~~Table~~SECURITIES ofAND ~~Contents~~EXCHANGE COMMISSION

~~SECURITIES~~Washington, ~~AND~~D.C. ~~EXCHANGE~~20549 ~~COMMISSION~~

~~Washington,~~FORM ~~D.C.~~10-K ~~20549~~

~~FORM~~(Mark ~~10-K~~One)

~~(Mark~~x ~~One~~ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

xFor ~~ANNUAL~~the ~~REPORT~~fiscal ~~PURSUANT~~year TOended ~~SECTION~~July 132, OR2005 ~~15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For~~OR ~~the fiscal year ended June 28, 2003~~

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

¨Commission ~~TRANSITION~~file ~~REPORT~~number ~~PURSUANT~~0-19299 ~~TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~Commission~~Integrated ~~file~~Circuit ~~number~~Systems, ~~0-19299~~Inc.

~~Integrated~~(Exact ~~Circuit~~name ~~Systems,~~of ~~Inc.~~registrant as specified in its charter)

(Exact name of registrant as specified in its charter)

Pennsylvania

23-2000174

(State or other jurisdiction of

Incorporation or organization)

(I.R.S. Employer

Identification No.)

Pennsylvania		23-2000174
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)
2435 Boulevard of the Generals, Norristown, Pennsylvania		19403
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (610) 630-5300

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

(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

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

OnIndicate ~~September~~by 6,check ~~2003,~~mark ~~the~~whether ~~aggregate market value of~~ the registrant’s ~~Common~~is ~~Stock~~a ~~held~~shell bycompany ~~non-affiliates~~(as defined ofin the ~~registrant~~Exchange ~~was~~Act ~~approximately~~Rule $12b-2~~,461,000,000~~).~~00.~~ Yes ¨ No x

AsOn ofJanuary ~~September 6~~1, ~~2003~~2005, ~~there~~the ~~were~~aggregate ~~71,870,404~~market ~~shares~~ value of the registrant’s Common Stock held by non-affiliates of the registrant was approximately $1,467,000,000.00 based upon the closing sale price of $020.0192 ~~par~~per ~~value,~~share on the NASDAQ National market for that date. Shares of Common Stock held by each executive 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 affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

~~Table~~As of ~~Contents~~September 1, 2005, there were 70,252,312 shares of Common Stock, $0.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain statements contained in the Company’s ~~Definitive~~Joint Proxy Statement/Prospectus ~~for~~filed ~~the~~by ~~2003~~Integrated ~~Annual~~Device ~~Meeting~~Technology, ~~of Shareholders~~Inc. ~~(the~~on ~~“Definitive~~July ~~Proxy~~22, ~~Statement”)~~2005 are incorporated by reference into Part III of this Form 10-K.

2The Index to Exhibits can be found on page 72 of this Form 10-K.

~~Table~~PART ofI ~~Contents~~

~~PART~~Item I1. BUSINESS

~~Item~~General ~~1. BUSINESS~~

~~General~~Integrated Circuit Systems, Inc. (“ICS” or the “Company”) was incorporated in Pennsylvania in 1976, and began by designing and marketing custom application specific integrated circuits (“ASICs”) for various industrial customers. In particular, we were noted for our unique expertise in designing ASICs, which combined both analog and digital, or “mixed-signal”, technology. By 1988, we had adopted a strategy of developing proprietary integrated circuits (“ICs”) to capitalize on our complex mixed-signal design technology and pioneered the market for frequency timing generators or silicon timing devices which provide the timing signals or “clocks” necessary to synchronize high performance electronic systems. Clocks replaced the multiple crystal oscillators and other peripheral circuitry previously used to generate and synchronize timing signals, thus providing savings in board space, power consumption and cost. Our clock products were initially used in video graphics applications in personal computers (“PCs”), but subsequently expanded to include motherboards, PC peripheral devices such as disk drives, audio cards, laser printers and other digital consumer electronics such as digital set-top boxes and games consoles. We further extended into communications, which needs high performance clocking solutions supporting networking, telecommunication, workstation and server applications. Additionally, we now offer surface acoustic wave (“SAW”) technology to develop high performance products for telecommunications and wireless infrastructure markets.

~~Integrated~~Our ~~Circuit Systems, Inc. was incorporated in Pennsylvania in 1976, and began by designing and marketing custom application specific integrated circuits (~~“~~ASICs~~first”) ~~for~~initial ~~various~~public ~~industrial~~offering ~~customers.~~of Incommon ~~particular,~~stock weoccurred ~~were noted for our unique expertise~~ in ~~designing~~June ~~ASICs~~1991, at which ~~combined~~time ~~both~~our ~~analog~~common ~~and~~stock ~~digital,~~commenced ortrading ~~“mixed-signal”, technology. By 1988, we had adopted a strategy of developing proprietary integrated circuits (“ICs”) to capitalize~~ on ~~our~~ ~~complex mixed-signal design technology and pioneered~~ the Nasdaq ~~market~~National ~~for~~Market ~~frequency~~under ~~timing generators or silicon timing devices which provide~~ the ~~timing~~symbol ~~signals or “clocks” necessary to synchronize high performance electronic systems~~ICST. Clocks replaced the multiple crystal oscillators and other peripheral circuitry previously used to generate and synchronize timing signals, thus providing savings in board space, power consumption and cost. Our clock products were initially used in video graphics applications in personal computers (“PCs”), but subsequently expanded to include motherboards, PC peripheral devices such as disk drives, audio cards, laser printers and other digital consumer electronics such as digital set-top boxes and games consoles. We further extended into communications, which needs high performance clocking solutions supporting networking, telecommunication, workstation and server applications. Additionally, we now offer surface acoustic wave (“SAW”) technology to develop high performance products for telecommunications and wireless infrastructure markets.

~~Our~~On May 11, 1999, we merged with ICS Merger Corp., a transitory merger company formed and wholly owned by the affiliates of Bain Capital, LLC and Bear, Stearns and Company Inc. We refer to this event as the “~~first~~recapitalization.” ~~initial~~We ~~public~~issued ~~offering~~$100.0 million in aggregate principal amount of ~~common~~senior ~~stock~~subordinated ~~occurred~~notes inand ~~June~~entered ~~1991,~~into ata ~~which~~$95.0 ~~time~~million ~~our~~senior credit facility in connection with the recapitalization. Our common stock ~~commenced~~was ~~trading~~no longer traded on the Nasdaq National Market. ~~under~~We no longer filed periodic reports with the ~~symbol~~Securities ~~ICST~~and Exchange Commission until we filed the registration statement filed in connection with the exchange offer for the senior subordinated notes in October 1999.

On May 1122, ~~1999~~2000, we ~~merged~~completed ~~with~~our ~~ICS~~“second” ~~Merger~~initial ~~Corp.,~~public ~~a transitory~~offering ~~merger company formed and wholly owned by the affiliates~~ of ~~Bain Capital, LLC and Bear, Stearns and Company Inc~~12.5 ~~We refer to this event as the recapitalization. We issued $100.0~~ million inshares ~~aggregate principal amount~~ of ~~senior~~our ~~subordinated notes~~common ~~and entered into a $95~~stock.0 ~~million~~We ~~senior~~used ~~credit facility in connection with~~ the ~~recapitalization.~~net proceeds ~~Our~~of ~~common~~this ~~stock~~initial ~~was~~offering noto ~~longer~~repay ~~traded~~our onbank ~~the~~debt, ~~Nasdaq~~close ~~National~~our ~~Market.~~tender Weoffer nofor ~~longer~~subordinated ~~filed~~notes, ~~periodic~~and ~~reports~~pay ~~with~~ the ~~Securities~~fees and ~~Exchange Commission~~expenses ~~until~~associated ~~we filed the registration statement filed in connection~~ with the ~~exchange offer for the senior subordinated notes in October 1999~~offering.

On May 2231, ~~2000~~2001, wea ~~completed~~secondary ~~our~~offering ~~“second”~~took ~~initial~~place, ~~public~~in ~~offering~~which certain shareholders of 12the Company sold 11.53 million shares of our common stock~~. We used the net proceeds of this initial offering~~ to ~~repay~~the ~~our~~public. ~~bank~~We ~~debt,~~did ~~close~~not ~~our~~receive ~~tender~~any ~~offer~~of ~~for~~the ~~subordinated~~proceeds ~~notes,~~from ~~and pay~~ the ~~fees~~sale ~~and~~of ~~expenses~~the ~~associated~~shares ~~with~~in ~~the~~this secondary offering.

On ~~May~~January 314, ~~2001~~2002 we acquired Micro Networks Corporation (“MNC”) for $74.9 million, net of cash acquired. MNC is a ~~secondary~~supplier ~~offering~~of ~~took~~a ~~place~~broad range of precision electronic devices and modules for optical networking wireless and broadband infrastructure, inhigh-end ~~which~~network ~~certain~~servers ~~shareholders~~and ofdefense electronic markets. We believe that by acquiring MNC we now have access to technology that will enhance the ~~Company~~performance ~~sold~~of 11our silicon timing products in order to strengthen our position within existing strategic markets such as servers and storage systems.3 The purchase price included $5.6 million ~~shares~~in purchase accounting liabilities and write-down of certain fixed assets related to our ~~common~~preliminary ~~stock~~plan to restructure the ~~public~~activities of MNC. WeMNC ~~did~~received ~~not receive~~a ~~any~~$2.5 million income tax refund during fiscal year 2003 and as a result goodwill was adjusted. Goodwill was reduced $1.2 million in fiscal 2004 as a result of the ~~proceeds~~reversal ~~from~~of ~~the~~a ~~sale~~portion of the restructuring ~~shares~~reserve. The results of MNC have been included in ~~this~~the ~~secondary~~consolidated ~~offering~~financial statements since the acquisition date.

On January 4, 2002 we acquired Micro Networks Corporation (“MNC”) for $74.9 million, net of cash acquired. MNC is a supplier of a broad range of precision electronic devices and modules for optical networking wireless and broadband infrastructure, high-end network servers and defense electronic markets. We believe that by acquiring MNC we now have access to technology, that will enhance the performance of our silicon timing products in order to strengthen our position within existing strategic markets such as servers and storage systems. The purchase price includes $5.6 million in purchase accounting liabilities and write-down of certain fixed assets related to our preliminary plan to restructure the activities of MNC. MNC received a $2.5 ~~million income tax refund during fiscal year 2003 and as a~~

On June 15, 2005, we entered into a merger agreement with Integrated Device Technologies, Inc., a Delaware corporation (“IDT”), and Colonial Merger Sub I, Inc., a wholly-owned subsidiary of IDT (“Merger Sub”). The merger agreement, a copy of which was filed as an exhibit to a Current Report on form 8-K on June 17, 2005, provides for the merger of ICS with and into Merger Sub, with Merger Sub continuing as the surviving corporation in the merger and as a wholly-owned subsidiary of IDT (the “Merger”). At the time when the Merger becomes effective, each share of our common stock issued and outstanding immediately prior to the effective time of the Merger will be canceled and converted into the right to receive $7.25 in cash and 1.3 shares of common stock of IDT. Based on the number of shares of ICS common stock and IDT common stock outstanding as of July 1, 2005 (assuming the exercise of all outstanding IDT stock options and ICS stock options), immediately after the Merger, the shareholders of IDT immediately before the Merger will own approximately 54% of the outstanding IDT common stock in the aggregate and the shareholders of ICS will own approximately 46% of the outstanding IDT common stock in the aggregate.

~~Table~~The consummation of ~~Contents~~the Merger is subject to the satisfaction or waiver of closing conditions applicable to both IDT and to ICS, including regulatory review and approval by both our shareholders and the stockholders of IDT. ICS and IDT have each called a special meeting of its shareholders to vote on the proposals related to the Merger, which meetings are currently scheduled to occur on September 15, 2005. We hope to complete the Merger by the end of the third quarter of calendar year 2005.

~~result~~The ~~goodwill~~merger ~~was~~agreement ~~adjusted~~also includes other terms related to the Merger, including representations, warranties and covenants of both ICS and IDT. IDT has filed a registration statement on Form S-4 containing a joint proxy statement/prospectus relating to the Merger and we have filed that joint proxy statement/prospectus under cover of Schedule 14A. Investors and security holders are urged to read these documents because they contain important information about the Merger, the merger agreement and the other transactions described therein. The ~~results~~foregoing description of ~~MNC~~the ~~have~~Merger ~~been~~and ~~included~~the merger agreement does not purport to be complete and is qualified in ~~the~~its ~~consolidated~~entirety ~~financial~~by ~~statements~~reference ~~since~~to the merger agreement, a copy of which is ~~acquisition~~incorporated ~~date~~herein by reference.

Products and Product ~~Applications~~ Applications

We supply a broad line of timing products for use in PC motherboard and peripheral applications. These silicon timing devices control multiple processes by providing and synchronizing the timing of the computer system, including signals from the video screen, graphics controller, memory, keyboard, microprocessor, disk drives and communication ports.

We also design, develop and market silicon timing devices for other applications such as games consoles, digital set-top boxes, digital cameras, laser printers, flat panel displays and digital TVs. Crystal oscillators have traditionally served the timing requirements of these products. Crystal oscillators are predominately quartz-based crystals that resonate at a single set frequency. In situations where a single clock can replace multiple crystal oscillators, clocks have emerged as both more cost-effective and ~~technologically~~ technologically superior solutions than the crystal-based standard. We view the $43 billion crystal-based oscillator market as a future growth opportunity, as our clock products provide viable alternatives to the present crystal-based standard. Several application segments are leading the conversion from crystal oscillators to silicon timing devices, including, telecom and networking equipment and mass storage systems.

A significant growth area for clocks is communications. As the Internet usage expands, there is a need for increased bandwidth and infrastructure. These increased requirements are driving demands for silicon timing devices.

We3 also sell leading edge mixed-signal (analog and digital) integrated circuits customized to the specific requirements of a broad range of customers and applications. Custom mixed-signal products are used in medical, consumer and industrial applications.

~~Micro~~We ~~Networks’~~also ~~main~~sell ~~frequency~~leading ~~source~~edge ~~product line includes fixed~~mixed-~~frequency~~signal (analog and ~~voltage-controlled~~digital) ~~oscillators,~~integrated ~~phase-locked~~circuits ~~loops,~~customized ~~synthesizers~~to ~~and~~the ~~clock~~specific ~~distribution~~requirements of ~~modules~~a broad range of customers and applications. ~~Our~~Custom ~~SAW~~mixed-~~based~~signal ~~product~~products ~~offerings~~ are ~~narrow~~used ~~and~~in ~~wideband~~medical, ~~bandpass~~consumer and ~~band~~industrial ~~reject~~applications. ~~filters,~~We ~~switched~~are ~~filter~~currently ~~banks~~developing ~~and~~a ~~unity~~line ~~gain modules.~~of ~~SAW~~high ~~technology~~performance ismixed ~~also~~signal ~~used~~products for ~~several~~the ~~oscillator-based~~high ~~products~~definition and digital video/imaging market.

~~Sales~~Our main frequency source product line includes fixed-frequency and ~~Marketing~~voltage-controlled oscillators, phase-locked loops, synthesizers and clock distribution modules. Our SAW-based product offerings are narrow and wideband bandpass and band reject filters, switched filter banks and unity gain modules. SAW technology is also used for several oscillator-based products.

~~We market~~In ~~our~~fiscal ~~products~~year ~~through~~2005, ~~a direct sales force that manages a worldwide network of independent sales representatives and distributors. We direct~~ our ~~sales~~SAW ~~efforts through offices in Norristown, PA, San Jose, CA, Worcester, MA, Taipei, Taiwan, Tokyo, Japan,~~ and ~~Seoul,~~high ~~Korea~~performance ~~and~~mixed ~~throughout~~signal ~~Europe.~~products Wewere ~~currently~~less ~~have more~~ than 1,600 OEM end customers. Maxtek Technology Co. Ltd. and Lacewood Corporation, the latter formerly known as Maxtech Corporation Limited, overseas distributors in China and Taiwan and China and Hong Kong respectively, who are commonly controlled, accounted for 205% ~~and 21%~~ of our ~~fiscal~~total ~~year 2003~~ revenue~~, respectively~~. ~~These international distributors sell to approximately 130 OEM end customers.~~

~~Foreign~~Sales ~~sales are directly conducted by sales representatives~~ and ~~distributors~~Marketing located in the Pacific Rim and Europe, and managed by direct sales staff in the Europe, Taiwan, Korea and Japan sales offices. Foreign sales are denominated in U.S. dollars and are subject to risks common to export activities, including governmental regulation and trade barriers.

We market our products through a direct sales force that manages a worldwide network of independent sales representatives, international stocking representatives and distributors. Our 10 largest OEM end customers accounted for approximately 45% of our total revenue in fiscal year 2005. 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 currently have approximately 1,090 OEM end customers. Maxtek Technology Co. Ltd., Lacewood Corporation (formerly known as Maxtech Corporation Limited), MEC Technology Co., Ltd, Magic Island International, and MEC Tech Singapore Pte Ltd. overseas stocking representatives in China and Taiwan, China and Hong Kong, Taiwan, Korea and Singapore respectively, accounted for 25%, 10%, 7%, 6% and 4% of our fiscal year 2005 revenue, respectively. Maxtek, Lacewood, and Magic Island are under common control. MEC Technology and MEC Tech Singapore are under common control. These international stocking representatives sell to approximately 220 OEM end customers.

~~Table~~For the fiscal years 2005, 2004, and 2003, we generated approximately 74.1%, 76.1% and 75.6% of ~~Contents~~our revenue, respectively, from international markets. These sales were generated primarily from customers in the Pacific Rim region and included sales to foreign corporations, as well as to foreign subsidiaries of U.S. corporations. Certain of our international sales are to customers in the Pacific Rim region, who in turn sell some of their products to North America, Europe and other non-Asian markets. In addition, two of our wafer suppliers and all of our assemblers are located in the Pacific Rim region. Foreign sales are directly conducted by sales representatives and international stocking representatives located in the Pacific Rim and Europe, and managed by direct sales staff in the Europe, Taiwan, Korea and Japan sales offices. Foreign sales are denominated in U.S. dollars and are subject to risks common to export activities, including governmental regulation and trade barriers.

Our backlog includes customer-released orders with firm schedules for shipment within the next twelve months. Generally, these orders may not be canceled without 45 days advance notice. Customer relationships are generally not subject to long-term contracts. Product delivery schedules are frequently revised to reflect changes in customer needs. For these reasons, our backlog at any particular date is not representative of actual sales orfor any succeeding period, and we believe that our backlog is not a meaningful indicator of future events.

Our revenues are subject to fluctuations primarily as a result of competitive pressures on selling prices, changes in the mix of products sold, the timing and success of new product introductions and the scheduling of orders by customers.

We generally warrant that our products will be free from defects in workmanship and materials for a one-year period. ~~Defective~~If ~~products~~the ~~returned~~warranty toterms usare ~~within~~met, ~~the~~defective ~~warranty~~products ~~period~~returned to us are replaced ~~or refunded~~ after a confirming evaluation by our quality control staff. We have not experienced significant warranty claims to date.

~~Manufacturing~~4

WeManufacturing 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.

InWe ~~addition~~qualify weand ~~have~~utilize ~~production~~third ~~facilities~~party insuppliers ~~Worcester,~~for MAthe ~~and~~manufacture ~~Auburn,~~of NYsilicon wafers. ~~Worcester~~Most isof our ~~SAW~~wafers ~~wafer~~currently ~~fabrication~~are ~~facility~~manufactured ~~with~~by ~~sub-micron~~outside ~~capabilities.~~suppliers, ~~Our~~two ~~Auburn~~of ~~facility~~which ~~houses~~supply the ~~personnel~~substantial ~~for~~majority ~~testing~~of ~~and~~our ~~assembly~~wafers. ~~for~~The ~~the~~manufactured ~~majority~~wafers ofare ~~our~~packaged ~~military~~primarily ~~and~~at ~~defense~~three ~~products~~assemblers. ~~Low~~We ~~volume~~typically ~~assembly~~agree isupon ~~performed~~production ~~in-house~~schedules ~~while~~with ~~high~~our ~~volume~~suppliers isbased ~~subcontracted~~on ~~out~~order tobacklog ~~offshore~~and ~~manufacturers.~~demand forecasts for the approaching three-month period.

WeIn addition we have ~~our~~production facilities ~~own~~in ~~test~~Worcester, MA and ~~drop-ship~~Auburn, ~~facility~~NY. inWorcester ~~Singapore’s~~is ~~Kolam~~our ~~Ayer Industrial~~SAW ~~Park~~wafer tofabrication ~~achieve~~facility ~~faster~~with ~~delivery~~sub-micron capabilities, and produces the majority of our military and defense products. toOur ~~customers~~Auburn ~~throughout~~facility houses the ~~world.~~personnel ~~The~~for ~~Singapore~~testing ~~facility~~and assembly ~~handles~~for ~~wafer~~the ~~probe~~rest ~~and~~of ~~final~~our ~~testing~~military ~~for~~and ~~various~~defense ~~integrated~~products. ~~circuits~~Commercial ~~used~~SAW inproduct ~~personal~~is ~~computers~~primarily produced offshore, ~~data~~with ~~storage~~some ~~devices~~low ~~and~~volume ~~other peripheral~~assembly ~~applications~~performed at Worcester.

We ~~believe~~have ~~that adequate capacity will be available to support~~ our ~~manufacturing~~own ~~requirements.~~test ~~Our~~and ~~reliance,~~drop-ship ~~however,~~facility onin ~~multiple,~~Singapore’s ~~offshore,~~Kolam ~~outside~~Ayer ~~subcontractors~~Industrial ~~involves~~Park ~~several~~to ~~risks,~~achieve ~~including~~faster ~~capacity constraints or delays in timely~~ delivery ~~and~~of ~~reduced~~our ~~control~~products ~~over delivery schedules, quality~~to ~~assurance~~customers ~~and~~throughout ~~costs~~the world. WeThe ~~are~~Singapore ~~continuously~~facility ~~seeking~~handles towafer ~~obtain~~probe ~~additional~~and ~~sources~~final oftesting ~~supply~~for ~~and~~various ~~capacity~~integrated ~~for~~circuits ~~more~~used ~~advanced~~in ~~process~~personal ~~technologies~~computers, ~~although~~data ~~there~~storage ~~can~~devices ~~be no assurance that such additional sources~~ and ~~capacity can be obtained. The occurrence of any supply or~~ other ~~problems~~peripheral ~~resulting from these risks could have a material adverse effect on our operating results~~applications.

~~Research~~We believe that adequate capacity will be available to support our manufacturing requirements. Our reliance, however, on multiple, offshore, outside subcontractors involves several risks, including capacity constraints or delays in timely delivery and ~~Development~~reduced control over delivery schedules, quality assurance and costs. We are continuously seeking to obtain additional sources of supply and capacity for more advanced process technologies, although there can be no assurance that such additional sources and capacity can be obtained. The occurrence of any supply or other problems resulting from these risks could have a material adverse effect on our operating results.

The design process for our products is extremely complex and iterative, involving the development of a prototype through computer-aided design, the use of simulation methodology, the generation of photo masks for the manufacturing process, the fabrication of wafers and the characterization of the prototype on test systems before submission to customers for qualification. Research and ~~development~~Development ~~efforts concentrate on the design and development of new leading-edge products for our markets and the continual enhancement of our design capabilities.~~

5The design process for our products is extremely complex and iterative, involving the development of a prototype through computer-aided design, the use of simulation methodology, the generation of photo masks for the manufacturing process, the fabrication of wafers and the characterization of the prototype on test systems before submission to customers for qualification. Research and development efforts concentrate on the design and development of new leading-edge products for our markets and the continual enhancement of our design capabilities.

~~Table~~During fiscal year 2005, we developed and introduced to market 1,070 new products. For over twenty years, we have developed libraries of ~~Contents~~proprietary mixed-signal integrated circuit designs and have invested in extensive computer-aided design and engineering resources specifically designed to support the increasing complexity and customized nature of silicon timing devices. Our company’s SAW capabilities include a library of proprietary device design algorithms utilized by our engineers. Investments in research and development were approximately $46.0 million, $40.4 million and $35.0 million in fiscal years 2005, 2004 and 2003, respectively. Such expenses typically include costs for engineering personnel, prototype and wafer mask costs, and investment in design tools and support overhead related to new and existing product development. In the first quarter of fiscal year 2005 we completed the purchase of technology for the capability to develop a family of high performance mixed signal products for the high definition and digital video/imaging market and paid $24.5 million for the purchase of intellectual property and a team of proven engineers. Our research and development expense in fiscal year 2005 included $7.1 million of amortization of assets with a short useful life related to this purchase. As of July 2, 2005, our research and development staff comprised 142 people. We will continue to invest in research and new product development and invest in new technologies to support our current and future customers.

~~During~~5 fiscal year 2003, we developed and introduced to market 762 new products. For over twenty years, we have developed libraries of proprietary mixed-signal integrated circuit designs and have invested in extensive computer-aided design and engineering resources specifically designed to support the increasing complexity and customized nature of silicon timing devices. Our company’s SAW capabilities include a library of proprietary device design algorithms utilized by our engineers. Investments in research and development were approximately $35.0 million, $29.2 million and $28.3 million in fiscal years 2003, 2002 and 2001, respectively. Such expenses typically include costs for engineering personnel, prototype and wafer mask costs, and investment in design tools and support overhead related to new and existing product development. As of June 28, 2003, our research and development staff comprised 128 people. We will continue to invest in research and new product development and invest in new technologies to support our current and future customers.

Patents, Licenses and Trademarks

We hold several patents, as well as copyrights, proprietary mask sets, and trademarks with respect to our various products and expect to continue to file applications in the future as a means of protecting our technology and market position. Most of our earlier patents carry a 20-year life and begin expiring in fiscal year 2010. In addition, we seek to protect our proprietary information and know-how through the use of trade secrets, confidentiality agreements and other security measures. To augment product feature sets or accelerate development schedules, we license certain technologies. No single license, however, is believed to be material to our business. In certain instances, we have performed design services pursuant to an agreement by which we transferred certain of our intellectual property rights in the final product to our customers. Such transfers are also not deemed material to our business. There can be no assurance, however, that these measures and/or others will be adequate to safeguard our interests or preserve our competitive position or protect us from allegations regarding potential patent infringement.

In connection with the purchase of MNC, we acquired $36.3 million of intangible assets based on an independent appraisal. Of this amount, $2.9 million was assigned to research and development assets that were written off at the date of acquisition. The remaining $33.4 million of intangible assets include a customer base valued at $12.0 million (6 year weighted-average useful life); a trade name valued at $3.0 million (ten year weighted-average useful life) and developed technology valued at $18.4 million (indefinite useful life).

As is typical in the semiconductor industry, we have, from time to time, been notified that we may be infringing certain patents and other intellectual property rights of others. Such matters are evaluated and reviewed with counsel. There can be no assurance that litigation will not be commenced in the future regarding any claim of infringement of any intellectual property right, or that, if required, any licenses or other rights could be obtained on acceptable terms.

Competition

In general, the semiconductor and PC component industries are intensely competitive and characterized by rapid technological changes, price erosion, cyclical shortages of materials and variations in manufacturing yields and efficiencies. Our ability to compete in this dynamic and opportunistic environment depends on factors both within and outside our control, including new product introduction, product quality, product performance and price, cost-effective manufacturing, general economic conditions, the performance of competition and the growth and evolution of the industry in general. There are several substantial entities in the industry who are much larger than us and who could, and do, exert significant influence in determining the pace and key trends in the development of PCs and PC components. Moreover, some of our current and potential competitors have significantly greater financial, technical, manufacturing and marketing resources. Competitors also include privately owned and emerging companies attempting to secure a share of the market for our products.

6Employees

~~Table~~As of ~~Contents~~July 2, 2005, we had 540 full-time employees, 142 of whom were engaged in research and development, 44 in sales, 41 in marketing and technical support, 46 in finance and administration and 267 in manufacturing support and operations. We have incentive programs to reward and retain our personnel, especially our key research and development staff.

~~have~~6 significantly greater financial, technical, manufacturing and marketing resources. Competitors also include privately owned and emerging companies attempting to secure a share of the market for our products.

~~Forward-Looking~~Available ~~Statements~~Information

~~This~~Our ~~report~~website ~~contains~~address ~~forward-looking~~is ~~statements,~~www.icst.com. ~~including,~~Within ~~without limitation, statements concerning~~ the ~~conditions~~“Investors” insection ~~the~~of ~~semiconductor and semiconductor capital equipment industries,~~ our ~~operations~~website, ~~economic performance~~you ~~and~~can ~~financial condition~~access, ~~including~~free inof ~~particular~~charge, ~~statements relating to~~ our ~~business and growth strategy and product development efforts. The words “believe,” “expect,” “anticipate,” “intend” and~~annual ~~other~~report ~~similar~~on ~~expressions~~Form ~~generally identify forward~~10-~~looking~~K, ~~statements.~~quarterly ~~For~~reports such statements we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The reader is cautioned not to place undue reliance on ~~these~~Form ~~forward~~10-~~looking statements~~Q, ~~which~~current ~~speak~~reports ~~only~~on asForm ~~of their dates. These forward~~8-~~looking statements~~K, ~~are based largely on our current expectations~~ and ~~are~~amendments ~~subject~~ to athese ~~number~~reports offiled ~~risks~~with ~~and~~or ~~uncertainties, including,~~furnished ~~without limitation, those identified under the “Factors That May Affect Future Results” section and elsewhere in this report and other risks and uncertainties indicated from time~~ to ~~time in our other filings with~~ the Securities and Exchange Commission (“SEC”)~~. Actual results could differ materially from these forward-looking statements. In addition~~, ~~important factors to consider~~ in ~~evaluating~~accordance ~~such~~with ~~forward-looking~~Section ~~statements~~13(a) ~~include changes in external market factors, changes in our business~~ or ~~growth~~15(d) ~~strategy~~of ~~or an inability to execute our strategy due to changes in our industry or~~ the Securities ~~economy~~Exchange ~~generally,~~Act ~~the emergence~~ of ~~new~~1934, oras ~~growing competitors and various other competitive factors~~amended. In ~~light of these risks and uncertainties~~addition, ~~there~~the ~~can~~SEC bemaintains noa ~~assurance~~website, ~~that~~www.sec.gov, ~~the~~which ~~matters~~contains ~~referred~~reports, toproxy inand ~~the~~information ~~forward-looking~~ statements, ~~contained~~and inother ~~this~~information ~~report~~regarding ~~will~~issuers infiling ~~fact~~electronically, ~~occur~~including our company.

~~We do not undertake to update our forward~~Forward-~~looking~~Looking ~~statements or factors that may affect future results to reflect future events or circumstances.~~ Statements

This report contains forward-looking statements, including, without limitation, statements concerning the conditions in the semiconductor and semiconductor capital equipment industries, our operations, economic performance and financial condition, including in particular statements relating to our business and growth strategy and product development efforts. The words “believe,” “expect,” “anticipate,” “intend” and other similar expressions generally identify forward-looking statements. For such statements we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The reader is cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements, are based largely on our current expectations and are subject to a number of risks and uncertainties, including, without limitation, those identified under the “Factors That May Affect Future Results” section and elsewhere in this report and other risks and uncertainties indicated from time to time in our other filings with the SEC. Actual results could differ materially from these forward-looking statements. In addition, important factors to consider in evaluating such forward-looking statements include changes in external market factors, changes in our business or growth strategy or an inability to execute our strategy due to changes in our industry or the economy generally, the emergence of new or growing competitors and various other competitive factors. In light of these risks and uncertainties, there can be no assurance that the matters referred to in the forward-looking statements contained in this report will in fact occur.

~~You~~We should carefully consider the following factors in addition to the other information set forth in this 10-K in analyzing an investment in our Company. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we do not ~~presently~~undertake know about or that we currently believe are immaterial may also inadvertently impact our business operations. If any of the following risks actually occur, our business, financial condition or results of operations will likely suffer. In such case, the trading price of our common stock could fall, and you may lose all or part of the money you paid to ~~buy~~update our ~~common stock. This 10-K contains~~ forward-looking statements or factors that ~~involve~~may ~~risks~~affect ~~and~~future ~~uncertainties. Actual~~ results ~~could~~to ~~differ~~reflect ~~materially~~future ~~from~~events ~~those discussed herein. Factors that could cause~~ or ~~contribute to such differences include, but are not limited to, those identified below, as well as those discussed elsewhere in this 10-K~~circumstances.

~~Our~~Factors ~~future~~That ~~operating~~May ~~results~~Affect ~~are~~Future ~~likely~~Results ~~to fluctuate and therefore may fail to meet expectations, which would cause our stock price to decline.~~

~~Our~~You ~~operating~~should ~~results~~carefully ~~have~~consider ~~varied~~the ~~widely~~following factors in addition to the ~~past~~other ~~and~~information ~~are~~set ~~likely~~forth toin dothis so10-K in analyzing an investment in our Company. The risks and uncertainties described below are not the ~~future~~only ones facing us. InAdditional ~~addition,~~risks ~~our~~and ~~operating~~uncertainties ~~results~~that ~~may~~we do not ~~follow~~presently ~~any~~know ~~past~~about ~~trends~~or that we currently believe are immaterial may also inadvertently impact our business operations. ~~Our~~If ~~future~~any ~~operating~~of the following risks actually occur, our business, financial condition or results of operations will ~~depend~~likely onsuffer. ~~many~~In ~~factors~~such case, the trading price of our common stock could fall, and ~~might~~you ~~fail~~may lose all or part of the money you paid to ~~meet~~buy our ~~expectations~~common ~~for~~stock. aThis ~~number~~form of10-K ~~reasons~~contains forward-looking statements that involve risks and uncertainties. ~~Any~~Actual ~~failure~~results tocould ~~meet~~differ ~~expectations~~materially from those discussed herein. Factors that could cause ~~our~~or ~~stock~~contribute ~~price~~ to ~~significantly~~such ~~fluctuate~~differences orinclude, ~~decline~~but are not limited to, those identified below, as well as those discussed elsewhere in this form 10-K.

~~Factors~~We ~~that~~are ~~could~~subject ~~cause our operating results~~ to ~~fluctuate~~a ~~that~~pending ~~relate~~merger toagreement ~~our~~with Integrated ~~internal~~Device ~~operations~~Technology, ~~include:~~Inc.

•As described above, we have entered into the ~~need~~Merger Agreement which provides for ~~continual~~the Company to merge with and into a subsidiary of IDT. Certain members of our senior management team have spent a large amount of time on the pending merger. The merger contains customary termination provisions and is subject to customary conditions, ~~rapid~~including ~~new~~the ~~product~~approval ~~introductions;~~of the Company’s shareholders. Although we currently expect the merger to be completed in September 2005, there can be no assurance that the merger will be completed, or as to the timing of the completion of the merger. The termination or failure to complete the merger with IDT could have a negative impact on our share price, our financial condition and results of operations. We have also incurred certain fixed costs which will have to be settled regardless of the consummation of the merger.

•7 ~~changes in our product mix; and~~

•In ~~our~~addition, ~~inability~~achieving tothe ~~adjust~~anticipated ~~our~~benefits ~~fixed~~of ~~costs~~the merger will depend in part upon whether the ~~face~~two companies integrate their businesses in an efficient and effective manner. In particular, the necessity of coordinating geographically separated organizations and addressing possible differences in corporate cultures and management philosophies may increase the difficulties of integration. Because of the complex nature of the integration process, we cannot provide any ~~declines~~assurances regarding the ultimate success of these integration activities. In addition, the combined company will likely incur considerable expenditures with respect to, among other things, transaction expenses, employee change-in-control ~~sales~~payments and the integration of their various information systems.

7Our future operating results are likely to fluctuate and therefore may fail to meet expectations, which would cause our stock price to decline.

~~Table~~Our operating results have varied widely in the past and are likely to do so in the future. In addition, our operating results may not follow any past trends. Our future operating results will depend on many factors and might fail to meet our expectations for a number of ~~Contents~~reasons. Any failure to meet expectations could cause our stock price to significantly fluctuate or decline.

Factors that could cause our operating results to fluctuate that ~~depend~~relate onto our ~~suppliers~~internal ~~and~~operations ~~customers~~ include:

• the ~~timing~~need offor ~~significant product orders~~continual, ~~order~~rapid ~~cancellations~~new ~~and~~product ~~rescheduling~~introductions;

• ~~the~~changes ~~availability of production capacity and fluctuations~~ in ~~the manufacturing yields at third parties’ facilities that manufacture~~ our ~~devices~~product mix; and

• ~~the~~our ~~cost~~inability ofto ~~raw~~adjust ~~materials~~our ~~and~~fixed ~~manufacturing~~costs ~~services~~in ~~from~~the ~~our~~face ~~suppliers~~of any declines in sales.

~~Downturns~~Factors inthat ~~the business cycle~~ could ~~reduce~~cause our ~~revenues~~operating ~~and~~results ~~the~~to ~~profitability~~fluctuate ofthat depend on our ~~business.~~suppliers and customers include:

~~The~~• ~~semiconductor~~the ~~industry~~timing isof highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. This industry has experienced significant ~~downturns, which have been characterized by diminished~~ product ~~demand~~orders, ~~production overcapacity,~~order ~~high~~cancellations ~~inventory levels, accelerated erosion of average prices~~ and industry-wide fluctuations in the demand for semiconductors, which have resulted in under-utilization of design capacity. Any future downturns could have a material adverse effect on our business and operating results. Furthermore, any upturn in the semiconductor industry could result in increased demand for, and possible shortages of, components we use to manufacture and assemble our ICs. Such shortages could have a material adverse effect on our business and operating results. rescheduling;

~~Our markets~~• ~~may experience severe and prolonged downturns in~~ the ~~future.~~availability ~~According~~of toproduction ~~the~~capacity ~~Semiconductor~~and ~~Industry~~fluctuations ~~Association (“SIA”), calendar year 2001 was the most severe year ever~~ in the ~~semiconductor~~manufacturing ~~industry,~~yields ~~experiencing~~at athird ~~32%~~parties’ ~~decline. However,~~facilities ~~sales~~that ~~began~~manufacture toour ~~turn~~devices; ~~towards the end of calendar year 2001~~ and ~~growth for calendar year 2002 was 1.3%. The projected compounded annual growth rate for calendar years 2003-2006, per the SIA, is forecasted to be 9.6%.~~

~~The~~• ~~markets~~the ~~for~~cost ~~our~~of ~~products~~raw ~~depend~~materials ~~on continued demand for PCs, communications equipment~~ and ~~consumer~~ ~~electronics.~~manufacturing ~~There~~services ~~can~~from ~~be no assurance that these end-user markets will not experience changes in demand that will adversely affect~~ our ~~business~~suppliers.

~~Our~~Downturns ~~inability~~in tothe ~~introduce~~business ~~new~~cycle ~~products~~could ~~based~~reduce onour ~~the~~revenues ~~latest~~and ~~technology~~the ~~could~~profitability ~~adversely~~of ~~affect~~ our business.

The ~~markets~~semiconductor ~~for~~industry ~~our~~is ~~products~~highly ~~are~~cyclical and is characterized by ~~rapidly~~constant ~~changing~~and ~~technology~~rapid technological change, ~~evolving industry~~rapid ~~standards~~product obsolescence and ~~frequent~~price ~~new~~erosion, ~~product~~evolving ~~introductions.~~standards, ~~Product~~short product life cycles ~~are~~and ~~continually~~wide ~~becoming~~fluctuations ~~shorter,~~in ~~which~~product ~~may~~supply ~~cause~~and ~~the~~demand. ~~gross~~This ~~margins~~industry ofhas ~~semiconductor~~experienced ~~products~~significant todownturns, ~~decline~~which ashave ~~the~~been ~~next~~characterized ~~generation~~by ofdiminished ~~competitive~~product ~~products~~demand, ~~is introduced.~~production ~~Therefore~~overcapacity, ~~our~~high ~~future~~inventory ~~success~~levels, isaccelerated ~~highly~~erosion ~~dependent~~of ~~upon~~average ~~our~~prices ~~ability to continually develop new products using the latest~~ and ~~most cost~~industry-~~effective~~wide ~~technologies,~~fluctuations ~~introduce our products~~ in ~~commercial quantities to~~ the ~~marketplace~~demand ~~ahead~~for ofsemiconductors, ~~the~~which ~~competition and~~ have ~~our~~resulted ~~products selected for inclusion~~ in ~~products~~under-utilization of ~~leading~~design ~~systems manufacturers’ products~~capacity. WeAny ~~cannot~~future ~~assure~~downturns ~~you~~could ~~that~~have wea ~~will~~material adverse beeffect ~~able~~on toour ~~regularly~~business ~~develop~~ and ~~introduce~~operating ~~such~~results. ~~new~~Furthermore, ~~products~~any onupturn ain ~~timely~~the ~~basis~~semiconductor orindustry ~~that~~could ~~our~~result ~~products, including~~in ~~recently~~increased ~~introduced~~demand ~~products~~for, ~~will~~and bepossible ~~selected~~shortages byof, ~~systems~~components ~~manufacturers~~we ~~for~~use ~~incorporation into their products. Our failure~~ to ~~design~~manufacture and ~~develop~~assemble ~~such new products, to have~~ our ~~products~~ICs. ~~available~~Such inshortages ~~commercial quantities ahead of~~could ~~competitive products or to~~ have ~~our products selected for inclusion in products of systems manufacturers would have~~ a material adverse effect on our ~~results~~business ~~of operations~~ and ~~financial~~operating ~~condition~~results.

~~Rapidly~~The markets ~~changing~~for ~~technology~~our ~~and~~products ~~continuing~~depend ~~process~~on ~~development~~continued ~~characterize~~demand ~~the~~for ~~market~~PCs, ~~for~~ communications ~~applications.~~equipment ~~Our~~and ~~future~~consumer ~~success~~electronics. inThere ~~the~~can ~~communications~~be ~~applications~~no ~~market~~assurance ~~depends~~that inthese ~~part~~end-user onmarkets ~~our~~will ~~ability~~not toexperience ~~design~~changes ~~and~~in ~~produce~~demand ~~products~~ that ~~meet~~will ~~the~~adversely ~~changing~~affect ~~needs~~our ~~of customers in this~~ business.

8Our inability to introduce new products based on the latest technology could adversely affect our business.

~~Table~~Our future success is highly dependent upon our ability to continually develop new products using the latest and most cost-effective technologies, introduce our products in commercial quantities to the marketplace ahead of ~~Contents~~the competition and have our products selected for inclusion in products of leading systems manufacturers’ products. We cannot assure you that we will be able to regularly develop and introduce such new products on a timely basis or that our products, including recently introduced products, will be selected by systems manufacturers for incorporation into their products.

~~market.~~8 ~~We can not assure you that we will be able to regularly develop and introduce products that will be selected by communications applications manufacturers for incorporation into their products.~~

Our ~~business~~failure isto ~~very~~design and develop such new products, to have our products available in commercial quantities ahead of competitive ~~and~~products ~~increased~~or ~~competition~~to ~~could~~have ~~adversely~~our ~~affect~~products usselected for inclusion in products of systems manufacturers would have a material adverse effect on our results of operations and financial condition.

~~The~~We ~~semiconductor~~cannot ~~and~~assure PCyou ~~component~~that ~~industries~~we ~~are~~will ~~intensely~~be ~~competitive.~~able ~~Our ability~~ to ~~compete~~regularly ~~depends~~develop ~~heavily upon elements outside our control, such as general economic conditions affecting the semiconductor~~ and ~~PC industries~~introduce ~~and the introduction of new~~ products ~~and technologies by competitors. Many of our competitors and potential competitors have significant financial, technical, manufacturing and marketing resources. These competitors include major~~that ~~multinational~~will ~~corporations~~be ~~possessing~~selected ~~worldwide~~by ~~wafer~~communications ~~fabrication~~applications ~~and~~manufacturers ~~integrated circuit production facilities and diverse, established product lines. Competitors also include emerging companies attempting to obtain a share of the existing market~~ for ~~our~~incorporation ~~current~~into and proposed products. We also compete with alternative timing solutions, such as crystal oscillators. To the extent that PCs, communications equipment and consumer electronics OEMs choose to install crystal oscillators as timing devices in their products~~, demand for our products may decline~~. To the extent that our products achieve market acceptance, competitors typically seek to offer competitive products or embark on pricing strategies, which, if successful, could have a material adverse effect on our results of operation and financial condition.

WeOur ~~depend~~business onis ~~the~~very PCcompetitive ~~Industry~~ and ~~our~~increased ~~business~~competition could be adversely ~~affected~~affect ~~by a decline in the PC market~~us.

AThe ~~substantial~~semiconductor ~~portion~~and ofPC ~~the~~component ~~sales~~industries ofare ~~our~~intensely ~~products~~competitive. Our ability to compete depends ~~largely~~heavily onupon ~~sales~~elements outside our control, such as general economic conditions affecting the semiconductor and PC industries and the introduction of ~~PCs~~new products and ~~peripherals~~technologies ~~for~~by ~~PCs~~competitors. ~~The~~Many PCof ~~industry~~our iscompetitors ~~subject~~and topotential ~~price~~competitors ~~competition~~have significant financial, ~~rapid~~technical, manufacturing and ~~technological~~marketing ~~change,~~resources. ~~evolving~~These ~~standards,~~competitors ~~short~~include ~~product~~major ~~life~~multinational ~~cycles~~corporations possessing worldwide wafer fabrication and ~~continuous~~integrated ~~erosion~~circuit ofproduction ~~average~~facilities ~~selling~~and ~~prices.~~diverse, ~~Should~~established ~~the~~product PClines. ~~market~~Competitors ~~decline~~also orinclude ~~experience~~emerging ~~slower~~companies attempting ~~growth,~~to ~~then~~obtain a ~~decline~~share inof the ~~order~~existing ~~rate~~market for our current and proposed products. ~~could~~We ~~occur~~also compete with alternative timing solutions, such as crystal oscillators. ATo ~~downturn~~the extent that PCs, communications equipment and consumer electronics OEMs choose to install crystal oscillators as timing devices in their products, demand for our products may decline. To the PCextent that our products achieve market ~~could~~acceptance, ~~also~~competitors ~~affect~~typically ~~the~~seek ~~financial~~to ~~health~~offer ofcompetitive ~~some~~products ofor ~~our~~embark ~~customers~~on pricing strategies, which, if successful, could ~~affect~~have ~~our~~a ~~ability~~material toadverse ~~collect~~effect ~~outstanding~~on ~~accounts~~our ~~receivable~~results ~~from~~of ~~such~~operation ~~customers~~and financial condition.

~~Our~~We ~~inability~~depend toon ~~obtain~~the ~~wafers~~PC Industry and ~~assemblers~~our business could ~~seriously~~be ~~affect~~adversely ~~our~~affected ~~operations~~by a decline in the PC market.

WeA ~~currently~~substantial ~~depend~~portion ~~upon~~of ~~third-party suppliers for~~ the ~~manufacture~~sales of ~~the~~our ~~silicon~~products ~~wafers from~~depends ~~which~~largely ~~our~~on ~~finished~~sales ~~ICs~~of ~~are~~PCs ~~manufactured~~ and peripherals for ~~the packaging of finished ICs from silicon wafers~~PCs. WeThe ~~cannot~~PC ~~assure~~industry ~~you~~is ~~that~~subject weto ~~will~~price becompetition, ~~able~~rapid totechnological ~~obtain~~change, ~~adequate~~evolving ~~quantities~~standards, ofshort ~~processed~~product ~~silicon~~life ~~wafers~~cycles ~~within~~and acontinuous ~~reasonable~~erosion ~~period~~ of ~~time~~average orselling ~~at commercially reasonable rates~~prices. InShould the ~~past,~~PC ~~the~~market ~~semiconductor~~decline ~~industry~~or ~~has~~experience ~~experienced~~slower growth, ~~disruptions~~then ~~from~~a ~~time~~decline ~~to time~~ in the ~~supply~~order ofrate ~~processed~~for ~~silicon wafers due to quality or yield problems or capacity limitations. Two outside foundries manufacture virtually all of~~ our ~~wafers.~~products ~~If one or more of these foundries is unable or unwilling to produce adequate supplies of processed wafers on a timely basis, it~~ could ~~cause~~occur. ~~significant~~A ~~delays~~downturn ~~and expense~~ in ~~locating a new foundry and redesigning circuits to be compatible with~~ the ~~new~~PC ~~manufacturer’s~~market ~~processes and, consequently,~~ could ~~have a material adverse effect on our results of operations and financial condition. We~~ also ~~rely~~affect ~~upon third parties for~~ the ~~assembly~~financial ofhealth ~~our finished integrated circuits from processed silicon wafers. We currently rely on three assemblers, two~~ of ~~which~~some ~~produce most~~ of our ~~finished integrated circuits. While we believe that there is typically a greater availability of assemblers than silicon wafer foundries~~customers, wewhich could ~~nonetheless~~affect ~~incur~~our ~~significant~~ability ~~delays and expense if one or more of the assemblers upon which we currently rely are unable or unwilling~~ to ~~assemble~~collect ~~finished~~outstanding ~~integrated~~accounts ~~circuits~~receivable from ~~silicon wafers~~such customers.

IfOur weinability ~~lose~~to ~~any~~obtain ~~customers,~~wafers ~~our~~and ~~sales~~assemblers could ~~decline~~seriously affect our operations.

~~Our~~We 10currently ~~largest~~depend ~~OEM~~upon ~~end~~third-party ~~customers~~suppliers ~~accounted~~for the manufacture of the silicon wafers from which our finished ICs are manufactured and for ~~approximately~~the ~~50%~~packaging of ~~our~~finished ~~total~~ICs ~~revenue~~from insilicon wafers. We cannot assure you that we will be able to obtain adequate quantities of processed silicon wafers within ~~fiscal~~a ~~year~~reasonable ~~2003.~~period ~~Maxtek~~of ~~Technology~~time ~~Co.~~or ~~Ltd~~at commercially reasonable rates. ~~and~~In ~~Lacewood~~the ~~Corporation~~past, the ~~latter~~semiconductor ~~formerly~~industry ~~known~~has asexperienced ~~Maxtech~~disruptions ~~Corporation~~from ~~Limited~~time to time in the supply of processed silicon wafers due to quality or yield problems or capacity limitations. Two outside foundries manufacture virtually all of our wafers. If one or more of these foundries is unable or unwilling to produce adequate supplies of processed wafers on a timely basis, ~~overseas~~it ~~distributors~~could cause significant delays and expense in locating ~~China~~a new foundry and ~~Taiwan~~redesigning circuits to be compatible with the new manufacturer’s processes and, ~~China~~consequently, could have a material adverse effect on our results of operations and ~~Hong~~financial ~~Kong~~condition. ~~respectively,~~We ~~who~~also ~~are~~rely ~~commonly~~upon ~~controlled,~~third ~~accounted~~parties for ~~20%~~the ~~and~~assembly ~~21%~~ of our ~~fiscal~~finished ~~year~~integrated ~~2003~~circuits ~~revenue,~~from ~~respectively~~processed silicon wafers. ~~These~~We ~~international~~currently ~~distributors~~rely ~~sell~~on tothree ~~approximately~~assemblers, ~~130~~two ~~OEM~~of ~~end~~which ~~customers~~produce most of our finished integrated circuits. ~~Because~~While we ~~are~~believe ~~dependent~~that ~~upon~~there ~~continued~~is ~~revenue~~typically ~~from~~a ~~OEM~~greater ~~end~~availability of ~~customers,~~assemblers ~~any~~than ~~material~~silicon ~~delay~~wafer foundries, we could nonetheless incur significant delays and expense if one or more of the assemblers upon which we currently rely are unable or unwilling to assemble finished integrated circuits from silicon wafers.

9If we lose any customers, our sales could decline.

~~Table~~Our 10 largest OEM end customers accounted for approximately 45% of ~~Contents~~our total revenue in fiscal year 2005. Maxtek Technology Co. Ltd., Lacewood Corporation, (formerly known as Maxtech Corporation Limited), MEC Technology Co. Ltd., Magic Island International, and MEC Tech Singapore Pte Ltd. overseas stocking representatives in China and Taiwan, China and Hong Kong, Taiwan, Korea and

~~cancellation~~9 or reduction of orders from these or other major customers could cause our sales to decline significantly. There is no guarantee that we will be able to retain any of our customers. In addition, our customers may materially reduce the amount of product ordered from us at any time. This could cause a significant decline in our net sales and we may not be able to reduce the accompanying expenses at the same time.

IfSingapore werespectively, ~~fail~~accounted for 25%, 10%, 7%, 6% and 4% of our fiscal year 2005 revenue, respectively. Maxtek, Lacewood and Magic Island are under common control. MEC Technology and MEC Tech Singapore are under common control. These international stocking representatives sell to approximately 220 OEM end customers. Because we are dependent upon continued ~~accurately~~revenue ~~forecast~~from ~~demand~~OEM ~~for~~end ~~our~~customers, ~~products~~any material delay, cancellation or reduction of orders from these or other major customers could cause our sales to decline significantly. There is no guarantee that we will be able to retain any of our customers. In addition, our customers may ~~have~~materially ~~large~~reduce ~~amounts~~the amount of ~~unsold~~product ~~products~~ordered orfrom us at any time. This could cause a significant decline in our net sales and we may not be able to ~~fill~~reduce ~~all~~the ~~orders~~accompanying expenses at the same time.

WeIf ~~provision semiconductors based primarily on our internal forecasts, and secondarily on existing orders, which may be cancelled under many circumstances. Consequently,~~ we ~~depend~~fail ~~on our forecasts~~ to ~~determine~~accurately ~~inventory~~forecast ~~levels~~demand for our products~~. Because our markets are volatile and subject to rapid technological and price changes~~, ~~our forecasts may be wrong, and~~ we may ~~make~~have ~~too~~large ~~many~~amounts ~~or too few~~ of unsold ~~certain~~ products~~. Also,~~ ~~our~~or customers frequently place orders requesting product delivery almost immediately after the order is made, which makes forecasting customer demand even more difficult. The above factors also make it difficult to forecast quarterly operating results. If we ~~are~~may ~~unable~~not tobe ~~predict~~able ~~accurately the appropriate amount of product required~~ to ~~meet~~fill ~~customer~~all ~~demand, our business, financial condition and results of operations could be seriously harmed~~orders.

~~Our~~We ~~business~~provision semiconductors ~~could~~based primarily on our internal forecasts, and secondarily on existing orders, which may be ~~adversely~~cancelled ~~affected~~under bymany circumstances. Consequently, we depend on our forecasts to determine inventory levels for our products. Because our markets are volatile and subject to rapid technological and price changes, inour ~~political~~forecasts may be wrong, and ~~economic~~we ~~conditions~~may make too many or too few of certain products. Also, our customers frequently place orders requesting product delivery almost ~~abroad~~immediately after the order is made, which makes forecasting customer demand even more difficult. The above factors also make it difficult to forecast quarterly operating results. If we are unable to predict accurately the appropriate amount of product required to meet customer demand, our business, financial condition and results of operations could be seriously harmed.

For the fiscal years 2003, 2002, and 2001, we generated approximately 74.6%, 78.6% and 71.0% of our revenue, respectively, from international markets. These sales were generated primarily from customers in the Pacific Rim region and included sales to foreign corporations, as well as to foreign subsidiaries of U.S. corporations. Certain of our international sales are to customers in the Pacific Rim region, who in turn sell some of their products to North America, Europe and other non-Asian markets. In addition, two of our wafer suppliers and all of our assemblers are located in the Pacific Rim region. There can be no assurance that the effect of an economic crisis on our suppliers will not impact our wafer supply or assembly operations, or that the effect on our customers in that region will not adversely affect both the demand for our products and the collectibility of our receivables. Our ~~international~~ business ~~activities~~could in general are subject to a variety of potential risks resulting from certain political, economic and other uncertainties including, without limitation, political risks relating to a substantial number of our customers being in Taiwan. Certain aspects of our operations are subject to governmental regulations in the countries in which we do business, including those relating to currency conversion and repatriation, taxation of our earnings and earnings of our personnel, and our use of local employees and suppliers. Our operations are also subject to the risk of changes in laws and policies in the various jurisdictions in which we do business, which may impose restrictions on us. We cannot determine to what extent our future operations and earnings may be adversely affected by ~~new laws, new regulations,~~ changes in orpolitical new interpretations of existing laws or regulations or other consequences of doing business outside the U.S. Our activities outside the U.S. are subject to additional risks associated with fluctuating currency values and ~~exchange~~economic ~~rates,~~conditions ~~hard currency shortages and controls on currency exchange, even though business is denominated in U~~abroad.S. dollars. Additionally, worldwide semiconductor pricing is influenced by currency fluctuations and the devaluation of foreign currencies could have a significant impact on the prices of our products if our competitors offer products at significantly lower prices in an effort to maximize cash flows to finance short-term, dollar denominated obligations; such devaluation could also impact the competitive position of our customers in Taiwan and elsewhere, which could impact our sales. Currently, we do not engage in currency hedging activities as all transactions are denominated in U.S. dollars.

WeFor ~~may~~the ~~make~~fiscal ~~acquisitions~~years 2005, ~~which~~2004, ~~could~~and 2003, we generated approximately 74.1%, 76.1% and 75.6% of our revenue, respectively, from international markets. These sales were generated primarily from customers in the Pacific Rim region and included sales to foreign corporations, as well as to foreign subsidiaries of U.S. corporations. Certain of our international sales are to customers in the Pacific Rim region, who in turn sell some of their products to North America, Europe and other non-Asian markets. In addition, two of our wafer suppliers and all of our assemblers are located in the Pacific Rim region. There can be no assurance that the effect of an economic crisis on our suppliers will not impact our wafer supply or assembly operations, or that the effect on our customers in that region will not adversely affect both the demand for our products and the collectibility of our receivables. Our international business activities in general are subject usto a variety of potential risks resulting from certain political, economic and other uncertainties including, without limitation, political risks relating to a substantial number of ~~operational~~our customers being in Taiwan. Certain aspects of our operations are subject to governmental regulations in the countries in which we do business, including those relating to currency conversion and repatriation, taxation of our earnings and earnings of our personnel, and our use of local employees and suppliers. Our operations are also subject to the risk of changes in laws and policies in the various jurisdictions in which we do business, which may impose restrictions on us. We cannot determine to what extent our future operations and earnings may be affected by new laws, new regulations, changes in or new interpretations of existing laws or regulations or other consequences of doing business outside the U.S. Our activities outside the U.S. are subject to additional risks associated with fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange, even though business is denominated in U.S. dollars. Additionally, worldwide semiconductor pricing is influenced by currency fluctuations and the devaluation of foreign currencies could have a significant impact on the prices of our products if our competitors offer products at significantly lower prices in an effort to maximize cash flows to finance short-term, dollar denominated obligations; such devaluation could also impact the competitive position of our customers in Taiwan and elsewhere, which could impact our sales. Currently, we do not engage in currency hedging activities as all transactions are denominated in U.S. dollars.

In10 ~~order to grow our business and maintain our competitive position, we may acquire other businesses in the future. We cannot predict whether or when any acquisitions will occur. Acquisitions commonly~~

10We may make acquisitions, which could subject us to a number of operational risks.

~~Table~~In order to grow our business and maintain our competitive position, we may acquire other businesses in the future. We cannot predict whether or when any acquisitions will occur. Acquisitions commonly involve certain risks, and we cannot assure you that any acquired business will be successfully integrated into our operations or will perform as we expect. Any future acquisitions could involve certain other risks, including the assumption of ~~Contents~~additional liabilities, potentially dilutive issuances of equity securities and diversion of management’s attention from other business concerns. Furthermore, we may issue equity securities or incur debt to pay for any future acquisitions. If we issue equity securities, your percentage of ownership of our company would be reduced. If we issue debt securities, our financial condition may be strained by the requirement to pay interest and other debt-related costs. In addition, our operations may be restricted by the covenants associated with these debt securities. We may also enter into joint venture transactions. Joint ventures have the added risk that the other joint venture partners may have economic, business or legal interests or objectives that are inconsistent with our interests and objectives. We may also have to fulfill our joint venture partners’ economic or other obligations if they fail to do so.

~~involve~~Our ~~certain~~inability ~~risks,~~to secure and protect ~~we cannot assure you that any acquired business will be successfully integrated into~~ our ~~operations~~ orintellectual ~~will perform as we expect. Any future acquisitions could involve certain other risks~~property, ~~including~~and/or the ~~assumption~~effort of ~~additional~~third ~~liabilities,~~parties ~~potentially dilutive issuances of equity securities and diversion of management’s attention from other business concerns. Furthermore, we may issue equity securities or incur debt~~ to ~~pay~~enforce ~~for~~their ~~any~~own ~~future~~intellectual ~~acquisitions.~~property Ifrights weagainst ~~issue equity securities~~us, ~~your~~has ~~percentage~~in ~~of ownership of our company would be reduced. If we issue debt securities, our financial condition may be strained by~~ the ~~requirement~~past toresulted ~~pay interest~~ and ~~other debt-related costs. In addition, our operations~~ may bein ~~restricted by~~ the ~~covenants~~future ~~associated~~result ~~with~~in ~~these~~costly debt securities. We may also enter into joint venture transactions. Joint ventures have the added risk that the other joint venture partners may have economic, business or legal interests or objectives that are inconsistent with our interests and ~~objectives.~~time-consuming ~~We may also have to fulfill our joint venture partners’ economic or other obligations if they fail to do so~~litigation.

~~Our~~We ~~inability~~hold several patents as well as copyrights, mask works and trademarks with respect to various ~~secure~~products and ~~protect~~expect to continue to file applications in the future as a means of protecting our ~~intellectual~~technology ~~property~~and market position. In addition, we seek to protect our proprietary information and~~/or~~ know-how through the ~~effort~~use of ~~third~~trade ~~parties~~secrets, confidentiality agreements and other similar security measures. With respect to ~~enforce~~patents, ~~their~~there ~~own~~can ~~intellectual~~be ~~property~~no ~~rights~~assurance ~~against~~that usany applications for patent protection will be granted, ~~has~~or, inif ~~the~~granted, ~~past~~will ~~resulted~~offer meaningful protection. Additionally, there can be no assurance that competitors will not develop, patent or gain access to similar know-how and ~~may~~technology, inor ~~the~~reverse ~~future~~engineer ~~result~~our inproducts, ~~costly~~or that any confidentiality agreements upon which we rely to protect our trade secrets and other ~~time-consuming~~proprietary ~~litigation~~information will be adequate to protect our proprietary technology. The occurrence of any such events could have a material adverse effect on our results of operations and financial condition.

WePatents ~~hold~~covering ~~several~~a ~~patents~~variety asof ~~well~~semiconductor asdesigns ~~copyrights, mask works~~ and ~~trademarks~~processes ~~with~~are ~~respect~~held toby various companies. ~~products~~We ~~and~~have ~~expect~~from time to ~~continue~~time toreceived, ~~file~~and ~~applications~~may in the future asreceive, acommunications ~~means~~from ofthird ~~protecting~~parties ~~our~~claiming ~~technology~~that ~~and market position. In addition,~~ we ~~seek~~might tobe ~~protect~~infringing ~~our~~certain ~~proprietary information and know-how through the use~~ of ~~trade~~such ~~secrets,~~parties’ ~~confidentiality~~patents ~~agreements~~ and/or other ~~similar~~intellectual ~~security~~property ~~measures~~rights. ~~With~~Any ~~respect to patents, there can be no assurance that any applications for patent protection will be granted, or, if granted, will offer~~infringement ~~meaningful~~claim ~~protection. Additionally, there can be no assurance that competitors will not develop, patent~~ or ~~gain~~other ~~access~~litigation toagainst ~~similar know-how and technology,~~ or ~~reverse~~by ~~engineer~~us our products, or that any confidentiality agreements upon which we rely to protect our trade secrets and other proprietary information will be adequate to protect our proprietary technology. The occurrence of any such events could have a material adverse effect on our results of operations and financial condition.

~~Patents~~Virtually ~~covering~~all aof ~~variety~~our ofkey ~~semiconductor~~engineers ~~designs~~worked at other companies or at universities and ~~processes~~research ~~are~~institutions ~~held~~before ~~by various~~joining ~~companies~~us. WeDisputes ~~have~~may ~~from~~arise ~~time~~as to ~~time~~whether ~~received~~technology developed by such engineers was first discovered when they were employed by or associated with other institutions in a manner that would give third parties rights to such technology superior to our rights, ~~and~~if any. Disputes of this nature may arise in the future ~~receive~~, ~~communications~~and ~~from~~there ~~third~~can ~~parties~~be ~~claiming~~no assurance that we ~~might~~will beprevail ~~infringing~~in ~~certain~~these ofdisputes. ~~such~~To ~~parties’~~the ~~patents~~extent ~~and/~~that consultants, vendors or other ~~intellectual~~third ~~property~~parties ~~rights.~~apply ~~Any infringement~~technological ~~claim~~information orindependently ~~other~~developed ~~litigation~~by ~~against~~them or by usothers ~~could~~to ~~have~~our aproposed products, ~~material~~disputes ~~adverse~~may ~~effect~~also onarise ~~our~~as ~~results~~to ofthe ~~operations~~proprietary ~~and~~rights ~~financial~~to ~~condition~~such information, which may not be resolved in our favor.

~~Virtually~~Loss ~~all~~ of ~~our~~certain key ~~engineers~~members ~~worked~~of atour ~~other~~management ~~companies~~ or atinability ~~universities and research institutions before joining us. Disputes may arise as~~ to ~~whether~~attract technology developed by such engineers was first discovered when they were employed by or associated with other institutions in a manner that would give third parties rights to such technology superior to our rights, if any. Disputes of this nature may arise in the future, and ~~there~~retain ~~can~~skilled bepersonnel nocould ~~assurance~~negatively ~~that~~impact ~~we will prevail in these disputes. To the extent that consultants, vendors or other third parties apply technological information independently developed by them or by others to~~ our ~~proposed products,~~business ~~disputes may also arise as to the proprietary rights to such information, which may not be resolved in our favor~~prospects.

~~Loss~~We ofare ~~certain~~dependent upon our ability to attract and retain highly skilled technical and managerial personnel. We do not maintain “key ~~members~~man” life insurance on our Chief Executive Officer, Mr. Hock E. Tan, or any of our ~~management~~other technical or ~~inability~~managerial topersonnel. We believe that our future success in developing marketable products and achieving a competitive position will depend in large part upon whether we can attract and retain skilled personnel. ~~could~~Competition ~~negatively~~for ~~impact~~such ~~our~~personnel ~~business~~is ~~prospects.~~intense, and there can be no assurance that we will be successful in attracting and retaining the personnel we

We11 are dependent upon our ability to attract and retain highly skilled technical and managerial personnel. We do not maintain “key man” life insurance on Mr. Tan or any of our other technical or managerial personnel. We believe that our future success in developing marketable products and achieving a competitive position will depend in large part upon whether we can attract and retain skilled personnel. Competition for such personnel is intense, and there can be no assurance that we will be successful in attracting and retaining the personnel we require to successfully develop new and

11require to successfully develop new and enhanced products and to continue to grow and operate profitably. Furthermore, retention of technical and engineering personnel in our industry typically requires us to present competitive compensation packages, including stock option grants.

~~Table~~Some of ~~Contents~~our products may be subject to product liability claims.

~~enhanced~~Certain of our custom ICs products ~~and~~are tosold ~~continue~~into tomedical ~~grow~~markets ~~and~~for ~~operate~~applications, ~~profitably~~such as hearing aids. ~~Furthermore~~Although we believe that exposure to third-party claims has been minimized, ~~retention~~there ofcan ~~technical~~be ~~and~~no ~~engineering personnel~~assurance that we will not be subject to third-party claims in ~~our~~these ~~industry~~or ~~typically~~other ~~requires~~applications or that any indemnification or insurance available to us will be adequate to ~~present~~protect ~~competitive~~us ~~compensation~~from liability. ~~packages~~A product liability claim, ~~including~~product ~~stock~~recall ~~option~~or ~~grants.~~other claim, as well as any claims for uninsured liabilities or in excess of insured liabilities, could have a material adverse effect on our results of operations and financial condition.

~~Some~~Provisions of our ~~products~~charter ~~may~~documents beand ~~subject~~Pennsylvania tolaw ~~product~~could ~~liability~~discourage potential ~~claims~~acquisition proposals and could delay, deter or prevent a change in control.

~~Certain~~Provisions of our ~~custom~~articles ~~ICs~~of ~~products~~incorporation ~~are~~and ~~sold into medical markets for applications, such as hearing aids. Although we believe that exposure to third~~by-~~party~~laws ~~claims~~may ~~has~~inhibit ~~been minimized,~~changes ~~there~~in ~~can~~control beof noour ~~assurance~~company ~~that we will~~ not beapproved ~~subject~~by toour ~~third-party~~board ~~claims~~of indirectors ~~these~~and orwould ~~other~~limit ~~applications~~the orcircumstances ~~that~~in ~~any~~which ~~indemnification~~a orpremium ~~insurance~~may ~~available to us will~~ be ~~adequate~~paid tofor ~~protect~~the common usstock ~~from~~in ~~liability.~~proposed ~~A product liability claim~~transactions, ~~product~~ ~~recall~~ or ~~other~~a ~~claim,~~proxy ascontest ~~well as any claims~~ for ~~uninsured~~control ~~liabilities or in excess~~ of ~~insured~~the ~~liabilities,~~board ~~could~~may ~~have~~be ainitiated. ~~material~~These ~~adverse~~provisions ~~effect~~provide onfor: ~~our results of operations and financial condition.~~

~~Provisions~~• the authority of our ~~charter~~board ~~documents~~of ~~and~~directors ~~Pennsylvania~~to ~~law~~issue, ~~could~~without ~~discourage~~shareholder ~~potential acquisition~~approval, ~~proposals~~preferred ~~and~~stock ~~could~~with ~~delay,~~such ~~deter~~terms oras ~~prevent~~our aboard ~~change~~of indirectors ~~control.~~ determines;

~~Provisions~~• ofclassified ~~our articles of incorporation and by-laws may inhibit changes in control of our company not approved by our~~ board of directors and would limit the circumstances in which a premium may be paid for the common stock in proposed transactions, or a proxy contest for control of the board may be initiated. These provisions provide for: ;

• ~~the~~a ~~authority~~prohibition ofon ~~our board of directors to issue, without~~ shareholder ~~approval,~~action ~~preferred~~through ~~stock~~written ~~with such terms as our board of directors determines~~consents;

• ~~classified~~a requirement that special meetings of shareholders be called only by our chief executive officer or board of directors; and

• aadvance ~~prohibition~~notice onrequirements for shareholder ~~action~~proposals ~~through~~and ~~written consents;~~nominations.

•Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law of 1988 prohibits certain transactions with a ~~requirement~~20% ~~that~~shareholder, ~~special~~an ~~meetings~~“ interested shareholder,” for a period of ~~shareholders~~five beyears ~~called~~after ~~only~~the bydate ~~our~~any ~~chief~~shareholder ~~executive~~becomes ~~officer~~an interested shareholder unless the interested shareholder’s acquisition of 20% or more of the common stock is approved by our board of directors;. This provision may discourage potential acquisition proposals and limit the circumstances in which a premium may be paid for our company.

•The ~~advance~~stock ~~notice~~prices ~~requirements~~of ~~for~~technology ~~shareholder~~companies ~~proposals~~such as ours are highly volatile and ~~nominations~~could drop unexpectedly.

~~Subchapter~~The Fpublic ofmarkets ~~Chapter~~have 25experienced ofvolatility ~~the~~that ~~Pennsylvania~~has ~~Business~~particularly ~~Corporation~~affected ~~Law~~the market prices of ~~1988~~securities ~~prohibits~~of ~~certain~~many ~~transactions~~technology ~~with~~companies afor ~~20%~~reasons ~~shareholder,~~that anhave “often ~~interested shareholder,”~~been ~~for~~unrelated ato ~~period~~operating ofresults. ~~five~~During ~~years~~the ~~after~~course of the ~~date~~preceding ~~any~~twelve ~~shareholder~~months ~~becomes~~ended anJuly ~~interested~~2, ~~shareholder~~2005 ~~unless~~ the ~~interested~~market ~~shareholder’s~~price ~~acquisition~~ of ~~20%~~our ~~or more of the~~ common stock istraded ~~approved~~within bya ~~our~~range ~~board~~ of $17.41 ~~directors~~to $25.54 per share. This ~~provision~~ volatility may ~~discourage~~adversely ~~potential~~affect ~~acquisition~~the ~~proposals~~market ~~and~~price ~~limit~~of ~~the~~our ~~circumstances~~common instock ~~which~~and aour ~~premium~~visibility ~~may~~and becredibility ~~paid~~in ~~for~~the ~~our company~~markets.

~~The~~Item ~~stock prices of technology companies such as ours are highly volatile and could drop unexpectedly~~2. PROPERTIES

~~The~~Our ~~public~~corporate ~~markets~~headquarters, ~~have~~covering ~~experienced~~approximately ~~volatility~~61,000 ~~that~~square ~~has~~feet, ~~particularly~~is ~~affected~~located ~~the~~in ~~market prices~~Norristown, ofPennsylvania. ~~securities~~The oflease ~~many~~will ~~technology~~expire ~~companies~~in ~~for~~February ~~reasons~~2007 ~~that~~with ~~have~~current ~~often~~monthly rent ~~been~~of ~~unrelated~~approximately to$60,700 ~~operating~~and ~~results.~~progressively ~~During~~increasing ~~the~~each ~~course~~year ofto ~~the~~approximately ~~preceding twelve months ended June 28~~$63,000 ~~2003~~in the ~~market~~final ~~price~~year of ~~our~~the ~~common~~lease ~~stock traded within a range of $11~~term.64 toWe ~~$33.20~~also ~~per~~have ~~share.~~a ~~This~~renewal ~~volatility~~option ~~may adversely affect the market price~~ of ~~our~~three ~~common~~years ~~stock~~after ~~and our visibility and credibility in~~ the ~~markets~~initial term.

~~Employees~~We opened an approximate 10,000 square foot design facility in Tempe, Arizona in January 2000. The current lease for this facility commenced in January 2005 and runs for three years with monthly rent beginning at $8,764 for the first year and progressively increasing each year to $9,298 in the third year.

As12 of June 28, 2003, we had 503 full-time employees, 128 of whom were engaged in research and development, 44 in sales, 28 in marketing and technical support, 53 in finance and administration and 250 in manufacturing support and operations. We have incentive programs to reward and retain our personnel, especially our key research and development staff.

12We utilize a facility located in Singapore for testing, warehousing, sales and administration, which consists of approximately 24,000 square feet of space leased pursuant to an agreement, which have various expiration dates through September 2006. The rent for this facility is approximately $23,900 per month.

~~Table~~Our San Jose operations consist of ~~Contents~~approximately 70,000 square feet of office space pursuant to a lease agreement, which will expire in December 2008. Monthly rent began at $100,100 per month, increasing annually to approximately $130,608 per month in 2008.

~~Item~~Our 2Worcester, Massachusetts’ facility consists of approximately 86,200 square feet of space leased pursuant to an agreement, which expires in December 2010 with monthly rent of approximately $40,400 progressively increasing each year to approximately $48,000 in the tenth year, with an option to renew for two more terms of five years. ~~PROPERTIES~~

Our ~~corporate headquarters~~Bloomfield, ~~covering~~Connecticut facility consisted of approximately 6116,~~000~~400 square feet, isof ~~located in Norristown, Pennsylvania. The lease will expire in~~space ~~February~~leased ~~2007~~pursuant ~~with~~to ~~monthly~~an ~~rent~~agreement, ofwhich ~~approximately~~was ~~$56,000~~terminated in ~~fiscal~~July ~~year~~ 2003. ~~and~~The ~~progressively~~rent ~~increasing~~was ~~each year to~~ approximately $636,~~000~~700 inper ~~the final year of the lease term~~month. ~~We also have a renewal option of three years after the initial term.~~

WeOur ~~opened an approximate 10~~Auburn,~~000~~ ~~square~~New ~~foot~~York ~~design~~ facility ~~in Tempe~~, ~~Arizona in~~which ~~January 2000. The lease term for this facility~~ is ~~five~~primarily ~~years~~our ~~with~~defense ~~monthly~~production ~~rent~~location, ~~beginning~~consists atof approximately $921,~~300~~533 ~~for~~square ~~the~~feet. ~~first~~This ~~year~~property ~~and~~was ~~progressively~~purchased ~~increasing each year to approximately $10,100~~ in ~~the~~March ~~fifth year~~of 1998.

WeItem utilize a facility located in Singapore for testing, warehousing, sales and administration, which consists of approximately 24,000 square feet of space leased pursuant to an agreement, which have various expiration dates through September 20063. ~~The~~LEGAL ~~rent~~PROCEEDINGS ~~for this facility is approximately $19,000 per month.~~

~~Our~~From ~~San~~time ~~Jose~~to ~~operations~~time, ~~consist~~various ofinquiries, ~~approximately~~potential ~~70,000~~claims ~~square~~and ~~feet~~charges ofand ~~office~~litigation ~~space~~are ~~pursuant~~made, toasserted aor ~~lease~~commenced ~~agreement~~by or against us, ~~which~~principally ~~will~~arising ~~expire~~from inor ~~December~~related ~~2008~~to contractual relations and possible patent infringement. We believe that ~~this~~any ~~facility~~of isthese ~~adequate~~claims tocurrently ~~meet~~pending, ~~our~~individually ~~requirements~~and ~~going~~in ~~forward.~~the ~~Monthly~~aggregate, ~~rent~~will ~~began~~not athave ~~$100,100~~any material ~~per~~adverse ~~month~~effect on our consolidated financial position, ~~increasing~~results ~~annually~~of tooperations ~~approximately~~or ~~$130~~cash flows,~~608~~ ~~per~~although ~~month~~no assurance can be made in ~~2008~~this regard.

~~Our~~Item ~~Worcester,~~4. ~~Massachusetts~~SUBMISSION ~~facility~~OF ~~consists~~MATTERS ofTO ~~approximately~~A ~~86,200~~VOTE ~~square feet~~OF ofSECURITY ~~space~~HOLDERS leased pursuant to an agreement, which expires in December 2010 with monthly rent of approximately $39,400, progressively increasing each year to approximately $48,000 in the tenth year, with an option to renew for two more terms of 5 years.

~~Our Bloomfield, Connecticut facility consisted of approximately 16,400 square feet of space leased pursuant to an agreement, which was terminated in July 2003~~None. ~~The rent was approximately $6,700 per month.~~

~~Our~~PART ~~Auburn,~~II ~~New York facility, which is primarily our defense production location, consists of approximately 21,533 square feet. This property was purchased in March of 1998.~~

Item 35. ~~LEGAL~~MARKET ~~PROCEEDINGS~~FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

~~From~~Market ~~time~~Price to time, various inquiries, potential claims and charges and litigation 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 of ~~these claims currently pending, individually~~ and inDividends on the ~~aggregate,~~Registrant’s ~~have~~Common ~~been~~Equity ~~adequately reserved~~ and ~~will~~Related ~~not~~Stockholder ~~have~~Matters ~~any material adverse effect on our consolidated financial position or results of operations, although no assurance can be made in this regard.~~

~~Item~~Our 4common stock is traded in the over-the-counter market on the Nasdaq National Market System under the symbol ICST. ~~SUBMISSION~~Below OFare ~~MATTERS~~the TOquarterly Ahigh ~~VOTE~~and OFlow ~~SECURITY~~sale ~~HOLDERS~~prices of our common stock for the fiscal years ended July 2, 2005 and July 3, 2004 based on the daily closing price.

None.


	Fiscal Year 2005		Fiscal Year 2004⁽¹⁾
	High	Low	High	Low
First quarter	24.68	19.92	35.63	28.09
Second quarter	25.54	20.88	34.59	26.10
Third quarter	20.64	18.22	29.53	23.85
Fourth quarter	21.94	17.41	27.46	23.41

13(1) In our Form 10-K for the year ended July 3, 2004 the closing price reported was the intraday high/low. The prices shown above have been adjusted to reflect the daily closing high/low price.

~~Table~~13 ~~of Contents~~

~~PART~~We IIhave not in the past, and do not expect for the foreseeable future to pay dividends on our common stock. Instead, we anticipate that all of our earnings in the foreseeable future will be used for working capital and other general corporate purposes. Our existing revolving credit loan agreement restricts our ability to pay dividends to the holders of our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions.

~~Item~~As 5of July 2, 2005, we had 70.2 ~~MARKET~~million ~~FOR~~shares ~~REGISTRANT’S~~of ~~COMMON~~common ~~EQUITY~~stock ~~AND~~outstanding which ~~RELATED~~are ~~STOCKHOLDER~~held ~~MATTERS~~by 197 holders of record and approximately 6,717 beneficial holders.

~~Our~~Issuer ~~common~~Purchases ~~stock is traded in the over-the-counter market on the Nasdaq National Market System under the symbol ICST. Below are the quarterly high and low sale prices~~ of ~~our~~Equity ~~common~~Securities ~~stock for the fiscal years ended June 28, 2003 and June 29, 2002.~~

	Fiscal Year 2003		Fiscal Year 2002
	High	Low	High	Low
First quarter	22.15	14.93	22.89	11.77
Second quarter	25.00	11.64	24.45	9.67
Third quarter	24.71	17.69	27.09	17.27
Fourth quarter	33.20	20.44	23.00	15.33

Shares are repurchased in open-market transactions pursuant to a stock repurchase program announced in September 2001. Up to 5.0 million shares of our common stock have been authorized for repurchase under the repurchase program of which 1.8 million shares remain to be repurchased. The repurchase program does not have an expiration date. We did not repurchase any shares in the open market in the quarter ended July 2, 2005.

We14 have not in the past, and do not expect for the foreseeable future to pay dividends on our common stock. Instead, we anticipate that all of our earnings in the foreseeable future will be used for working capital and other general corporate purposes. Our existing term loan restricts our ability to pay dividends to the holders of our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions.

AsItem ~~of June 28, 2003, we had 70~~6.2 ~~million~~SELECTED ~~shares~~CONSOLIDATED ~~outstanding.~~FINANCIAL DATA

14Five-Year Summary

~~Table~~(In ofthousands, ~~Contents~~except for per share data)

Item 6. SELECTED CONSOLIDATED FINANCIAL DATA


	Year Ended
	July 2, 2005		July 3, 2004		June 28, 2003		June 29, 2002		June 30, 2001
Consolidated Statement of Operations Data:

Revenue	$	243,110	$	272,140	$	241,762	$	182,654	$	188,298
Gross margin		143,407		163,376		144,097		106,350		116,301
Research and development		38,977		40,352		35,006		29,239		28,301
Amortization of Video research and development costs (2)		7,051		—		—		—		—
Merger/acquisition costs (1)(3)		3,203		—		—		2,900		—
Operating income		51,365		84,775		70,053		41,058		66,194

Net income	$	47,403	$	78,515	$	61,076	$	37,778	$	56,458

Basic income per share	$	0.68	$	1.12	$	0.90	$	0.57	$	0.87
Diluted income per share	$	0.67	$	1.08	$	0.87	$	0.54	$	0.81
Weighted average shares outstanding (basic)		70,197		70,358		67,898		66,500		64,837
Weighted average shares outstanding (diluted)		71,109		72,578		70,564		70,192		69,573

	July 2, 2005		July 3, 2004		June 28, 2003		June 29, 2002		June 30, 2001
Consolidated Balance Sheet Data:
Working capital	$	174,669	$	260,283	$	168,687	$	129,063	$	128,036
Total assets		407,722		377,596		315,148		276,392		154,117
Long-term debt, less current portion		—		—		—		28,514		280
Shareholders’ equity		381,593		336,225		270,823		183,971		139,053
# of fiscal weeks		52		53		52		52		52

~~Five~~1) ~~Year~~On ~~Summary~~January 4, 2002, we acquired Micro Networks Corporation. The acquisition resulted in a charge of $2.9 million related to the write-off of in-process research and development costs.

~~(In~~2) ~~thousands~~On August 4, ~~except~~2004, we acquired assets, which provides us with the technology and capability to develop a family of high performance mixed signal products for ~~per~~the ~~share~~high ~~data)~~definition and digital video/imaging market. Some of the assets acquired had very short useful lives, which were fully amortized in FY2005. This expense of $7.1 million is included in research and development expense for FY2005.

	Year Ended
	June 28,2003		June 29,2002		June 30,2001		July 1,2000		July 3,1999
Consolidated Statement of Operations Data:
Revenue	$	241,762	$	182,654	$	188,298	$	165,521	$	139,063
Gross margin		144,097		106,350		116,301		99,398		74,567
Research and development		35,006		29,239		28,301		24,848		21,316
Special charges (1)		—		2,900		—		—		15,051
Operating income (2)		70,053		41,058		66,194		24,016		18,406
Income (loss) from continuing operations		61,076		37,778		56,458		4,440		23,043
Net income	$	61,076	$	37,778	$	56,458	$	14,732	$	23,043
Diluted income per share (3)	$	0.87	$	0.54	$	0.81	$	0.30	$	0.86
Weighted average shares outstanding (diluted) (3)		70,564		70,192		69,573		49,871		26,277
	June 28, 2003		June 29, 2002		June 30, 2001		July 1, 2000		July 3, 1999
Consolidated Balance Sheet Data:
Working capital	$	168,687	$	129,063	$	128,036	$	56,094	$	26,910
Total assets		315,148		276,392		154,117		100,485		87,795
Long-term debt, less current portion (4)		—		28,514		280		835		169,000
Shareholders’ equity (deficit) (4)		270,823		183,971		139,053		68,920		(106,912	)
# of fiscal weeks		52		52		52		52		53

3)	In FY2005, we incurred $3.2 million of costs related to the proposed merger of ICS with Integrated Device Technology. These costs are expensed as incurred.

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1) On January 4, 2002, we acquired Micro Networks Corporation. The acquisition resulted in a charge of $2.9 million related to the write-off of in-process research and development costs. On May 11, 1999, we merged with ICS Merger Corp., a transitory merger company formed and wholly owned by the affiliates of Bain Capital, LLC and Bear, Stearns and Company Inc. (the “Equity Investors”). We refer to this event as the recapitalization. In connection with the recapitalization, we recorded a compensation charge of $15.1 ~~million related to the accelerated vesting, cash-out and conversion of employee stock options.~~

2)Item Includes a charge of $ 26.9 million relating to (a) prepayment penalty, totaling $15.4 million, associated with the repurchase of the aggregate outstanding principal amount of our senior subordinated notes (b) the elimination of deferred financing costs, totaling $11.7 ~~million associated with the repayment of our senior subordinated notes and senior credit facility (c) purchase of $2~~.0 ~~million~~MANAGEMENT’S ofDISCUSSION ~~our~~AND ~~senior~~ANALYSIS ~~subordinated~~OF ~~notes~~FINANCIAL ~~below~~CONDITION ~~par~~AND inRESULTS ~~September~~OF ~~1999,~~OPERATIONS ~~resulting in a gain of $36,000 net of income taxes and (d) purchase of $5.0 million of our senior subordinated notes below par in November 1999 resulting in a gain of $134,000 net of income taxes.~~

3)We ~~Diluted~~design, ~~income~~develop ~~per~~and ~~share~~market ~~and~~silicon ~~weighted~~timing ~~average~~devices ~~shares~~that ~~outstanding-diluted~~emit ~~have~~timing ~~been~~signals ~~adjusted~~used to sequence ~~reflect~~and synchronize electronic operations to ensure that information is interpreted at the 1right time and speed.~~6942-to-1~~ ~~common~~Our ~~stock-split~~silicon ~~that~~timing ~~occurred~~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 ~~pricing~~communications infrastructure ~~date~~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 ~~the~~complexity ~~initial~~require ~~public~~silicon ~~offering~~timing devices to time and synchronize their various operations. Additionally, we now offer surface acoustic wave (“SAW”) technology to develop high performance products for ~~all~~optical ~~periods~~networking ~~shown~~and wireless infrastructure markets.

4)Prices Wefor ~~issued~~our ~~$100.0~~products ~~million~~are inpredominantly ~~aggregate~~a ~~principal amount~~ function of ~~senior~~their ~~subordinated~~position ~~notes~~ in ~~connection with~~ the ~~recapitalization~~product ~~and~~life ~~entered~~cycle, ~~into~~design acomplexity, ~~$95.0~~competitive ~~million senior credit facility. On May 22~~environment, ~~2000,~~the weprice ~~completed~~of ~~our~~alternative ~~initial~~solutions ~~public~~such ~~offering~~as ~~(IPO)~~crystal ofoscillators ~~12.5~~and ~~million~~overall ~~shares~~market ~~of our common stock~~demand. We ~~used~~recognize ~~the~~revenue ~~net~~upon ~~proceeds~~transfer of ~~this~~title, ~~initial~~and ~~offering~~substantially toall ~~repay~~ of our ~~bank~~sales ~~debt,~~are ~~close~~made ~~our~~on ~~tender offer for subordinated notes, and pay~~ the ~~fees~~basis ~~and~~of ~~expenses~~purchase ~~associated~~orders ~~with~~rather ~~the~~than ~~offering~~long-term agreements.

15Significant Transactions

~~Table~~Acquisition of Micro ~~Contents~~Networks Corporation

~~Item~~On 7January 4, 2002 we acquired Micro Networks Corporation (“MNC”) for $74.9 ~~MANAGEMENT’S~~million, ~~DISCUSSION~~net ~~AND~~of ~~ANALYSIS~~cash. OFWe ~~FINANCIAL~~believe ~~CONDITION~~that ~~AND~~by ~~RESULTS~~acquiring MNC we now have access to technology that will enhance the performance of our silicon timing products in order to strengthen our position within existing OFstrategic ~~OPERATIONS~~markets such as servers and storage systems. The purchase price included $5.6 million in purchase accounting liabilities and write-down of certain fixed assets related to our preliminary plan to restructure the activities of the acquired entity. MNC received a $2.5 million income tax refund during fiscal year 2003 and as a result goodwill was adjusted. Goodwill was reduced $1.2 million in fiscal 2004 as a result of 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.

WeAcquisition 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~~high ~~consumer~~performance ~~products,~~mixed 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.~~

~~Prices~~On ~~for~~August ~~our products~~4, ~~are~~2004 ~~predominantly~~we announced that we had signed an agreement to purchase technology and the capability to develop a ~~function~~family of ~~their~~high ~~position~~performance inmixed ~~the~~signal ~~product~~products ~~life~~for ~~cycle,~~the ~~design~~high ~~complexity,~~definition ~~competitive~~and ~~environment,~~digital video/imaging market. In the ~~price~~first quarter of ~~alternative~~fiscal ~~solutions~~year ~~such~~2005 aswe ~~crystal~~completed ~~oscillators~~the purchase and ~~overall~~paid ~~market~~$24.5 ~~demand~~million for the purchase of intellectual property and a team of proven engineers. WeSome ~~recognize~~of ~~revenue~~these ~~upon~~assets had a short useful life and were fully amortized in the ~~transfer~~first quarter of ~~title~~fiscal year 2005, resulting in an additional $7.1 million, which was included in research and ~~substantially~~development ~~all~~expense. The remaining assets consist of ~~our~~a ~~sales~~database ~~are~~valued ~~made~~at on$16.2 ~~the~~million ~~basis~~with a useful life of ~~purchase~~eight ~~orders~~years ~~rather~~and ~~than~~an ~~long-term~~assembled workforce ~~agreements~~valued at $1.2 million with a useful life of nine years.

~~Significant~~Merger of ~~Transactions~~ Integrated Circuit Systems, Inc and Integrated Device Technology, Inc.

~~Acquisition~~On June 15, 2005, we entered into a merger agreement with Integrated Device Technologies, Inc., a Delaware corporation (“IDT”), and Colonial Merger Sub I, Inc., a wholly-owned subsidiary of ~~Micro~~IDT ~~Networks~~(“Merger ~~Corporation~~Sub”). The merger agreement, a copy of which was filed as an exhibit to a Current Report on form 8-K on June 17, 2005, provides for the merger of ICS with and into Merger Sub, with Merger Sub continuing as the surviving corporation in the merger and as a wholly-owned subsidiary of IDT (the “Merger”). At the time when the Merger becomes effective, each share of ICS common stock issued and outstanding immediately prior to the effective time of the Merger will be canceled and converted into the right to receive $7.25 in cash and 1.3 shares of common stock of IDT. Based on the number of shares of ICS common stock and IDT common stock outstanding as of July 1, 2005 (assuming the exercise of all outstanding IDT stock options and ICS stock options), immediately after the Merger, the

On16 January 4, 2002 we acquired Micro Networks Corporation (“MNC”) for $74.9 million, net of cash. We believe that by acquiring MNC we now have access to technology that will enhance the performance of our silicon timing products in order to strengthen our position within existing strategic markets such as servers and storage systems. The purchase price includes $5.6 million in purchase accounting liabilities and write-down of certain fixed assets related to our preliminary plan to restructure the activities of the acquired entity. MNC received a $2.5 million income tax refund during fiscal year 2003 and as a result goodwill was adjusted. The results of MNC have been included in the consolidated financial statements since the acquisition date.

~~Secondary~~shareholders ~~Public~~of ~~Offering~~IDT immediately before the Merger will own approximately 54% of the outstanding IDT common stock in the aggregate and the shareholders of ICS will own approximately 46% of the outstanding IDT common stock in the aggregate.

InThe ~~May~~consummation ~~2001, a~~of ~~secondary~~the ~~offering~~Merger ~~took~~is ~~place,~~subject into ~~which~~the ~~certain~~satisfaction ~~shareholders~~or waiver of closing conditions applicable to both IDT and ICS, including regulatory review and approval by the ~~Company~~stockholders ~~sold~~of 11both IDT and ICS.3 ~~million~~ICS ~~shares~~and IDT have each called a special meeting of ~~our~~its ~~common~~shareholders ~~stock~~to vote on the proposals related to the ~~public.~~Merger, Wewhich ~~did~~meetings ~~not~~are ~~receive~~currently ~~any~~scheduled ofto ~~the~~occur ~~proceeds~~on ~~from~~September 15, 2005. We hope to complete the Merger ~~sale~~by the end of the ~~shares~~third inquarter ~~this~~of ~~secondary~~calendar ~~offering~~year 2005.

16Subsequent Event

~~Table~~On August 31, 2005 we entered into a patent cross license agreement with Freescale Semiconductor, Inc. Upon the execution and delivery of ~~Contents~~the cross-license agreement, ICS agreed to pay to Freescale a non-refundable payment of $10.0 million. In addition, in connection with the execution and delivery of the cross-license agreement, ICS and Freescale entered into an option agreement, pursuant to which ICS has the option to purchase from Freescale certain of its assets for approximately $35.0 million. ICS has not yet exercised its option as of the date of the filing of this report but has a right to do so under the option agreement at any time until September 23, 2005.

Annual Results of Operations

The following table sets forth statement of operations line items as a percentage of total revenue for the periods indicated and should be read in conjunction with the Consolidated Financial Statements and Notes thereto.

(Expressed as a percentage of total revenue)

	Year Ended
	June 28, 2003		June 29, 2002		June 30, 2001
	July 2,2005		July 3,2004		June 28,2003
Revenue	100.0	%	100.0	%	100.0	%
Gross margin	59.60		5860.20		6159.86
Research and development expense	1416.50		1614.08		1514.05
Selling, general and administrative expense	16.1		18.1		11.6
Amortization of video research and development costs	2.9		—		—
Non-recurring special charge	—		1.6		—
Selling, general and administrative expense	15.9		13.2		15.2
Operating income	29.0		22.5		35.2
Charges arising from acquisition	1.3		—		—
Interest and other income	1.2		1.7		1.9
Amortization of Intangibles	1.8		0.8		0.9
Interest expense	(0.6	)	(0.6	)	(0.1	)
Operating income	21.1		31.2		29.0
Income before income taxes from continuing operations	29.6		23.6		37.0
Interest and other income	1.7		0.9		1.2
Income tax expense	4.3		2.9		7.0
Interest expense	(0.0	)	(0.1	)	(0.6	)
Net income	25.3	%	20.7	%	30.0	%
Income before income taxes from continuing operations	22.8		32.0		29.6
Income tax expense	(3.3	)	(3.1	)	(4.3	)
Net income	19.5	%	28.9	%	25.3	%

Fiscal Year ~~2003~~2005, as Compared to Fiscal Year ~~2002~~2004

Revenue. ~~Total~~Revenue ~~revenue~~declined ~~for~~11%, ~~fiscal~~as ~~year~~the ~~ended June~~average 28selling price declined 5%, ~~2003~~while ~~increased~~volume bydecreased ~~$59~~6%.1 ~~million~~Units tofor ~~$241.8~~PC ~~million~~were asflat ~~compared~~year toover year as the ~~previous~~market ~~year~~for our products put on motherboards decreased from fiscal 2004. The ~~increase~~communications ismarket ~~primarily~~to ~~due~~which towe ~~the~~ship ~~increases~~slowed in ~~sales~~the tofirst ~~all~~half of the fiscal ~~end~~year ~~markets~~to ~~and~~decrease ~~the~~communication ~~acquisition~~equipment ofin ~~Micro~~the ~~Networks~~channel. ~~Corporation~~Digital ~~(“MNC”)~~consumer inunits ~~the March~~improved ~~quarter~~because of ~~fiscal~~increased ~~2002~~penetration into games consoles and digital TV. ~~The~~While ~~average~~military ~~selling~~represents ~~price~~less ~~declined~~than 510% ~~while~~of ~~volume~~our ~~increased~~revenue, 40the decline in military of 43% year on year reflects a weaker procurement environment for our products.

Foreign revenue, which includes shipments of integrated circuits to foreign companies as well as offshore subsidiaries of US multinational companies, was 74.6% of total revenue for fiscal year 2003 as compared to 78.6% of total revenue in the prior year. The ~~decrease~~following inis ~~foreign revenue as~~ a ~~percentage~~summary of ~~total~~ revenue ~~was~~percentages ~~due~~by toend ~~increased~~market: sales in the last time buys for some older parts which were sold domestically. Certain of our international sales were to customers in the Pacific Rim, which in turn sold some of their products to North America, Europe and other non-Asian markets.

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, test, quality assurance, product yields and the cost of personnel and equipment associated with manufacturing support. Cost of sales increased $21.4 million to $97.7 million for fiscal year 2003, as compared to the prior year period due to increased sales. Gross margin as a percentage of total revenue was 59.6% for fiscal year 2003 as compared to 58.2% in the prior year. The overall increase in gross margin as a percentage of revenue is due to product mix, including last time buys for some older high margin products. In addition prior year amounts include the non-recurring charge of $1.3 million related to the fair value adjustment to inventory that was acquired in connection with the acquisition of MNC and sold during fiscal year 2002. We anticipate that gross margin will continue to fluctuate as a percentage of revenue because of anticipated fluctuations in product mix, manufacturing costs and competitive pricing.


	FY2005		FY2004		Year over Year Revenue Growth
PC	46	%	43	%	-5	%
Digital Consumer	17	%	14	%	3	%
Communications	32	%	34	%	-16	%
Other	5	%	9	%	-43	%

~~Research~~17 and Development Expense. Research and development (“R&D”) expense increased $5.8 million to $35.0 million for fiscal year 2003 as compared to the prior year. As a percentage of revenue, research and development decreased to 14.5% as compared to 16.0% in fiscal year 2002.

17Foreign revenue, which includes shipments of integrated circuits to foreign companies as well as offshore subsidiaries of US multinational companies, was 74.1% of total revenue for fiscal year 2005 as compared to 76.1% of total revenue in the prior year. Certain of our international sales were to customers in the Pacific Rim, which in turn sold some of their products to North America, Europe and other non-Asian markets.

~~Table~~Gross Margin. Gross margin represents net revenue less cost of ~~Contents~~sales. Cost of sales includes the cost of purchasing the finished silicon wafers manufactured by independent foundries, costs associated with assembly, packaging, test, quality assurance, product yields and the cost of personnel and equipment associated with manufacturing support. Cost of sales decreased $9.1 million to $99.7 million for fiscal year 2005, as compared to the prior year period due to decreased sales. Gross margin as a percentage of total revenue was 59.0% for fiscal year 2005 as compared to 60.0% in the prior year. The overall decrease in gross margin as a percentage of revenue is due to the decline in volume and a $0.04 per unit decline in average selling price. We anticipate that gross margin will continue to fluctuate as a percentage of revenue because of anticipated fluctuations in product mix, manufacturing costs and competitive pricing.

~~R&D~~Research ~~costs~~and ~~consist~~Development ~~primarily~~Expense. ofResearch ~~the salaries~~ and ~~related~~development ~~expenses~~(“R&D”) ofexpense ~~engineering~~decreased ~~employees~~$1.4 ~~engaged~~million into ~~research,~~$39.0 ~~design~~million for ~~and~~fiscal ~~development~~year ~~activities,~~2005 ~~costs~~as ~~related~~compared to ~~design~~the ~~tools~~prior year. As a percentage of revenue, ~~supplies~~research and ~~services~~development ~~and~~increased ~~facilities~~to ~~expenses~~16.0% ~~The~~as ~~level~~compared ofto ~~research~~14.8% ~~and~~in ~~development~~fiscal ~~expenditures~~year as2004 abecause ~~percentage~~ of ~~net~~lower ~~revenues~~sales. ~~will~~During ~~vary~~fiscal ~~from~~year ~~period~~2005, we spent $1.8 million to ~~period,~~hire additional ~~depending,~~people in ~~part~~R&D, onoffset ~~the level~~by a decrease of ~~net~~$2.3 ~~revenues~~million in variable compensation and, in$0.9 ~~part,~~million less on ~~our~~R&D ~~success~~overhead inexpenses. ~~recruiting~~In the ~~technical~~first ~~personnel~~quarter ~~needed~~of ~~for~~fiscal ~~our~~year ~~new~~2005 ~~product~~we ~~introductions~~completed ~~and~~the ~~process~~purchase ~~development.~~of Wetechnology ~~continuously~~for ~~attempt~~the capability to develop ~~control~~a ~~expense~~family ~~levels~~of inhigh ~~all~~performance ~~areas~~mixed ~~including~~signal ~~research~~products for the high definition and ~~development.~~ ~~However,~~digital wevideo/imaging ~~continue~~market toand ~~make~~paid ~~substantial~~$24.5 ~~investments~~million infor ~~research~~the purchase of intellectual property and ~~development~~a toteam ~~enhance~~of ~~our~~proven ~~product~~engineers. ~~offerings,~~$7.1 ~~which~~million of the assets purchased were amortized in ~~turn~~the ~~are~~first ~~critical~~quarter toof ~~our~~fiscal ~~future~~2005 ~~growth~~as a result of short useful lives.

~~Selling,~~R&D ~~General,~~costs ~~Administrative~~consist ~~and~~primarily ~~Other.~~of ~~Selling,~~the ~~general,~~salaries ~~administrative~~ and ~~other~~related ~~expense~~expenses ~~(“SG&A”),~~of ~~including amortization~~engineering ofemployees ~~indefinite-lived~~engaged ~~intangible~~in ~~assets~~research, design and ~~management~~development ~~fees~~activities, ~~increased~~costs ~~$5.9~~related ~~million~~ to ~~$39.0~~design ~~million~~tools, ~~for~~supplies ~~fiscal~~and ~~year~~services ~~2003~~and asfacilities ~~compared~~expenses. toThe ~~the~~level ~~prior~~of research ~~year~~and ~~period.~~development Asexpenditures as a percentage of ~~total~~net ~~revenue,~~revenues ~~selling,~~will ~~general,~~vary ~~administrative~~from ~~and~~period ~~other expenses decreased~~ to ~~16.1%~~period, ofdepending, ~~revenue~~in aspart, ~~compared~~on tothe ~~18.1%~~level inof ~~the~~net ~~prior~~revenues ~~year~~and, ~~period.~~in ~~The~~part, ~~decrease~~on isour ~~attributable~~success toin recruiting the ~~settlement~~technical ofpersonnel ~~the~~needed ~~patent~~for ~~litigation~~our ~~that~~new ~~was~~product introductions ~~recorded~~and inprocess ~~fiscal~~development. ~~year~~We ~~2002.~~continuously ~~Refer~~attempt to ~~footnote~~control 18expense ~~for~~levels ~~additional~~in ~~information regarding~~all ~~the~~areas ~~patent~~including ~~litigation~~research and development. ~~SG&A~~However, ~~expenses~~we ~~consist~~continue ~~mainly~~to ofmake ~~salaries~~investments ~~and~~in ~~related~~research ~~expenses,~~and ~~sales~~development ~~commissions,~~to ~~professional~~enhance ~~and~~our ~~legal~~product ~~fees~~offerings, ~~facilities~~which ~~expenses~~in turn ~~and~~are ~~amortization~~critical ofto ~~intangibles~~our future growth.

InSelling, ~~accordance~~General ~~with~~and Administrative. ~~Statement~~Selling, ofgeneral ~~Financial~~and ~~Accounting~~administrative ~~Standards~~expenses (“~~SFAS~~SG&A”), Noincreased $2.6 ~~142, “Goodwill~~million ~~and~~to ~~Other~~$38.5 ~~Intangible~~million ~~Assets”,~~for wefiscal ~~ceased~~year 2005 as compared to the ~~amortization~~prior year period. As a percentage of ~~goodwill~~total ~~beginning~~revenue, ~~July~~selling, 1general, administrative ~~2001~~and other expenses increased to 15.9% ~~Instead,~~of werevenue ~~will,~~as atcompared ~~least~~to ~~annually,~~13.2% ~~review~~in the ~~recoverability~~prior year period. SG&A expenses consist mainly of ~~goodwill~~salaries and ~~other~~related ~~indefinite~~expenses, ~~lived~~sales ~~intangible~~commissions, ~~assets~~and professional and legal fees.

InSelling ~~Process~~expense ~~Research~~increased ~~and Development~~$1.8 Inmillion ~~connection~~in ~~with~~fiscal 2005 as compared to the ~~acquisition~~prior ofyear. ~~MNC,~~This weis ~~incurred~~ a ~~one-time~~result ~~charge~~ of $21.95 million ~~for~~in ~~the~~higher ~~write-off~~commissions ofdue to a change in ~~process~~commission ~~research~~rate ~~and~~structure. ~~development~~As ~~during~~a percentage of total revenue, sales expense increased slightly to 10.7% in fiscal ~~year~~2005 ~~2002~~from 8.9% in fiscal 2004.

~~The~~18 value of in-process research and development was determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate includes a risk-adjusted discount rate to take into account the uncertainty surrounding the successful development of the purchased in-process technology.

~~Operating~~General ~~Income. In~~and ~~dollar~~administrative ~~terms,~~expense ~~operating~~increased ~~income was~~ $~~70.~~1.3 million in fiscal ~~year~~2005 ~~2003~~as compared to ~~$41~~fiscal 2004. As a percentage of total revenue, general & administrative expense increased to 5.1% ~~million~~of revenue as compared to 4.0% in the prior year period. ~~Expressed~~The asincrease is primarily attributable to a ~~percentage~~$1.8 ofmillion ~~revenue~~increase in audit and consulting fees related to our Sarbanes-Oxley compliance work, ~~operating~~and ~~income~~legal ~~was~~and 29consulting fees of $0.5 million related to the acquisition of assets for the Video business unit, offset by decreases of $0%.6 million in bonuses and 22$0.5%4 million in ~~fiscal~~insurance ~~year~~costs ~~2003~~compared ~~and~~to fiscal ~~year 2002,~~ ~~respectively~~2004.

~~Interest~~Included ~~and~~in ~~Other~~SG&A ~~Income.~~is ~~Interest~~the ~~and~~amortization ~~other~~of ~~income~~deferred ~~was~~compensation for $3restricted stock awards.0 ~~million~~The ~~for~~amortization ~~fiscal~~of ~~year~~deferred ~~ended~~compensation ~~June~~relating ~~28,~~to ~~2003~~stock ~~and~~awards was $30.2 million in ~~the~~fiscal ~~prior~~2005 ~~year~~as ~~period.~~compared ~~Included~~to ~~in other income is the gain of~~ $0.67 million ~~as a result~~ of ~~the~~amortization ~~sale~~in offiscal ~~50%~~2004 ofrelating ~~our~~to ~~investment~~stock inoptions ~~Maxtek~~issued ~~Technology. The decrease~~ in ~~interest~~fiscal ~~income is~~2002 ~~attributable~~below tofair ~~declining interest rates~~market value.

~~Interest~~Amortization ~~Expense~~of Intangibles. ~~Interest expense~~Amortization ~~was~~of ~~$1.5~~intangible ~~million~~assets acquired in ~~fiscal~~connection ~~year~~with ~~2003~~the ~~and~~acquisition of MNC was $12.13 million infor fiscal year ~~2002.~~2005 ~~The~~and ~~increase~~for infiscal ~~expense~~year is2004. ~~due~~An toadditional ~~the~~ $452.0 million ~~term debt incurred~~ in ~~order~~amortization toresulted ~~purchase~~from ~~MNC~~the inacquisition ~~the~~of ~~second~~intangibles ~~half~~related ofto ~~fiscal~~the ~~year~~Video ~~2002.~~business assets.

~~Income~~Acquisition ~~Tax Expense~~Charges. ~~Our~~In ~~effective~~connection ~~tax~~with ~~rate~~the ~~was~~proposed ~~14.6%~~acquisition ~~and~~of ~~12.4%~~our company ~~for~~by ~~fiscal~~Integrated ~~years~~Device ~~2003 and 2002~~Technology, ~~respectively~~Inc., ~~The~~we ~~tax~~incurred ~~rate~~$3.2 ~~increased~~million ~~due~~of toexpense. ~~the~~Included ~~additional~~in ~~domestic~~these ~~income~~expenses ~~generated~~were ~~by MNC~~$0.8 ~~The~~million ~~effective~~in ~~tax~~legal ~~rate~~fees, ~~for~~$2.3 ~~fiscal~~million ~~years~~in ~~2003~~investment ~~and~~opinion ~~2002~~fees, ~~reflects~~and ~~the~~$0.1 ~~tax-exempt~~million ~~status~~in ofFTC ~~our~~filing ~~Singapore~~fees. ~~operation,~~These ~~which~~costs ~~has~~are ~~been~~expensed ~~given pioneer~~as ~~status~~incurred, orand ~~exemption~~included ~~of taxes on non-passive income for five years as stated~~ in ~~our~~charges ~~agreement~~arising ~~with~~from ~~the Economic Development Board of Singapore~~merger. ~~The five-year period ends December 31, 2007. We do not currently calculate deferred taxes on our investment in~~

18Operating Income. Operating income decreased $33.4 million to $51.4 million in fiscal year 2005 compared to $84.8 million in the prior year period. Expressed as a percentage of revenue, operating income was 21.1% and 31.2% in fiscal year 2005 and fiscal year 2004, respectively.

~~Table~~Interest and Other Income. Interest and other income was $4.2 million for fiscal year ended July 2, 2005 and $2.5 million in the prior year period. Included in other income for fiscal 2004 is the gain of ~~Contents~~$0.3 million as a result of the sale of 25% of our initial investment in Maxtek Technology. The increase in interest income is attributable to the move to longer maturities in our investments.

~~our~~Interest ~~Singapore~~Expense. ~~operations,~~Interest asexpense ~~all~~was ~~undistributed~~$0.06 ~~earnings~~million ~~are~~in ~~permanently~~fiscal ~~reinvested~~year ~~back~~2005 ~~into~~and ~~the Singapore facility~~$0.3 ~~If we~~million ~~were~~in tofiscal ~~record~~year ~~deferred~~2004. ~~taxes~~The ondecrease ~~our~~is ~~investment,~~due to the ~~amount~~elimination ~~would~~of beour adebt ~~$51.0~~in ~~million~~the ~~liability~~second asquarter of ~~June~~fiscal ~~28, 2003~~2004.

~~Fiscal~~Income ~~Year~~Tax ~~2002~~Expense. Our effective tax rate was 14.6% and 9.8% for fiscal years 2005 and 2004, asrespectively. ~~Compared~~The increase in our effective tax rate is the result of changes in state tax effects in fiscal 2005, an increase in our contingency reserve of $0.9 million and the non-deductible acquisition costs incurred in the fourth quarter of fiscal year 2005. The increase in the tax contingency reserve was primarily attributable to ~~Fiscal~~the ~~Year~~increase in exposure due to the current ongoing federal audit for our fiscal years 2001, 2002 and 2003 and potential tax exposure in foreign jurisdictions for fiscal years 2001 through 2005.

~~Revenue.~~The effective ~~Total~~tax ~~revenue~~rate for fiscal ~~year~~years ~~ended~~2005 ~~June~~and ~~29,~~2004 ~~2002~~reflects the tax-exempt status of our Singapore operation, ~~decreased~~which byhas ~~$5.6~~been ~~million~~given topioneer ~~$182.7~~status, ~~million~~or asexemption ~~compared~~of totaxes ~~the~~on ~~previous~~non-passive ~~year.~~income ~~The~~for ~~decrease~~five isyears ~~primarily due~~as tostated in our agreement with the ~~decline~~Economic Development inBoard ~~end~~of ~~market~~Singapore. ~~demand,~~The ~~which~~five-year ~~affected~~period ~~overall~~ends ~~revenue~~December ~~and~~31, ~~was~~2007. ~~offset~~We bydo ~~the~~not ~~acquisition~~currently ofrecord ~~Micro~~deferred ~~Networks~~taxes ~~Corporation~~on ~~(“MNC”)~~our investment in ~~the~~our ~~March~~Singapore ~~quarter.~~operations, ~~Although~~as weall ~~have~~undistributed ~~experienced~~earnings ~~stabilization~~are inpermanently ~~our~~reinvested ~~average~~back ~~selling~~into ~~prices~~the Singapore ~~for~~facility. ~~the~~If ~~second~~we ~~half~~were ofto ~~fiscal~~record ~~year~~deferred ~~2002~~taxes on our investment, the ~~average~~amount ~~selling~~would ~~price~~be ~~declined~~an 6$88.8%7 ~~while~~million ~~volume~~liability ~~increased~~as 4of July 2, 2005.~~0%.~~

~~Foreign~~Fiscal ~~revenue,~~Year ~~which includes shipments of integrated circuits to foreign companies as well as offshore subsidiaries of US multinational companies~~2004, ~~was 78.6% of total revenue for fiscal year 2002~~ as ~~compared~~Compared to ~~71.0%~~ ofFiscal ~~total~~Year ~~revenue~~2003 in the prior year. The increase in foreign revenue as a percentage of total revenue was due to declining domestic sales as our customers have responded to tight markets by moving portions of their manufacturing operations to overseas markets with lower labor costs and increased European sales due to the addition of MNC. Certain of our international sales were to customers in the Pacific Rim, which in turn sold some of their products to North America, Europe and other non-Asian markets.

~~Gross Margin~~Revenue. ~~Cost~~Total ofrevenue ~~sales increased $4.3 million to $76.3 million~~ for fiscal year ~~2002,~~ended asJuly ~~compared~~3, to2004 ~~the~~increased ~~prior~~by ~~year period~~$30.4 ~~Gross~~million ~~margin~~to ~~as a percentage of total revenue was 58~~$272.2%1 ~~for~~million ~~fiscal year 2002~~ as compared to ~~61.8% in~~ the ~~prior~~previous year. The ~~overall~~increases ~~decrease~~ in ~~gross margin as a percentage of~~sales ~~revenue~~occurred isover ~~due~~all ~~to product mix. In addition the non-recurring charge~~ of ~~$1.3~~our ~~million~~end ~~related to the fair value adjustment to inventory that was acquired in connection with the acquisition of MNC and sold during fiscal year 2002 further reduced margins~~markets.

~~Research~~19 and Development Expense. Research and development expense increased $0.9 million to $29.2 million for fiscal year 2002 as compared to the prior year. As a percentage of revenue, research and development increased to 16.0% as compared to 15.0% in fiscal year 2001. The increase in research and development in dollar terms is the result of the acquisition of MNC, offset slightly by the impact of company wide cost saving initiatives.

~~Selling,~~Communications ~~General,~~was ~~Administrative~~the ~~and~~fastest ~~Other.~~growing ~~Selling,~~revenues ~~general,~~driven ~~administrative~~by ~~and~~ramp-ups ~~other~~in ~~expense~~the ADSL, ~~including~~server, ~~amortization~~server ofmemory ~~intangibles~~ and ~~management fees,~~networking ~~increased $11~~markets.4 ~~million~~Of tothe $3330.24 million ~~for~~increase ~~fiscal~~in ~~year~~revenues, ~~2002~~communications aswas ~~compared~~$23.8 ~~to the prior year period~~million. ~~As a percentage of total revenue~~Combined, ~~selling,~~all ~~general, administrative and~~ other ~~expenses~~revenue ~~increased~~only togrew ~~18.1~~4% ~~of revenue~~ as ~~compared to 11.6% in~~ the ~~prior year~~average period. The increase is attributable to the purchase of MNC and increased legal fees associated with certain patent litigation. In addition, due to a conclusion in certain patent litigation, expenses related to this litigation were charged against selling, ~~general,~~price ~~administrative~~declined ~~and other expense~~7.8% ~~During~~while ~~fiscal~~volume ~~year~~increased ~~2001 selling, general, administrative and other expense was offset by the receipt of $2~~22.~~0 million in insurance proceeds received in relation to litigation charges incurred during fiscal year 2000~~1%.

InThe ~~accordance~~following ~~with~~is ~~SFAS~~a ~~No.~~summary ~~142, “Goodwill and Other Intangible Assets”, we ceased the amortization~~ of ~~goodwill~~revenue ~~beginning~~percentages ~~July~~by 1,end ~~2001.~~market: ~~Instead, we will, at least annually, review the recoverability of goodwill and other indefinite lived intangible assets. We had $0.2 million in amortization expense during fiscal year 2001.~~

In Process Research and Development. In connection with the acquisition of MNC, we incurred a one-


	FY2004		FY2003		Year over Year Revenue Growth
PC	43	%	46	%	5	%
Digital Consumer	14	%	16	%	0	%
Communications	34	%	29	%	34	%
Other	9	%	9	%	7	%

19Foreign revenue, which includes shipments of integrated circuits to foreign companies as well as offshore subsidiaries of US multinational companies, was 76.1% of total revenue for fiscal year 2004 as compared to 75.6% of total revenue in the prior year. Certain of our international sales were to customers in the Pacific Rim, which in turn sold some of their products to North America, Europe and other non-Asian markets.

~~Table~~Gross Margin. Gross margin represents net revenue less cost of ~~Contents~~sales. Cost of sales includes the cost of purchasing the finished silicon wafers manufactured by independent foundries, costs associated with assembly, packaging, test, quality assurance, product yields and the cost of personnel and equipment associated with manufacturing support. Cost of sales increased $11.1 million to $108.8 million for fiscal year 2004, as compared to the prior year period due to increased sales. Gross margin as a percentage of total revenue was 60.0% for fiscal year 2004 as compared to 59.6% in the prior year. The overall increase in gross margin as a percentage of revenue is due to increased sales of higher margin products, such as ADSL, server and server memory. We anticipate that gross margin will continue to fluctuate as a percentage of revenue because of anticipated fluctuations in product mix, manufacturing costs and competitive pricing.

~~time~~Research ~~charge~~and ofDevelopment Expense. R&D expense increased $25.93 million to $40.4 million for fiscal year 2004 as compared to the ~~write-off~~prior ofyear. inAs ~~process~~a percentage of revenue, research and development ~~during~~increased to 14.8% as compared to 14.5% in fiscal year ~~2002~~2003. During fiscal year 2004, we spent $3.6 million more on R&D projects and $1.7 million on hiring additional personnel and overhead expenses.

~~The~~R&D ~~value~~costs consist primarily of ~~in-process~~the ~~research~~salaries and ~~development~~related ~~was~~expenses ~~determined~~of byengineering ~~estimating~~employees ~~the~~engaged in research, design and development activities, costs related to ~~develop~~design ~~the~~tools, ~~purchased~~supplies ~~in-process~~and ~~technology~~services ~~into~~and ~~commercially~~facilities ~~viable~~expenses. ~~products,~~The ~~estimating~~level ~~the~~of ~~resulting~~research and development expenditures as a percentage of net ~~cash~~revenues ~~flows~~will vary from ~~such~~period ~~projects~~to ~~and~~period, ~~discounting~~depending, in part, on the level of net ~~cash~~revenues ~~flows~~and, ~~back~~in topart, ~~their~~on ~~present~~our success ~~value.~~in ~~The~~recruiting ~~discount~~the ~~rate~~technical ~~includes~~personnel aneeded ~~risk-adjusted discount~~for ~~rate~~our new product introductions and process development. We continuously attempt to ~~take~~control ~~into~~expense ~~account~~levels ~~the~~in ~~uncertainty~~all ~~surrounding~~areas ~~the~~including ~~successful~~research and development. ofHowever, ~~the~~we ~~purchased~~continue to make substantial investments in~~-process~~ ~~technology~~research and development to enhance our product offerings, which in turn are critical to our future growth.

~~Operating~~Selling, ~~Income.~~General Inand ~~dollar~~Administrative. ~~terms,~~SG&A ~~operating~~decreased ~~income~~$0.8 ~~was~~million to $4135.19 million infor fiscal year ~~2002~~2004 as compared to ~~$66.2 million in~~ the prior year period. ~~Expressed~~As as a percentage of total revenue, ~~operating~~selling, ~~income~~general, ~~was~~administrative 22and other expenses decreased to 13.52% ~~and~~of 35revenue as compared to 15.2% in ~~fiscal~~the prior year ~~2002~~period. SG&A expenses consist mainly of salaries and ~~fiscal~~related ~~year~~expenses, ~~2001~~sales commissions, ~~respectively~~and professional and legal fees.

~~Interest~~Selling ~~and~~expense ~~Other~~increased ~~Income~~$2.3 ~~Interest~~million ~~and~~in ~~other~~fiscal ~~income~~2004 ~~was~~as compared ~~$3.2~~to ~~million~~the ~~for~~prior ~~fiscal~~ year. ~~ended~~This ~~June~~is ~~29,~~a ~~2002~~result ~~and~~of ~~$3.6~~increased ~~million~~sales incommission ~~the~~to ~~prior~~outside ~~year~~sales ~~period.~~representatives ~~Although~~as ~~we have~~ a ~~greater~~result ~~cash~~of ~~balance~~higher ~~available~~revenue. ~~for~~As ~~investing,~~a ~~the~~percentage ~~overall~~of ~~decrease~~total inrevenue, ~~federal~~sales ~~rates~~expense ~~over~~decreased ~~the~~slightly ~~past~~to ~~year~~8.9% ~~has~~in ~~affected~~fiscal ~~our~~2004 ~~investment~~from ~~income~~9.1% in fiscal 2003.

~~Interest~~20 ~~Expense. Interest expense was $1.1 million in fiscal year 2002 and $0.2 million in fiscal year 2001. The increase in expense is due to the $45.0 million term debt incurred in order to purchase MNC.~~

~~Income~~General ~~Tax Expense. Our effective tax rate was 12.4%~~ and ~~18.9%~~administrative ~~for~~expense ~~fiscal~~declined ~~years 2002 and 2001, respectively~~$2.0 ~~The~~million effective tax rate for fiscal years 2002 and 2001 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. The tax rate dropped in fiscal ~~year~~2004 ~~2002~~ as wecompared ~~had~~to ~~increased~~fiscal ~~income from our Singapore facility~~2003. WeThe dodecrease ~~not currently calculate deferred taxes on our investment in our Singapore operations, as all~~is ~~undistributed~~attributable ~~earnings are permanently reinvested back into the Singapore facility. If we were~~ to ~~record deferred taxes on our investment, the amount would be~~ a ~~$36.3~~reduction ~~million~~of ~~liability~~legal asfees ofin ~~June~~fiscal ~~29, 2002~~2004.

~~Liquidity~~Included ~~and~~in ~~Capital~~SG&A is ~~Resources~~the amortization of deferred compensation for options issued in fiscal 2002 below fair market value. The amortization of deferred compensation relating to stock options was $0.7 million in fiscal 2004 as compared to $0.5 million in fiscal 2003. Fiscal year 2003 includes a $1.3 million accelerated payout for the buyout of executive stock options. Refer to Note14 in Notes to Consolidated Financial Statements for additional details.

AtAmortization ~~June~~of ~~28,~~Intangibles. ~~2003,~~Amortization ~~our principal sources~~ of ~~liquidity~~intangible ~~included~~assets ~~cash~~acquired ~~and~~in ~~investments of $123.0~~connection ~~million~~with ~~as compared to~~ the ~~June~~acquisition ~~29, 2002 balance~~ of ~~$110.5~~MNC million. The cash and investments include amounts, which have been permanently reinvested into the Singapore operations. If we were to repatriate these amounts, they would be subject to U.S. Federal Income Tax. Net cash provided by operating activities was $692.53 million infor fiscal year ~~2003,~~2004 as compared to $63.0 million in the prior year period. The increase is primarily attributable to the increase in operating income. Our days sales outstanding were 47 days in the fourth quarter of fiscal year 2003 and ~~the~~for ~~fourth quarter of~~ fiscal year ~~2002. Inventory turns increased from 4.72 times in the fourth quarter of fiscal year 2002 to 5.42 times in the fourth quarter of fiscal year~~ 2003.

~~Purchases~~Operating ~~for~~Income. ~~property~~Operating ~~and~~income ~~equipment~~increased ~~were~~ $514.7 million to $84.8 million in fiscal year ~~2003~~ as2004 compared to $370.41 million in the prior year period. ~~These~~Expressed ~~expenditures~~as ~~were~~a ~~primarily~~percentage toof ~~support~~revenue, ~~our~~operating ~~testing~~income ~~facility~~was 31.2% ~~in Singapore~~ and ~~the~~29.0% ~~manufacturing~~in ~~facility~~fiscal inyear ~~Worcester,~~2004 MAand ~~acquired~~fiscal ~~with~~year ~~MNC~~2003, respectively.

InInterest ~~September~~and ~~2001,~~Other weIncome. ~~announced~~Interest aand ~~stock~~other ~~repurchase~~income ~~program,~~was ~~which~~$2.5 ~~authorized~~million ~~the~~for ~~purchase, from~~fiscal ~~time~~year toended ~~time~~July 3, of2004 2and $3.0 million ~~shares~~in ofthe ~~our~~prior ~~common~~year ~~stock~~period. onIncluded in other income in fiscal 2004 is the ~~market~~gain of $0.3 Inmillion ~~October~~as ~~2002,~~a weresult ~~announced~~of the ~~that~~sale ~~our~~of ~~board~~25% of ~~directors~~our ~~approved~~initial toinvestment ~~increase~~in ~~the~~Maxtek ~~number~~Technology. ofIncluded ~~shares~~in toother beincome ~~repurchased~~for ~~under~~fiscal ~~this~~2003 ~~repurchase~~is ~~program~~the togain 3.of $0.6 million. ~~From inception~~as a result of ~~this~~the ~~program~~sale ~~through~~of ~~June~~50% ~~28,~~of ~~2003,~~our weinitial ~~had~~investment ~~purchased~~in 1Maxtek Technology.1 ~~million~~The ~~shares~~decrease ~~for~~in ~~$16.2~~interest ~~million~~income is attributable to declining interest rates.

20Interest Expense. Interest expense was $0.3 million in fiscal year 2004 and $1.5 million in fiscal year 2003. The decrease in expense is due to the elimination of our debt in the second quarter of fiscal 2004.

~~Table~~Income Tax Expense. Our effective tax rate was 9.8% and 14.6% for fiscal years 2004 and 2003, respectively. The decrease in our effective tax rate is the result of ~~Contents~~R&D tax credits of $4.3 million recorded in fiscal 2004. The effective tax rate for fiscal years 2004 and 2003 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 record 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 $70.8 million liability as of July 3, 2004.

InLiquidity June 2000, we obtained a $30.0 million revolving credit facility with a commercial bank to expire in June 2002, with an option to extend the facility for an additional period subject to certain covenants, including maintenance of certain financial ratios. At the beginning of the third quarter of fiscal 2002, we terminated this credit facility and ~~entered~~Capital ~~into~~Resources ~~a new facility as discussed below.~~

InAt ~~connection~~July ~~with~~2, ~~the acquisition of MNC~~2005, ~~we entered~~our ~~into~~principal asources ~~new~~of ~~revolving~~liquidity ~~credit~~included cash and short-term ~~loan~~investments of ~~facility~~$127.0 ~~dated~~million ~~December~~as ~~31,~~compared ~~2001,~~to ~~which~~the ~~will~~July ~~expire December 31~~3, 2004 balance of $195.6 million. The ~~new~~cash ~~facility~~and ~~enables~~investments usinclude toamounts ~~draw~~which ~~down~~have ~~$45.0~~been ~~million~~permanently ~~under~~reinvested into the ~~term~~Singapore ~~loan~~operations. ~~and~~In addition, $10100.09 million ~~under~~of ~~the~~our ~~revolving~~long-term ~~credit~~investments are ~~facility.~~invested Atin ~~our~~marketable ~~option,~~debt ~~the~~securities. ~~interest~~If ~~rates~~we ~~under~~were ~~the~~to ~~term~~repatriate ~~loan~~these ~~will~~amounts, bethey ~~either~~would ~~(1)~~be asubject ~~base~~to ~~rate,~~U.S. ~~which~~Federal isIncome ~~the~~Tax. ~~higher~~Net ofcash ~~(i)~~provided aby ~~rate~~operating ofactivities ~~interest~~was ~~announced~~$68.8 ~~from~~million ~~time~~in tofiscal ~~time~~year by2005, ~~the~~as ~~lenders’~~compared ~~administrative~~to ~~agent~~$89.7 asmillion in the prior ~~base~~year ~~rate~~period. ~~(“Base Rate”)~~The ordecrease ~~(ii)~~is primarily attributable to the ~~sum~~decrease ofin ~~0.5%~~operating ~~per~~income, ~~annum~~after ~~plus~~taxes, and the ~~federal~~after-tax ~~funds~~effect ~~rate~~of orthe change in amortization (2)including ~~London~~amortization ~~Interbank~~of ~~Offer~~video ~~Rate~~research ~~(“LIBOR”)~~and ~~plus~~development 1costs).~~75%.~~ AtOur ~~our~~days ~~option,~~sales outstanding ~~the~~were ~~interest~~62 ~~rates~~days ~~under~~in the ~~Revolving~~fourth ~~Credit~~quarter ~~Loan,~~of ~~will~~fiscal beyear ~~either~~2005 ~~(1)~~and 58 days in the ~~Base~~fourth ~~Rate~~quarter orof ~~(2) the~~fiscal ~~LIBOR~~year ~~Rate~~2004, ~~plus~~as a ~~pre-formulated~~result ~~margin.~~of ~~Since~~the ~~its~~effect ~~inception~~of wesales ~~paid~~mix ~~down~~towards ~~$35~~offshore sales, with longer sales terms.0 ~~million~~Inventory ofturns decreased from 5.2 times in the ~~term~~fourth ~~loan,~~quarter of ~~which~~fiscal ~~$32.0~~year ~~million~~2004 ~~was~~to ~~paid~~4.8 times in ~~fiscal~~the ~~2003.~~fourth Asquarter of ~~June~~fiscal ~~28,~~year ~~2003~~2005, ~~$10.0~~primarily ~~million~~because ~~was~~of ~~outstanding~~the oneffect ~~our~~of ~~term~~inventory ~~loan,~~held ~~all~~for ofa ~~which~~customer ~~is classified~~pursuant ~~current~~to a dispute.

~~Certain~~Purchases offor ~~our~~property ~~loan agreements require the maintenance of specified financial ratios, including a fixed charge coverage ratio, a funded debt to EBITDA ratio~~ and aequipment ~~minimum~~were ~~tangible net worth, and impose financial limitations~~$7.2 Atmillion ~~June 28, 2003, we were~~ in ~~compliance~~fiscal ~~with~~year ~~the~~2005 ~~covenants.~~as Ascompared ~~a result of early~~to ~~debt payoff the swap agreement was terminated in January 2003~~$8.6 million

~~The~~21 ~~following summarizes our significant contractual obligations and commitments as of June 28, 2003 (in thousands):~~

Contractual Obligations	Total		Less than 1 year		1 – 3years		4 – 5years		After 5 years
Long-Term Debt	$	10,000	$	10,000	$	—	$	—	$	—
Operating Leases		15,142		2,843		8,062		3,427		810
Total	$	25,142	$	12,843	$	8,062	$	3,427	$	810

in the prior year period. These expenditures were primarily to support our testing facilities in Singapore and San Jose, the fabrication capabilities in our facility in Worcester, MA acquired with MNC, and to support assembly operations in Singapore. We do not expect significant changes in these levels of capital expenditures.

~~Operating~~In ~~leases~~September ~~primarily~~2001, ~~consist~~we ofannounced a stock repurchase program, which authorized the purchase, ~~leased~~from ~~facilities~~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 to increase the number of shares to be repurchased under this repurchase program to 3.0 million. In October, 2004, we ~~utilize~~announced that our board of directors approved an increase in ~~various~~the ~~locations~~number of shares under this repurchase program to 5.0 million. From inception of this program through July 2, 2005, we have purchased 3.2 million shares for $67.8 million.

On ~~January~~March 41, ~~2002,~~2004 we ~~acquired~~ ~~MNC,~~entered ~~net~~into ofa ~~cash,~~revolving ~~for~~credit ~~$74.9~~loan ~~million.~~agreement, which ~~We believe that by acquiring MNC we now have access to technology that~~ will ~~broaden~~terminate ~~our~~March ~~offering of silicon timing products to strengthen our position within strategic markets such as servers~~1, ~~storage systems and communications~~2007. The ~~purchase~~revolving ~~price~~credit ~~includes~~loan ~~$5.6~~agreement ~~million~~allows inus ~~purchase~~to ~~accounting~~draw ~~liabilities and write-~~down ofto ~~fixed~~a ~~assets.~~maximum Ofbalance ~~the~~of ~~total amount recorded,~~ $120.20 million ~~represents~~in ~~costs~~increments ~~associated~~of ~~with~~not ~~closing~~less orthan ~~moving office and production activities and~~ $2500,000.0 ~~million~~At ~~represents~~our ~~severance~~option, ~~and~~the ~~other~~unpaid ~~personnel~~balance ~~costs.~~shall Webear ~~expect~~interest toat ~~complete~~ the ~~restructuring~~available London byInterbank ~~the~~Offer ~~end~~Rate of(“LIBOR”) ~~calendar~~Based ~~2003.~~Rate As(as ofdefined) ~~June~~or ~~28,~~the ~~2003,~~Prime weBased ~~have~~Rate ~~utilized~~(as ~~approximately $1~~defined).6 ~~million~~A ~~and~~commitment ~~$0.5~~fee ~~million~~on ofthe ~~this reserve~~average ~~relating~~daily tounused ~~severance~~portion ~~and facility closing costs, respectively. Approximately $0.4 million~~ of the ~~remaining~~revolving ~~amount~~credit ~~relates~~loan tobalance ~~severance and other personnel costs, which~~ will be ~~paid~~due inand ~~fiscal~~payable ~~year~~on ~~2004~~a ~~and~~quarterly $0basis.7 ~~million~~The commitment ~~relates~~fee towill ~~closing~~be ~~or moving~~between ~~production~~.20% ~~activities~~(.0020) ~~This~~and ~~reserve~~.25% is(.0025) ~~included~~based inon ~~“Accrued~~the ~~expense~~funded ~~and~~debt ~~other~~to ~~current~~EBITDA ~~liabilities”~~ratio incalculated the ~~Balance~~previous ~~Sheet~~quarter. ~~During~~There ~~fiscal year 2003, goodwill~~ was ~~adjusted~~no tooutstanding ~~reflect~~balance ~~changes~~on inour ~~estimated~~revolving ~~deferred~~credit ~~taxes~~loan ~~and~~agreement anas ~~income tax refund~~ of $July 2.5, ~~million~~2005. ~~The results of MNC have been included in the consolidated financial statements since the acquisition date.~~

21In connection with the acquisition of MNC in fiscal year 2002, we entered into a revolving credit and term loan facility dated December 31, 2001. During the first three months 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 the term loan. This loan agreement was terminated in the third quarter of fiscal 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) 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.

~~Table~~Our revolving credit loan agreement requires the maintenance of ~~Contents~~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 July 2, 2005 we were in compliance with all of these covenants.

InOn ~~fiscal~~January ~~year~~4, ~~2001~~2002, we ~~entered~~acquired ~~into~~MNC, annet ~~Investment~~of ~~and Stock Trade Agreement (the “Agreement”) with Maxtek Technology Co. Ltd (“Maxtek”)~~cash, anfor ~~overseas distributor in Taiwan and China. We invested~~ $474.09 million ~~and owned approximately 10% of Maxtek~~. ~~The~~We ~~Agreement~~believe ~~states~~ that ~~if Maxtek fails to successfully complete a public offering~~ by ~~December~~acquiring ~~5, 2005,~~MNC we, atnow ~~our sole option,~~ have ~~the~~access ~~right~~ to ~~demand~~technology ~~immediate~~that ~~repurchase~~will ofbroaden ~~all~~our ~~4.0~~offering ~~million shares, at the original purchase price plus accrued annual interest (commercial rate set by the Central Bank~~ of ~~China)~~silicon ~~during~~timing ~~the~~products ~~said~~to ~~period.~~strengthen ~~In fiscal 2003 we sold 50% of~~ our ~~investment~~position inwithin ~~Maxtek~~strategic markets ~~resulting~~such inas ~~a gain of $0.6 million. As of June 28~~servers, ~~2003,~~storage wesystems ~~owned~~and $2communications.0 ~~million~~In ~~shares,~~connection orwith ~~approximately,~~the 5%acquisition of ~~Maxtek. Subsequent to year end~~MNC, we ~~sold~~put anin ~~additional~~place ~~1.0 million shares at~~ a ~~gain~~restructuring ofplan ~~$0.3 million. Maxtek, represented approximately 20% of our sales~~ for ~~fiscal year 2003, and 19% in~~ the ~~prior~~purpose ~~year~~of ~~period.~~making ~~Additionally,~~MNC ~~sales~~more toefficient ~~Lacewood Corporation, an entity which is commonly controlled~~ by ~~the~~combining ~~owners’~~facilities ofand ~~Maxtek~~moving ~~representing~~some manufacturing ~~business~~operations ~~into~~offshore. ~~Hong~~The ~~Kong~~purchase ~~and~~price ~~China,~~included ~~were~~$5.6 ~~21%~~million ~~of our sales~~ in ~~fiscal~~purchase ~~year~~accounting ~~2003~~liabilities and ~~18%~~write-down inof ~~the~~fixed ~~prior year period~~assets. ~~These international distributors sell to approximately 130 OEM end customers.~~

WeFrom ~~believe that~~ the ~~funds~~date onof ~~hand~~the ~~together~~acquisition ~~with~~until ~~funds~~the ~~expected~~end toof befiscal ~~generated~~2005, ~~from~~one ~~our operations~~plant asin ~~well~~Bloomfield, asCT ~~borrowings~~was ~~under~~shut ~~our~~down ~~bank revolving credit facility will be sufficient to meet our anticipated cash needs for working capital~~ and ~~capital~~the ~~expenditures~~fixed ~~for~~assets atassociated ~~least~~were ~~the~~disposed ~~next twelve months~~of. ~~Thereafter, we may need to raise~~Sixty-four ~~additional~~manufacturing ~~funds~~personnel, inboth ~~future~~line ~~periods~~and tomanagement, ~~fund~~were ~~our~~laid ~~operations and potential acquisitions~~off. WeThe ~~may~~production ~~also~~from ~~consider~~Bloomfield ~~conducting~~was ~~future~~relocated ~~equity or debt financings if we perceive an opportunity~~ to ~~access~~facilities ~~the~~in ~~capital~~Worcester, ~~markets~~MA onand aAuburn, ~~favorable basis~~NY, ~~within~~with the ~~next twelve~~remainder ~~months~~going ~~or thereafter~~offshore. ~~Any~~During ~~such~~fiscal ~~additional~~year ~~financing~~2004, ifgoodwill ~~needed,~~was ~~might~~adjusted ~~not~~due ~~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 were~~ ~~raised through~~ the ~~issuance~~reversal of ~~equity~~a ~~securities~~portion orof ~~convertible debt securities,~~ the ~~percentage~~restructuring ~~of ownership of our shareholders would be reduced~~reserve. ~~Furthermore, such equity securities or convertible debt securities might have rights, preferences or privileges senior to our common stock.~~

~~Critical~~The ~~Accounting~~following ~~Policies~~table summarizes the activity of the restructuring reserve since inception:

In response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies”, we have identified below some of the accounting principles critical to our business and results of operations. We 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 herein. In addition, we believe our most critical accounting policies include, but are not limited to, the following:


*(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 6/2005
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	$	—

~~Accounts~~22 ~~Receivable~~

WeThis ~~maintain~~reserve ~~reserves~~was ~~for~~included ~~uncollectible~~in ~~accounts.~~“Accrued ~~Our~~expense ~~reserve~~and ~~for~~other ~~uncollectible~~current ~~accounts~~liabilities” isin ~~based~~the onBalance i)Sheet. ~~our~~During fiscal ~~specific~~year ~~assessment~~2004, ofgoodwill was adjusted due to the ~~collectibility~~reversal of ~~all~~a ~~significant~~portion ~~accounts~~of ~~greater~~the ~~than~~restructuring 90reserve. ~~days~~A ~~past~~total ~~due,~~of ~~ii)~~$0.4 ~~our historical~~million, ~~estimate~~$1.6 ofmillion, ~~the~~and ~~rate~~$0.9 ofmillion ~~default~~in ~~for~~plant ~~all~~closing ~~accounts~~and ~~less~~personnel ~~than~~costs 90were ~~days~~utilized ~~past~~in ~~due~~2002, 2003, and ~~iii)~~2004, ~~any~~respectively. The ~~specific~~restructuring ~~knowledge~~reserve wewas ~~have~~fully ~~acquired~~utilized ~~that~~in ~~might~~fiscal ~~indicate~~2005 ~~that~~when ana ~~account~~total isof ~~uncollectible~~$72,000 ~~regardless~~related ofto ~~age.~~plant ~~The~~closing ~~facts~~costs ~~and~~was ~~circumstances~~utilized. The results of ~~each account~~MNC ~~may~~have ~~require~~been usincluded toin ~~use~~the ~~substantial~~consolidated ~~judgment~~financial instatements ~~assessing~~since ~~its~~the ~~collectibility~~acquisition date.

~~Inventory~~On August 4, 2004 we announced that we had signed an agreement to purchase technology and the capability to develop a family of high performance mixed signal products for the high definition and digital video/imaging market. In the first quarter of fiscal year 2005 we completed the purchase and paid $24.5 million for the purchase of intellectual property and a team of proven engineers. Some of these assets had a short useful life and were fully amortized in the first quarter of fiscal year 2005, resulting in an additional $7.1 million, which was included in research and development expense. The remaining assets consist of a database valued at $16.2 million with a useful life of eight years and an assembled workforce valued at $1.2 million with a useful life of nine years.

~~Inventory~~In isfiscal ~~stated~~year at2001, we entered into an Investment and Stock Trade Agreement (the “Agreement”) ~~lower~~with ofMaxtek ~~cost~~Technology orCo. ~~market~~Ltd (“Maxtek”), an international stocking representative in Taiwan and China. We invested $4.0 million and owned approximately 10% of Maxtek. The Agreement states that if Maxtek fails to ~~Cost~~successfully iscomplete ~~determined~~a public offering by December 5, 2005, we, at our sole option, have the ~~first~~right into demand immediate repurchase of all 4.0 million shares, ~~first~~at ~~out~~the original purchase price plus accrued annual interest (~~FIFO~~commercial rate set by the Central Bank of China) ~~method~~during the said period. WeIn ~~record~~fiscal a2004 ~~reserve~~we ~~for~~sold ~~obsolete~~25% ~~and~~of ~~unmarketable~~our ~~inventory~~initial ~~based~~investment onin ~~assumptions~~Maxtek ofresulting ~~future~~in ~~demand~~a ~~and~~gain ~~market~~of ~~conditions~~$0.3 ~~Because~~million. ~~many~~In fiscal 2003 we sold 50% of our ~~products~~initial ~~have~~investment ~~multiple~~in ~~applications~~Maxtek ~~and~~resulting ~~serve volatile~~in ~~markets,~~a ~~the~~gain ~~recent~~of ~~sales~~$0.6 ~~history~~million. As of ~~any~~July ~~one~~2, ~~product~~2005, iswe ~~not~~owned ~~necessarily~~1.3 ~~indicative~~million shares, or approximately, 2.3% of ~~the~~Maxtek. ~~future~~Maxtek ~~demand~~represented approximately 25% of our sales for ~~such~~fiscal ~~product~~year 2005, 23% in fiscal year 2004 and 20% in fiscal year 2003. ~~The~~Additionally, ~~reserve~~sales ~~for~~to ~~obsolete~~Lacewood Corporation, representing business into Hong Kong and ~~unmarketable~~China, ~~inventory~~and isMagic ~~therefore~~Island ~~based~~International onrepresenting ~~our~~business ~~collective~~in ~~judgment~~Korea, ~~regarding~~entities that are commonly controlled by the ~~realistic~~ owners’ of Maxtek, were 10% and ~~potential~~6% ~~future~~of ~~demand~~our ~~for~~sales ~~each~~in ~~product~~fiscal year 2005, respectively. Sales to Lacewood were 13% in fiscal year 2004 and is21% ~~inherently~~in ~~subjective.~~fiscal ~~The~~year ~~fact~~2003. ~~that~~These ~~our~~international ~~products~~stocking ~~have~~representatives asell ~~substantial~~to ~~shelf~~approximately ~~life~~103 ~~and~~OEM ~~low~~end ~~holding~~customers.

22On June 15, 2005, we entered into a merger agreement with Integrated Device Technologies, Inc., a Delaware corporation (“IDT”), and Colonial Merger Sub I, Inc., a wholly-owned subsidiary of IDT (“Merger Sub”). The merger agreement, a copy of which was filed as an exhibit to a Current Report on form 8-K on June 17, 2005, provides for the merger of ICS with and into Merger Sub, with Merger Sub continuing as the surviving corporation in the merger and as a wholly-owned subsidiary of IDT (the “Merger”). At the time when the Merger becomes effective, each share of ICS common stock issued and outstanding immediately prior to the effective time of the Merger will be canceled and converted into the right to receive $7.25 in cash and 1.3 shares of common stock of IDT. Based on the number of

~~Table~~23 ~~of Contents~~

~~costs~~shares ~~increase~~of ~~the~~ICS ~~subjectivity~~common ~~because~~stock ~~these~~and ~~factors~~IDT ~~extend~~common stock outstanding as of July 1, 2005 (assuming the ~~time~~exercise ~~frame~~of inall ~~which~~outstanding IDT westock ~~could~~options ~~potentially~~and ~~recover~~ICS stock options), immediately after the ~~costs~~ Merger, the shareholders of ~~each~~IDT ~~product.~~immediately Ifbefore ~~actual~~the ~~market~~Merger ~~conditions~~will ~~are~~own ~~less~~approximately ~~favorable~~54% ~~than~~of ~~those~~the ~~projected~~outstanding byIDT ~~management,~~common ~~additional~~stock ~~inventory~~in ~~reserves~~the ~~may~~aggregate beand ~~required~~the shareholders of ICS will own approximately 46% of the outstanding IDT common stock in the aggregate.

~~Goodwill~~The consummation of the Merger is subject to the satisfaction or waiver of closing conditions applicable to both IDT and ~~Other~~ICS, ~~Intangible~~including ~~Assets~~regulatory review and approval by the stockholders of both IDT and ICS. ICS and IDT have each called a special meeting of its shareholders to vote on the proposals related to the Merger, which meetings are currently scheduled to occur on September 15, 2005. We hope to complete the Merger by the end of the third quarter of calendar year 2005.

~~Goodwill~~The ~~represents~~Merger ~~the~~Agreement ~~excess~~contains ofcertain ~~cost~~termination ~~over~~rights ~~the~~for ~~fair~~both ~~value~~IDT of net assets acquired from business acquisitions. Prior to July 1, 2001, our goodwill was amortized using the straight-line method over its estimated useful life of seven years. SFAS No. 142, “Goodwill and ~~Other Intangible Assets”~~ICS, ~~addresses, among other things, how goodwill~~ and ~~other intangible assets should be accounted for after they have been~~further ~~initially~~provides ~~recorded in the financial statements. Under SFAS 142~~that, ~~goodwill~~upon ~~and~~termination ~~other indefinite lived intangible assets are no longer amortized. Beginning July 1, 2001, we ceased the amortization~~ of ~~goodwill. Instead, we will, at least annually, review~~ the ~~recoverability~~Merger ofAgreement ~~goodwill~~under ~~and~~specified ~~other indefinite lived intangible assets. In assessing recoverability~~circumstances, ~~many~~either ~~factors~~party ~~are~~may ~~considered,~~be ~~including~~required ~~historical~~to ~~and~~pay ~~forecasted operating results and cash flows of~~ the ~~acquired businesses. After consideration of these factors, we will determine whether or not there is an impairment to goodwill and~~ other ~~indefinite~~a ~~lived~~termination ~~intangible~~fee ~~assets.~~of Inup ~~addition if an intangible asset that is not being amortized is subsequently determined~~ to ~~have~~$40 a finite useful life, the asset shall be tested for impairment and that intangible asset shall then be amortized prospectively over its estimated remaining useful life and accounted for in the same manner as other intangible assets that are subject to amortizationmillion.

In connection with the ~~purchase of MNC~~Merger, weholders ~~acquired $36.3 million~~ of ~~intangible~~outstanding ~~assets~~ICS ~~based on an independent appraisal. Of this amount~~options, ~~$2.9~~whether ~~million~~vested ~~was~~or ~~assigned~~not tovested ~~research~~or ~~and~~exercisable ~~development~~or ~~assets~~not ~~that~~exercisable, ~~were~~will ~~written off at the date of acquisition~~be cancelled. ~~The~~Holders ~~remaining $33.4 million~~ of ~~intangible~~outstanding ~~assets~~ICS ~~include~~options, ~~a customer~~whether ~~base~~or ~~valued~~not atvested ~~$12.0~~or ~~million~~exercisable, ~~(six~~with ~~year~~an ~~weighted-average~~exercise ~~useful~~price ~~life);~~that ais ~~trade~~less ~~name~~than ~~valued at~~ $37.025 ~~million~~plus ~~(ten~~the ~~year~~product ~~weighted-average~~of ~~useful life) and developed technology valued at $18~~1.43 ~~million~~times ~~(indefinite~~the ~~useful~~average ~~life).~~closing ~~The~~price ~~initial and continuing valuation~~ of ~~these~~IDT ~~assets~~common ~~and~~stock for the ~~assessment~~five oftrading ~~their~~days ~~useful~~ending ~~lives were based~~ on ~~subjective conclusions drawn from~~ the second ~~characteristics~~trading ofday ~~each~~prior ~~intangible~~to ~~asset.~~the Weeffective ~~have~~time ~~assigned~~of ~~indefinite life to~~ the ~~developed~~merger ~~technology~~will ~~because~~receive inan ~~our judgment~~amount ~~there~~of ~~are~~cash noper ~~legal~~share, ~~regulatory,~~without ~~contractual~~interest, ~~competitive,~~equal ~~economic, or other factors~~ to ~~limit~~ the ~~useful~~excess ~~life~~ of ~~this~~such ~~intangible~~aggregate ~~asset.~~value Ifover wethe ~~had~~per ~~determined~~share ~~that~~exercise ~~there~~price ~~were~~of ~~factors~~such ~~that~~options. ~~would~~Holders ~~limit the life~~ of ~~this~~options ~~asset,~~to ~~we would have~~purchase ~~amortized~~ICS itcommon ~~over~~stock ~~the~~with ~~estimated~~an ~~useful~~exercise ~~life.~~price ~~The~~equal ~~effect~~to ofor ~~this~~in ~~amortization~~excess ~~might~~of ~~have~~such ~~resulted~~aggregate invalue awill ~~significant~~not ~~change~~receive toany ~~our~~cash ~~financial~~for ~~statements~~such ~~based~~options. onWe anticipate the ~~value~~cash ofoutlay ~~this~~to ~~intangible~~fund ~~asset and dependent upon~~ the ~~useful~~cancellation ~~life~~of weoptions ~~would~~will ~~have assigned~~be toapproximately ~~this~~$27 ~~asset~~million.

~~Revenues~~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. 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 were 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.

~~Revenues~~Off-Balance ~~from~~Sheet ~~product sales are recognized as revenue upon shipment to the customer. We~~Arrangements offer a right of return to certain customers. Allowances are established to provide for estimated returns at the time of sale. Revenues from sales to distributors are made under agreements allowing price protection and rights of return on unsold products. We recognize sales to these customers, in accordance with the criteria of SFAS No. 48, “Revenue Recognition When Right of Return Exists”, at the time of the sale based on the following: the selling price is fixed at the date of sale, the buyer is obligated to pay for the products, title of the products has transferred, the buyer has economic substance apart from us, we do not have further obligations to assist the buyer in the resale of the product and the returns can be reasonably estimated at the time of sale. Customer payment terms generally range from letters of credit collectible upon shipment to open accounts payable 30 days after shipment.

~~Income~~Our ~~Taxes~~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.

~~Income~~Operating ~~tax~~leases ~~expense~~primarily ~~includes~~consist ~~U.S. federal, state and international income taxes and is computed in accordance with SFAS No. 109, “Accounting for Income Taxes”. Certain items~~ of ~~income~~leased ~~and~~facilities ~~expense~~that ~~are~~we ~~not~~utilize ~~reported~~ in ~~income~~various ~~tax returns and financial statements in the same year~~locations. ~~The income tax effects of these differences are reported as deferred income taxes. Income tax credits are accounted~~

23Contractual Obligations and Commitments

~~Table~~The following summarizes our significant contractual obligations and commitments as of ~~Contents~~July 2, 2005 (in thousands):

for as a reduction of income tax expense in the year in which the credits reduce income taxes payable. Valuation allowances are provided against deferred income tax assets if it is more likely than not that some portion or all of the deferred tax asset will not be realized. We currently provide income taxes on the earnings of foreign subsidiaries to the extent those earnings are taxable in the local jurisdictions. The effective tax rate for fiscal years 2003 and 2002 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 $51.0 million liability as of June 28, 2003.


Contractual Obligations (in thousands)	Total		Less than 1 year		1 –3 years		4 –5 years		After 5 years
Long-Term Debt	$	8	$	8	$	—	$	—	$	—
Operating Leases		10,142		3,235		6,097		810		—
Purchase Obligations		19,009		19,009		—		—		—

Total	$	29,159	$	22,252	$	6,097	$	810	$	—

~~Inflation~~24

~~Inflation~~Critical ~~has~~Accounting ~~not~~Policies ~~had a significant impact on our results of operations.~~

~~New~~In response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting ~~Pronouncements~~Policies,” we have identified below some of the accounting principles critical to our business and results of operations. We 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 Consolidated Financial Statements contained herein. In addition, we believe our most critical accounting policies include, but are not limited to, the following:

InAccounts ~~October~~Receivable 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation,” which amends FASB statement No. 123, “Accounting for Stock-Based Compensation.” This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and ~~interim~~Allowance ~~financial statements about the method of accounting~~ for ~~stock-based~~Doubtful ~~employee~~Accounts compensation and the effect of the method used on reported results. This statement is effective for financial statements for fiscal years ending after December 15, 2002. We adopted this statement during the third quarter of fiscal year 2003.

InTrade accounts ~~February~~receivable ~~2003,~~are recorded at the ~~Emerging~~invoiced ~~Issues~~amount ~~Task~~and ~~Force~~do ~~ratified~~not ~~Issue~~bear Nointerest. ~~00-21,”Revenue Arrangements~~The ~~with~~allowance ~~Multiple~~for ~~Deliverables,”~~doubtful ~~(“Issue~~accounts ~~00-21”).~~is ~~Issue~~our ~~00-21~~best ~~addresses~~estimate ~~certain~~of ~~aspects~~the amount of ~~the~~probable ~~accounting~~credit bylosses ain ~~vendor~~our ~~for~~existing ~~arrangements~~accounts ~~under~~receivable. ~~which~~Our itreserve ~~will~~for ~~perform~~doubtful ~~multiple~~accounts is ~~revenue-generating~~based ~~activities~~on ~~and~~(i) ~~addresses~~our ~~how~~specific ~~to determine~~assessment ~~whether~~of anthe ~~arrangement~~collectibility ~~involving~~of ~~multiple~~all ~~deliverables~~significant ~~contains~~accounts ~~more~~greater than ~~one~~90 ~~unit~~days ofpast ~~accounting. Currently~~due, we(ii) ~~are~~our ~~evaluating~~historical estimate of the ~~impact~~rate ~~Issue~~of ~~00-21~~default ~~could~~for all accounts less than 90 days past due and (iii) any specific knowledge we have onacquired ~~our~~that ~~results~~might ofindicate ~~operations,~~that ~~financial~~an ~~position~~account is uncollectible, ~~liquidity~~regardless ~~and~~of ~~disclosure requirements~~age. ~~Issue~~The ~~00-21~~facts ~~becomes~~and ~~effective~~circumstances ~~for~~of ~~revenue~~each ~~arrangements~~account ~~entered~~may ~~into~~require ~~after~~us ~~June~~to ~~30,~~use ~~2003~~substantial judgment in assessing its collectibility.

InInventory April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This Statement improves financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. This Statement is effective for contracts entered into or modified after June 30, 2003. We do not believe that adoption of this statement will have a material impact on our operating results.

InInventory ~~May~~is ~~2003,~~stated ~~FASB~~at ~~issued~~the ~~SFAS~~lower Noof cost or market. ~~150~~Cost is determined by the first in, ~~“Accounting~~first ~~for~~out ~~Certain~~(FIFO) ~~Financial~~method. We record a reserve for ~~Instruments~~obsolete ~~with~~and ~~Characteristics~~unmarketable inventory based on assumptions of ~~both~~future ~~Liabilities~~demand and ~~Equity~~market conditions.” ~~This~~Because ~~Statement~~many ~~establishes~~of ~~standards~~our ~~for~~products ~~how~~have anmultiple ~~issuer~~applications ~~classifies~~ and ~~measures~~serve ~~certain~~volatile ~~financial~~markets, ~~instruments~~the ~~with~~recent ~~characteristics~~sales history of ~~both~~any ~~liabilities~~one ~~and~~product ~~equity.~~is Itnot ~~requires that~~necessarily anindicative ~~issuer~~of ~~classify~~the afuture ~~financial~~demand ~~instrument~~for ~~that~~such isproduct. ~~within~~The ~~its~~reserve ~~scope~~for asobsolete aand ~~liability~~unmarketable ~~(or~~inventory anis ~~asset~~therefore inbased ~~some~~on ~~circumstances).~~our ~~Many~~collective ofjudgment ~~those~~regarding ~~instruments~~the ~~were~~realistic ~~previously~~and ~~classified~~potential asfuture ~~equity.~~demand ~~This~~for ~~Statement~~each product and is ~~effective~~inherently ~~for~~subjective. The ~~financial~~fact ~~instruments~~that ~~entered~~our ~~into or~~products ~~modified~~have ~~after~~a ~~May~~long ~~31,~~product ~~2003~~life cycle and ~~otherwise~~low isholding ~~effective~~costs atincrease the ~~beginning~~subjectivity ofbecause these factors extend the ~~first~~time ~~interim~~frame ~~period~~in ~~beginning~~which ~~after~~we ~~June~~could ~~15,~~potentially ~~2003~~recover the costs of each product. WeSilicon dotiming ~~not~~devices ~~believe~~are ~~that~~analog building ~~adoption~~block products and may be used across platforms of ~~this~~different ~~statement~~technologies ~~will~~and ~~have~~generations aof ~~material~~the ~~impact~~same technology. There is limited technology risk on ~~our~~inventories ~~operating~~because ~~results~~markets continue to exist for older products. If actual market conditions are less favorable than those projected by management, additional inventory reserves may be required.

InInvestments ~~May 2003, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 01-08,~~

24We account for investments in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Investments at July 2, 2005 and July 3, 2004 consist primarily of debt securities. We classify debt securities as “held-to-maturity” for those securities that we have the intent and the ability to hold until they mature. Securities classified as “held-to-maturity” are recorded at amortized cost. Securities classified as “available-for-sale” are recorded at fair market value and the gain or loss is included in other comprehensive income.

~~Table~~25 ~~of Contents~~

~~“Determining~~Goodwill Whether an Arrangement Contains a Lease.” EITF Issue No. 01-08 provides guidance on how to determine if an arrangement contains a lease that is within the scope of SFAS 13, “Accounting for Leases.” The provisions of EITF Issue No. 01-08 will apply primarily to arrangements agreed to or committed to after the beginning of an entity’s next reporting period beginning after May 28, 2003, or previous arrangements modified after the beginning of an entity’s next reporting period beginning after May 28, 2003. We are currently evaluating the effect EITF Issue No. 01-08 will have on our consolidated financial position, liquidity, and ~~results~~Other ofIntangible ~~operations.~~Assets

InGoodwill ~~November~~represents ~~2002,~~ the ~~FASB~~excess ~~issued~~of ~~FASB~~cost ~~Interpretation~~over fair value of net assets acquired from business acquisitions. SFAS No. 45142, “~~Guarantor’s~~Goodwill ~~Accounting~~and Other Intangible Assets” addresses how goodwill and ~~Disclosure~~other ~~Requirements~~intangible assets should be accounted for ~~Guarantees”~~after ~~(“FIN~~they ~~45”).~~have ~~FIN~~been 45initially ~~requires~~recorded ~~that~~in ~~upon~~the ~~issuance~~financial ofstatements. aUnder ~~guarantee~~SFAS 142, goodwill and other indefinite life intangible assets are no alonger ~~guarantor~~amortized. ~~must~~SFAS ~~recognize~~142 arequires ~~liability~~goodwill to be tested for ~~the~~impairment ~~fair~~at ~~value~~least ofon an ~~obligation~~annual ~~assumed~~basis ~~under~~and abetween ~~guarantee~~annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. ~~The~~Furthermore, ~~liability~~SFAS ~~recognition~~142 ~~provisions~~requires purchases of ~~FIN~~intangible 45assets, ~~are~~other ~~applicable~~than goodwill, to ~~any~~be ~~guarantees~~amortized ~~issued~~over ortheir ~~modified~~useful ~~after~~lives, ~~December~~unless ~~31,~~these ~~2002~~lives are determined to be indefinite. ~~Adoption~~The ofimpairment ~~FIN~~test 45for ~~did~~intangible assets with indefinite ~~not~~useful ~~have~~lives consists of a ~~material~~comparison ~~impact~~of onfair ~~our~~value ~~financial~~to ~~position~~carrying orvalue, ~~results~~with any excess of ~~operations.~~carrying ~~FIN~~value 45over ~~also~~fair ~~requires~~value ~~additional~~being ~~disclosures~~recorded byas aan ~~guarantor~~impairment inloss. ~~its~~The ~~interim~~fair ~~and~~value ~~annual~~of ~~financial~~the ~~statements~~indefinite ~~about~~live ~~the~~intangible ~~obligations~~was ~~associated~~determined ~~with~~using ~~guarantees~~the ~~issued,~~relief from ~~including~~royalty ~~product warranties~~method.

InWe ~~January~~perform ~~2003,~~goodwill impairment tests in the ~~FASB~~fourth ~~issued~~quarter ~~FASB~~of ~~Interpretation~~each Nofiscal year for each reporting unit. ~~46,~~We ~~“Consolidation~~have ofallocated ~~Variable~~nearly ~~Interest~~all ~~Entities~~the ~~(“FIN~~goodwill ~~46”).~~to ~~FIN~~one 46reporting ~~requires~~unit anas ~~investor~~it ~~with~~resulted afrom ~~majority~~the MNC acquisition. The process of evaluating the ~~variable~~potential ~~interests~~impairment inof agoodwill ~~variable~~can ~~interest~~be ~~entity~~subjective toand ~~consolidate~~may require experienced judgment during the ~~entity~~analysis. ~~and~~We use the two-step method to ~~provide~~measure ~~certain disclosures~~impairment loss. AThe ~~variable~~first ~~interest~~step ~~entity~~compares isthe ~~defined~~fair asvalue anof ~~entity~~the inreporting ~~which~~units ~~the~~with ~~equity~~its ~~investors~~carrying doamount, ~~not~~including ~~have~~goodwill. The second step is only necessary if the fair ~~characteristics~~value of athe ~~controlling~~reporting ~~interest~~unit oris doless ~~not~~than ~~have~~its ~~sufficient~~carrying ~~equity~~value. atUsed ~~risk~~in the valuations were assumptions of growth rates and profitability for the ~~entity~~reporting tounit ~~finance~~based ~~its~~on ~~activities~~market ~~without additional~~data, ~~subordinated~~cost ~~financial~~cutting ~~support~~plans ~~from~~and ~~the~~internal ~~other~~forecasts ~~parties~~based on product development plans. AsWe used a combination of ~~June~~three 28valuation methods, ~~2003~~discounted cash flow, wequoted ~~had~~market noprice ~~investments~~and inmarket ~~variable~~capitalization ~~interest~~to ~~entities~~determine fair value of the reporting unit.

~~Item~~In 7Aconnection with the purchase of MNC, we acquired $36.3 ~~QUANTITATIVE~~million ~~AND~~of ~~QUALITATIVE~~intangible ~~DISCLOSURES~~assets ~~ABOUT~~based ~~MARKET~~on ~~RISK~~an independent appraisal. Of this amount, $2.9 million was assigned to research and development assets that were written off at the date of acquisition. The remaining $33.4 million of intangible assets include a customer base valued at $12.0 million (six year weighted-average useful life); a trade name valued at $3.0 million (ten year weighted-average useful life) and developed technology valued at $18.4 million (indefinite useful life). The initial and continuing valuation of these assets and the assessment of their useful lives were based on subjective conclusions drawn from the characteristics of each intangible asset. We have assigned indefinite life to the developed technology because in our judgment there are no legal, regulatory, contractual, competitive, economic, or other factors to limit the useful life of this intangible asset. If we had determined that there were factors that would limit the life of this asset, we would have amortized it over the estimated useful life. The effect of this amortization might have resulted in a significant change to our financial statements based on the value of this intangible asset and dependent upon the useful life we would have assigned to this asset.

~~Foreign~~Revenues ~~Currency Exposures~~

~~Our~~Revenues from product sales are ~~denominated~~recognized inas Urevenue upon shipment to the customer.S. ~~dollars~~By contract and written agreement, there are only seven customers that have capped right of return and, ~~accordingly~~for three of these customers, weprice doprotection. ~~not~~These ~~use~~customers ~~forward~~accounted ~~exchange~~for ~~contracts~~approximately 63% of revenues for fiscal 2005. Upon shipment to ~~hedge~~these ~~exposures~~customers, ~~denominated~~we inprovide ~~foreign~~an ~~currencies~~allowance for the full 5% or, ~~any~~in ~~other~~some cases 7%, for ~~derivative~~rights ~~financial~~of ~~instruments~~return, as historically, customers granted a limited right of return have utilized that right to the agreed limit. We also utilize historical data and consider market conditions to estimate an allowance for ~~trading~~price orprotection. ~~speculative~~These ~~purposes~~products are semi-custom, prices are predetermined with the end customer, and accordingly are substantially fixed at the time of sale. We recognize sales to these customers in accordance with criteria of SFAS No. 48, “Revenue Recognition When Right of Return Exists”, at the time of sale based on the following: The ~~effect~~selling price is substantially fixed or determinable at the date of ansale; ~~immediate~~the ~~10%~~buyer ~~change~~is inobligated ~~exchange~~to ~~rates~~pay ~~would~~for the products; title of the products has transferred; the buyer has economic substance apart from us; we do not have afurther ~~material~~obligations ~~impact~~to onassist ~~our~~buyer ~~future~~in ~~operating~~the ~~results~~resale orof ~~cash~~the ~~flows~~product; and the returns can be reasonably estimated at the time of sale.

~~Interest~~26 ~~Rate Risk~~

InIncome ~~connection~~Taxes with our bank agreement, we entered into an 18-month interest rate swap agreement with the same financial institution. The interest rate swap agreement essentially enables us to manage the exposure to fluctuations in interest rates on a portion of our term loan.

~~Our~~Income ~~term~~tax ~~loan~~expense ~~requires~~includes usU.S. tofederal, ~~pay~~state ~~interest~~and ~~based~~international onincome ataxes ~~variable~~and ~~rate~~is computed in accordance with SFAS No. ~~Under~~109, “Accounting for Income Taxes”. Certain items of income and expense are not reported in income tax returns and financial statements in the ~~interest~~same ~~rate~~year. ~~swap~~The ~~agreement;~~income wetax effects of these differences are ~~exchanging~~reported as deferred income taxes. Valuation allowances are provided against deferred income tax assets if it is more likely than not that some portion or all of the ~~variable~~deferred ~~rate~~tax ~~interest~~asset will not be realized. We currently provide income taxes on athe ~~portion~~earnings of foreign subsidiaries to the extent those earnings are taxable in ~~our~~the ~~term~~local ~~loan~~jurisdictions. The effective tax rate for fiscal years 2005, ~~equal~~2004 toand ~~50%~~2003 ofreflects the ~~outstanding~~tax-exempt ~~loan~~status ~~amount~~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 athe ~~fixed~~Economic ~~rate~~Development Board of 5Singapore.~~0%.~~ The ~~interest~~five-year ~~rate~~period ~~swap~~ends ~~agreement~~December is31, in2007. ~~effect~~We ~~until~~do ~~June~~not ~~2003~~currently record deferred taxes on our investment in our Singapore operations, ~~with~~as all undistributed earnings are permanently reinvested back into the ~~notional~~Singapore ~~amount~~facility. ~~decreasing~~If we were to record deferred taxes on our investment, the amount would be an $1488.87 million ~~over~~liability ~~the~~as ~~effective~~of ~~period~~July 2, 2005.

AsAccounting afor ~~result~~Stock ofBased ~~our~~Compensation ~~early payoff of debt, the swap agreement was terminated in January 2003.~~

WeStock dooptions ~~not~~granted ~~use~~to ~~derivatives~~employees typically have an exercise price equal to the fair market value of our common stock and vest ratably over four years. Up until July 2, 2005, we applied APB 25 in accounting for ~~trading~~stock oroption ~~speculative~~plans ~~purposes~~and as a result, ~~nor~~generally ~~are~~recorded wezero compensation expense. However, since the value of an option bears a direct relationship to our stock price, it is an effective incentive for ~~party~~management to ~~leverage~~create ~~derivatives~~value for shareholders. We therefore view stock options as a critical component of our long-term performance-based compensation philosophy.

25Effective July 3, 2005, we adopted SFAS No. 123, as amended by SFAS No. 148. We use the Black-Scholes option-pricing model. The assumptions used are expected volatility based upon the movement of the stock price since the grant date of the option, average expected option life based upon actual history of option grants being exercised, and risk free interest rate based upon current market price for loans of LIBOR plus a pre-formulated margin.

~~Table~~Inflation ~~of Contents~~

WeInflation ~~had~~has ~~interest~~not ~~expense~~had ~~of $1.5 million for the fiscal year 2003. The potential increase in interest expense for fiscal year 2003 from~~ a ~~hypothetical~~significant 2%impact ~~adverse~~on ~~change~~our inresults ~~variable~~of ~~interest rates would be approximately $0~~operations.4 ~~million.~~

26New Accounting Pronouncements

~~Table~~In March 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations.” This interpretation clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations and clarifies when an entity would have sufficient information to reasonably estimate the fair value of ~~Contents~~an asset retirement obligation. This interpretation is effective no later than the end of fiscal years ending after December 15, 2005. At this time, we do not expect the adoption of this statement to have a material impact on our financial position.

On June 29, 2005, the FASB reached a consensus on EITF 05-6, “Determining the Amortization Period for Leasehold Improvements.” This consensus is effective for ~~Item~~periods 8beginning after that date. ~~FINANCIAL~~We ~~STATEMENTS~~do ~~AND~~not ~~SUPPLEMENTARY~~expect ~~DATA~~this statement to have a material impact on our financial position or results of operations.

Independent Auditors’ Reports		28
Consolidated Balance Sheets – June 28, 2003 and June 29, 2002		29
Consolidated Statements of Operations – Three Years Ended June 28, 2003, June 29, 2002 and June 30, 2001		30
Consolidated Statements of Shareholders’ Equity (Deficit) – Three Years Ended June 28, 2003, June 29, 2002 andJune 30, 2001		31
Consolidated Statements of Cash Flows – Three Years Ended June 28, 2003, June 29, 2002 and June 30, 2001		32
Notes to Consolidated Financial Statements		34

In May 2005, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections.” This statement replaced Accounting Principles Board (“APB”) Opinion No. 20 and FASB SFAS No. 3, and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement will be effective for accounting changes made in fiscal years beginning after December 15, 2005. At this time, we do not expect the adoption of this statement to have a material impact on our financial position.

~~Table~~In December 2004, the FASB issued SFAS No. 123 (revised 2004) – “Share-Based Payment.” This standard supersedes APB No. 25, and requires recognition of ~~Contents~~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 annual periods beginning after June 15, 2005. We adopted this statement on July 3, 2005 using the modified prospective method. Under this method, stock-based employee compensation cost will be recognized for all new awards granted after July 2, 2005 using the Black-Scholes method. Additionally, compensation costs for unvested stock options and awards that are outstanding at July 2, 2005 will be recognized over the requisite service period based on the grant-date fair value of those options and awards as previously calculated under the pro-forma disclosures under FAS 123 using the Black-Scholes method. We do not expect any significant changes in the assumptions used to calculate the fair value of stock options as disclosed in Note 1 in the Notes to Consolidated Financial Statements.

Under the terms of the proposed Merger Agreement, each outstanding option to purchase ICS common stock, whether vested or not vested or exercisable or not exercisable, will be cancelled. Holders of outstanding ICS options, whether or not ~~Report~~vested or exercisable, with an exercise price that is less than $7.25 plus the product of ~~Independent~~1.3 ~~Auditors~~times the average closing price of IDT common stock for the five trading days ending on the second trading day prior to the effective time of the merger will receive an amount of cash per share, without interest, equal to the excess of such aggregate value over the per share exercise price of such options. Holders of options to purchase ICS common stock with an exercise price equal to or in excess of such aggregate value will not receive any cash for such options. As of the effective time of the merger, each outstanding share of ICS restricted common stock will become fully vested and the holders of such shares of ICS restricted common stock will receive $7.25 in cash and 1.3 shares of IDT common stock for each share of ICS restricted common stock held.

ToThe pro forma information provided in Note 1, in the ~~Board~~Notes to Consolidated Financial Statements, “Accounting for Stock-Based Compensation” provides a reasonable estimate of the impact on our financial statements when the statement is fully implemented. We are continuing to assess the impact of the proposed merger with IDT upon the results of operations under the guidance provided by SFAS 123R, which may ~~Directors~~vary ~~and~~significantly ~~Shareholders~~from our historical experience.

In December 2004, the FASB also issued SFAS No. 153 – “Exchanges of ~~Integrated~~Nonmonetary ~~Circuit~~Assets.” ~~Systems~~This standard amends APB Opinion No. 29, ~~Inc~~Accounting for Nonmonetary Transactions by eliminating the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance.: The provisions of this standard are effective for public companies for annual periods beginning after June 15, 2005. We have adopted this statement beginning with our first quarter of fiscal year 2006. We do not expect this statement to have a material impact on our financial position.

In ~~our~~November ~~opinion~~2004, the ~~consolidated~~FASB ~~financial~~issued ~~statements~~SFAS ~~listed~~No. in151 ~~the~~– ~~accompanying~~“Inventory ~~index~~Costs ~~present~~– ~~fairly,~~an inamendment ~~all material respects, the financial position~~ of ~~Integrated Circuit~~ARB ~~Systems, Inc~~No. ~~and its subsidiaries at June 28~~43, ~~2003~~Chapter ~~and~~4.” ~~June~~This ~~29,~~standard ~~2002,~~clarifies ~~and~~ the ~~results~~accounting ~~of their operations and their cash flows~~ for abnormal ~~each~~amounts of ~~the~~idle ~~three~~facility ~~years~~expense, ~~in the period ended June 28~~freight, ~~2003~~handling incosts ~~conformity~~and ~~with~~wasted ~~accounting~~material. ~~principles~~The ~~generally accepted~~provisions ~~in the United States~~ of ~~America.~~this ~~In addition, in our opinion, the financial~~ statement ~~schedule~~are ~~listed~~effective infor ~~the~~inventory ~~index~~costs ~~appearing~~incurred ~~under~~during ~~Item~~fiscal 15years ~~(a)~~beginning ~~(2)~~after ~~presents~~June ~~fairly~~15, ~~in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements~~2005. ~~These~~Currently ~~financial~~this ~~statements and financial~~ statement ~~schedule~~does ~~are~~not have ~~the responsibility of the Company’s management; our responsibility is to express~~ an ~~opinion~~impact on ~~these~~our financial ~~statements~~ ~~and financial statement schedule based on our audits~~position. WeHowever, ~~conducted~~if ~~our audits of these statements~~ in ~~accordance with auditing standards generally accepted in~~ the ~~United~~future ~~States of America, which require that~~ we ~~plan~~were ~~and perform the audit~~ to ~~obtain~~experience ~~reasonable~~such ~~assurance~~abnormal ~~about~~costs ~~whether~~such ~~the~~as ~~financial~~idle ~~statements~~facility ~~are free of material misstatement. An audit includes examining~~expense, onhandling acosts ~~test basis, evidence supporting the amounts~~ and ~~disclosures~~wasted inmaterial ~~the~~it ~~financial~~could ~~statements,~~have ~~assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide~~ a ~~reasonable~~material ~~basis~~impact ~~for~~on our ~~opinion~~operations.

~~PricewaterhouseCoopers~~28 ~~LLP~~

~~Philadelphia~~In September 2004, PAthe 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.

~~July~~On 28October 22, ~~2003~~2004, the American Jobs Creation Act of 2004 (“AJCA”) was enacted by President Bush. The AJCA includes a deduction of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. We may elect to apply this provision to qualifying earnings repatriations in fiscal year 2006. We have started an evaluation of the effects of the repatriation provision. We expect to complete our evaluation of the effects of the repatriation provision before the end of the first quarter for fiscal 2006. The range of possible amounts that we are considering for repatriation under this provision is between zero and $150 million. The related potential range of income tax expense is between zero and $7.3 million. This is a one-time event and all future earnings will be permanently reinvested into our Singapore operations.

28On 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.

~~Table~~Item of7A. ~~Contents~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~Integrated~~Foreign ~~Circuit~~Currency ~~Systems,~~Exposures ~~Inc.~~

~~Consolidated~~Our ~~Balance~~sales ~~Sheets~~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.

~~(In~~Interest ~~thousands)~~Rate Risk

	June 28, 2003			June 29, 2002
Assets
Current Assets:
Cash and cash equivalents	$	118,038		$	74,255
Investments		5,000			36,266
Accounts receivable, net		31,501			28,741
Inventory, net		15,822			18,556
Deferred income taxes		6,713			6,791
Prepaid assets		4,842			4,781
Prepaid income taxes		12,212			1,181
Other current assets		6,309			8,924
Total current assets		200,437			179,495
Property and equipment, net		15,749			18,324
Intangibles		30,245			32,400
Goodwill		36,573			41,575
Long-term investments		32,000			4,000
Other assets		144			598
Total assets	$	315,148		$	276,392
Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of long-term debt	$	10,059		$	13,744
Accounts payable		10,836			11,416
Accrued salaries and bonuses		2,302			2,268
Accrued expenses and other current liabilities		8,553			23,004
Total current liabilities		31,750			50,432
Long-term debt, less current portion		—			28,514
Deferred income taxes		12,080			12,876
Other liabilities		495			599
Total liabilities		44,325			92,421
Commitments and contingencies
Shareholders’ Equity:
Preferred stock, authorized 5,000; none issued		—			—
Common stock, $0.01 par, authorized 300,000: issued 71,284 and 67,841 shares as of June 28, 2003 and June 29, 2002 respectively		713			678
Additional paid in capital		258,428			227,531
Retained earnings (deficit)		28,625			(32,451	)
Deferred compensation		(731	)		(3,988	)
Treasury stock, at cost, 1,120 and 655 shares as of June 28, 2003 and June 29, 2002 respectively		(16,212	)		(7,799	)
Total shareholders’ equity		270,823			183,971
Total liabilities and shareholders’ equity	$	315,148		$	276,392

Our interest rate risk relates primarily to our investment portfolio, which consisted of $55.6 million in cash and cash equivalents, $71.4 million in short term investments and $105.9 million in long term investments as of July 2, 2005, all denominated in U.S. dollars. While our portfolio of debt securities has an average duration of 1.9 years, $ 88.0 million are classified as “held to maturity.” We have the intention to hold these securities to maturity, so a hypothetical 10% move in interest rates on those securities would have no effect on our financial position, results of operations, and cash flows. The remaining $83.2 million of debt securities are classified as “available for sale,” with a duration of 2.1 years. Because of the short duration of the portfolio, a hypothetical 10% move in interest rates would have an insignificant effect on our financial position, results of operations, and cash flows. By policy, we mitigate the credit risk through diversification and adherence to high credit-quality rating standards. We further minimize our risks by restricting the sector concentration and asset allocation of certain type of securities in our investment portfolio. We do not use derivatives for trading or speculative purposes, nor are we party to leveraged derivatives.

~~SEE~~In ~~ACCOMPANYING~~connection ~~NOTES~~with TOour ~~CONSOLIDATED~~bank agreement, we entered into an 18-month interest rate swap ~~FINANCIAL~~agreement ~~STATEMENTS~~with the same financial institution. The interest rate swap agreement essentially enabled us to manage the exposure to fluctuations in interest rates on a portion of our term loan.

~~Table~~Our term loan required us to pay interest based on a variable rate. Under the interest rate swap agreement; we were exchanging the variable rate interest on a portion of ~~Contents~~our term loan, equal to 50% of the outstanding loan amount, with a fixed rate of 5.0%. The interest rate swap agreement was in effect until June 2003, with the notional amount decreasing to $14.8 million over the effective period.

~~Integrated~~As ~~Circuit~~a ~~Systems~~result of our early payoff of debt, the ~~Inc~~swap agreement was terminated in January 2003.

~~Consolidated~~We ~~Statements~~had interest expense of $0.06 ~~Operations~~million for the fiscal year 2005. The potential increase in interest expense for fiscal year 2005 from a hypothetical 10% adverse change in variable interest rates would have an insignificant effect on our financial position, results of operations, and cash flows.

~~(In~~30 ~~thousands, except per share data)~~

	Year Ended
	June 28, 2003			June 29, 2002			June 30, 2001
Revenue	$	241,762		$	182,654		$	188,298
Cost and expenses:
Cost of sales		97,665			76,304			71,997
Research and development		35,006			29,239			28,301
Selling, general and administrative		36,738			32,153			21,572
In process R&D		—			2,900			—
Amortization of intangibles		2,300			1,000			234
Operating income		70,053			41,058			66,194
Interest and other income		2,954			3,201			3,611
Interest expense		(1,466	)		(1,109	)		(219	)
Income before income taxes		71,541			43,150			69,586
Income tax expense		10,465			5,372			13,128
Net income	$	61,076		$	37,778		$	56,458
Basic net income per share:
Net Income	$	0.90		$	0.57		$	0.87
Diluted net income per share:
Net Income	$	0.87		$	0.54		$	0.81
Weighted average shares outstanding – basic		67,898			66,500			64,837
Weighted average shares outstanding – diluted		70,564			70,192			69,573

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


Report of Independent Registered Public Accounting Firm		32

Consolidated Balance Sheets – July 2, 2005 and July 3, 2004		34

Consolidated Statements of Operations — Three Years Ended July 2, 2005, July 3, 2004, and June 28, 2003		35

Consolidated Statements of Shareholders’ Equity — Three Years Ended July 2, 2005, July 3, 2004, and June 28, 2003		36

Consolidated Statements of Cash Flows — Three Years Ended July 2, 2005, July 3, 2004, and June 28, 2003		37

Notes to Consolidated Financial Statements		38

3031

~~Table~~ Report of ~~Contents~~Independent Registered Public Accounting Firm

~~Integrated~~To ~~Circuit~~the ~~Systems,~~Board ~~Inc.~~of Directors and Shareholders

~~Consolidated~~of ~~Statements~~Integrated ofCircuit ~~Shareholders’~~Systems, ~~Equity~~Inc.: ~~(Deficit)~~

(We have completed an integrated audit of Integrated Circuit Systems, Inc.’s 2005 consolidated financial statements and of its internal control over financial reporting as of July 2, 2005 and audits of its 2004 and 2003 consolidated financial statements in ~~thousands~~accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

	Common Stock Shares	CommonStock Amount		Additional Paid in Capital			RetainedEarnings (Deficit)			Deferred Compensation			Treasury Shares		Treasury Stock			Notes Receivable			Total Shareholders’ Equity (Deficit)
Balance at July 1, 2000	64,269	$	643	$	199,018		$	(126,687	)	$	(3,768	)	—			—		$	(286	)	$	68,920
Shares issued upon exercise of stock options	1,808		18		1,222			—			—		—			—			—			1,240
Tax benefits related to stock options	—		—		10,813			—			—		—			—			—			10,813
Shares issued by the Stock Purchase Plan	51		—		679			—			—		—			—			—			679
Net income	—		—		—			56,458			—		—			—			—			56,458
Other	—		—		(208	)		—			1,046		—			—			105			943
Balance at June 30, 2001	66,128		661		211,524			(70,229	)		(2,722	)	—			—			(181	)		139,053
Shares issued upon exercise of stock options	1,659		17		1,932			—			—		—			—			—			1,949
Tax benefits related to stock options	—		—		10,688			—			—		—			—			—			10,688
Shares issued by the Stock Purchase Plan	54		—		686			—			—		—			—			—			686
Purchase of treasury shares	—		—		—			—			—		(655	)		(7,799	)		—			(7,799	)
Net income	—		—		—			37,778			—		—			—			—			37,778
Issuance of stock options	—		—		2,699			—			(2,699	)	—			—			—			—
Other	—		—		2			—			1,433		—			—			181			1,616
Balance at June 29, 2002	67,841		678		227,531			(32,451	)		(3,988	)	(655	)		(7,799	)		—			183,971
Shares issued upon exercise of stock options	3,389		34		13,313			—			—		—			—			—			13,347
Tax benefits related to stock options	—		—		19,516			—			—		—			—			—			19,516
Shares issued by the Stock Purchase Plan	54		1		804			—			—		—			—			—			805
Purchase of treasury shares	—		—		—			—			—		(465	)		(8,413	)		—			(8,413	)
Net income	—		—		—			61,076			—		—			—			—			61,076
Deferred compensations	—		—		(2,738	)		—			3,257		—			—			—			519
Other	—		—		2			—			—		—			—			—			2
Balances at June 28, 2003	71,284	$	713	$	258,428		$	28,625		$	(731	)	(1,120	)	$	(16,212	)		—		$	270,823

Consolidated financial statements and financial statement schedule

~~SEE~~In ~~ACCOMPANYING~~our ~~NOTES~~opinion, TOthe ~~CONSOLIDATED~~consolidated ~~FINANCIAL~~financial ~~STATEMENTS~~statements listed in the accompanying index present fairly, in all material respects, the financial position of Integrated Circuit Systems, Inc. and its subsidiaries at July 2, 2005 and July 3, 2004, and the results of their operations and their cash flows for each of the three years in the period ended July 2, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15 (a) (2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

31Internal control over financial reporting

~~Table~~Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of ~~Contents~~July 2, 2005 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 2, 2005, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

~~Integrated~~32 ~~Circuit Systems, Inc.~~

~~Consolidated~~A ~~Statements~~company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of ~~Cash~~financial ~~Flows~~reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

~~(In~~Because ~~thousands)~~of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

	Year Ended
	June 28, 2003			June 29, 2002			June 30, 2001
Cash flows from operating activities:
Net income	$	61,076		$	37,778		$	56,458
Adjustments to reconcile net income to net cash provided by operating activities, net of acquisition:
Depreciation and amortization		8,583			6,912			5,142
Amortization of deferred finance charge		149			68			12
Amortization of bond premiums		—			17			36
Amortization of deferred compensation		519			1,433			1,046
(Gain) loss on sale of assets and investments		(804	)		(315	)		(95	)
Write-off on in-process R&D		—			2,900			—
Tax benefit of stock options		20,202			10,688			10,813
Deferred income taxes		(562	)		(3,201	)		(929	)
Changes in assets and liabilities:
Accounts receivable		(2,760	)		5,466			(3,699	)
Inventory		2,734			3,547			621
Other assets, net		(4,825	)		(3,471	)		110
Accounts payable, accrued expenses and other liabilities		(5,130	)		4,701			(7,329	)
Accrued interest expense		56			(15	)		(11	)
Income taxes payable		(9,756	)		(3,499	)		9,149
Net cash provided by operating activities		69,482			63,009			71,324
Cash flows from investing activities:
Capital expenditures		(5,722	)		(3,428	)		(3,264	)
Proceeds from sale of fixed assets		99			136			187
Proceeds from maturities of marketable securities		36,635			31,000			17,404
Proceeds from sale of investment in Maxtek		2,578
Purchases of marketable securities		(35,174	)		(64,019	)		(20,218	)
Acquisition of Micro Networks Corporation, net of cash acquired		2,345			(77,269	)		—
Investment in Maxtek		—			—			(4,000	)
Refunds on purchase contracts		—			—			9,877
Net cash provided by (used in) investing activities		761			(113,580	)		(14	)
Cash flows from financing activities:
(Repayments) under line of credit agreement		—			—			(10,000	)
Repayments of long-term debt		(32,199	)		(6,080	)		(561	)
Proceeds from exercise of stock options		13,347			1,949			1,240
Proceeds from stock purchase plan		805			686			679
Proceeds from long-term debt		—			45,000			—
Initial Public Offering, net		—			—			(208	)
Deferred financing charges		—			(330	)		—
Purchase of treasury stock		(8,413	)		(7,799	)		—
Net cash provided by (used in) financing activities		(26,460	)		33,426			(8,850	)
Net increase (decrease) in cash		43,783			(17,145	)		62,460
Cash and cash equivalents:
Beginning of year		74,255			91,400			28,940
End of year	$	118,038		$	74,255		$	91,400

PricewaterhouseCoopers LLP

32Philadelphia, Pennsylvania

~~Table~~September of2, ~~Contents~~2005

~~Consolidated~~33 ~~Statements of Cash Flows (cont’d)~~

~~(In~~ Integrated ~~thousands)~~Circuit Systems, Inc.

Supplemental disclosures of cash information:
Cash payments (receipts) during the period for:
Interest	$	1,091		$	1,021		$	215
Income taxes (refunded)	$	(2,503	)	$	(252	)	$	(5,926	)
Supplemental disclosures for non-cash information:
Capital lease of equipment	$	—		$	98		$	45

Consolidated Balance Sheets

~~SEE~~(In ~~ACCOMPANYING~~thousands, ~~NOTES~~except TOper ~~CONSOLIDATED FINANCIAL~~share ~~STATEMENTS.~~data)


	July 2, 2005			July 3, 2004
Assets
Current Assets:
Cash and cash equivalents	$	55,605		$	68,973
Investments		71,375			126,606
Accounts receivable, net		40,110			45,717
Inventory, net		17,430			18,772
Deferred income taxes		5,678			22,759
Prepaid assets		4,045			6,309
Other current assets		2,804			880

Total current assets		197,047			290,016
Property and equipment, net		19,416			19,254
Intangibles		40,943			27,842
Goodwill		35,422			35,422
Long-term investments		105,865			5,000
Deferred income taxes		4,527			—
Other assets		4,502			62

Total assets	$	407,722		$	377,596

Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of long-term debt	$	8		$	82
Accounts payable		14,103			17,557
Accrued salaries and bonuses		459			2,811
Accrued commissions		1,329			1,688
Accrued expenses and other current liabilities		4,282			4,019
Income taxes payable		2,197			3,576

Total current liabilities		22,378			29,733
Deferred income taxes		3,466			11,248
Other liabilities		285			390

Total liabilities		26,129			41,371

Commitments and contingencies
Shareholders’ Equity:
Preferred stock, $0.01 par, authorized 5,000; none issued		—			—
Common stock, $0.01 par, authorized 300,000: issued 73,396 and 72,701 shares as of July 2, 2005 and July 3, 2004 respectively		734			727
Additional paid in capital		294,697			282,569
Retained earnings		154,543			107,140
Deferred compensation		(543	)		—
Treasury stock, at cost, 3,153 and 2,475 shares as of July 2, 2005 and July 3, 2004 respectively		(67,824	)		(54,211	)
Accumulated other comprehensive income (loss)		(14	)		—

Total shareholders’ equity		381,593			336,225

Total liabilities and shareholders’ equity	$	407,722		$	377,596

~~Table~~SEE ofACCOMPANYING ~~Contents~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

~~Notes~~34 ~~to Consolidated Financial Statements~~

~~(1)~~ Integrated ~~Summary~~Circuit ofSystems, ~~Significant~~Inc. ~~Accounting Policies~~

~~Consolidation~~Consolidated ~~Policy~~Statements of Operations

~~The~~(In ~~accompanying~~thousands, ~~consolidated~~except ~~financial statements~~per ~~include~~share ~~the~~data) ~~accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated.~~

Reporting Periods


	Year Ended
	July 2, 2005			July 3, 2004			June 28, 2003
# of fiscal weeks		52			53			52

Revenue	$	243,110		$	272,140		$	241,762
Cost and expenses:
Cost of sales		99,703			108,764			97,665
Research and development		38,977			40,352			35,006
Amortization of Video research and development costs		7,051			—			—
Selling, general and administrative		38,533			35,949			36,738
Charges arising from merger		3,203			—			—
Amortization of intangibles		4,278			2,300			2,300

Operating income		51,365			84,775			70,053

Interest and other income		4,233			2,507			2,954
Interest expense		(60	)		(266	)		(1,466	)

Income before income taxes		55,538			87,016			71,541

Income tax expense		8,135			8,501			10,465

Net income	$	47,403		$	78,515		$	61,076

Basic net income per share:
Net Income	$	0.68		$	1.12		$	0.90

Diluted net income per share:
Net Income	$	0.67		$	1.08		$	0.87

Weighted average shares outstanding – basic		70,197			70,358			67,898
Weighted average shares outstanding – diluted		71,109			72,578			70,564

~~Our~~SEE ~~fiscal~~ACCOMPANYING ~~year is a 52/53 week operating cycle that ends on the Saturday~~NOTES ~~nearest~~TO ~~June~~CONSOLIDATED ~~30.~~FINANCIAL ~~All of the periods presented herein represent a 52-week operating cycle~~STATEMENTS.

~~Cash~~35 ~~Equivalents~~

~~We consider all~~ ~~highly~~Integrated ~~liquid~~Circuit ~~investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents at June 28~~Systems, ~~2003 consist of cash, overnight retail repurchase agreements (collateralized by U~~Inc.S. ~~Treasury obligations), money market funds and commercial paper.~~

~~Investments~~ Consolidated Statements of Shareholders’ Equity

~~Investments~~(in atthousands) ~~June 28, 2003 and June 29, 2002 consist of debt securities. We have the intent and the ability to hold all of our debt securities until maturity and have recorded them at amortized cost.~~

Inventory


	Common Stock Shares	Common Stock Amount		Additional Paid in Capital			Retained Earnings (Deficit)			Deferred Compensation			Treasury Shares		Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at June 29, 2002	67,841		678		227,531			(32,451	)		(3,988	)	(655	)		(7,799	)		—			183,971
Shares issued upon exercise of stock options	3,389		34		13,313			—			—		—			—			—			13,347
Tax benefits related to stock options	—		—		19,516			—			—		—			—			—			19,516
Shares issued by the Stock Purchase Plan	54		1		804			—			—		—			—			—			805

Purchase of treasury shares	—		—		—			—			—		(465	)		(8,413	)		—			(8,413	)

Net Income								61,076			—		—			—			—			61,076

Deferred compensation	—		—		(2,738	)		—			3,257		—			—			—			519

Other	—		—		2			—			—		—			—			—			2

Balance at June 28, 2003	71,284		713		258,428			28,625			(731	)	(1,120	)		(16,212	)		—			270,823
Shares issued upon exercise of stock options	1,378		14		10,443			—			—		—			—			—			10,457
Tax benefits related to stock options	—		—		12,793			—			—		—			—			—			12,793
Shares issued by the Stock Purchase Plan	39		—		898			—			—		—			—			—			898

Purchase of treasury shares	—		—		—			—			—		(1,355	)		(37,999	)		—			(37,999	)

Net income	—		—		—			78,515			—		—			—			—			78,515

Deferred compensation	—		—		—			—			731		—			—			—			731

Other	—		—		7			—			—		—			—			—			7

Balances at July 3, 2004	72,701	$	727	$	282,569		$	107,140		$	—		(2,475	)	$	(54,211	)	$	—		$	336,225
Shares issued upon exercise of stock options	601		6		7,388																	7,394
Tax benefits related to stock options	—				3,005																	3,005
Shares issued by the Stock Purchase Plan	61				1,042																	1,042
Shares issued – Restricted Stock Grant	33		1		705																	706

Purchase of treasury shares	—												(678	)		(13,613	)					(13,613	)

Net income	—		—		—			47,403			—		—			—			—			47,403

Deferred compensation	—		—		—			—			(543	)	—			—						(543	)
Unrealized loss on securities available for sale																			(24	)		(24	)

Other	—		—		(12	)		—			—		—			—			10			(2	)

Balances at July 2, 2005	73,396	$	734	$	294,697		$	154,543		$	(543	)	(3,153	)	$	(67,824	)	$	(14	)	$	381,593

~~Inventory~~SEE isACCOMPANYING ~~stated~~NOTES atTO ~~the~~CONSOLIDATED ~~lower~~FINANCIAL of cost or market. Cost is determined by the first in, first out (FIFO) method. We record a reserve for obsolete and unmarketable inventory based on assumptions of future demand and market conditions. Because many of our products have multiple applications and serve volatile markets, the recent sales history of any one product is not necessarily indicative of the future demand for such product. The reserve for obsolete and unmarketable inventory is therefore based on our collective judgment regarding the realistic and potential future demand for each product and is inherently subjective. The fact that our products have a substantial shelf life and low holding costs increase the subjectivity because these factors extend the time frame in which we could potentially recover the costs of each product. If actual market conditions are less favorable than those projected by management, additional inventory reserves may be required. STATEMENTS

~~Property,~~36 ~~Plant and Equipment~~

~~Property and equipment are recorded at cost less accumulated depreciation. Depreciation on~~ ~~furniture~~Integrated ~~and~~Circuit machinery and equipment is computed using the straight-line depreciation method over periods ranging from three to ten years. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful life of the improvement. The cost of fully depreciated assets remaining in use is included in the respective asset and accumulated depreciation accounts. When items are sold or retiredSystems, ~~related gains or losses are included in net income~~Inc. ~~Maintenance and repairs are charged to expense when incurred.~~

~~Deferred~~Consolidated ~~Financing~~Statements ~~Costs~~ of Cash Flows

(In ~~fiscal~~thousands) year 2002 we entered into a term loan facility. Costs incurred in connection with this term loan are being amortized over the life of the loan, three years. Accumulated amortization was $108,000 with approximately $132,000 remaining to be amortized as of June 28, 2003.


	Year Ended
	July 2, 2005			July 3, 2004			June 28, 2003
Cash flows from operating activities:
Net income	$	47,403		$	78,515		$	61,076
Adjustments to reconcile net income to net cash provided by operating activities, net of acquisition:
Depreciation and amortization		11,064			8,436			8,583
Amortization of Video research and development costs.		7,051
Amortization of deferred finance charge		19			138			149
Amortization of bond premiums/discounts		(368	)		(265	)		—
Amortization of deferred compensation		162			731			519
(Gain) loss on sale of operating assets and investments		168			(930	)		(804	)
Tax benefit of stock options		3,005			12,793			20,202
Deferred income taxes		4,772			(7,140	)		(562	)
Changes in assets and liabilities:
Accounts receivable		5,607			(14,216	)		(2,760	)
Inventory		1,342			(2,950	)		2,734
Other assets		(4,176	)		3,969			(4,825	)
Accounts payable, accrued expenses and other liabilities		(5,902	)		4,551			(5,074	)
Income taxes payable		(1,379	)		6,050			(9,756	)

Net cash provided by operating activities		68,768			89,682			69,482

Cash flows from investing activities:
Capital expenditures		(7,221	)		(8,587	)		(5,722	)
Proceeds from sale of fixed assets		263			62			99
Proceeds from sales of available-for-sale investments		61,409
Proceeds from maturities of held-to-maturity investments		197,771			145,056			36,635
Proceeds from sale of investment in Maxtek					1,324			2,578
Purchases of available-for-sale investments		(145,062	)		(239,925	)		(35,174	)
Purchases of held-to-maturity investments		(159,531	)		—			—
Acquisition of MRT assets		(24,450	)		—			—
Acquisition of Micro Networks Corporation, net of cash acquired		—			—			2,345

Net cash provided by (used in) investing activities		(76,821	)		(102,070	)		761

Cash flows from financing activities:
Repayments of long-term debt and capital leases		(138	)		(9,977	)		(32,199	)
Proceeds from exercise of stock options		7,394			10,457			13,347
Proceeds from stock purchase plan		1,042			898			805
Deferred financing charges		—			(56	)		—
Purchase of treasury stock		(13,613	)		(37,999	)		(8,413	)

Net cash used in financing activities		(5,315	)		(36,677	)		(26,460	)

Net increase (decrease) in cash		(13,368	)		(49,065	)		43,783
Cash and cash equivalents:
Beginning of year		68,973			118,038			74,255

End of year	$	55,605		$	68,973		$	118,038

Supplemental disclosures of cash information:
Cash payments (receipts) during the period for:
Interest	$	(3,082	)	$	161		$	1,091

Income taxes (refunded)	$	1,417		$	(5,115	)	$	(2,503	)

Supplemental disclosures for non-cash information:

Capital lease of equipment	$	—		$	171		$	—

~~Table~~SEE ofACCOMPANYING ~~Contents~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~Goodwill~~37 ~~and Other Indefinite Lived Intangible Assets~~

~~Goodwill represents the excess of cost over the fair value of net assets acquired from~~ ~~business~~Notes ~~acquisitions. Prior~~ to ~~July~~Consolidated 1,Financial ~~2001,~~Statements all goodwill was amortized using the straight-line method over its estimated useful life of seven years. SFAS No. 142, “Goodwill and Other Intangible Assets”, addresses, among other things, how goodwill and other intangible assets should be accounted for after they have been initially recorded in the financial statements. Under SFAS 142, goodwill and other indefinite lived intangible assets are no longer amortized. Beginning July 1, 2001, we ceased the amortization of goodwill. Instead, we will, at least annually, review the recoverability of goodwill and other indefinite lived intangible assets. In assessing recoverability, many factors are considered, including historical and forecasted operating results and cash flows of the reporting unit. After consideration of these factors, we will determine whether or not there is impairment to goodwill and other indefinite lived intangible assets. Goodwill was not material to the results of operations in the previous periods.

~~In addition if an intangible~~(1) ~~asset~~Summary ~~that~~of isSignificant ~~not~~Accounting ~~being~~Policies amortized is subsequently determined to have a finite useful life, the asset shall be tested for impairment and that intangible asset shall then be amortized prospectively over its estimated remaining useful life and accounted for in the same manner as other intangible assets that are subject to amortization.

AtConsolidation June 28, 2003, we have $39.2 million of goodwill and $18.4 million of indefinite lived intangible assets. The decrease in goodwill from the prior year was a result of an income tax refund received by MNC in fiscalPolicy ~~year 2003. No impairment of goodwill or other indefinite lived intangible assets existed at June 28, 2003. We had no indefinite lived intangible assets prior to the acquisition of MNC.~~

~~Carrying~~The ~~Value~~accompanying consolidated financial statements include the accounts of ~~Long-Term~~the ~~Assets~~Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated.

WeReporting ~~periodically~~Periods evaluate the carrying value of long-term assets when events and circumstances warrant such review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is separately identifiable and is less than the carrying value. In that event a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined by reference to quoted market prices, if available, or the utilization of certain valuation techniques such as using the anticipated cash flows discounted at a rate commensurate with the risk involved.

~~Revenue~~Our ~~Recognition~~fiscal year is a 52/53 week operating cycle that ends on the Saturday nearest June 30. The period ending July 3, 2004 is a 53 week period. All other periods presented herein represent a 52-week operating cycle.

~~Revenues~~Cash ~~from~~Equivalents product sales are recognized as revenue upon transfer of title to the customer. We offer a right of return to certain customers. Allowances are established to provide for estimated returns at the time of sale. We recognize sales to these customers, in accordance with the criteria of SFAS No. 48, “Revenue Recognition When Right of Return Exists”, at the time of the sale based on the following: the selling price is fixed at the date of sale, the buyer is obligated to pay for the products, title of the products has transferred, the buyer has economic substance apart from us, we do not have further obligations to assist the buyer in the resale of the product and the returns can be reasonably estimated at the time of sale.

~~Concentration~~We consider all highly liquid investments purchased with an original maturity of ~~Credit~~three months ~~Risk~~or less at purchase to be cash equivalents. Cash and cash equivalents at July 2, 2005 consist of cash, money market funds and commercial paper.

WeInvestments sell our products primarily to original equipment manufacturers (“OEMs”) and distributors in North America, Europe and the Pacific Rim. We perform ongoing credit evaluations of our customers and maintain reserves for potential credit losses. For the fiscal year ended June 28, 2003 two customers, Lacewood Corporation, formerly known as Maxtech Corporation Limited, and Maxtek Technology Co. Ltd (“Maxtek”), represented 21% and 20% of our revenues respectively. These same customers, who are commonly controlled, accounted for 17% and 10% of our total accounts receivable as of June 28, 2003, respectively. A third, unrelated company accounted for an additional 13% of our total accounts receivable as of June 28,

35We account for investments in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Investments at July 2, 2005 and July 3, 2004 consist primarily of debt securities. We classify debt securities as “held-to-maturity” for those securities that we have the intent and the ability to hold until they mature. Securities classified as “held-to-maturity” are recorded at amortized cost. Securities classified as “available-for-sale” are recorded at fair market value and the gain or loss is included in other comprehensive income.

~~Table~~We also have investments in two privately held companies. We account for these non-marketable equity securities using the cost method because these securities which do not have a readily determined fair value and we do not exercise significant influence on these investees as our holdings are 2.3% and 0.6% of ~~Contents~~the outstanding shares, respectively. We evaluate our investments for impairment whenever circumstances arise that may indicate an impairment event may have occurred.

~~2003. For fiscal years 2002 and 2001, Maxtek represented 19% and 13% of our revenues respectively, and accounted for 22%~~Accounts ~~and~~Receivable ~~18% of our total accounts receivable respectively. Lacewood represented 18% of our revenue~~ and ~~15%~~Allowance of our total accounts receivable in fiscal year 2002 and 10% of our revenue and 20% of our total accounts receivable in fiscal year 2001. These international distributors sell to approximately 130 OEM end customers. We also have a substantial concentration of credit risk in the PC motherboard industry. Refer to Note 16 for ~~geographic~~Doubtful ~~information.~~Accounts

~~Cash~~Trade ~~deposits~~accounts receivable are ~~maintained~~recorded ~~with~~at ~~financial~~the ~~institutions~~invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in ~~excess~~our existing accounts receivable. Our reserve for doubtful accounts is based on (i) our specific assessment of ~~federally~~the ~~insured~~collectibility of all significant accounts greater than 90 days past due, (ii) our historical estimate of the rate of default for all accounts less than 90 days past due and (iii) any specific knowledge we have acquired ~~limits~~that might indicate that an account is uncollectible, regardless of age. The facts and circumstances of each account may require us to use substantial judgment in assessing its collectibility.

InInventory ~~order to mitigate investment risk, our policy requires all short-term investments bear at least AA from Standard & Poor’s or Aa2 from Moody’s investor service.~~

~~Income~~Inventory ~~Taxes~~is stated at the lower of cost or market. Cost is determined by the first in, first out (FIFO) method. We record a reserve for obsolete and unmarketable inventory based on assumptions of future demand and market conditions. Because many of our products have multiple applications and serve volatile markets, the recent sales history of any one product is not necessarily indicative of the future demand for such product. The reserve for obsolete and unmarketable inventory is therefore based on our collective judgment regarding the realistic and potential future demand for each product and is inherently subjective. The fact that our products have a long product life cycle and low holding costs

~~Income~~38 tax expense includes U.S. federal, state and international income taxes and is computed in accordance with SFAS No. 109, “Accounting for Income Taxes”. Certain items of income and expense are not reported in income tax returns and financial statements in the same year. The income tax effects of these differences are reported as deferred income taxes. Income tax credits are accounted for as a reduction of income tax expense in the year in which the credits reduce income taxes payable. Valuation allowances are provided against deferred income tax assets, which are not likely to be realized. We currently provide income taxes on the earnings of foreign subsidiaries to the extent those earnings are taxable in the local jurisdictions. The effective tax rate for fiscal years 2003, 2002 and 2001 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 $51.0 million liability as of June 28, 2003.

~~Foreign~~increases ~~Currency~~the ~~Translation~~subjectivity because these factors extend the time frame in which we could potentially recover the costs of each product. Silicon timing devices are analog building block products and may be used across platforms of different technologies and generations of the same technology. There is limited technology risk on inventories because markets continue to exist for older products. If actual market conditions are less favorable than those projected by management, additional inventory reserves may be required.

~~The functional currency of the Company’s foreign subsidiary is the U.S. dollar~~Property, asPlant ~~this is the currency of the primary economic environment in which the subsidiary conducts its business. Transactions~~ and ~~balances~~Equipment originally denominated in other currencies are remeasured into dollars in accordance with the provisions of SFAS No. 52, “Foreign Currency Translation,” with any resulting gain or loss charged against net income or loss.

~~Use~~Property and equipment are recorded at cost less accumulated depreciation. Depreciation on furniture and machinery and equipment is computed using the straight-line depreciation method over periods ranging from three to ten years. Leasehold improvements are amortized over the lesser of ~~Estimates~~the lease term or the estimated useful life of the improvement. The cost of fully depreciated assets remaining in use is included in the respective asset and accumulated depreciation accounts. When items are sold or retired, related gains or losses are included in net income. Maintenance and repairs are charged to expense when incurred.

~~The~~Deferred ~~preparation~~Financing ~~of financial~~Costs statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, revenues and expense and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates and assumptions.

~~Accounting~~In ~~for~~fiscal ~~Stock-Based~~year ~~Compensation~~2002 we entered into a term loan facility. Costs incurred in connection with this term loan were being amortized over the life of the loan, three years. This loan agreement was terminated in the third quarter of fiscal 2004, and we entered into a new facility.

WeIn ~~have~~March ~~adopted~~2004, ~~the~~we ~~disclosure~~entered ~~provisions~~into ofa ~~SFAS~~new ~~No.~~revolving ~~123,~~credit ~~“Accounting~~and ~~for~~term ~~Stock-Based Compensation”,~~facility. ~~and~~Costs ~~continue~~incurred toin ~~apply~~connection ~~Accounting~~with ~~Principles~~this ~~Board~~term ~~Opinion~~loan ~~(“APB”)~~are ~~No.~~being amortized 25over ~~“Accounting~~the ~~for~~life ~~Stock~~of ~~Issued~~the toloan, ~~Employees”~~three ~~and~~years. ~~related~~Accumulated ~~interpretations~~amortization inwas ~~accounting~~$18,700 ~~for~~with ~~stock~~approximately ~~options~~$31,000 ~~issued~~remaining to ~~employees~~be ~~and directors~~amortized as of July 2, 2005.

36Goodwill and Other Indefinite Lived Intangible Assets

~~Table~~Goodwill represents the excess of ~~Contents~~cost over fair value of net assets acquired from business acquisitions. SFAS No. 142, “Goodwill and Other Intangible Assets” addresses how goodwill and other intangible assets should be accounted for after they have been initially recorded in the financial statements. Under SFAS 142, goodwill and other indefinite life intangible assets are no longer amortized. SFAS 142 requires goodwill to be tested for impairment at least on an annual basis and between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. Furthermore, SFAS 142 requires purchases of intangible assets, other than goodwill, to be amortized over their useful lives, unless these lives are determined to be indefinite. The impairment test for intangible assets with indefinite useful lives consists of a comparison of fair value to carrying value, with any excess of carrying value over fair value being recorded as an impairment loss. The fair value of the indefinite live intangible was determined using the relief from royalty method.

~~SFAS~~We ~~No.~~perform ~~148,~~goodwill ~~“Accounting~~impairment tests in the fourth quarter of each fiscal year for ~~Stock-Based~~each reporting ~~Compensation”~~unit. ~~amends~~We have allocated nearly all the ~~disclosure~~goodwill ~~requirements~~to one reporting unit as it resulted from the MNC acquisition. The process of ~~Statement~~evaluating ~~123~~the ~~to require~~potential ~~prominent~~impairment ~~disclosures~~of ingoodwill ~~both~~can ~~annual~~be subjective and ~~interim~~may ~~financial~~require ~~statements~~experienced ~~about~~judgment during the analysis. We use the two-step method ofto ~~accounting~~measure ~~for~~impairment ~~stock-based~~loss. ~~employee~~The ~~compensation~~first ~~and~~step compares the ~~effect~~fair value of the ~~method~~reporting ~~used~~units onwith ~~reported~~its ~~results~~carrying amount, including goodwill. ~~This~~The ~~statement~~second step is ~~effective~~only ~~for~~necessary ~~financial~~if the fair value of the reporting unit is ~~statements~~less than its carrying value. Used in the valuations were assumptions of growth rates and profitability for ~~fiscal~~the ~~years~~reporting ~~ending~~unit ~~after~~based ~~December~~on 15market data, ~~2002~~cost cutting plans and internal forecasts based on product development plans. We ~~adopted~~used ~~this~~a ~~statement~~combination of ~~during~~three ~~the~~valuation ~~third~~methods, ~~quarter~~discounted cash flow, quoted market price and market capitalization to determine fair value of ~~fiscal~~the ~~year~~reporting ~~2003~~unit.

WeAs ~~apply~~of ~~APB~~July 252, ~~and~~2005 ~~related~~we ~~interpretations~~determined inthat ~~accounting~~there ~~for~~was ~~stock~~no ~~option~~impairment ~~plans.~~of ~~Had~~goodwill ~~compensation~~or ~~cost~~indefinite ~~been~~life ~~recognized consistent with SFAS No~~intangibles. ~~123, as amended by SFAS No. 148, our consolidated net earnings and earnings per share for each fiscal year would have been as follows (in thousands except per share data):~~

	2003		2002		2001
Net Income:
As Reported	$	61,076	$	37,778	$	56,458
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects		1,781		1,433		1,031
Deduct: Total stock -based employee expense determined under the fair value based method for all awards, net of related tax effects		28,046		18,935		4,620
Pro forma	$	34,811	$	20,276	$	52,869
Basic earnings per common share:
As Reported	$	0.90	$	0.57	$	0.87
Pro forma	$	0.51	$	0.30	$	0.82
Diluted earnings per common share:
As Reported	$	0.87	$	0.54	$	0.81
Pro forma	$	0.49	$	0.29	$	0.76

~~SFAS~~At ~~No.~~July ~~123~~2, ~~requires~~2005, ~~the~~we ~~use~~have ~~of option pricing models that were not developed for use in valuing employee stock options~~$35.4 ~~The~~million ~~Black-Scholes option-pricing model was developed for use in estimating the fair value~~ of ~~short-lived~~goodwill ~~exchange traded options that have no vesting restrictions~~ and ~~are fully transferable~~$18.4 Inmillion ~~addition, option-pricing models require the input~~ of ~~highly~~indefinite ~~subjective~~lived ~~assumptions,~~intangible ~~including~~assets. ~~the~~No ~~option’s expected life and the price volatility~~ impairment of ~~the~~goodwill ~~underlying~~or ~~stock.~~other ~~Because~~indefinite ~~our~~lived ~~employee~~intangible ~~stock options~~assets ~~have~~existed ~~characteristics~~at ~~significantly~~July ~~different from those of traded options~~2, ~~and~~2005. ~~because~~We ~~changes~~had inno ~~the~~indefinite ~~subjective~~lived ~~input~~intangible ~~assumptions~~assets ~~can~~prior ~~materially~~to ~~affect~~ the ~~fair~~acquisition ~~value estimate, in the opinion~~ of ~~management,~~MNC. ~~the~~There ~~existing~~was ~~models~~no dochange ~~not necessarily~~in ~~provide~~goodwill aduring ~~reliable~~fiscal ~~single~~year ~~measure of the fair value of employee stock options~~2005.

~~The~~Carrying ~~following~~Value ~~assumptions were used to determine the fair value~~ of ~~stock options granted using the Black~~Long-~~Scholes~~Term ~~option-pricing~~Assets ~~model:~~

	2003		2002		2001
Dividend yield	0	%	0	%	0	%
Expected volatility	85	%	92	%	104	%
Average expected option life	5 years		5 years		5 years
Risk-free interest rate	4.6	%	3.8	%	5.1	%

We periodically evaluate the carrying value of long-term assets when events and circumstances warrant such review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is separately identifiable and is less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined by reference to quoted market prices, if available, or the utilization of certain valuation techniques such as using the anticipated cash flows discounted at a rate commensurate with the risk involved.

37Revenue Recognition

~~Table~~Revenues from product sales are recognized as revenue upon shipment to the customer. By contract and written agreement, there are only seven customers that have capped right of ~~Contents~~return and, for three of these customers, price protection. These seven customers accounted for approximately 63% of revenues for fiscal 2005. Upon shipment to these customers, we provide an allowance for the full 5% or, in some cases 7%, for rights of return, as historically, customers granted a limited right of return have utilized that right to the agreed limit. We also utilize historical data and consider market conditions to estimate an allowance for price protection. These products are semi-custom, prices are predetermined with the end customer, and accordingly, are substantially fixed at the time of sale. We recognize sales to these customers in accordance with criteria of SFAS No. 48, “Revenue Recognition When Right of Return Exists”, at the time of sale based on the following: The selling price is substantially fixed or determinable at the date of sale; the buyer is obligated to pay for the products; title of the products has transferred; the buyer has economic substance apart from us; we do not have further obligations to assist buyer in the resale of the product; and the returns can be reasonably estimated at the time of sale.

~~Reclassification~~Concentration of ~~Accounts~~Credit Risk

~~Certain~~We ~~prior~~sell our products primarily to original equipment manufacturers (“OEMs”) and distributors in North America, Europe and the Pacific Rim. We perform ongoing credit evaluations of our customers and maintain reserves for potential credit losses. For the fiscal year ~~balances~~ended ~~have~~July ~~been~~2, ~~reclassified~~2005 totwo ~~conform~~customers, accounted for 41% and 11% of revenue, and for 42% and 17%, respectively of our total accounts receivable as of July 2, 2005. These two customers sell to approximately 220 OEMs. For fiscal years 2004 and 2003 one customer comprised 39% and 27% of our revenues, respectively, and accounted for 37% of our accounts receivable at July 3, 2004. We also have a substantial concentration of credit risk in the ~~current~~PC ~~year~~motherboard ~~classifications~~industry. Refer to Note 16 for geographic information.

~~Other~~Cash ~~Comprehensive~~deposits ~~Income~~are maintained with financial institutions in excess of federally insured limits.

~~Our~~In ~~reported~~order ~~net~~to ~~income~~mitigate investment ~~for~~risk, ~~all~~our ~~periods~~policy ~~presented~~requires isall ~~the~~investments ~~same~~in asdebt ~~our~~securities ~~comprehensive~~bear ~~income since~~at ~~there~~least ~~were~~an noA- ~~items~~rating offrom ~~other~~Standard ~~comprehensive~~& ~~income~~Poor’s or ~~loss~~A3 ~~for~~by ~~any~~Moody’s. ofInvestments ~~the~~in ~~periods~~asset ~~covered~~backed byand ~~these~~mortgage ~~financial~~backed ~~statements.~~bonds are limited to those rated AAA/Aaa.

~~New~~Income ~~Accounting~~Taxes ~~Pronouncements~~

InIncome ~~February~~tax ~~2003,~~expense ~~the~~includes ~~Emerging Issues Task Force ratified Issue No~~U.S. ~~00-21~~federal,~~”Revenue~~ ~~Arrangements~~state ~~with~~and ~~Multiple~~international ~~Deliverables,”~~income ~~(“Issue~~taxes ~~00-21”).~~and ~~Issue~~is ~~00-21~~computed ~~addresses~~in ~~certain~~accordance ~~aspects~~with ofSFAS ~~the~~No. ~~accounting~~109, by“Accounting ~~a vendor~~ for ~~arrangements~~Income ~~under~~Taxes”. ~~which~~Certain ititems ~~will~~of ~~perform~~income ~~multiple revenue-generating activities~~ and ~~addresses~~expense ~~how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. Currently, we~~ are ~~evaluating~~not ~~the~~reported ~~impact~~in ~~Issue~~income ~~00-21~~tax ~~could~~returns ~~have~~and ~~on our results of operations,~~ financial ~~position,~~statements ~~liquidity~~in ~~and~~the ~~disclosure~~same ~~requirements~~year. ~~Issue~~The ~~00-21~~income ~~becomes~~tax ~~effective for revenue arrangements entered into after June 30, 2003.~~

In40 April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This Statement improves financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. This Statement is effective for contracts entered into or modified after June 30, 2003. We do not believe that adoption of this statement will have a material impact on our operating results.

Ineffects ~~May~~of ~~2003,~~these ~~the~~differences ~~FASB~~are ~~issued~~reported ~~SFAS~~as Nodeferred income taxes. ~~150,~~Valuation ~~“Accounting~~allowances ~~for~~are ~~Certain~~provided ~~Financial~~against ~~Instruments~~deferred income ~~with~~tax ~~Characteristics~~assets, ofwhich ~~both~~are ~~Liabilities~~not ~~and Equity~~likely to be realized.” ~~This~~We ~~Statement~~currently ~~establishes~~provide ~~standards~~income ~~for~~taxes ~~how~~on anthe ~~issuer~~earnings ~~classifies~~of ~~and~~foreign ~~measures~~subsidiaries ~~certain~~to ~~financial~~the ~~instruments~~extent ~~with~~those ~~characteristics~~earnings ofare ~~both~~taxable ~~liabilities~~in ~~and~~the ~~equity~~local jurisdictions. ItThe ~~requires~~effective ~~that~~tax anrate ~~issuer~~for ~~classify~~fiscal ayears ~~financial~~2005, ~~instrument~~2004 and ~~that~~2003 isreflects ~~within its~~the ~~scope~~tax-exempt asstatus aof ~~liability~~our ~~(or~~Singapore anoperation, ~~asset~~which inhas ~~some~~been ~~circumstances).~~given ~~Many~~pioneer status, or exemption of ~~those~~taxes ~~instruments~~on ~~were~~non-passive ~~previously~~income ~~classified~~for five years as ~~equity.~~stated ~~This~~in ~~Statement~~our isagreement ~~effective~~with ~~for~~the ~~financial~~Economic ~~instruments~~Development ~~entered~~Board ~~into~~of orSingapore. ~~modified~~The five-year ~~after~~period ~~May~~ends December 31, ~~2003~~2007. ~~and~~We ~~otherwise~~do ~~is effective~~not atcurrently ~~the~~record ~~beginning~~deferred oftaxes ~~the~~on ~~first~~our ~~interim~~investment ~~period~~in ~~beginning~~our ~~after~~Singapore ~~June 15~~operations, ~~2003.~~as Weall doundistributed ~~not~~earnings ~~believe~~are ~~that~~permanently ~~adoption~~reinvested ofback ~~this~~into ~~statement~~the ~~will~~Singapore ~~have~~facility. aIf ~~material~~we ~~impact~~were to record deferred taxes on our ~~operating~~investment, ~~results~~the amount would be an $88.7 million liability as of July 2, 2005.

InForeign ~~May~~Currency ~~2003,~~Translation the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 01-08, “Determining Whether an Arrangement Contains a Lease.” EITF Issue No. 01-08 provides guidance on how to determine if an arrangement contains a lease that is within the scope of SFAS 13, “Accounting for Leases.” The provisions of EITF Issue No. 01-08 will apply primarily to arrangements agreed to or committed to after the beginning of an entity’s next reporting period beginning after May 28, 2003, or previous arrangements modified after the beginning of an entity’s next reporting period beginning after May 28, 2003. We are currently evaluating the effect EITF Issue No. 01-08 will have on our consolidated financial position, liquidity, and results of operations.

InThe functional ~~November~~currency ~~2002,~~of the ~~FASB issued FASB Interpretation No. 45, “Guarantor~~Company’s ~~Accounting~~ ~~and~~foreign ~~Disclosure~~subsidiary ~~Requirements~~is ~~for~~the ~~Guarantees” (“FIN 45”)~~U.S. ~~FIN~~dollar, 45as ~~requires~~this ~~that~~is ~~upon~~the ~~issuance~~currency of athe ~~guarantee,~~primary aeconomic ~~guarantor~~environment ~~must~~in ~~recognize~~which ~~a liability for~~ the ~~fair~~subsidiary ~~value~~conducts ofits anbusiness. ~~obligation~~Transactions ~~assumed~~and ~~under~~balances aoriginally ~~guarantee.~~denominated ~~The~~in ~~liability~~other ~~recognition~~currencies ~~provisions of FIN 45~~ are ~~applicable~~remeasured tointo ~~any~~dollars ~~guarantees~~in ~~issued~~accordance orwith ~~modified~~the ~~after~~provisions ~~December~~of ~~31,~~SFAS ~~2002~~No. ~~Adoption~~52, of“Foreign ~~FIN~~Currency 45Translation,” ~~did~~with ~~not~~any ~~have~~resulting again ~~material~~or ~~impact~~loss oncharged ~~our~~against ~~financial~~net ~~position~~income or ~~results of operations~~loss. ~~FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued,~~

38Research and Development

~~Table~~Research and development costs consist primarily of ~~Contents~~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.

~~including~~Use ~~product~~of ~~warranties.~~Estimates

InThe ~~January~~preparation ~~2003, the FASB issued FASB Interpretation No. 46, “Consolidation~~ of ~~Variable~~financial ~~Interest~~statements ~~Entities~~in ~~(“FIN~~conformity ~~46”). FIN 46 requires an investor~~ with ~~a majority~~generally ofaccepted ~~the~~accounting ~~variable~~principles ~~interests~~requires inmanagement ~~a variable interest entity~~ to ~~consolidate~~make ~~the~~estimates ~~entity~~ and ~~to provide certain disclosures~~assumptions. AThese ~~variable~~estimates ~~interest~~and ~~entity~~assumptions isaffect ~~defined~~the asreported anamounts ~~entity~~of assets inand ~~which~~liabilities, ~~the~~revenues ~~equity~~and ~~investors~~expense doand ~~not have~~ the ~~characteristics~~disclosure of ~~a controlling~~contingent ~~interest~~assets orand doliabilities ~~not~~at ~~have~~the ~~sufficient~~date ~~equity~~of atthe ~~risk~~financial ~~for~~statements. ~~the~~In ~~entity~~addition, tothey ~~finance~~affect ~~its~~the ~~activities~~reported ~~without~~amounts ~~additional~~of ~~subordinated~~revenue ~~financial~~and ~~support~~expenses ~~from~~during the ~~other~~reporting ~~parties~~period. AsActual results ofcould ~~June~~differ ~~28,~~from ~~2003,~~these weestimates ~~had~~and ~~no investments in variable interest entities~~assumptions.

~~(2)~~Reclassification of ~~Acquisition~~Accounts

OnCertain ~~January~~prior 4,year ~~2002,~~balances wehave ~~acquired~~been ~~MNC~~reclassified ~~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, weconform began a restructuring plan that involved moving certain manufacturing operations offshore, reducing its workforce and combining facilities. The purchase price includes $5.6 million in purchase accounting liabilities and write-down of fixed assets. Of the total amount recorded, $1.2 million represents costs associated with closing or moving office and production activities and $2.0 million represents severance and other personnel costs. We expect to ~~complete~~ the restructuring by the end of calendar 2003. As of June 28, 2003, we have utilized approximately $1.6 million and $0.5 of this reserve relating to severance and facility cost closings, respectively. Approximately $0.4 million of the remaining amount relates to severance and other personnel costs to be paid in fiscal year 2004 and $0.7 million relates to closing or moving production activities. This reserve is included in “Accrued expense and other current ~~liabilities” in the Balance Sheet. During fiscal~~ year ~~2003,~~ ~~goodwill was adjusted to reflect changes in estimated deferred taxes and an income tax refund of $2~~classifications.5 ~~million.~~

~~The~~Accounting ~~following~~for ~~table~~Stock-Based Compensation ~~summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.~~

	January 4,2002
Accounts receivable	$	6,849
Inventory		12,005
Other current assets, net of cash acquired		3,503
Deferred tax asset		1,275
Property, plant and equipment		9,803
Intangible assets		36,300
Goodwill		35,946
Total assets acquired		105,681
Current liabilities		(12,981	)
Long-term debt		(2,530	)
Deferred tax liabilities		(15,246	)
Total liabilities acquired		(30,757	)
Net assets acquired	$	74,924

We have adopted the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, and continue to apply Accounting Principles Board Opinion (“APB”) No. 25 “Accounting for Stock Issued to Employees” and related interpretations in accounting for stock options issued to 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. However, 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.

OfSFAS ~~the $36~~No.3 ~~million~~148, of“Accounting ~~acquired intangible~~for ~~assets,~~Stock-Based ~~$2.9~~Compensation” ~~million~~amends ~~was~~the ~~assigned~~disclosure requirements of Statement 123 to ~~research~~require prominent disclosures in both annual and ~~development~~interim ~~assets~~financial ~~that~~statements ~~were~~about ~~written~~the ~~off~~method atof accounting for stock-based employee compensation and the ~~date~~effect of ~~acquisition~~the method used on reported results. ~~The~~This ~~remaining~~statement is ~~$33~~effective for financial statements for fiscal years ending after December 15, 2002.4 ~~million~~We adopted this statement during the third quarter of fiscal year 2003.

3941

~~Table~~We apply APB 25 and related interpretations in accounting for stock option plans. Our policy is to grant stock options at the fair market value of ~~Contents~~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 each fiscal year would have been as follows (in thousands except per share data):

intangible assets include a customer base valued at $12.0 million (6 year weighted-average useful life); a trade name valued at $3.0 million (ten year weighted-average useful life) and developed technology valued at $18.4 million (indefinite useful life). For fiscal year 2003, we had $2.0 million and $0.3 million in expense for the amortization of the customer base and trade name, respectively.


	2005		2004		2003
Net Income:
As Reported	$	47,403	$	78,515	$	61,076
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects (1)		105		475		1,158
Deduct: Total stock - based employee expense determined under the fair value based method for all awards, net of related tax effects (2)		20,353		21,102		18,230
Pro forma	$	27,155	$	57,888	$	44,004

Basic earnings per common share:
As Reported	$	0.68	$	1.12	$	0.90
Pro forma	$	0.39	$	0.82	$	0.65

Diluted earnings per common share:
As Reported	$	0.67	$	1.08	$	0.87
Pro forma	$	0.38	$	0.81	$	0.63

Diluted common shares:
As Reported		71,109		72,578		70,564
Pro forma		70,927		71,389		69,548

~~Future~~(1) ~~amortization~~In ~~amounts~~the ~~are~~Company’s asForm ~~follows~~10-K asfor of the year ended June 28, 2003, (the stock-based employee compensation expense included in ~~thousands):~~reported net earnings was reported as $1,781 for the year ended June 28, 2003. This amount has been adjusted as shown above to provide for the related tax effects.

2004	$	2,300
2005		2,300
2006		2,300
2007		2,300
2008 and after		2,500
	$	11,700

(2)	In the Company’s Form 10-K for the year ended June 28, 2003, the stock-based employee compensation expense determined under the fair value based method was reported as $28,046 for the year ended June 28, 2003. This amount has been adjusted as shown above to provide for the related tax effects.

~~The~~42 value of in-process research and development was determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate includes a risk-adjusted discount rate to take into account the uncertainty surrounding the successful development of the purchased in-process technology.

~~The~~SFAS ~~following~~No. ~~unaudited~~123 ~~pro~~requires ~~forma~~the ~~combined~~use ~~results~~ of ~~operations~~option ispricing ~~provided~~models ~~for~~that ~~illustrative~~were ~~purposes~~not ~~only~~developed ~~and~~for ~~assumes~~use ~~this~~in ~~acquisition~~valuing employee stock options. ~~occurred~~The asBlack-Scholes ofoption-pricing model was developed for use in estimating the ~~beginning~~fair value of ~~each~~short-lived ofexchange ~~the~~traded ~~periods~~options ~~presented.~~that ~~The~~have ~~following~~no ~~unaudited~~vesting ~~pro~~restrictions ~~forma~~and ~~information~~are ~~(in~~fully ~~thousands~~transferable. In addition, ~~except~~option-pricing ~~per~~models ~~share~~require ~~amounts)~~the ~~should~~input ~~not~~of highly besubjective ~~relied~~assumptions, ~~upon~~including asthe ~~necessarily~~option’s ~~being~~expected ~~indicative~~life and the price volatility of the ~~historical~~underlying ~~results~~stock. ~~that~~Because ~~would~~our employee stock options have characteristics significantly different from those of traded options, and because ~~been~~changes ~~obtained~~in ifthe ~~this~~subjective ~~acquisition~~input ~~had~~assumptions ~~actually~~can ~~occurred~~materially ~~during~~affect ~~those~~the ~~periods~~fair value estimate, orin the opinion of management, the ~~result~~existing ~~that~~models ~~may~~do benot ~~obtained~~necessarily inprovide a reliable single measure of the ~~future.~~fair value of employee stock options.

	Year Ended
	June 29, 2002		June 30, 2001
Pro forma revenue	$	206,380	$	248,710
Pro forma net income	$	43,017	$	60,520
Diluted net income per common share as reported	$	0.54	$	0.81
Pro forma diluted net income per common share	$	0.61	$	0.87

The following assumptions were used to determine the fair value of stock options granted using the Black-Scholes option-pricing model:

The pro forma net income for the fiscal year ended June 29, 2002 excludes one-time charges of $2.9 million for the write off of in process research and development and $1.3 million related to the fair value adjustment to inventory that was acquired from MNC and sold during the quarter ended March 30, 2002.


	2005		2004		2003
Dividend yield	0	%	0	%	0	%
Expected volatility	40	%	76	%	85	%
Average expected option life	5.43 years		6 years		5 years
Risk-free interest rate	3.87	%	3.1	%	4.6	%

~~(3)~~New ~~Other~~Accounting ~~Agreements~~Pronouncements

In ~~fiscal~~March ~~year~~2005, ~~1998~~the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 47, we“Accounting ~~entered~~for ~~into~~Conditional aAsset ~~non-transferable~~Retirement ~~and~~Obligations.” ~~non-exclusive license~~This ~~with~~interpretation ~~Philips~~clarifies ~~Electronics~~that tothe ~~use~~term ~~their~~“conditional ~~technical~~asset ~~information~~retirement ~~for~~obligation” ~~data~~as ~~transmission~~used ~~systems~~in FASB Statement No. 143, InAccounting ~~consideration~~for ofAsset ~~the~~Retirement ~~licenses~~Obligations and ~~rights~~clarifies ~~granted~~when wean entity would have ~~expensed~~sufficient ~~and~~information ~~paid~~to ~~approximately~~reasonably ~~$1.4~~estimate ~~million~~the infair ~~licensing~~value ~~fees~~of ~~during~~an ~~fiscal~~asset ~~year~~retirement ~~2003, $1~~obligation.0 ~~million~~This ~~during~~interpretation ~~fiscal~~is ~~year~~effective ~~2002,~~no ~~and~~later ~~$0.2~~than ~~million~~the ~~during~~end of fiscal years ~~year~~ending ~~2001.~~after ~~The~~December ~~expense~~15, is2005. ~~included~~At inthis ~~our~~time, ~~research~~we ~~and~~do ~~development~~not ~~expense~~expect in the ~~Statements~~adoption of ~~Operations~~this statement to have a material impact on our financial position.

40On June 29, 2005, the FASB reached a consensus on EITF 05-6, “Determining the Amortization Period for Leasehold Improvements.” This consensus is effective for periods beginning after that date. We do not expect this statement to have a material impact on our financial position or results of operations.

~~Table~~In May 2005, FASB issued Statement of ~~Contents~~Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections.” This statement replaced Accounting Principles Board (“APB”) Opinion No. 20 and FASB SFAS No. 3, and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement will be effective for accounting changes made in fiscal years beginning after December 15, 2005. At this time, we do not expect the adoption of this statement to have a material impact on our financial position.

In December 2004, the FASB issued SFAS No. 123 (4revised 2004) ~~Investments~~– “Share-Based Payment.” This standard supersedes 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 annual periods beginning after June 15, 2005. We adopted this statement on July 3, 2005 using the modified prospective method. Under this method, stock-based employee compensation cost will be recognized for all new awards granted after July 2, 2005 using the Black-Scholes method. Additionally, compensation costs for unvested stock options and awards that are outstanding at July 2, 2005 will be recognized over the requisite service period based on the grant-date fair value of those options and awards as previously calculated under the pro-forma disclosures under FAS 123 using the Black-

~~During~~43 fiscal years 2003, 2002 and 2001, we invested in debt securities, which we intend to hold to maturity, and are carried at amortized cost. We also have an investment in a privately held company that is carried at cost, or $2.0 million.

~~Aggregate~~Scholes ~~annual~~method. ~~maturities~~We ofdo ~~debt~~not ~~securities~~expect asany significant changes in the assumptions used to calculate the fair value of ~~June~~stock options ~~28,~~as ~~2003~~disclosed (in ~~thousands):~~Note 1 in the Notes to Consolidated Financial Statements.

2004	$	10,000
2005		20,000
2006		—
2007		—
2008 and beyond		—
	$	30,000

In December 2004, the FASB also issued SFAS No. 153 – “Exchanges of Nonmonetary Assets.” This standard amends APB Opinion No. 29, Accounting for Nonmonetary Transactions by eliminating the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. The provisions of this standard are effective for public companies for annual periods beginning after June 15, 2005. We will adopt this statement beginning with our first quarter of fiscal year 2006. We do not expect this statement to have a material impact on our financial position.

WeIn ~~have~~November 2004, the FASB issued SFAS No. 151 – “Inventory Costs – an amendment ~~unrealized~~of ~~gain~~ARB No. 43, Chapter 4.” This standard clarifies the accounting for abnormal amounts of $0idle facility expense, freight, handling costs and wasted material.~~1 million~~ asThe provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 2815, ~~2003~~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 (5“FSP”) ~~Accounts~~EITF ~~Receivable~~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 (“AJCA”) was enacted by President Bush. The ~~components~~AJCA includes a deduction of ~~accounts~~85% ~~receivable~~of certain foreign earnings that are repatriated, as ~~follows~~defined (in ~~thousands):~~the AJCA. We may elect to apply this provision to qualifying earnings repatriations in fiscal year 2006. We have started an evaluation of the effects of the repatriation provision. We expect to complete our evaluation of the effects of the repatriation provision before the end of the first quarter for fiscal 2006. The range of possible amounts that we are considering for repatriation under this provision is between zero and $150 million. The related potential range of income tax expense is between zero and $7.3 million. This is a one-time event and all future earnings will be permanently reinvested into our Singapore operations.

	June 28, 2003			June 29, 2002
Accounts receivable	$	33,515		$	30,768
Less: allowance for returns and doubtful accounts		(2,014	)		(2,027	)
	$	31,501		$	28,741

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.

(62) ~~Inventory~~ Merger and Acquisition

~~The~~On ~~components~~January of4, ~~inventories~~2002, ~~are~~we asacquired ~~follows~~Micro ~~(in~~Networks ~~thousands~~Corporation (“MNC”): for $74.9 million, net of cash acquired. We acquired MNC to gain access to technology that we believe will enhance the

	June 28, 2003			June 29, 2002
Raw Materials	$	6,972		$	8,922
Work-in-process		8,761			6,921
Finished parts		8,579			10,797
Less: obsolescence reserve		(8,490	)		(8,084	)
Inventory, net	$	15,822		$	18,556

41performance 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 began a restructuring plan that involved moving certain manufacturing operations offshore, reducing its workforce and combining facilities. In connection with the acquisition of MNC, we put in place a restructuring plan for the purpose of making MNC more efficient by combining facilities and moving some manufacturing operations offshore. The purchase price includes $5.6 million in purchase accounting liabilities and write-down of fixed assets.

~~Table~~From the date of ~~Contents~~the acquisition until the end of the first quarter of fiscal 2005, 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. The production from Bloomfield was relocated to facilities in Worcester, MA and Auburn, NY, with the remainder going offshore. During fiscal year 2004, goodwill was adjusted due to the reversal of a portion of the restructuring reserve.

~~(7)~~The ~~Property~~following ~~and~~table ~~Equipment~~summarizes the activity of the restructuring reserve since inception:

Property and equipment consists of the following (in thousands):


*(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 6/2005
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	$	—

	June 28, 2003			June 29, 2002
Land	$	170		$	170
Building and improvements		948			930
Machinery and equipment		35,738			32,476
Furniture and fixtures		2,803			2,903
Leasehold improvements		5,230			5,408
Capital leases		1,252			1,394
		46,141			43,281
Less: accumulated depreciation and amortization		(30,392	)		(24,957	)
Property and equipment, net	$	15,749		$	18,324

Related to the acquisition of MNC we acquired $36.3 million of intangible assets, of which, $2.9 million was assigned to research and development assets that were written off at the date of acquisition. The remaining $33.4 million of intangible assets include a customer base valued at $12.0 million (6 year weighted-average useful life); a trade name valued at $3.0 million (ten year weighted-average useful life) and developed technology valued at $18.4 million (indefinite useful life). Amortization of the customer base for fiscal years 2005, 2004, and 2003, was $2.0 million, $2.0 million and $2.0 million, respectively. Amortization of the trade name, which commenced in fiscal year 2003, was $0.3 million, $0.3 million and $0.3 million for fiscal years 2005, 2004 and 2003, respectively.

~~Depreciation~~On ~~and~~August ~~amortization~~4, ~~expense~~2004 we announced that we had signed an agreement ~~related~~to purchase technology and the capability to develop a family of high performance mixed signal products for the high definition and digital video/imaging market. In the first quarter of fiscal year 2005 we completed the purchase and paid $24.5 million for the purchase of intellectual property and ~~equipment~~a ~~was~~team of proven engineers. Some of these assets had a short useful life and were fully amortized in the first quarter of fiscal year 2005, resulting in an additional $67.31 million, which was included in research and development expense. The remaining assets consist of a database valued at $516.92 million, with a useful life of 8 years and an assembled workforce valued at $41.92 million with a useful life of 9 years, which are included in intangible assets. Amortization expense for fiscal ~~years~~year ~~2003,~~2005 ~~2002~~included ~~and~~$2.0 ~~2001,~~million ~~respectively~~for the database and $0.1 million for the workforce

~~(8)~~45 ~~Other Balance Sheet Accounts~~

~~Other~~Future ~~current~~amortization ~~assets~~amounts ~~consists~~are as follows as of ~~the~~July ~~following~~2, 2005 (in thousands):

	Year Ended
2006	4,460
	June 28, 2003		June 29, 2002
2007	4,460
MNC purchase price deposit	$	—	$	7,437
2008	3,460
Due from employee stock option exercise		4,201		346
2009	2,460
Other		2,108		1,141
2010	2,460
	$	6,309	$	8,924

~~Accrued~~Total ~~expenses~~amortization ~~and other~~expense ~~current liabilities consists of the following~~ (in thousands):

	Year Ended
2005	4,278
	June 28, 2003		June 29, 2002
2004	2,300
Purchase price payable to the MNC shareholders	$	—	$	9,437
2003	2,300
Legal accruals		1,823		3,513
Accrued restructuring expense		1,144		5,186
Other		5,586		4,868
	$	8,553	$	23,004

On ~~January~~June 415, ~~2002~~2005, we ~~wired~~entered ~~funds~~into toa anmerger ~~escrow~~agreement ~~account~~with Integrated Device Technologies, Inc., a Delaware corporation (“IDT”), and Colonial Merger Sub I, Inc., a wholly-owned subsidiary of IDT (“Merger Sub”). The merger agreement, a copy of which was filed as an exhibit to ~~cover~~a ~~the~~Current ~~original~~Report ~~purchase~~on ~~price~~form 8-K on June 17, 2005, provides for the merger of ICS with and into Merger Sub, with Merger Sub continuing as the ~~MNC~~surviving ~~acquisition~~corporation in the merger and as a wholly-owned subsidiary of IDT (the “Merger”). ~~All~~At ~~but~~the ~~two~~time ~~equity~~when ~~holders~~the ~~accepted~~Merger becomes effective, each share of ICS common stock issued and outstanding immediately prior to the ~~terms~~effective time of the ~~acquisition~~Merger will be canceled and ~~received~~converted ~~these~~into ~~funds~~the right to receive $7.25 Onin orcash and ~~about~~1.3 shares of common stock of IDT. Based on the number of shares of ICS common stock and IDT common stock outstanding as of July 81, ~~2002~~2005 we(assuming ~~reached~~the ~~settlement~~exercise ~~with~~of ~~those~~all ~~two~~outstanding ~~equity~~IDT ~~holders.~~stock options and ICS stock options), immediately after the Merger, the shareholders of IDT immediately before the Merger will own approximately 54% of the outstanding IDT common stock in the aggregate and the shareholders of ICS will own approximately 46% of the outstanding IDT common stock in the aggregate.

42The consummation of the Merger is subject to the satisfaction or waiver of closing conditions applicable to both IDT and ICS, including regulatory review and approval by the stockholders of both IDT and ICS. ICS and IDT have each called a special meeting of its shareholders to vote on the proposals related to the Merger, which meetings are currently scheduled to occur on September 15, 2005. We hope to complete the Merger by the end of the third quarter of calendar year 2005.

~~Table~~The Merger Agreement contains certain termination rights for both IDT and ICS, and further provides that, upon termination of ~~Contents~~the Merger Agreement under specified circumstances, either party may be required to pay the other a termination fee of up to $40 million.

~~(9)~~We ~~Debt~~incurred $3.2 million in expenses associated with the merger of our company with Integrated Device Technology, Inc. Included in these expenses were $0.8 million in legal fees, $2.3 million in investment opinion fees, and $0.1 million in FTC filing fees. These costs are expensed as incurred, and included in charges arising from merger.

In(3) ~~June~~Other ~~2000,~~Agreements we secured a $30 million revolving credit facility with a commercial bank. The facility was to expire in June 2002, with an option, at the bank’s sole discretion, to extend the facility for an additional period and is subject to certain covenants, including the maintenance of certain financial ratios. Advances under the revolving credit facility bear interest at LIBOR plus margin. At the beginning of the third quarter, fiscal year 2002, we terminated this credit facility and entered into a new facility as discussed below.

In ~~connection~~fiscal ~~with~~year ~~the acquisition of Micro Networks~~1998, we entered into a ~~new~~non-transferable ~~revolving credit~~ and ~~term~~non-exclusive ~~loan~~license ~~facility~~with ~~dated~~Philips ~~December~~Electronics ~~31, 2001, which will expire December 31, 2004. The new facility enables us~~ to ~~draw~~use ~~down~~their ~~$45.0~~technical ~~million~~information ~~under~~for ~~the~~data ~~term loan and $10~~transmission systems.0 ~~million~~In ~~under~~consideration ~~the revolving credit facility. At our option, the interest rates under the term loan will be either (1) a base rate, which is the higher~~ of ~~(i)~~ ~~a rate of interest announced from time to time by~~ the ~~lenders’~~licenses ~~administrative~~and ~~agent~~rights asgranted ~~the~~we ~~base~~have ~~rate~~expensed ~~(“Base~~and ~~Rate”)~~paid orapproximately ~~(ii) the sum of~~ $0.5%4 ~~per~~million ~~annum~~in ~~plus~~licensing ~~the~~fees ~~federal~~during ~~funds~~fiscal ~~rate~~year ~~or (2) London Interbank Offer Rate (“LIBOR”) plus 1.75%. At our option~~2005, ~~the interest rates under the Revolving Credit Loan, will be either (~~$1~~) the Base Rate or (~~.2) ~~the~~million ~~LIBOR~~during ~~Rate plus a pre-formulated margin. During the~~ fiscal year ~~2003~~2004, weand ~~paid down~~ $321.04 million ofduring ~~the term~~fiscal ~~loan.~~year ~~As of June 28,~~ 2003~~, $10~~.0 ~~million~~The ~~was~~expense is ~~outstanding~~included onin our ~~term~~research ~~loan;~~and ~~all~~development ofexpense ~~which~~in ~~is classified current. There were no amounts outstanding on~~ the ~~revolving~~Statements ~~credit facility as~~ of ~~June 28, 2003~~Operations.

In46 connection with our bank agreement, we entered into an 18-month interest rate swap agreement with the same financial institution. The interest rate swap agreement essentially enables us to manage the exposure to fluctuations in interest rates on a portion of our term loan.

~~Our~~(4) ~~term~~Investments loan requires us to pay interest based on a variable rate. Under the interest rate swap agreement; we are exchanging the variable rate interest on a portion of our term loan, equal to 50% of the outstanding loan amount, with a fixed rate of 5.00%. The interest rate swap agreement was in effect until June 2003, with the notional amount decreasing to $14.8 million over the effective period. As a result of early debt payoff the swap agreement was terminated in January 2003 with a payment of $170,000. The $170,000 is included in interest expense.

~~Senior~~During fiscal years 2005 and 2004, we invested in debt ~~consisted~~securities. ofSecurities for which we have the ~~following~~intent (and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Certain securities have been classified as available-for-sale. Securities classified as available-for-sale are recorded at fair market value and the gain or loss is included in ~~thousands):~~other comprehensive income.

	June 28, 2003		June 29, 2002
Revolving credit facility at LIBOR plus 1.75 (LIBOR was 2.875% at June 28, 2003)	$	10,000	$	42,000
Capital lease obligations and other		59		258
	$	10,059	$	42,258
Less current portion		10,059		13,744
Long-term debt, less current portion	$	—	$	28,514

Aggregate annual maturities of debt securities as of July 2, 2005 (in thousands):

Aggregate annual maturities of long-term debt as of June 28, 2003 (in thousands):


	Held-to- maturity		Available- for-sale
2006	$	29,285	$	12,540
2007		29,567		22,971
2008		14,219		47,716
2009		4,847		—
2010 and beyond		10,120		—

	$	88,038	$	83,227

2004	$	10,000
2005		—
2006		—
2007		—
2008 and beyond		—
	$	10,000

Aggregate fair value of debt securities classified as available-for-sale as of July 2, 2005 (in thousands):


	Fair market Value		Unrecognized Gain(Loss)
US Treasury securities	$	83,207	$	(24	)

~~Table~~The ofunrecognized ~~Contents~~loss is included in other comprehensive income for fiscal year 2005.

~~Certain~~Aggregate offair ~~our~~value ~~loan agreements require the maintenance~~ of ~~specified~~debt securities ~~financial~~classified ~~ratios~~as ~~and~~held-to-maturity ~~impose financial limitations~~ as ~~well~~ asof aJuly ~~restriction on paying dividends. At June 28~~2, ~~2003,~~2005 ~~we were~~ (in ~~compliance~~thousands): ~~with the covenants.~~

(10) Lease Obligations


	Fair Market Value		Unrecognized Gain(Loss)
Corporate debt securities	$	80,568	$	26
Mortgage-backed securities		7,519		23

Total	$	88,087	$	49

WeProceeds ~~lease~~from ~~certain~~sales of available-for-sale ~~our~~securities ~~facilities~~(in ~~under~~thousands): ~~operating lease agreements, some of which have renewal options.~~

Rental expense under operating lease agreements was $3.5 million, $3.4 million and $2.6 million in 2003, 2002 and 2001, respectively.


	Proceeds		Recognized Gain(Loss)
US Treasury securities	$	61,409	$	(99	)

~~Future~~47 ~~minimum lease commitments under our operating leases are as follows as of June 28, 2003 (in thousands):~~

2004	$	2,843
2005		2,728
2006		2,735
2007		2,599
2008 and after		4,237
	$	15,142

The average cost basis was used for the recognized gain or loss on the sales of securities.

~~Sublease~~We ~~income~~also ~~under~~have ~~all~~investments ~~operating~~in two privately held companies Maxtek Technology Co. Ltd and Best ~~lease~~Elite ~~agreements~~International Ltd that are carried at cost. The carrying cost of Maxtek was $01.90 million inas ~~fiscal~~of ~~year~~July ~~2003~~2, 2005 and $1.10 million inas ~~fiscal~~of ~~years~~July ~~2002~~3, 2004. During the first quarter of fiscal 2004 and ~~2001~~in the second quarter of 2005, Maxtek declared stock dividends. ~~Future~~Our ~~amounts~~ownership ~~due~~is ~~under~~1.3 ~~the~~million ~~subleases~~shares ~~are~~or approximately 2.3% of Maxtek as ~~follows~~of July 2, 2005 and was 1.3 million shares or approximately 2.5% as of ~~June~~July 283, ~~2003~~2004. (Our investment in ~~thousands):~~Best Elite was made during fiscal 2004 and is carried at a cost of $5.0 million at July 2, 2005 and July 3, 2004. Our percent ownership of this company was 0.6% as of July 2, 2005 and 0.7% as of July 3, 2004.

2004	$	951
2005		793
2006		650
2007		233
2008 and after		—
	$	2,627

(5) Accounts Receivable

~~(11)~~The ~~Fair~~components ~~Value~~ of ~~Financial~~ ~~Instruments~~accounts receivable are as follows (in thousands):

We have estimated the fair value of our financial instruments using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value.


	Year Ended
	July 2, 2005			July 3, 2004
Accounts receivable	$	43,107		$	47,209
Less: allowance for returns and doubtful accounts		(2,997	)		(1,492	)

	$	40,110		$	45,717

~~The~~(6) ~~following~~Inventory ~~methods and assumptions were used to estimate the fair value of each class of financial instruments:~~

~~Cash and cash equivalents, accounts receivable and accounts payable –~~ The ~~carrying~~components ~~amounts~~ of ~~these~~inventories ~~items~~are ~~approximate~~as ~~their~~follows ~~fair~~(in ~~values~~thousands): ~~at June 28, 2003 due to the short-term maturities of these instruments.~~

Long-term debt – Interest rates that are currently available to us for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues for which quoted market prices are not available. The carrying value of this item is not materially different from its fair value on June 28, 2003 due to the variable interest rate of this debt.


	Year Ended
	July 2, 2005			July 3, 2004
Raw Materials	$	9,897		$	8,237
Work-in-process		6,735			7,953
Finished parts		7,899			9,296
Less: obsolescence reserve		(7,101	)		(6,714	)

Inventory, net	$	17,430		$	18,772

44(7) Property and Equipment

~~Table~~Property and equipment consists of ~~Contents~~the following (in thousands):

Interest rate swap agreement– In connection with our bank agreement, on December 31, 2001 we entered into an 18-month interest rate swap agreement with one of the same financial institutions. The interest rate swap agreement essentially enables us to manage the exposure to fluctuations in interest rates on a portion of our term loan. This agreement was paid off January 2003.


	Year Ended
	July 2, 2005			July 3, 2004
Land	$	170		$	170
Building and improvements		1,008			1,005
Machinery and equipment		46,222			42,577
Furniture and fixtures		2,801			2,864
Leasehold improvements		5,675			5,563
Capital leases		171			171

		56,047			52,350
Less: accumulated depreciation and amortization		(36,631	)		(33,096	)

Property and equipment, net	$	19,416		$	19,254

~~(12)~~48 ~~Income Taxes~~

~~The~~Depreciation ~~provision~~and ~~for~~amortization ~~income~~expense ~~taxes~~related ~~consists~~to ofproperty ~~the~~and ~~following~~equipment ~~(in~~was $6.7 million, $6.0 million, and $6.3 million ~~thousands):~~in fiscal years 2005, 2004 and 2003, respectively.

	Year Ended
	June 28, 2003			June 29, 2002			June 30, 2001
Current tax expense:
Federal	$	10,086		$	6,984		$	12,384
State		979			1,089			1,017
Foreign		(38	)		500			656
Total current	$	11,027		$	8,573		$	14,057
Deferred tax expense (benefit):
Federal	$	(926	)	$	(2,658	)	$	(909	)
State		77			(543	)		(20	)
Foreign		287			—			—
Total deferred		(562	)		(3,201	)		(929	)
Total income tax expense	$	10,465		$	5,372		$	13,128

(8) Other Balance Sheet Accounts

~~The~~Other ~~tax~~current ~~effects~~assets ofconsist ~~temporary differences that give rise to significant portions~~ of the ~~deferred~~following ~~tax assets and deferred tax liabilities are as follows~~ (in thousands):

	Year Ended
	June 28, 2003				June 29, 2002			June 30, 2001
	July 2, 2005			July 3, 2004
Deferred tax assets:
Due from employee stock option exercise	$	121		$	181
Accounts receivable allowances	$	776			$	284		$	433
Interest receivable		1,972			133
Inventory valuation		2,686				649			817
Other		711			566
Disqualified disposition exercises of options		—				502			1,010
	$	2,804		$	880
Other compensation charges		340				287			117
Net state operating loss carry forward		3,742				3,582			3,061
Capital loss carry forward		3,360				3,360			3,361
Depreciation		918				1,655			149
Accrued expenses and other		1,993				5,284			2,181
Gross deferred tax assets		13,815				15,603			11,129
Less: valuation allowance		7,102				6,942			6,422
Deferred tax asset		6,713				8,661			4,707
Deferred tax liabilities:
Intangibles		11,085				14,746			—
Other		995				—			854
Deferred tax liabilities		12,080				14,746			854
Net deferred tax asset (liability)	$	(5,367	)		$	(6,085	)	$	3,853

45Included in other noncurrent assets as of July 2, 2005 is $4.5 million related to prepaid maintenance contracts.

~~Table~~Accrued expenses and other current liabilities consist of ~~Contents~~the following (in thousands):

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible.


	Year Ended
	July 2, 2005		July 3, 2004
Legal accruals	$	220	$	20
Accrued restructuring expense		—		72
Accrued vacation		1,086		1,024
Accrued rent		721		820
Other		2,255		2,083

	$	4,282	$	4,019

Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, potential limitations with respect to the utilization of loss carry forwards and tax planning strategies in making this assessment. Based upon the projections for future taxable income over the periods which deferred tax assets are deductible and the potential limitations of loss and credit carry forwards, management believes it is more likely than not that we will realize these deductible differences, net of existing valuation allowances (~~both federal and state~~9) atDebt June 28, 2003. We periodically reassess and re-evaluate the status of our recorded deferred tax assets. We currently provide income taxes on the earnings of foreign subsidiaries to the extent those earnings are taxable in the local jurisdictions. The effective tax rate for fiscal years 2003 and 2002 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 $51.0 million liability as of June 28, 2003.

On March 1, 2004 we entered into a revolving credit loan agreement, which will terminate March 1, 2007. The ~~actual~~revolving ~~tax~~credit ~~expense~~loan ~~differs~~agreement ~~from~~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 ~~“expected”~~unpaid ~~tax~~balance ~~expense~~shall ~~computed~~bear byinterest ~~applying~~at the available LIBOR Based Rate (as defined) or the ~~statutory~~Prime ~~Federal~~Based ~~corporate~~Rate ~~income~~(as ~~tax~~defined). ~~rate~~A commitment fee on the average daily-unused portion of 35the revolving credit loan balance will be due and payable on a quarterly basis. The commitment fee will be between .20% in(.0020) ~~all~~and ~~fiscal~~.25% ~~years~~(.0025) based toon ~~income~~the ~~before~~funded ~~income~~debt ~~taxes~~to EBITDA ratio, as ~~follows~~defined (in ~~thousands):~~the revolving credit loan agreement, calculated the previous quarter. There was no outstanding balance on our revolving credit loan agreement as of July 2, 2005.

	Year Ended
	June 28, 2003			June 29, 2002			June 30, 2001
Earnings before income taxes	$	71,541		$	43,150		$	69,586
Computed expected tax expense		25,039			15,103			24,355
State taxes (net of federal income tax benefit)		666			353			662
Effect of lower foreign tax rates		(13,792	)		(10,588	)		(11,866	)
Increase in the valuation allowance		160			520			1,351
Other		(1,608	)		(16	)		(1,374	)
	$	10,465		$	5,372		$	13,128

In connection with the acquisition of Micro Networks Corporation (“MNC”) in Fiscal 2002, we entered into a revolving credit and term loan facility dated December 31, 2001. During the first three months 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 the term loan. This loan agreement was terminated in the third quarter of fiscal 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) 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. In connection with our bank agreement, we entered into an 18-month interest rate swap agreement with the same financial institution. The interest rate swap agreement essentially enabled us to manage the exposure to fluctuations in interest rates on a portion of our term loan.

~~The~~49 ~~effect of lower foreign tax rates is due to our Singapore operation, which has been given pioneer status, or exemption of taxes on non-passive income for five years.~~

AsOur ofterm ~~June~~loan ~~28,~~required ~~2003,~~us weto ~~have~~pay ~~state~~interest ~~operating~~based ~~loss~~on ~~carry~~a ~~forwards~~variable ofrate. ~~approximately~~Under ~~$44.4~~the ~~million,~~interest ~~which~~rate ~~begin~~swap ~~expiring~~agreement inwe ~~2004.~~exchanged the Wevariable ~~have~~rate ~~provided~~interest on a ~~full~~portion ~~valuation~~of ~~allowance against~~our aterm ~~portion~~loan, equal to 50% of the ~~state~~outstanding ~~operating~~loan ~~loss~~amount, ~~carry~~with ~~forwards~~a ~~where~~fixed itrate isof ~~more~~5.0%. ~~likely~~The ~~than~~interest ~~not~~rate ~~that~~swap ~~those~~agreement ~~carry~~was ~~forwards~~in ~~will~~effect ~~not~~until beJune ~~utilized.~~2003, Wewith ~~currently~~the ~~provide~~notional ~~income~~amount ~~taxes~~decreasing onto $14.8 million over the ~~earnings~~effective ofperiod. ~~foreign~~The ~~subsidiaries~~swap toagreement ~~the~~was ~~extent~~terminated ~~those~~in ~~earnings~~January ~~are taxable~~2003 orwith ~~are~~a ~~expected~~payment toof be$170,000. ~~remitted~~The in$170,000 ~~the~~was ~~local~~included ~~jurisdictions~~in interest expense.

~~(13)~~Senior ~~Employee~~debt ~~Benefit~~consisted ~~Plans~~of the following (in thousands):

We have a bonus plan, which covers permanent full-time exempt employees with at least six months of service. Bonuses under this plan are based on achieving specified revenue, operating and profit


	July 2, 2005		July 3, 2004
Revolving credit facility at LIBOR plus 1.75 bp	$	—	$	—
Capital lease obligations and other		8		82

	$	8	$	82
Less current portion		8		82

Long-term debt, less current portion	$	—	$	—

46Our 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. The current revolving credit loan agreement also restricts our ability to pay dividends to the holders of our common stock. At July 2, 2005, and July 3, 2004 we were in compliance with all of these covenants. There was no outstanding balance on our revolving credit loan agreement as of July 2, 2005.

~~Table~~(10) ofLease ~~Contents~~Obligations

~~objectives.~~We ~~Amounts~~lease ~~charged~~certain toof ~~operating~~our ~~expense~~facilities ~~for~~under ~~the~~operating ~~plan~~lease ~~were $4.8 million~~agreements, ~~$2.9~~some ~~million~~of ~~and~~which ~~$3.8 million in fiscal years 2003, 2002 and 2001,~~have ~~respectively~~renewal options.

WeRental ~~have~~expense aunder ~~401(k)~~operating ~~employee~~lease ~~savings~~agreements ~~plan,~~was ~~which provides for contributions to be held in trust by corporate fiduciaries~~$3. ~~Beginning in fiscal year 2000, employees were permitted to contribute up to 18% of their annual compensation. Under the plan, we make matching contributions equal to 150% of the first 1%~~6 ~~contributed~~million, ~~125% of the second 1% contributed, 100% of the third 1% contributed, 75% of the fourth 1% contributed and 50% of the next 2% up to a maximum of 6% of annual compensation, subject to IRS limits~~$4.0 ~~The~~million ~~matching amounts contributed~~ and ~~charged~~ ~~to expense were~~ $1.3.5 million in ~~fiscal year 2003~~2005, ~~$0.9~~2004 ~~million~~and ~~in fiscal year 2002~~2003, ~~and $0~~respectively.8 ~~million in fiscal year 2001.~~

~~(14)~~Future ~~Shareholders’~~minimum ~~Equity~~lease commitments under our operating leases are as follows as of July 2, 2005 (in thousands):

Treasury Stock


2006	$	3,235
2007		2,741
2008		2,147
2009		1,209
2010 and after		810

	$	10,142

In50 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 to increase the number of shares to be repurchased under this repurchase program to 3.0 million. As of June 28, 2003, we had purchased 1.1 million shares for $16.2 million.

~~Employee~~Sublease ~~Stock~~income ~~Purchase~~under ~~Plan~~all operating lease agreements was $0.9 million, $0.9 million, and $0.9 million in fiscal years 2005, 2004 and 2003, respectively. Future amounts due under the subleases are as follows as of July 2, 2005 (in thousands):

We authorized 500,000 shares of common stock under our employee stock purchase plan (“ESPP”). The ESPP permits employees to purchase common stock through payroll deductions. The purchase price is the lower of 85% of the fair market value of the common stock at the beginning or end of each three-month offering period. Shares purchased by and distributed to participating employees were 53,884 in fiscal 2003, 53,668 in fiscal 2002 and 50,850 in fiscal 2001 at weighted average prices of $15.15, $12.78 and $13.36, respectively.


2006	$	536
2007		531
2008		132
2009		—
2010 and after		—

	$	1,199

~~2002~~Future ~~Equity~~minimum ~~Incentive~~lease ~~Plan~~commitments under our capital leases are as follows as of July 2, 2005 (in thousands):

In October 2002, our board of directors approved the 2002 Employees’ Equity Incentive Plan (“2002 Plan”). The 2002 Plan provides for grants of non-qualified stock options, stock appreciation rights, restricted stock and performance awards to employees of the Company and its subsidiaries, persons to whom an offer of employment has been extended and others performing services for the Company or a subsidiary, but does not permit any grants to our officers and directors. The compensation committee of our board of directors will administer the 2002 Plan, including determining the exercise price and other terms and conditions of options granted under the 2002 Plan. The maximum term for exercise of options granted under the 2002 Plan is ten years from the date of grant. Three million shares of our common stock are available for issuance under the 2002 Plan, subject to adjustment in the event of a reorganization, merger or similar change in our corporate structure or change in the shares of common stock. As of June 28, 2003 there were 1.5 million options issued and outstanding under the 2002 Plan.


2006	$	8
2007 and after		—

	$	8

We(11) ~~apply~~Fair ~~the~~Value intrinsic-value-based method prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for employee stock options. Our policy is to grant stock options at the fair market value of ~~the underlying stock at the date of grant.~~Financial ~~Accordingly,~~Instruments 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.

47We have estimated the fair value of our financial instruments using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value.

~~Table~~The following methods and assumptions were used to estimate the fair value of ~~Contents~~each class of financial instruments:

~~2000~~Cash ~~Long~~and cash equivalents, accounts receivable and accounts payable – The carrying amounts of these items approximate their fair values at July 2, 2005 due to the short-~~Term~~term ~~Equity~~maturities ~~Incentive~~of ~~Plan~~these instruments.

InInvestment ~~May~~securities ~~2000, the 2000 Long~~-~~Term~~For ~~Equity~~securities ~~Incentive~~held ~~Plan~~as ~~was~~investments ~~approved,~~(which ~~ratified~~include corporate and ~~adopted~~government ~~(the~~bonds ~~“2000~~and ~~Plan”~~notes). ~~The~~and marketable equity ~~incentive~~securities ~~plan~~held ~~provides~~ for ~~grants~~investment ~~of stock options~~purposes, ~~stock~~fair ~~appreciation~~values ~~rights,~~are ~~restricted~~based ~~stock~~on ~~and~~quoted ~~performance~~market ~~awards.~~prices ~~Directors,~~or ~~officers~~dealer ~~and other employees of our Company and its subsidiaries and persons who engage in services for us are eligible for grants under the plan~~quotes. ~~The~~For ~~purpose~~nonpublic ~~of the~~ equity ~~incentive~~investments, ~~plan~~it is tonot ~~provide~~practicable ~~these individuals with incentives~~ to ~~maximize~~estimate ~~shareholder~~fair value ~~and~~where ~~otherwise contribute to our success and to enable us to attract, retain and reward~~ the ~~best~~company ~~available persons~~holds ~~for~~less ~~positions~~than of responsibility. The Compensation Committee has discretion to set the terms of awards granted under the 2000 Plan, including vesting terms. Typically, options which have been granted under the 2000 Plan vest over 4 years. Under the 2000 Plan 8.4 million shares of our common stock available for issuance, subject to adjustment in the event of a ~~reorganization,~~5% ~~merger or similar change in our corporate structure or change in the outstanding shares of common stock~~interest. ~~As of June 28, 2003 there were 4.7 million options issued and outstanding under the 2000 Plan.~~

~~1999~~Long-term ~~Plan~~debt – Interest rates that are currently available to us for issuance of debt with similar terms and remaining maturities would be used to estimate fair value for debt issues for which quoted market prices are not available. Since we have no outstanding long-term debt at July 2, 2005, the carrying value of this item is not materially different from its fair value.

InInterest ~~May~~rate ~~1999,~~swap ~~the~~agreement– ~~1999~~In ~~Stock Option~~connection ~~Plan~~with ~~was adopted (the “1999 Plan”). The equity plan provided for periodic grants of options to purchase~~ our ~~common~~bank ~~stock. These options will vest upon the fulfillment of certain conditions~~agreement, ~~the~~on ~~passage~~December ~~of a specified period of time and our achievement of certain performance goals~~31, as2001 ~~determined~~we byentered ~~our~~into ~~board~~an of18-month ~~directors.~~interest ~~All~~rate ofswap ~~the~~agreement ~~unvested~~with ~~options~~one of ~~any terminated employee will expire upon termination, and~~ the ~~exercise~~same ~~period~~financial ofinstitutions. ~~all~~The ~~vested~~interest ~~options~~rate ~~will be reduced to sixty~~swap ~~days~~agreement ~~following~~essentially ~~the~~enables ~~date~~us ofto ~~termination.~~manage ~~We and certain investors have~~ the ~~right~~exposure to ~~repurchase~~fluctuations ~~shares~~in ofinterest ~~our~~rates ~~common~~on ~~stock~~a ~~issued~~portion ~~upon the exercise~~ of ~~options~~our ~~granted~~term ~~under the 1999 Plan if any employee ceases to be employed by us~~loan. NoThis ~~future~~agreement ~~grants will~~was bepaid ~~made~~off ~~under~~in ~~the~~January ~~1999 Plan. As of June 28,~~ 2003 ~~there were 1~~.7 ~~million options issued and outstanding under the 1999 Plan.~~

~~Stock~~51 ~~option transactions during fiscal years 2001, 2002 and 2003 are summarized as follows (in thousands, except price per share):~~

1999, 2000 and 2002 Plans	Options Available For Grant Under The Plans		Options Outstanding		Weighted Average Exercise Price
Common Share:
Balance July 1, 2000	6,943		8,819		$	0.74
Shares reserved	646		—			—
Granted	(1,036	)	1,036			15.05
Exercised	—		(1,808	)		0.69
Terminated	727		(727	)		1.53
Cancelled shares	(1,228	)	—			—
Balance June 30, 2001	6,052		7,320		$	2.70
Shares reserved	661		—			—
Granted	(4,239	)	4,239			18.71
Exercised	—		(1,659	)		1.17
Terminated	292		(292	)		3.59
Cancelled shares	(153	)	—			—
Balance June 29, 2002	2,613		9,608		$	9.85
Shares reserved	3,673		—			—
Granted	(2,490	)	2,490			21.62
Exercised	—		(3,390	)		3.94
Terminated	667		(667	)		16.08
Cancelled shares	(31	)	—			—
Balance June 28, 2003	4,432		8,041		$	15.47

(12) Income Taxes

48The provision for income taxes consists of the following (in thousands):


	Year Ended
	July 2, 2005		July 3, 2004			June 28, 2003
Current tax expense (benefit):
Federal	$	1,355	$	2,260		$	10,086
State		215		997			979
Foreign		54		(72	)		(38	)

Total current	$	1,624	$	3,185		$	11,027

Deferred tax expense (benefit):
Federal	$	5,189	$	7,085		$	(926	)
State		454		(2,155	)		77
Foreign		868		386			287

Total deferred		6,511		5,316			(562	)

Total income tax expense	$	8,135	$	8,501		$	10,465

AsThe oftax ~~June~~effects ~~28,~~of ~~2003,~~temporary differences ~~options~~that ~~for~~give ~~2.3~~rise ~~million shares were exercisable at exercise prices ranging from $0.1299~~ to ~~$24.50~~significant ~~at an~~portions ~~aggregate exercise price~~ of ~~$14.2~~the ~~million.~~deferred ~~Income~~ tax ~~benefits~~assets ~~attributable to non-qualified stock options exercised~~ and ~~disqualifying~~deferred ~~dispositions~~tax ofliabilities ~~incentive stock options~~ are ~~credited~~as tofollows ~~equity~~(in ~~when~~thousands): ~~such options are exercised.~~

Options Outstanding							Options Exercisable
	Fiscal Year Ended
Range of Exercise Price	Outstanding as of 6/28/2003		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Exercisable as of 6/28/2003	Weighted Average Exercise Price
	July 2, 2005			July 3, 2004
$0.1299 -$3.205	1,802,420		6.1		$	0.87	1,625,991	$	0.85
Deferred tax assets:
$9.62 - $12.82	244,416		7.3			11.06	65,422		11.06
Depreciation	$	195			—
$12.82 - $16.03	78,750		8.5			15.25	7,500		15.00
Accounts receivable allowances		250		$	222
$16.03 - $19.23	1,495,975		7.9			17.59	230,350		17.41
Inventory valuation		2,182			2,244
$19.23 - $22.44	4,273,367		9.0			20.75	401,692		19.63
Other compensation charges		388			658
$22.44 - $25.64	75,000		9.5			22.95	3,750		23.85
Net state operating loss carry forward		2,072			3,917
$25.64 - $28.85	36,250		9.9			28.18	—		—
Net federal operating loss carry forward		2,884			10,450
$28.85- $32.05	35,000		10.0			28.97	—
Federal tax credits		10,561			6,367
	8,041,178		8.1		$	15.47	2,334,705		$6.08
State tax credits		5,012			3,316
Accrued expense and other		773			872
Gross deferred tax assets		24,317			28,046
Less: valuation allowance		4,629			3,719
Deferred tax asset		19,688			24,327
Deferred tax liabilities:
Intangibles		9,226			10,038
Depreciation		0			372
Prepaid expenses		356			389
Singapore deferred taxes		1,525			674
Federal impact of state tax attributes		1,841			1,343
Other		1			—
Deferred tax liabilities		12,949			12,816
Net deferred tax asset (liability)	$	6,739		$	11,511

~~The~~In ~~per~~assessing ~~share~~the ~~weighed-average~~realizability ~~fair~~of ~~value~~deferred tax assets, management considers whether it is more likely than not that some portion or all of ~~stock~~the ~~options~~deferred ~~issued~~tax assets will not be realized. The ultimate realization of deferred tax assets is asdependent ~~follows:~~upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible.

	2003		2002		2001
Option Price = FMV	$	15.09	$	19.01	$	11.83
Option Price > FMV		—		—		—
Option Price < FMV		—	$	12.61		—

~~During~~Management ~~fiscal~~considers ~~year~~the ~~2002~~scheduled reversal of deferred tax liabilities, ~~approximately~~projected future taxable income; potential ~~0.2~~limitations ~~million~~with ~~shares~~respect ~~were~~to ~~issued~~the ~~below~~utilization ~~fair~~of ~~market~~loss ~~value.~~carry ~~These~~forwards ~~shares~~and ~~were~~tax ~~subsequently~~planning ~~cancelled~~strategies ~~during~~in ~~fiscal~~making ~~year~~this ~~2003~~assessment. ~~Prior~~Based toupon ~~our~~the ~~Initial~~projections ~~public~~for ~~offering~~future ~~(IPO)~~taxable income over the periods which deferred tax assets are deductible and the potential limitations of loss and credit carry forwards, wemanagement ~~issued~~believes ~~options~~it atis ~~what~~more welikely ~~believed~~than ~~was~~not ~~fair~~that ~~market~~we ~~value.~~will Asrealize these ~~options~~deductible ~~were granted~~differences, ~~within~~net ~~six~~of ~~months~~existing ofvaluation ~~our~~allowances ~~IPO~~(both federal and state) at July 2, we2005. We periodically reassess and re-evaluate the status of our recorded deferred ~~compensation~~tax asassets. ~~the~~We ~~difference~~currently ~~between~~provide income taxes on the ~~strike~~earnings ~~price~~of ~~and~~foreign ~~our~~subsidiaries ~~IPO~~to ~~price.~~the Weextent those earnings are ~~currently~~taxable ~~amortizing~~in the ~~deferred~~local ~~compensation~~jurisdictions. ~~charge~~The ~~over~~effective tax rate for fiscal years 2005, 2004 and 2003 reflects the ~~four~~tax-~~year~~exempt ~~vesting~~status ~~period~~of our Singapore operation, which has been given pioneer status, or exemption of ~~these~~taxes ~~options~~on non-passive income through December 31, 2007. This is stated in our agreement with the Economic ~~Amortization~~Development ~~for~~Board ~~fiscal~~of ~~year~~Singapore. ~~2003~~The ~~was~~pioneer $1status is contingent upon ICS meeting certain investment criteria in fixed assets, personnel, and technology.8 ~~million~~We do not currently record deferred taxes on our investment in our Singapore operations, ~~fiscal~~as ~~year~~all undistributed ~~2002~~earnings ~~was~~are $1permanently reinvested back into the Singapore facility.4 ~~million~~If ~~and~~we ~~fiscal~~were ~~year~~to ~~2001~~record ~~was~~deferred taxes on our investment, the amount would be an $188.07 million liability as of July 2, 2005.

On October 22, 2004, the American Jobs Creation Act (15“AJCA”) ~~Earnings~~was ~~Per~~signed ~~Share~~into law. The AJCA includes a deduction of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. We may elect to apply this provision to qualifying earnings repatriations in fiscal year 2006. We have started an evaluation of the effects of the repatriation provision. We expect to complete our evaluation of the effects of the repatriation provision before the end of the first quarter for fiscal 2006. The range of possible amounts that we are considering for repatriation under this provision is between zero and $150 million. The related potential range of income tax expense is between zero and $7.3 million. This is a one-time event and all future earnings will be permanently reinvested into our Singapore operations.

~~The~~Pretax ~~calculations~~income offrom ~~earnings~~foreign ~~per~~operations ~~share~~was ~~(EPS)~~$41.3 ~~follow~~million (in ~~thousands~~fiscal ~~except~~2005, ~~per~~$57.5 million ~~share~~in ~~amounts):~~fiscal 2004, and $42.0 million in fiscal 2003. Pretax income from domestic operations was $14.2 million in fiscal 2005, $29.5 million in fiscal 2004, and $29.5 million in fiscal 2003.

	Fiscal Years Ended
	June 28,2003		June 29,2002		June 30,2001
Numerator:
Net income	$	61,076	$	37,778	$	56,458
Denominator:
Weighted average shares used for basic income per share		67,898		66,500		64,837
Common stock options		2,666		3,692		4,736
Weighted average shares outstanding used for diluted income per share		70,564		70,192		69,573

The actual tax expense differs from the “expected” tax expense computed by applying the statutory Federal corporate income tax rate of 35% in all fiscal years to income before income taxes as follows (in thousands):


	Year Ended
*(in thousands)*	July 2, 2005			July 3, 2004			June 28, 2003
Earnings Before Income Taxes	$	55,538		$	87,016		$	71,541
Computed Expected Tax Expense		19,438			30,456			25,039
State Taxes (net of Federal Income tax benefit)		435			(1,158	)		666
Effects of lower foreign tax rates		(12,074	)		(18,988	)		(13,792	)
Federal research and development credits		(2,152	)		(2,718	)		—
Increase in the Federal valuation allowance		598			680			160
Increase in the contingency reserve		863			—			—
Non-deductible acquisition costs		1,051			—			—
Other		(24	)		229			(1,608	)

	$	8,135		$	8,501		$	10,465


Basic per share effect of tax holiday	$	0.17		$	0.27		$	0.20
Diluted per share effect of tax holiday	$	0.17		$	0.26		$	0.20

Weighted average shares outstanding – basic		70,197			70,358			67,898
Weighted average shares outstanding – diluted		71,109			72,578			70,564

~~Table~~53 ~~of Contents~~

~~Options~~The toeffect ~~purchase~~of ~~2.4~~lower ~~million,~~foreign ~~2.8~~tax ~~million~~rates ~~and~~is ~~0.1~~due ~~million~~to ~~shares~~our ofSingapore ~~common stock~~operation, ~~with~~which ~~average~~has ~~exercise~~been ~~prices~~given ~~of $20.96,~~pioneer ~~$19.35 and $17.94 were outstanding during fiscal years 2003~~status, ~~2002~~or exemption ~~and~~of ~~2001,~~taxes ~~respectively~~on ~~but~~non-passive ~~were~~income ~~excluded~~for ~~from~~five ~~the diluted earnings per common share calculation because the options’ exercise prices were greater than the average market price of our common stock~~years.

~~(16)~~We ~~Business~~establish ~~Segment~~reserves for tax contingencies when, despite the belief that our tax return positions are fully supported, it is probable that certain positions may be challenged and may not be fully sustained. The tax contingency reserves are analyzed on a quarterly basis ~~Geographic~~and ~~Information~~adjusted based upon changes in facts and circumstances, such as the progress of federal and state audits, case law and emerging legislation. Our effective tax rate includes the impact of tax contingency reserves and changes to the reserves, including related interest, as considered appropriate by management. The tax contingency reserve was increased for the fiscal year ended July 2, 2005 by $0.9 million primarily attributable to the increase in exposure due to the current ongoing federal audit for our fiscal years 2001, 2002 and 2003 and potential tax exposure in foreign jurisdictions for fiscal years 2001 through 2005.

~~Factors~~As ~~used~~of inJuly ~~determining~~2, ~~the~~2005 ~~reportable business~~we ~~segments~~have ~~include~~federal ~~the~~operating ~~nature~~loss carry forwards of $8.2 million, which begin expiring in 2021. As of July 2, 2005, we have state operating ~~activities~~loss carry forwards of approximately $58.8 million, ~~existence~~which began expiring in 2005. We have provided a full valuation allowance against a portion of ~~separate~~the ~~senior~~state ~~management~~operating ~~teams~~loss ~~and~~carry forwards where it is more likely than not that those carry forwards will not be utilized. We currently provide income taxes on the ~~type~~earnings of ~~information~~foreign ~~presented~~subsidiaries to the ~~Company’s~~extent ~~chief~~those ~~operating~~earnings ~~decision~~are ~~maker~~taxable toor ~~evaluate~~are ~~all~~expected ~~results~~to ofbe ~~operations~~remitted.

We(13) ~~operate~~Employee ~~and~~Benefit ~~track~~Plans our results in one operating segment. We design, develop and market silicon timing devices. The nature of our products and production processes as well as distribution methods is consistent among all of our products.

~~Revenue~~We ~~and~~have ~~long~~a bonus plan, which covers permanent full-~~lived~~time ~~assets~~exempt byemployees ~~our~~with ~~geographic~~at ~~locations~~least six months of service. Bonuses under this plan are asbased ~~follows:~~on achieving specified revenue, operating and profit objectives. Amounts charged to operating expense for the plan were $0.2 million, $5.1 million, and $4.8 million in fiscal years 2005, 2004 and 2003, respectively.

	Revenue by Geographic Location
	2003			2002			2001
North America	$	64,274		$	41,406		$	61,325
Asia-Pacific		92,803			68,022			68,618
Europe		17,670			25,541			8,481
Taiwan		67,015			47,685			49,874
	$	241,762		$	182,654		$	188,298
	Long-Lived Assets
	2003			2002			2001
United States	$	41,753		$	48,414		$	8,711
Singapore		4,959			3,075			3,313
Europe		7			8			2
Elimination of Intercompany		(725	)		(773	)		(811	)
	$	45,994		$	50,724		$	11,215

We have a 401(k) employee savings plan, which provides for contributions to be held in trust by corporate fiduciaries. Employees are permitted to contribute up to 18% of their annual compensation. Under the plan, we make matching contributions equal to 150% of the first 1% contributed, 125% of the second 1% contributed, 100% of the third 1% contributed, 75% of the fourth 1% contributed and 50% of the next 2% up to a maximum of 6% of annual compensation, subject to IRS limits. The matching amounts contributed and charged to expense were $1.3 million in fiscal year 2005, $1.3 million in fiscal year 2004, and $1.3 million in fiscal year 2003.

(1714) ~~Related Party~~ ~~Transactions~~Shareholders’ Equity

~~Michael~~Treasury A.Stock Krupka and David Dominik, both of whom are directors of the Company, are members or general partners of certain investment funds associated with Bain Capital, LLC. Certain of these Bain Capital, LLC investment funds are also shareholders of ChipPAC, Inc., one of our production vendors. Our orders to ChipPAC totaled approximately $0.5 million for fiscal year 2003, $1.0 million for fiscal year 2002 and $6.0 million in fiscal year 2001 and were on market terms.

In ~~fiscal~~September ~~year~~ 2001, we ~~entered~~announced ~~into~~a anstock ~~Investment~~repurchase ~~and~~program, ~~Stock~~which ~~Trade~~authorized ~~Agreement (~~the ~~“Agreement”)~~purchase, from ~~with~~time ~~Maxtek~~to ~~Technology~~time, Coof 2.0 ~~Ltd (“Maxtek”),~~million anshares ~~overseas~~of ~~distributor~~our incommon ~~Taiwan~~stock ~~and~~on ~~China~~the market. WeIn ~~invested~~October $42002, we announced that our board of directors approved to increase the number of shares to be repurchased under this repurchase program to 3.0 million. ~~and~~In October ~~owned~~2004, ~~approximately~~we ~~10%~~announced that our board of ~~Maxtek.~~directors ~~The~~had ~~Agreement~~approved ~~states~~an ~~that~~increase ifin ~~Maxtek~~the ~~fails~~number toof ~~successfully~~shares ~~complete~~to abe ~~public~~repurchased ~~offering~~under bythe ~~December~~program to 5.0 million. As of July 2, 2005, we, athad ~~our sole~~purchased ~~option,~~3.2 ~~have~~million ~~the~~shares ~~right~~for to$67.8 million. The stock repurchase program was instituted to improve shareholder value.

50Employee Stock Purchase Plan

~~Table~~We authorized 500,000 shares of ~~Contents~~common stock under our employee stock purchase plan (“ESPP”). The ESPP permits employees to purchase common stock through payroll deductions. The purchase price is the lower of 85% of the fair market value of the common stock at the beginning or end of each three-month offering period. Shares purchased by and distributed to participating employees were 61,178 in fiscal 2005, 39,529 in fiscal 2004, and 53,206 in fiscal 2003 at weighted average prices of $17.05, $22.72 and $15.15, respectively.

~~demand~~54 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. In fiscal 2003, we sold 50% of our investment in Maxtek resulting in a gain of $0.6 million. As of June 28, 2003, we owned 2.0 million shares, or approximately 5% of Maxtek. Subsequent to year end, we sold an additional 1.0 million shares at a gain of $0.3 million. Maxtek represented approximately 20% of our sales for fiscal year 2003, and 19% in the prior year period. Additionally, sales to Lacewood Corporation, formerly known as Maxtech Corporation Limited, an entity which is commonly controlled by the owners’ of Maxtek representing business into Hong Kong and China, were 21% of our sales in fiscal year 2003 and 18% in the prior year period. These international distributors sell to approximately 130 OEM end customers.

~~(18)~~2002 ~~Litigation~~ Equity Incentive Plan

OnIn ~~March~~October 282002, ~~2001,~~our ~~Cypress~~board ~~Semiconductor~~of ~~Corporation (“Cypress”),~~directors ~~filed~~approved athe ~~patent~~2002 ~~infringement~~Employees’ ~~lawsuit~~Equity inIncentive ~~Delaware~~Plan ~~federal court against us~~ (“~~Delaware~~2002 ~~Lawsuit~~Plan”). OnThe ~~April~~2002 4,Plan provides ~~2001,~~for wegrants ~~filed~~of anon-qualified ~~patent~~stock ~~infringement~~options, ~~lawsuit~~stock inappreciation ~~California~~rights, ~~federal~~restricted ~~court~~stock ~~against~~and ~~Cypress~~performance ~~(“California Lawsuit”).~~awards Onto ~~July~~employees ~~20,~~of ~~2001, Cypress filed a complaint with~~ the ~~International~~Company ~~Trade~~and ~~Commission~~its ~~(“ITC”)~~subsidiaries, ~~against~~persons usto ~~for~~whom ~~infringement~~an offer of ~~one~~employment ~~patent,~~has been extended and onothers ~~November~~performing services 5,for ~~2001,~~the weCompany ~~filed~~or a ~~complaint~~subsidiary, ~~with~~but ~~the~~does ~~ITC~~not ~~against~~permit ~~Cypress~~any ~~for infringement~~grants ofto ~~two~~our ~~patents~~officers ~~(collectively,~~and ~~“ITC Actions”)~~directors. ~~After~~The wecompensation ~~filed~~committee ~~the~~of

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