LIBOR Rate plus a pre-formulated margin. During the first quarter of fiscal year 2004, we paid down $4.2 million of the term loan. During the second quarter of fiscal 2004, we made the final payment of $5.8 million on our term loan. This loan agreement was terminated in the third quarter of fiscal year 2004.

(6) RESTRUCTURING COST

On January 4, 2002, we acquired Micro Networks Corporation (“MNC”) for $74.9 million, net of cash acquired. We acquired MNC to gain access to technology that we believe will enhance the performance of our silicon timing products, strengthening our position within existing strategic markets such as servers and storage systems. In connection with the acquisition of MNC, we put in place a restructuring plan for the purpose of making MNC more efficient by reducing the workforce, combining facilities and moving some manufacturing operations offshore, which is still in process. The purchase price includes $5.6 million in purchase accounting liabilities and write-down of fixed assets.

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From the date of the acquisition until the end of fiscal 2004, one plant in Bloomfield, CT was shut down and the fixed assets associated were disposed of. Sixty-four manufacturing personnel, both line and management, were laid off. In addition we planned to move the assembly process to offshore plants. During fiscal year 2004, goodwill was adjusted due to the reversal of a portion of the restructuring reserve. As of January 1, 2005 the restructuring reserve has been fully utilized.

The following table summarizes the activity of the restructuring reserve since inception:

(in thousands)	Original Plan Date 1/2002		Utilization 2002		Balance 6/2002		Utilization 2003		Balance 6/2003		Utilization 2004		Adjustments 2004			Balance 6/2004		Utilization 2005		Balance 1/2005
Plant Closing Costs	$	1,214	$	27	$	1,187	$	472	$	715	$	420	$	223		$	72	$	72	$	—
Personnel Costs		2,017		437		1,580		1,151		429		496		(67	)		—		—		—
Write-down of Fixed Assets		2,407		—		—		—		—		—		—			—		—		—
Total	$	5,638	$	464	$	2,767	$	1,623	$	1,144	$	916	$	156		$	72	$	72	$	—

(7) CAPITAL STOCK

In September 2001, we announced a share repurchase program, which authorized the purchase, from time to time, of 2.0 million shares of our common stock on the open market. In October 2002, we announced that our Board of Directors approved an increase in the number of shares to be repurchased under this repurchase program to 3.0 million. In October 2004, our Board of Directors approved an additional increase in the number of shares to be repurchased under the repurchase program by 2.0 million shares for a total of 5.0 million shares authorized for repurchase. As of January 1, 2005, we had repurchased 2.8 million shares for $60.4 million. There are 2.2 million shares available for repurchase.

As of January 1, 2005, additional paid in capital increased $5.6 million from the July 3, 2004 balance as the result of the exercise of stock options, the tax benefit relating to the exercises of non-qualified stock options, the purchase of our stock by employees in our stock purchase plan, and restricted stock grants.

On August 5, 2004 we issued restricted stock to certain employees. The issuance of this restricted stock resulted in deferred compensation of $0.9 million in the first quarter of fiscal 2005. The deferred compensation is amortized over four years. The amortization of deferred compensation is $0.1 million through the second quarter of fiscal 2005.

(8) INDUSTRY AND SEGMENT INFORMATION

Factors used in determining the reportable business segments include the nature of operating activities, existence of separate senior management teams and the type of information presented to the company’s chief operating decision maker to evaluate all results of operations.

We operate and track our results in one operating segment. We design, develop and sell silicon timing devices for

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various electronics applications. The nature of our products and operating activities, as well as selling methods, is consistent among all of our products. We have one senior management team and the information is presented to the company’s chief operating decision maker to evaluate all results as one operating segment. All of our products are similar because they are sold for the purpose of sequencing and synchronizing electronic operations. Over 90% of the products are integrated circuits. Less than 10% of the products are based on surface acoustic wave technology.

(9) NET INCOME PER SHARE

Basic net income per share is based on the weighted-average number of common shares outstanding excluding contingently issuable or returnable shares that contingently convert into common stock upon certain events. Diluted net income per share is based on the weighted average number of common shares outstanding and diluted potential common shares outstanding. For the three months ended January 1, 2005 and December 27, 2003, there were 1.3 million and 0.2 million options outstanding, respectively, that are excluded from the diluted net income per share calculation because their inclusion would have had an antidilutive effect on EPS. For the six months ended January 1, 2005 and December 27, 2003, there were 1.3 million and 0.1 million options outstanding, respectively, that are excluded from the diluted net income per share calculation because their inclusion would have had an antidilutive effect on EPS

The following table sets forth the computation of net income (numerator) and shares (denominator) for earnings per share:

	Three Months Ended				Six Months Ended
	January 1, 2005		December 27, 2003		January 1, 2005		December 27, 2003
Numerator (in thousands):
Net income	$	13,980	$	18,652	$	24,129	$	35,933
Denominator (in thousands):
Weighted average shares outstanding used for basic income per share		70,348		70,422		70,306		70,437
Common stock equivalents		1,120		2,460		1,115		2,650
Weighted average shares outstanding used for diluted income per share		71,468		72,882		71,421		73,087

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(10) COMPREHENSIVE INCOME

Total comprehensive income represents net income plus the results of certain equity changes not reflected in the condensed consolidated statements of operations. The components of total comprehensive income are shown below.

	Three Months Ended				Six Months Ended
	January 1, 2005		December 27, 2003		January 1, 2005		December 27, 2003
Net income	$	13,980	$	18,652	$	24,129	$	35,933
Other comprehensive income:
Foreign currency translation		6		4		4		4
Total comprehensive income	$	13,986	$	18,656	$	24,133	$	35,937

(11) INCOME TAX

Our effective income tax rate was 13.6% for the first six months of fiscal year 2005 as compared to 15.8% in the prior year period. The effective tax rate for fiscal years 2005 and 2004 reflects the tax-exempt status of our Singapore operation, which has been given pioneer status, or exemption of taxes on non-passive income, for five years as stated in our agreement with the Economic Development Board of Singapore. The five-year period ends December 31, 2007. The pioneer status is contingent upon ICS meeting certain investment criteria in fixed assets, personnel, and technology. We do not currently calculate deferred taxes on our investment in our Singapore operations, as all undistributed earnings are permanently reinvested back into the Singapore facility. If we were to record deferred taxes on our investment, the amount would be a liability of approximately $77.6 million as of January 1, 2005.

Our projected effective income tax rate for fiscal 2005 does not take into account a new election that is available under the U.S. income tax rules regarding the allocation between U.S. and foreign jurisdictions tax deductions attributable to employee stock option compensation. If we take advantage of this election, it could detrimentally affect our effective income tax rate. We have not yet determined the impact that the election would have on us.

The American Jobs Creation Act of 2004, enacted on October 22, 2004, provides for a special one-time tax deduction on the repatriation of certain foreign earnings to a U.S. taxpayer, provided certain criteria are met. At this time we are still evaluating the effect this act will have on our income tax provision. We expect to complete our evaluation in our fiscal year 2006.

(12) CONTINGENCIES

From time to time, various inquiries, potential claims and charges and litigation (collectively “claims”) are made, asserted or commenced by or against us, principally arising from or related to contractual relations and possible patent infringement. We believe that any such claims currently pending, individually and in aggregate, have been adequately reserved and will not have any material adverse effect in terms of liquidity and in terms of the financial statements as a whole, although no assurance can be made in this regard.

We indemnify certain customers for fees and damages and costs awarded against them in certain circumstances in which our products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. To date, we have not paid or been required to defend any indemnification claims, and accordingly, we have not accrued any amounts for our indemnification obligations. However, there can be no assurances that we will not have any future financial exposure under those indemnification obligations.

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(13) CUSTOMERS

In fiscal year 2001, we entered into an Investment and Stock Trade Agreement (the “Agreement”) with Maxtek Technology Co. Ltd. (“Maxtek”), an international stocking representative in Taiwan and China. We invested in approximately 10% of Maxtek, or 4.0 million shares, at $4.0 million. The Agreement states that if Maxtek fails to successfully complete a public offering by December 5, 2005, we, at our sole option, have the right to demand immediate repurchase of all 4.0 million shares, at the original purchase price plus accrued annual interest (commercial rate set by the Central Bank of China) during the said period.

From December 2002 through August 2003 we sold 3.0 million shares or 75% of our ownership of Maxtek for a total gain of $0.9 million during this period. During the first quarter of fiscal 2004 and in the second quarter of 2005, Maxtek declared stock dividends. As a result of these dividends, our ownership is 1.3 million shares or approximately 2.5% of Maxtek.

Maxtek, our international stocking representative for our PC business in Taiwan and China, represented approximately 24% of our sales for the first six months of fiscal year 2005, and 22% in the prior year period. Additionally, sales to Lacewood International Corp, representing business in Hong Kong and China, and Magic Island International representing business in Korea, entities that are commonly controlled by the owners’ of Maxtek, were approximately 10% and 7% of our sales for the first six months of fiscal year 2005, respectively, and 17% for Lacewood in the prior year period.

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

Forward-Looking Statements

Except for the historical statements and discussions contained herein, statements contained in this Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as when we describe what we believe, expect or anticipate will occur, and other similar statements. You must remember that our expectations may not be correct. While we believe these expectations and projections are reasonable, such forward-looking statements are inherently subject to risks, uncertainties and assumptions about us, including, among other things the following:

• Our dependence on continuous introduction of new products based on the latest technology

• The intensely competitive semiconductor and personal computer component industries

• Our dependence on the personal computer industry and third-party silicon wafer fabricators and assemblers of semiconductors

• Risks associated with international business activities and acquisitions and integration of acquired companies or product lines

• Our dependence on proprietary information, technology and key personnel

• Our product liability exposure and the potential unavailability of insurance

• General economic conditions, including economic conditions related to the semiconductor and personal computer industries

We do not guarantee that the transactions and events described in this Form 10-Q will happen as described or that they will happen at all. You should read this Form 10-Q completely and with the understanding that actual future results may be materially different from what we expect. We disclaim any intention or obligation to update these forward-looking statements, even though our situation will change in the future.

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Executive Summary

We design, develop and market silicon timing devices that emit timing signals used to sequence and synchronize electronic operations to ensure that information is interpreted at the right time and speed. Our silicon timing devices are used in computing systems, such as PCs, workstations, disk drives and printers, as well as in a wide range of digital consumer products, such as digital set-top boxes, HDTVs, games consoles, digital audio and imaging products and video game consoles. Increasingly, our silicon timing devices are also being used in products within the communications infrastructure industry, including Internet backbone, access and networking equipment, such as optical switches, routers, cable and DSL modems, servers and storage area networks. All digital devices require a timing signal and those with any degree of complexity require silicon timing devices to time and synchronize their various operations. Additionally, we now offer surface acoustic wave (“SAW”) technology to develop high performance products for optical networking and wireless infrastructure markets.

We market our products through a direct sales force that manages a worldwide network of independent sales representatives, international stocking representatives and distributors. We direct our sales efforts through offices in Norristown, PA, San Jose, CA, Worcester, MA, Taipei, Taiwan, Tokyo, Japan, Seoul, Korea and throughout Europe.

We qualify and utilize third party suppliers for the manufacture of silicon wafers. Most of our wafers currently are manufactured by outside suppliers, two of which supply the substantial majority of our wafers. The manufactured wafers are packaged primarily at three assemblers. We typically agree upon production schedules with our suppliers based on order backlog and demand forecasts for the approaching three-month period.

In addition we have production facilities in Worcester, MA and Auburn, NY. Worcester is our SAW wafer fabrication facility with sub-micron capabilities. Our Auburn facility houses the personnel for testing and assembly for the majority of our military and defense products. Low volume assembly is performed in-house while high volume is subcontracted out to offshore manufacturers.

We have our own test and drop-ship facility in Singapore’s Kolam Ayer Industrial Park to achieve faster delivery of our products to customers throughout the world. The Singapore facility handles wafer probe and final testing for various integrated circuits used in personal computers, data storage devices and other peripheral applications.

Prices for our products are predominantly a function of their position in the product life cycle, design complexity, competitive environment, the price of alternative solutions such as crystal oscillators and overall market demand. We recognize revenue upon transfer of title, and substantially all of our sales are made on the basis of purchase orders rather than long-term agreements.

During the first quarter we acquired assets and formed the Video Business Unit. This purchase gives us the capability to develop a family of high performance mixed signal products for the high definition and digital video/imaging market.

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Results of Operations

The following table sets forth, for the periods indicated, the percentage relationship to revenue of certain cost, expense and income items. The table and the subsequent discussion should be read in conjunction with the financial statements and the notes thereto.

	Three Months Ended				Six Months Ended
	Jan. 1, 2005		Dec. 27, 2003		Jan. 1, 2005		Dec. 27, 2003
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Gross margin	58.3		59.6		58.9		59.6
Research and development	15.5		14.4		15.5		14.4
Amortization of Video research and development costs	—		—		5.6		—
Selling, general and administrative	15.7		13.1		15.4		13.6
Amortization of intangibles	1.8		0.8		1.6		0.8
Operating income	25.3		31.3		20.8		30.8
Interest and other income	1.4		0.7		1.2		1.0
Interest expense	(0.0	)	(0.1	)	(0.0	)	(0.2	)
Income before income taxes	26.7		31.9		22.0		31.6
Income taxes	3.6		5.1		3.0		5.0
Net income	23.1	%	26.8	%	19.0	%	26.6	%

SECOND QUARTER FISCAL YEAR 2005 AS COMPARED TO SECOND QUARTER FISCAL YEAR 2004

Revenue. Revenue was $60.6 million for the second quarter ended January 1, 2005, a decrease of $8.9 million from the prior year quarter. Demand in our communication end markets declined during the second half of calendar 2004 due to weak market conditions resulting in revenue decline of $4.3 million year over year. Our military revenue, which is included in “Other” end market listed below, also declined as some of the older programs have slowed. Our average selling price for our products decreased 1.7%, and the volume also decreased by 11.4% compared to prior year quarter.

The following is a summary of revenue percentages by end market:

	Three Months Ended
	Jan. 1, 2005		Dec. 27, 2003		Year over Year Revenue Growth
PC	48	%	46	%	-8	%
Digital Consumer	16	%	13	%	3	%
Communications	30	%	32	%	-19	%
Other	6	%	9	%	-40	%

Foreign revenue, which includes shipments of products to foreign companies as well as offshore subsidiaries of US multinational companies, was 74.0% of total revenue for the second quarter of fiscal year 2005 as compared to 78.0% of total revenue in the prior year quarter. Our sales are denominated in U.S. dollars, which minimizes foreign currency risk.

Gross Margin. Gross margin represents net revenue less cost of sales. Cost of sales includes the cost of purchasing the finished silicon wafers manufactured by independent foundries, costs associated with assembly, packaging, testing, quality assurance, product yields and the cost of personnel and equipment associated with manufacturing support. Cost of sales was $25.3 million for the quarter ended January 1, 2005, a decrease of $2.8 million from the prior year quarter,

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due to a decrease in units shipped as a result of the decline in the semiconductor industry. Cost of sales as a percentage of total revenue was 41.7% for the second quarter of fiscal year 2005 and 40.4% the prior year quarter. This translates to gross margin as a percentage of total revenue of 58.3% for the second quarter of fiscal year 2005 and 59.6% in the prior year quarter.

Research and Development Expense. Research and development (“R&D”) expense was $9.4 million for the second quarter of fiscal year 2005, a decrease of $0.6 million from the prior year quarter. We continue to invest in R&D through the hiring of additional personnel which resulted in an increase in compensation expense of $0.6 million. However, this increase is offset by a decrease in variable compensation expense in the second quarter of fiscal 2005 of $1.0 million and other controllable expenses of $0.2 million. As a percentage of revenue, R&D increased to 15.5% in the second quarter of fiscal year 2005 as compared to 14.4% in the prior year period.

R&D costs consist primarily of the salaries and related expenses of engineering employees engaged in research, design and development activities, costs related to design tools, supplies and services and facilities’ expenses. The level of research and development expenditures as a percentage of net revenues will vary from period to period, depending, in part, on the level of net revenues and, in part, on our success in recruiting the technical personnel needed for our new product introductions and process development. We continuously attempt to control expense levels in all areas including research and development. However, we continue to make substantial investments in research and development to enhance our product offerings, which in turn are critical to our future growth.

Selling, General and Administrative. Selling, general and administrative expense (“SG&A”) was $9.5 million for the second quarter of fiscal year 2005, an increase of $0.4 million from the prior year quarter. Selling expense increased $1.2 million in the second quarter of fiscal year 2005 as compared to the prior year period, which is attributable to an increase in commission expense due to a change in our commission rate structure. This increase was offset by a decrease in G&A of $0.6 million related to a decrease in bad debt expense and variable compensation and a decrease in deferred compensation of $0.2 million. As a percentage of total revenue, SG&A expenses increased to 15.7% in the second quarter of fiscal year 2005 as compared to 13.1% in the prior year quarter. SG&A expenses consist mainly of salaries and related expenses, sales commissions and professional and legal fees.

Included in SG&A in fiscal 2005 is the amortization of deferred compensation for restricted stock issued in the first quarter of fiscal 2005. Included in SG&A in fiscal 2004 is the amortization of deferred compensation for options issued in fiscal 2002 below fair market value. The amortization of deferred compensation is $60,000 in the second quarter of fiscal 2005 as compared to $0.2 million in the second quarter of fiscal 2004.

Amortization of Intangibles. Amortization of intangibles was $1.1 million for the second quarter of fiscal year 2005 as compared to $0.6 million in the prior year quarter. Intangibles consist of assets acquired in connection with the acquisition of MNC and assets acquired for the Video business unit. The increase is due to the additional amortization of intangible assets related to the acquisition of assets for the Video business unit which occurred in the first quarter of fiscal 2005.

Operating Income. In dollar terms, operating income was $15.3 million in the second quarter of fiscal year 2005 compared to $21.8 million in the second quarter of fiscal year 2004. Expressed as a percentage of revenue, operating income was 25.3% and 31.3% in the second quarter of fiscal year 2005 and the prior year quarter, respectively.

Interest Expense. Interest expense was $15,000 in the second quarter of fiscal year 2005 and $0.1 million in the second quarter of fiscal year 2004. This decrease is due to acceleration of financing fees in the second quarter of fiscal year 2004.

Interest and Other Income. Interest and other income was $0.9 million for the quarter ended January 1, 2005 and $0.5 million in the prior year quarter due to an increase in cash invested.

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Income Tax Expense. Our effective income tax rate was 13.6% for the second quarter of fiscal year 2005 as compared to 15.9% in the prior year period. The effective tax rate for fiscal years 2005 and 2004 reflects the tax-exempt status of our Singapore operation, which has been given pioneer status, or exemption of taxes on non-passive income, for five years as stated in our agreement with the Economic Development Board of Singapore. The five-year period ends December 31, 2007. We do not currently calculate deferred taxes on our investment in our Singapore operations, as all undistributed earnings are permanently reinvested back into the Singapore facility. If we were to record deferred taxes on our investment, the amount would be a $77.6 million liability as of January 1, 2005.

SIX MONTHS ENDED JANUARY 1, 2005 AS COMPARED TO SIX MONTHS ENDED DECEMBER 27, 2003

Revenue. Revenue was $126.7 million for the first half of fiscal year 2005, a decrease of $8.1 million from the corresponding prior year period. The decrease is attributable to a decline in volume and average selling price in sales of our PC end markets, due to inventory in the channel for the Christmas season. Our military revenue also declined as some of the older programs have slowed. Our average selling price for our products decreased 2.2% and the volume decreased 3.9%.

The following is a summary of revenue percentages by end market:

	Six Months Ended
	Jan. 1, 2005		Dec. 27, 2003		Year over Year Revenue Growth
PC	46	%	46	%	-7	%
Digital Consumer	16	%	14	%	6	%
Communications	32	%	31	%	-1	%
Other	6	%	9	%	-39	%

Foreign revenue, which includes shipments of products to foreign companies as well as offshore subsidiaries of US multinational companies, was 74.3% of total revenue for the first six months of fiscal year 2005 as compared to 76.4% of total revenue in the prior year period. Our sales are denominated in U.S. dollars, which minimizes foreign currency risk.

Gross Margin. Gross margin represents net revenue less cost of sales. Cost of sales includes the cost of purchasing the finished silicon wafers manufactured by independent foundries, costs associated with assembly, packaging, testing, quality assurance, product yields and the cost of personnel and equipment associated with manufacturing support. Cost of sales was $52.0 million for the first half of fiscal year 2005, a decrease of $2.5 million from the prior year period because of lower unit shipments. Cost of sales as a percentage of total revenue was 41.1% for the first half of fiscal year 2005 as compared to 40.4% in the prior year period. This translates to gross margin of 58.9% for the first half of fiscal year 2005 as compared to 59.6% in the prior year period.

Research and Development Expense. R&D expense was $26.7 million for the first half of fiscal year 2005, an increase of $7.3 million from the prior year period. This increase is due to the amortization of $7.1 million for assets with a short useful life related to the purchase of assets for the Video business unit. Excluding this charge, R&D expense increased $0.2 million in the first half of fiscal year 2005 as compared to the prior year period. As a result of the hiring of additional personnel compensation expense increased $1.2 million but was offset by a decrease in variable compensation of $1.1 million and other controllable expenses of $0.1 million in the first half of fiscal year 2005. As a percentage of revenue, R&D increased to 21.0% in the first half of fiscal year 2005 as compared to 14.3% in the prior year period. Excluding the amortization of Video business unit assets, R&D increased to 15.5% as a percentage of revenue in the first half of fiscal 2005.

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R&D costs consist primarily of the salaries and related expenses of engineering employees engaged in research, design and development activities, costs related to design tools, supplies and services and facilities expenses. The level of research and development expenditures as a percentage of net revenues will vary from period to period, depending, in part, on the level of net revenues and, in part, on our success in recruiting the technical personnel needed for our new product introductions and process development. We continuously attempt to control expense levels in all areas including research and development. However, we continue to make substantial investments in research and development to enhance our product offerings, which in turn are critical to our future growth.

Selling, General and Administrative. Selling, general, administrative and other expense (“SG&A”) was $19.6 million for the first half of fiscal year 2005, an increase of $1.3 million from the prior year period. The increase is attributable to legal and consulting fees of $0.6 million related to the acquisition of assets for the Video business unit, an increase in commission expense of $1.1 million, and an increase in consulting fees related to our Sarbanes-Oxley compliance of $0.2 million, offset by a decrease in deferred compensation of $0.4 million and a decrease in other controllable expenses of $0.2 million. The increase in sales commission expense is due to a change in our commission rate structure. As a percentage of total revenue, SG&A expenses increased to 15.4% in the first half of fiscal year 2005 as compared to 13.6% in the prior year period. The percentage increase is attributable to the decrease in revenue from the prior year period. SG&A expenses consist mainly of salaries and related expenses, sales commissions and professional and legal fees.

Included in SG&A in fiscal 2005 is the amortization of deferred compensation for restricted stock issued in the first quarter of fiscal 2005. Included in SG&A in fiscal 2004 is the amortization of deferred compensation for options issued in fiscal 2002 below fair market value. The amortization of deferred compensation is $0.1 million in the first half of fiscal 2005 as compared to $0.5 million in the fiscal 2004 period.

Amortization of Intangibles. Amortization of intangibles was $2.0 million for the first six months of fiscal year 2005 as compared to $1.2 million in the prior year corresponding period. Intangibles consist of assets acquired in connection with the acquisition of MNC and assets acquired for the Video business unit. The increase is due to the additional amortization of intangible assets related to the acquisition of assets for the Video business unit which occurred in the first quarter of fiscal 2005.

Operating Income. In dollar terms, operating income was $26.4 million in the first half of fiscal year 2005 compared to $41.6 million in the prior year period. Expressed as a percentage of revenue, operating income was 20.8% and 30.8% for the first six months of fiscal year 2005 and the prior year period, respectively.

Interest Expense. Interest expense was $30,000 in the first half of fiscal year 2005 and $0.2 million in the prior year period. This decrease is due to acceleration of financing fees in the first half of fiscal year 2004.

Interest and Other Income. Interest and other income was $1.6 million for the first half of fiscal year 2005 and $1.3 million in the prior year period. Included in other income for the first six months of fiscal 2004 is a gain of $0.3 million as a result of the sale of 25% of our investment in Maxtek Technology Co. Ltd.

Income Tax Expense. Our effective income tax rate was 13.6% for the first half of fiscal year 2005 as compared to 15.8% in the prior year period. The effective tax rate for fiscal years 2005 and 2004 reflects the tax-exempt status of our Singapore operation, which has been given pioneer status, or exemption of taxes on non-passive income, for five years as stated in our agreement with the Economic Development Board of Singapore. The five-year period ends December 31, 2007. The increase in overall tax rate was directly attributable to increased income in our USA locations relative to our total operations. We do not currently calculate deferred taxes on our investment in our Singapore operations, as all undistributed earnings are permanently reinvested back into the Singapore facility. If we were to record deferred taxes on our investment, the amount would be a $77.6 million liability as of January 1, 2005.

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INDUSTRY FACTORS

Our strategy has been to develop new products and introduce them ahead of the competition in order to have them selected for design into products of leading OEMs. Our newer components, which include advanced motherboard FTG components, data communication components and memory components, are examples of this strategy. However, there can be no assurance that we will continue to be successful in these efforts or that further competitive pressures would not have a material impact on revenue growth or profitability.

We include customer-released orders in our backlog, which may generally be canceled with 45 days advance notice without significant penalty to the customers. Accordingly, we believe that our backlog, at any time, should not be used as a measure of future revenues.

The semiconductor and personal computer industry, in which we participate, is generally characterized by rapid technological change, intense competitive pressure, and, as a result, products price erosion. Our operating results can be impacted significantly by the introduction of new products, new manufacturing technologies, rapid changes in the demand for products, decreases in the average selling price over the life of a product and our dependence on third-party wafer suppliers. Our operating results are subject to quarterly fluctuations as a result of a number of factors, including competitive pressures on selling prices, availability of wafer supply, fluctuation in yields, changes in the mix of products sold, the timing and success of new product introductions and the scheduling of orders by customers. We believe that our future quarterly operating results may also fluctuate as a result of Company-specific factors, including pricing pressures on our more mature FTG components, continuing demand for our Application Specific Standard Products, acceptance of our newly introduced components and market acceptance of our customers’ products. Due to the effect of these factors on future operations, past performance may be a limited indicator in assessing potential future performance.

LIQUIDITY AND CAPITAL RESOURCES

At January 1, 2005, our principal sources of liquidity included cash and marketable securities of $192.8 million as compared to the July 3, 2004 balance of $195.6 million. Net cash provided by operating activities was $29.0 million in the first six months of fiscal year 2005, as compared to $45.5 million in the prior year period. This decrease is attributable to expenses related to the acquisition of assets for the Video business unit. Our days sales outstanding increased from 58 days at July 3, 2004 to 72 days at January 1, 2005 as a result of back ended shipments during the quarter ending January 1, 2005. Inventory turns decreased from 5.1 times at July 3, 2004 to 4.1 times at January 1, 2005. Inventory is turning slower as demand for our products decreased in the first six months of fiscal year 2005.

Purchases for property and equipment were $5.3 million in the first six months of fiscal year 2005 as the company invested in production capacity and research and development versus $4.4 million in the prior year period.

Purchases of marketable securities were $70.4 million in the first six months of fiscal year 2005 compared to $124.6 million in the prior year period. During this period, we invested more funds in the three to six month ranges.

In fiscal year 2001, we entered into an Investment and Stock Trade Agreement (the “Agreement”) with Maxtek, an international stocking representative in Taiwan and China. We invested in approximately 10% of Maxtek, or 4.0 million shares, at $4.0 million. The Agreement states that if Maxtek fails to successfully complete a public offering by December 5, 2005, we, at our sole option, have the right to demand immediate repurchase of all 4.0 million shares, at the original purchase price plus accrued annual interest (commercial rate set by the Central Bank of China) during the said period.

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From December 2002 through August 2003 we sold 3.0 million shares or 75% of our ownership of Maxtek for a total gain of $0.9 million during this period. During the second quarter of fiscal 2005, Maxtek declared a stock dividend. As a result of this dividend, our ownership is 1.3 million shares or approximately 2.5% of Maxtek.

Maxtek, our international stocking representative for our PC business in Taiwan and China, represented approximately 24% of our sales for the first six months of fiscal year 2005, and 22% in the prior year period. Additionally, sales to Lacewood International Corp, representing business in Hong Kong and China, and Magic Island International representing business in Korea, entities that are commonly controlled by the owners’ of Maxtek, were approximately 10% and 7% of our sales for the first six months of fiscal year 2005, respectively, and 17% for Lacewood in the prior year period.

During the first six months of fiscal 2005, we received $2.8 million from the exercise of stock options.

In September 2001, we announced a stock repurchase program, which authorized the purchase, from time to time, of 2.0 million shares of our common stock on the market. In October 2002, we announced that our Board of Directors approved an increase in the number of shares to be repurchased under this repurchase program to 3.0 million. In October 2004, we announced that our Board of Directors approved an increase in the number of shares to be repurchases by an additional 2.0 million for a total of 5.0 million shares authorized for repurchase. As of January 1, 2005, we had repurchased 2.8 million shares for $60.4 million.

On January 4, 2002, we acquired MNC, net of cash, for $74.9 million. We believe that by acquiring MNC we now have access to technology that will broaden our offering of silicon timing products to strengthen our position within strategic markets such as servers, storage systems and communications. In connection with the acquisition of MNC, we put in place a restructuring plan for the purpose of making MNC more efficient by reducing the work force, combining facilities and moving some manufacturing operations offshore, which is still in process. The purchase price included $5.6 million in purchase accounting liabilities and write-down of fixed assets.

From the date of the acquisition until the end of fiscal 2004, one plant in Bloomfield, CT was shut down and the fixed assets associated were disposed of. Sixty-four manufacturing personnel, both line and management, were laid off. In addition we planned to move the assembly process to offshore plants.

The following table summarizes the activity of the restructuring reserve since inception:

(in thousands)	Original Plan Date 1/2002		Utilization 2002		Balance 6/2002		Utilization 2003		Balance 6/2003		Utilization 2004		Adjustments 2004			Balance 6/2004		Utilization 2005		Balance 1/2005
Plant Closing Costs	$	1,214	$	27	$	1,187	$	472	$	715	$	420	$	223		$	72	$	72	$	—
Personnel Costs		2,017		437		1,580		1,151		429		496		(67	)		—		—		—
Write-down of Fixed Assets		2,407		—		—		—		—		—		—			—		—		—
Total	$	5,638	$	464	$	2,767	$	1,623	$	1,144	$	916	$	156		$	72	$	72	$	—

During fiscal year 2004, goodwill was adjusted due to the reversal of a portion of the restructuring reserve. The results of MNC have been included in the consolidated financial statements since the acquisition date.

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On March 1, 2004 we entered into a revolving credit loan agreement, which will terminate March 1, 2007. The revolving credit loan agreement allows us to draw down to a maximum balance of $20.0 million in increments of not less than $500,000. At our option, the unpaid balance shall bear interest at the available LIBOR Based Rate (as defined) or the Prime Based Rate (as defined). A commitment fee on the average daily-unused portion of the revolving credit loan balance will be due and payable on a quarterly basis. The commitment fee will be between .20% (.0020) and .25% (.0025) based on the funded debt to EBITDA ratio calculated the previous quarter. There was no outstanding balance on our revolving credit loan agreement as of January 1, 2005.

Our revolving credit loan agreement requires the maintenance of specified financial ratios, including a fixed charge coverage ratio, a funded debt to EBITDA ratio, a liquidity ratio, a minimum tangible net worth, and imposes financial limitations. In addition, the loan agreement restricts our ability to pay dividends to the holders of our common stock. At January 1, 2005, we were in compliance with the covenants.

Off-Balance Sheet Arrangements

Our purchase obligations consist of purchase commitments with our manufacturers and are based on a six-month rolling forecast. The purchase commitments are utilized to ensure capacity at our various manufacturers.

The following summarizes our significant contractual obligations and commitments as of January 1, 2005 (in thousands):

Contractual Obligations	Total		Less than 1 year		1 – 3 years		4 – 5 years		After 5 years
(in thousands)
Long-Term Debt	$	—	$	—	$	—	$	—	$	—
Operating Leases		11,119		1,473		7,627		1,779		240
Purchase Obligations		18,495		18,495		—		—		—
Total	$	29,614	$	19,968	$	7,627	$	1,779	$	240

Operating leases primarily consist of leased facilities that we utilize in various locations.

We believe that the funds on hand together with funds expected to be generated from our operations as well as borrowings under our bank revolving credit facility will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. Thereafter, we may need to raise additional funds in future periods to fund our operations and potential acquisitions if any. We may also consider conducting future equity or debt financings if we perceive an opportunity to access the capital markets on a favorable basis, within the next twelve months or thereafter. Any such additional financing, if needed, might not be available on reasonable terms or at all. Failure to raise capital when needed could seriously harm our business and results of operations. If additional funds would be raised through the issuance of equity securities or convertible debt securities, the percentage of ownership of our shareholders would be reduced. Furthermore, such equity securities or convertible debt securities might have rights, preferences or privileges senior to our common stock.

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004) – “Share-Based Payment” This standard supercedes APB No. 25, and requires recognition of expense in the financial statements of the cost of share based payment transactions, including stock options, based on the fair value of the award at the grant date. The provisions of this standard are effective for public companies for interim or annual periods beginning after June 15, 2005. We will adopt this statement beginning with our first quarter of fiscal year 2006. At this time we have not determined the transition method that will be used. We are currently evaluating the implementation of this standard and the impact on our calculation of stock option expense. The pro forma provided in

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footnote 1 “Stock Compensation” provides a reasonable estimate of the impact on our financial statements. However, our implementation of this standard based on the new guidelines could vary from the pro forma and have a material impact on our financial position.

In November 2004, the FASB issued SFAS No. 151 – “Inventory Costs – an amendment of ARB No. 43, Chapter 4.” This standard clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Currently this statement does not have an impact on our financial position. However, if in the future we were to experience such abnormal costs such as idle facility expense, handling costs and wasted material it could have a material impact on our operations.

In September 2004, the FASB approved issuance of Staff Position (“FSP”) EITF 03-1-1, “Effective Date of Paragraphs 10 through 20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”). FSP EITF 03-1-1 delays the effective date of paragraphs 10 through 20 of EITF 03-1 as they relate to recognition of other-than-temporary impairment for cost method and marketable investments. This deferral will extend until a Staff Position is issued to provide clarification of the guidance presented in paragraphs 10 through 20. Effective July 4, 2004, we adopted all other provisions of EITF Issue 03-1, including measurement guidance for evaluating whether an impairment has occurred for marketable securities and cost method investments. Adoption of these requirements did not have a material effect on the results of operations. Effective December 31, 2004, additional disclosures were also required for cost method investments. The effect of implementing the final provisions of paragraphs 10 through 20 cannot currently be estimated due to the pending implementation issues, but is not expected to be material to the results of future operations.

On October 22, 2004, the American Jobs Creation Act of 2004 was enacted by President Bush. We are currently evaluating the impact of this new law on our operations and effective tax rate. At this time, we are unable to determine the effects of this new law and will continue to analyze its potential impact as guidance is made available.

On October 4, 2004, President George W. Bush signed the “Working Families Tax Relief Act of 2004”, which retroactively reinstated the research tax credit to the June 30, 2004 expiration date. This change in the law will not have a material impact on the results of future operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exposures. Our sales are denominated in U.S. dollars and accordingly, we do not use forward exchange contracts to hedge exposures denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. The effect of an immediate 10% change in exchange rates would not have a material impact on our future operating results or cash flows.

The company had interest expense of $30,000 for the first six months of fiscal year 2005 and consists of the commitment fee for our revolving credit loan agreement. We had no outstanding debt during the second quarter of fiscal year 2005; therefore, there is no potential increase in interest expense for the first six months of fiscal year 2005 from hypothetical 2% adverse change in variable interest rates.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of January 1, 2005, the Company’s president, chief executive officer and chief financial officer (principal executive officer and principal financial officer) have concluded that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and are operating in an effective manner.

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As of January 1, 2005, we are continuing our assessment of the effectiveness of our internal control procedures related to information systems access controls, financial reporting and certain entity-wide controls related to corporate governance. As of the date of this filing, we have identified and will remediate deficiencies relating to documentation of control procedures. We expect to fully remediate these matters by the end of fiscal year 2005.

Changes in internal controls. There have not been any changes in the Company’s internal controls over financial reporting during the quarter ended January 1, 2005 that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Period	Total # of Shares Purchased	Average Price Paid Per Share		Total # of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum # of Shares that May Yet Be Purchased Under the Plans or Programs
October 3, 2004 To October 30, 2004	25,000	$	22.6821	25,000	2,500,000
October 31, 2004 To November 27, 2004	12,500		22.4764	12,500	2,487,500
November 28, 2004 To January 1, 2005	250,000		21.3174	250,000	2,237,500
Total	287,500	$	21.4864	287,500	2,237,500

(1) These shares were repurchased in open-market transactions pursuant to a stock repurchase program announced in September 2001. Up to 3.0 million shares of our common stock were authorized for repurchase under the repurchase program. On October 26, 2004 2.0 million additional shares were authorized for repurchase to bring the total amount of shares to 5.0 million. The repurchase program does not have an expiration date.

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

At the Company’s annual meeting of stockholders held October 28, 2004, the stockholders of the Company elected three directors of the Company.

Mr. Lewis C. Eggebrecht, Mr. Henry I. Boreen and Mr. David Dominik were elected to serve as directors at the meeting. The voting results were 64,633,301 shares in favor and 1,798,891 shares abstained for Mr. Eggebrecht, 39,617,988 shares in favor and 26,814,204 shares abstained for Mr. Boreen and 65,218,793 shares in favor and 1,213,399 shares abstained for Mr. Dominik.

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Item 6. Exhibits

(a) The following is a list of exhibits filed as part of the Form 10-Q:

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Hock E. Tan
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Justine F. Lien

24

SIGNATURES

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

	INTEGRATED CIRCUIT SYSTEMS, INC.
Date: February 10, 2005	By:	/s/ Hock E. Tan
		Hock E. Tan
		President and Chief Executive Officer
Date: February 10, 2005	By:	/s/ Justine F. Lien
		Justine F. Lien
		Vice President, Finance and Chief Financial Officer
		(Principal financial & accounting officer)

25

EXHIBIT INDEX

Number	Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Hock E. Tan
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Justine F. Lien

26

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF

INTEGRATED CIRCUIT SYSTEMS, INC.

PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Hock E. Tan, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Integrated Circuit Systems, Inc.

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) [Intentionally omitted pursuant to transition reporting permitted under SEC Release No 33-8238];

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 10, 2005	/s/ Hock E. Tan
	Hock E. Tan
	President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER OF

INTEGRATED CIRCUIT SYSTEMS, INC.

PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Justine F. Lien, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Integrated Circuit Systems, Inc.

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) [Intentionally omitted pursuant to transition reporting permitted under SEC Release No 33-8238];

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 10, 2005	/s/ Justine F. Lien
	Justine F. Lien
	Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Integrated Circuit Systems, Inc. (the “Company”) for the period ending January 1, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Hock E. Tan, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Hock E. Tan

Hock E. Tan

Chief Executive Officer

February 10, 2005

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Integrated Circuit Systems, Inc. (the “Company”) on Form 10-Q for the period ending January 1, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Justine F. Lien, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Justine F. Lien

Justine F. Lien

Chief Financial Officer

February 10, 2005