ISE LABS INC, S-1/A, 1998-06-11

ISE LABS INC
S-1/A, 1998-06-11
SEMICONDUCTORS & RELATED DEVICES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1998
REGISTRATION NO. 333-49685

------------

AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
ISE LABS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

CALIFORNIA 3674 77-047-0213
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
(I.R.S. EMPLOYER
(STATE OF INCORPORATION) IDENTIFICATION NO.)
2095 RINGWOOD AVENUE
SAN JOSE, CALIFORNIA 95131
(408) 954-8378
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------
SAEED A. MALIK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ISE LABS, INC.
2095 RINGWOOD AVENUE
SAN JOSE, CALIFORNIA 95131
(408) 954-8378
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------
COPIES TO:
WARREN T. LAZAROW, ESQ. JEFFREY D. SAPER, ESQ.
MICHAEL C. DORAN, ESQ. JEFFREY A. HERBST, ESQ.
ALAN K. TSE, ESQ. CAINE T. MOSS, ESQ.
BROBECK, PHLEGER & HARRISON LLP STEPHANIE L. RUBY, ESQ.
TWO EMBARCADERO PLACE WILSON SONSINI GOODRICH & ROSATI
2200 GENG ROAD PROFESSIONAL CORPORATION
PALO ALTO, CALIFORNIA 94303 650 PAGE MILL ROAD
(650) 424-0160 PALO ALTO, CALIFORNIA 94304
(650) 493-9300
------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED JUNE 11, 1998

PROSPECTUS
, 1998

6,000,000 SHARES
ISE LABS, INC.

COMMON STOCK

Of the 6,000,000 shares of Common Stock offered hereby, 5,000,000 are being
offered and sold by ISE Labs, Inc. (which, together with its subsidiaries,
shall be referred to herein as "ISE" or the "Company") and 1,000,000 are being
offered by the Selling Shareholders. See "Principal and Selling Shareholders."
The Company will not receive any proceeds from the sale of shares by the
Selling Shareholders.

Prior to this offering, there has been no public market for the Common Stock
of the Company. See "Underwriting" for information relating to the method of
determining the initial public offering price. It is currently anticipated that
the initial public offering price per share will be between $12.00 and $14.00.

The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "ISET," subject to official notice of issuance.

AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS," BEGINNING ON PAGE 6, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF COMMON STOCK.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1)(2) COMPANY(3) SHAREHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share...................... $ $ $ $
Total(4)....................... $ $ $ $
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Does not include additional compensation to be received by Donaldson,
Lufkin & Jenrette Securities Corporation in the form of a nonaccountable
expense allowance. See "Underwriting."
(3) Before deducting expenses payable by the Company, estimated at $1,950,000,
including the nonaccountable expense allowance. See "Underwriting."
(4) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 900,000 additional shares of
Common Stock solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to the Public, Underwriting Discounts
and Commissions and Proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting."

The shares are being offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters, subject to various prior
conditions, including their right to reject orders in whole or in part. It is
expected that delivery of share certificates will be made in New York, New
York, on or about , 1998.

DONALDSON, LUFKIN & JENRETTE BT ALEX. BROWN
SECURITIES CORPORATION
<PAGE>

[INSIDE FRONT COVER GRAPHICS: SEE APPENDIX]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
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PROSPECTUS SUMMARY

The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors" and
the Consolidated Financial Statements and Notes thereto, appearing elsewhere in
this Prospectus. Unless otherwise indicated, the information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option and reflects a
series of amendments to the Company's Articles of Incorporation to, among other
things, increase the number of authorized shares of Common Stock to 50,000,000
and create a class of undesignated Preferred Stock of 3,000,000 shares.

THE COMPANY

ISE Labs, Inc. ("ISE" or the "Company") is one of the leading independent
integrated circuit ("IC") testing and evaluation companies in the world. Unlike
many of its competitors, the Company offers a broad range of IC testing,
evaluation and other services throughout the entire semiconductor manufacturing
process. These services include software development, electrical verification,
reliability analysis, failure analysis, wafer sort, production monitoring and
quickturn and prototype packaging. A significant portion of the Company's
revenues from testing services is derived from testing complex, high-
performance logic and mixed-signal products, which are typically the higher-
margin, faster growing segments of the testing services market.

The production of ICs is an extremely complex process that requires
substantial investment in specialized equipment and facilities and
sophisticated engineering and manufacturing expertise. As a result, many
semiconductor companies have begun to rely on outsourcing various steps of the
production process. Virtually every step of the semiconductor manufacturing
process can now be effectively outsourced. By outsourcing their IC testing
requirements, semiconductor companies can (i) focus on core business
activities; (ii) access leading edge testing technologies; (iii) react more
quickly to rapidly changing market conditions and reduce time to market for new
products; and (iv) reduce capital expenditures, fixed costs and operating
expenses. Currently, wafer foundry services and IC packaging are the largest
segments of the market for outsourced semiconductor manufacturing services,
while the testing services segment has only recently emerged as a major market
opportunity.

The Company's strategy is to become the leading independent provider of IC
testing and evaluation services in the world. The principal components of the
Company's strategy are to (i) maintain its technological leadership; (ii)
provide the broadest range of services; (iii) leverage strong relationships
with its diversified customer base; (iv) expand capacity worldwide; and (v)
focus on testing complex, high-performance logic ICs.

In contrast to all of its major independent competitors, the Company's
headquarters is located in the Silicon Valley. In addition to its significant
United States presence, the Company has established substantial test capacity
in Hong Kong and has more recently commenced testing operations in Singapore.
The Company's proximity to a large number of the world's leading semiconductor
companies, together with its broad service offerings, enables the Company to
establish close working relationships with its customers' design engineers
early in the IC development process. By establishing such early stage
relationships with its customers, the Company believes it has a significant
competitive advantage in competing for high volume future testing business. In
order to address the increasing demand for independent testing services, the
Company has made significant investments to increase its testing capacity.

3
<PAGE>

To expand its capacity and broaden its range of services, in September 1997
the Company purchased for approximately $31.2 million, including acquisition
costs, certain assets of Alphatec USA, Inc. ("Alphatec") (the "Alphatec
Acquisition"). These assets included 100% of the capital stock of Digital
Testing Services, Inc. ("DTS") and selected assets of Alphatec relating to its
Manteca, California operations (the "Manteca Operation"). DTS provides a broad
range of IC testing and validation services throughout the semiconductor
production process, with a primary focus on the initial development stage. The
Manteca Operation provides semiconductor packaging services, including
quickturn and prototype packaging.

During the last twelve months, the Company has provided services to more than
250 customers worldwide. The Company's customers include a number of the
world's leading vertically integrated and fabless semiconductor companies,
distributors and subcontractors, such as Atmel, C-Cube Microsystems, Cirrus
Logic, Hana Technologies, Hewlett-Packard, LSI Logic, Motorola, National
Semiconductor, NeoMagic, Philips Electronics, S3, Wyle Laboratories and Xilinx.

ISE Labs, Inc. was incorporated in the State of California in November 1983.
The Company currently has locations in San Jose, Santa Clara and Manteca,
California and in Hong Kong and Singapore. The Company's principal executive
offices are located at 2095 Ringwood Avenue, San Jose, California 95131, and
its telephone number at this location is (408) 954-TEST.

THE OFFERING

<TABLE>
<C> <S>
Common Stock offered by the Company................ 5,000,000 shares
Common Stock offered by the Selling Shareholders... 1,000,000 shares
Common Stock to be outstanding after the offering.. 22,500,000 shares(1)
Use of proceeds.................................... Repayment of bank
indebtedness, capital
expenditures and for
general corporate
purposes, including
working capital. See "Use
of Proceeds."
Nasdaq National Market symbol...................... ISET
</TABLE>
- --------------------
(1) Based on the number of shares of Common Stock outstanding at April 30,
1998. Excludes as of April 30, 1998: (i) 2,902,800 shares of Common Stock
issuable upon exercise of options currently outstanding under the Company's
1998 Stock Incentive Plan (the "1998 Plan") at a weighted average exercise
price of $8.08 per share; (ii) 1,597,200 shares of Common Stock issuable
upon exercise of options reserved for future issuance under the 1998 Plan;
and (iii) 600,000 shares of Common Stock reserved for future issuance under
the Company's 1998 Employee Stock Purchase Plan. See "Management--1998
Stock Incentive Plan" and "--1998 Employee Stock Purchase Plan" and Notes 5
and 10 of Notes to Consolidated Financial Statements of the Company.

4
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
--------------------------------------- ---------------
1993 1994 1995 1996 1997(1) 1997 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.............. $13,440 $15,548 $22,321 $25,354 $35,532 $12,675 $40,538
Gross profit.......... 6,883 8,788 13,368 13,260 17,582 5,758 21,473
Income from
operations........... 3,441 4,335 8,477 8,217 9,256 3,462 12,023
Income before income
taxes................ 3,340 4,359 8,597 8,191 9,319 3,438 10,358
Net income............ 1,986 2,468 4,930 4,848 5,740 2,118 6,421
Net income
per share(2):
Basic............... $ 0.11 $ 0.14 $ 0.28 $ 0.28 $ 0.33 $ 0.12 $ 0.37
Diluted............. 0.11 0.14 0.28 0.28 0.33 0.12 0.36
Basic shares
outstanding.......... 17,500 17,500 17,500 17,500 17,500 17,500 17,500
Diluted shares
outstanding.......... 17,500 17,500 17,500 17,500 17,500 17,500 18,001
</TABLE>

<TABLE>
<CAPTION>
AS OF APRIL 30, 1998
-------------------------
ACTUAL AS ADJUSTED (3)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 7,694 $ 43,485
Working capital (deficiency)....................... (15,485) 34,605
Total assets....................................... 88,496 124,287
Short-term debt, including current portion of long-
term debt......................................... 17,565 3,266
Long-term debt, less current portion............... 18,995 10,585
Retained earnings.................................. 29,379 29,379
Total shareholders' equity......................... 29,943 88,443
</TABLE>
- --------------------
(1) Statement of operations data for fiscal 1997 include the post-Alphatec
Acquisition results of operations of DTS and the Manteca Operation, which
were acquired in September 1997 and accounted for under the purchase method
of accounting. See Note 2 of Notes to Consolidated Financial Statements of
the Company.
(2) See Note 1 of Notes to Consolidated Financial Statements of the Company for
an explanation of the method used to determine the number of shares used in
computing net income per share.
(3) Adjusted to give effect to the sale of 5,000,000 shares of Common Stock by
the Company, at an assumed initial public offering price of $13.00 per
share, and the application of the estimated net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."

5
<PAGE>

RISK FACTORS

The discussion in this Prospectus may contain forward-looking statements.
Future events anticipated in any such forward-looking statements contained in
this Prospectus are uncertain. Actual events, and the Company's actual
results, may differ materially from those that may be predicted, assumed or
discussed in any such forward-looking statements. Factors that may cause or
contribute to such differences include those discussed below, as well as in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this Prospectus. The cautionary
statements made in this Prospectus should be read as being applicable to any
related forward-looking statements, wherever they appear in this Prospectus.
Any forward-looking statements are made as of the date of this Prospectus and
the Company assumes no obligation to update such forward-looking statements or
to update the reasons why actual results could differ materially from those
anticipated in such forward-looking statements.

SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS

A variety of factors have materially affected, and are expected to continue
to materially affect, the Company's operating results. These factors include
the cyclical nature of the semiconductor, personal computer ("PC") and related
industries and the various markets that serve consumers of products
incorporating semiconductors; absence of purchase contracts and the resulting
lack of backlog from the Company's customers; intense price competition;
timing and volume of orders received by the Company; reschedulings, delays,
deferrals and cancellations of orders; evolutions in the life cycles of
customers' products; erosion of semiconductor unit prices; changes in capacity
utilization; allocation of testing capacity between the Company's facilities
and those of its customers; availability, price and changes in advanced
testing equipment; changes in costs, availability and delivery time of raw
materials and components; changes in costs and availability of labor;
effectiveness in managing production processes; fluctuations in manufacturing
yields; changes in product and service mix or devices tested or assembled;
product obsolescence; availability of financing for expansion; the ability to
develop and implement new technologies on a timely basis; the loss of key
personnel or the shortage of available skilled workers; international
political or economic events; and currency and interest rate fluctuations. The
Company's gross margin has tended to fluctuate due in part to timing of costs
associated with the acquisition of additional equipment to expand capacity and
the delay associated with utilizing such expanded capacity. Furthermore, the
Company has historically experienced, and may continue to experience,
seasonality in its revenues and operating results. This seasonality, combined
with other factors including those described above, has resulted and is likely
to continue to result in significant variability in quarterly and annual
operating results. The Company's revenues increased significantly in the
quarters ended October 31, 1997, January 31, 1998 and April 30, 1998 compared
to the corresponding periods in the prior fiscal year due primarily to
revenues generated by DTS and the Manteca Operation, which were acquired in
September 1997, and increased revenues derived from the Company's other
facilities. The Company's revenues for the quarter ended April 30, 1998
decreased slightly from the revenues for the quarter ended January 31, 1998.
The Company does not believe that recent growth rates are indicative of future
operating results and there can be no assurance that profitability or
significant revenue growth on a quarterly or annual basis will occur in the
future. The Company anticipates that due to prevailing conditions in the
semiconductor market, its quarterly revenues in the near future will remain
relatively flat and may possibly decline from levels experienced in recent
periods. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

In connection with its efforts to increase testing capacity, the Company
intends to continue to make substantial capital investments in equipment for
testing advanced ICs, invest in additional facilities and recruit and train
additional personnel. Such expenditures are typically made in advance of
anticipated increases in sales. Therefore, the Company anticipates that its
gross margin and other operating results will be adversely affected from time-
to-time due to poor or non-utilization of capacity associated with such
additions of capital equipment, facilities or personnel. There can be no
assurance that any anticipated increases in sales will result from such
expenditures. Any failure of the Company to increase sales following such
expenditures would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, a large

6
<PAGE>

portion of the Company's operating expenses, including depreciation, rent and
salaries, are significant, fixed and difficult to reduce or modify. If the
Company's revenues do not meet its expectations, the material adverse effect
of any revenue shortfall will be magnified by the significant and fixed nature
of these operating expenses.

The average selling prices for the Company's services, calculated on a
hourly basis, historically have not fluctuated to a significant degree. There
can be no assurance that said prices will not fluctuate in the future.
However, the average selling price per device tested has varied and is
expected to continue to vary due to a number of factors, including the level
of device complexity and the time required to test each device. The Company
expects that average selling prices for its services may decline in the
future, principally due to intense competitive conditions and other factors. A
decline in average selling prices of the Company's services, if not offset by
reductions in the cost of providing those services or by a shift to testing
higher margin products, would decrease the Company's gross margin and could
have a material adverse effect on the Company's business, financial condition
and results of operations.

The Company believes there is a trend toward customers requesting turnkey
testing and packaging services. Since November 1997, the Company has entered
into arrangements with two of its customers to provide such turnkey services.
In providing such turnkey services, the Company intends to use the services of
independent assembly contractors to perform the packaging functions. The
Company currently anticipates that, for the foreseeable future, the
incremental costs incurred by it in utilizing the services of such independent
assembly contractors will substantially offset the incremental revenues
derived by it for providing packaging services under these turnkey
arrangements. Consequently, the Company believes, while these arrangements may
favorably impact its revenues, they may have a negative impact on its gross
margins.

Based on the foregoing or other factors, it is possible that in some future
periods the Company's reported or anticipated operating results will fail to
meet or exceed the expectations of analysts or investors. In such event, the
price of the Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

SIGNIFICANT CUSTOMER CONCENTRATION; ABSENCE OF CUSTOMER CONTRACTS

The Company has historically derived, and expects to continue to derive, a
significant percentage of its revenues from a limited but often different
group of customers. In fiscal 1995, 1996 and 1997 and the first six months of
fiscal 1998, 58.4%, 60.4% 54.2% and 45.9% of the Company's revenues,
respectively, were derived from sales to the Company's top five customers,
with 29.5%, 21.4%, 30.2% and 17.0% of the Company's revenues, respectively,
derived from sales to the Company's largest customer, Hana Technologies
Limited, formerly Swire Technologies ("Hana Technologies"), in each respective
period. A significant portion of the business that the Company derives from
Hana Technologies relates to testing services for LSI Logic Corporation ("LSI
Logic"). Additionally, LSI Logic directly accounted for 29.5% and 16.1% of the
Company's revenues in fiscal 1995 and 1996, respectively. Cirrus Logic Inc.
("Cirrus Logic") accounted for 12.3% of the Company's revenues in the six
months ended April 30, 1998. The Company's future financial results are
dependent in large part upon its ability to maintain relationships with such
customers and attract new customers. Any failure to maintain its relationships
with existing customers or to attract new customers would have a material
adverse effect on the Company's business, financial condition and results of
operations.

Until recently, the Company's Manteca Operation had been almost entirely
dependent on two customers. However, one of such customers is no longer a
customer of the Manteca Operation. Accordingly, the Company's Manteca
Operation (which accounted for approximately 10% of the Company's revenues in
the first six months of fiscal 1998) is dependent upon one customer for
substantially all of its revenues. In addition, the Company's Hong Kong
subsidiary is dependent on Hana Technologies for substantially all of its
revenues. Furthermore, a significant portion of the business that the Company
derives from Hana Technologies relates to testing services for LSI Logic,
which has historically been a significant customer of the Company's domestic
test operations. There can be no assurance that any one or more of the
Company's significant customers, including the major customer of the

7
<PAGE>

Company's Manteca Operation or Hong Kong subsidiary, will not reduce, cancel
or delay orders or seek other suppliers (within the same or other geographical
regions where the Company may not have a presence), which could have a
material adverse effect on the Company's business, financial condition and
results of operations.

None of the Company's customers, including its largest customer, Hana
Technologies, is presently obligated pursuant to any contractual commitment or
otherwise to purchase any amount of the Company's test or packaging services
or to provide the Company with binding forecasts for any period. As a result,
the Company has no material backlog. The lack of material backlog makes it
difficult for the Company to forecast its revenues in any future period. The
Company expects that in the future, revenues in any quarter will continue to
be substantially dependent on sales made within that quarter. Moreover,
customer orders can be cancelled and volume levels can be changed or delayed
with no penalties. Furthermore, all of the Company's customers operate in the
cyclical semiconductor industry and have varied and may continue to vary order
levels significantly from period to period in part based on orders from their
end-user customers. There can be no assurance that any of the Company's
customers will continue to place orders with the Company in the future at the
same levels as in prior periods. From time-to-time, semiconductor and other
companies have also experienced reduced prices and demand for their products,
as well as delays or cancellations of orders by their customers. There can be
no assurance that, should these circumstances occur in the future, they will
not have a material adverse effect on the Company's business, financial
condition and results of operations. The loss of one or more of the Company
customers, or reduced orders by any of its key customers, may have a material
adverse effect on the Company's business, financial condition and results of
operations.

DEPENDENCE ON THE HIGHLY CYCLICAL SEMICONDUCTOR AND PERSONAL COMPUTER
INDUSTRIES

The Company's business depends substantially upon revenue generated from
semiconductor companies, which in turn depends upon market conditions in the
semiconductor, qPC and related industries. These industries are generally
characterized by rapid technological change, rapid and significant erosion of
selling prices, high cyclicality, intense competition, significant shifts in
product standards and evolving industry demand. From time-to-time, these
industries have also experienced significant production overcapacity. The
effect of these conditions has resulted in, and may result in, significantly
reduced demand for the Company's services. For example, a general slowdown in
the semiconductor industry in late 1996 and early 1997 caused customers to
reduce their orders with the Company. There can be no assurance that there
will be no further downturns or slowdowns in any of the markets in which the
Company's customers compete. More recently, the Asian financial markets have
experienced significant turmoil. There can be no assurance that turmoil in
financial markets will not negatively impact the growth of the semiconductor
industry and the demand for the Company's services. Any significant or
prolonged reduction in orders resulting from a downturn or slowdown in the
semiconductor, PC or related industries would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Industry Background" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

EXPANSION OF TESTING CAPACITY; RESULTS OF OPERATIONS AFFECTED BY CAPACITY
UTILIZATION RATES

The Company believes that its competitive position depends substantially on
its ability to expand its testing capacity in the United States and
internationally. Accordingly, the Company is continuing to make significant
investments to expand its capacity, particularly through the acquisition of
capital equipment and additional facilities, and the training of new
personnel. In order to more fully utilize such capacity, the Company intends
to enter into turnkey relationships with wafer foundries and complementary
semiconductor services subcontractors in Asia, similar to its existing
relationship with Hana Technologies. There can be no assurance that the
Company will be able to successfully enter into or maintain such turnkey
relationships, adequately utilize its expanded capacity or continue to expand
its testing capacity in a timely manner or at all. In addition, there can be
no assurance that the cost of any capacity expansions will not exceed
management's current estimates. In addition, the Company expects to continue
to incur substantial additional depreciation and other expenses in connection
with the acquisition of new equipment and facilities and, consequently, to
increase its fixed costs. Any inability

8
<PAGE>

of the Company to generate the additional orders necessary to adequately
utilize its expanded capacity would have a material adverse effect on the
Company's business, financial condition and results of operations.

As a result of the capital intensive nature of the Company's business, the
Company's operations are characterized by high fixed costs. Consequently,
decreases in capacity utilization rates and declines in average selling prices
of the Company's services can have a material adverse effect on the Company's
gross margin. Therefore, the Company's ability to maintain or increase its
gross margin will continue to be dependent, in large part, upon its ability to
maintain high capacity utilization rates and to offset decreases in average
selling prices by improving production efficiency, or by a shift to testing
higher margin products. Any inability of the Company to maintain or increase
capacity utilization rates or to offset decreases in average selling prices by
improving production efficiency or by a shift to testing higher margin
products, which could have a material adverse affect on the Company's
business, financial condition and results of operations.

Capacity utilization rates may be affected by a number of factors and
circumstances, including overall industry conditions, operating efficiencies,
the level of customer orders, mechanical failure, disruption of operations due
to expansion of operations or relocation of equipment, fire or other natural
disasters, employee strikes or work stoppages or other circumstances. For
example, in late 1996 and early 1997, the Company's capacity utilization rates
were negatively affected by a downturn in the semiconductor industry. There
can be no assurance that the Company's capacity utilization rates will not be
materially adversely affected by future declines in the semiconductor, PC or
related industries or for any other reason. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business--
Facilities" and "--Services."

RISKS OF INTERNATIONAL OPERATIONS

In fiscal 1995, 1996 and 1997 and the six months ended April 30, 1998, the
Company derived 1.2%, 21.4%, 30.2% and 17.1% of its revenues from its
international operations. Current international operations include the
Company's IC testing facility in Hong Kong and its Singapore operations, which
commenced operations in March 1998. The Company's current expansion plans
include increasing testing capacity in its Hong Kong and Singapore operations,
and opening additional facilities or joint ventures internationally. There can
be no assurance that such expansion plans will materialize or that the
Company's anticipated revenues from such expansion will materialize or cover
the Company's increased costs relating to such expansion.

The Company's business, financial condition and results of operations may be
affected by economic and political conditions in each of the countries in
which it operates or intends to operate and certain other risks of doing
business abroad, including import duties, changes to import and export
regulations (including quotas), restrictions on the transfer of funds,
employee turnover, labor or civil unrest, potential risk of foreign currency
fluctuations, long payment cycles, greater difficulty in collecting accounts
receivable, and the burdens and cost of compliance with a variety of foreign
laws. Moreover, changes in policies by the United States or foreign
governments could result in increased duties, higher taxation, currency
conversion limitations, hostility toward United States-owned operations,
limitations on imports or exports, or the expropriation of private
enterprises, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.

In particular, the Company's Hong Kong operations and assets are subject to
significant political, economic, legal and other uncertainties in China. Under
its current leadership, the Chinese government has been pursuing economic
reform policies, including the encouragement of foreign trade and investment
and greater economic decentralization. The Company cannot provide any
assurance that the Chinese government will continue to pursue such policies,
that such policies will be successful if pursued, or that such policies will
not be significantly altered from time-to-time. Moreover, despite progress in
developing its legal system, China does not have a comprehensive and highly
developed system of laws, particularly with respect to foreign investment
activities and foreign trade. Enforcement of existing and future laws and
contracts is uncertain, and implementation and interpretation thereof may be
inconsistent. As the Chinese legal system develops, the promulgation of new
laws, changes to existing laws and the preemption of local regulations by
national laws may adversely affect the

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Company's foreign operations in Hong Kong. This in turn could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, in recent months, capital markets in Hong Kong and
other parts of Asia have been highly volatile, resulting in significant
fluctuations in Asian currencies and other economic instabilities. These
instabilities may continue or worsen, which could have a material adverse
effect on the Company's business, financial condition and results of
operations. Moreover, decreases in the value of Asian currencies relative to
the U.S. dollar could make the Company's services more expensive in relation
to its competitors, placing the Company at a disadvantage with respect to such
competitors.

HIGHLY COMPETITIVE INDUSTRY

The Company operates in a highly competitive industry. The Company's
competitors include large independent IC services providers, small independent
IC testing and packaging companies offering niche services, and vertically
integrated semiconductor manufacturers which have in-house testing and
packaging capabilities. Large independent IC services providers with which the
Company competes include Anam Industrial Co., Ltd./Amkor Technology, Inc.,
ASAT Limited, a subsidiary of QPL Holdings, ASE Test Limited, a subsidiary of
Advanced Semiconductor Engineering, Inc., Orient Semiconductor Electronics,
Ltd., Siliconware Precision Industries Co., Ltd., ST Assembly Test Services
Pte Ltd and Taiwan Semiconductor Manufacturing Company Ltd., most of which
have significantly larger financial, marketing, distribution and other
resources than the Company. Many of these companies have also established
relationships with current or potential customers of the Company and have
developed strategic relationships with third party providers of complementary
semiconductor services to enlarge their businesses. The Company may be at a
competitive disadvantage with such competitors that have fostered such
relationships if the Company does not continue to develop such strategic
relationships in the future. The small independent IC testing and packaging
companies with which the Company competes generally offer a limited range of
services and typically compete on the basis of price. Vertically integrated
semiconductor manufacturers that are customers of the Company continuously
evaluate the Company's services against developing or using or continuing to
use their own in-house capabilities, and most of these customers also obtain
testing services from other sources. Vertically integrated customers may have
more advanced testing technologies and typically have greater financial,
marketing, distribution and other resources than the Company.

The Company believes that its primary competitors in the test portion of its
business are located in Asia, particularly in Korea, Taiwan, Malaysia,
Singapore and Japan. Certain of such competitors may locate testing facilities
in North America in the future. In addition, several companies have announced
plans to commence independent testing operations in Asia, and several
independent testing companies in Asia which currently offer only memory
testing services could add logic testing and wafer sort. These operations
would compete directly with the Company. Although in recent years
semiconductor companies have increasingly outsourced portions of the IC
production process, including testing, to independent companies to reduce
costs and shorten production cycles, there can be no assurance that this
outsourcing trend will continue. Several of the Company's largest customers
have extensive internal capacity to test their own devices. From time-to-time,
the Company has lost business from customers who have chosen to perform their
testing operations in-house. See "Business--Competition." A reversal of, or a
slowdown in, this outsourcing trend would have a material adverse effect on
the Company's business, financial condition and results of operations.

HISTORY OF SIGNIFICANT LOSSES AT MANTECA OPERATION; NEW MANAGEMENT IN MANTECA
OPERATION

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relationships with key suppliers and potential customers. In addition, the
Company has successfully renewed the ISO 9002 certification for the Manteca
Operation, which had lapsed under Alphatec's ownership. If the revenues
generated by the Manteca Operation are not maintained at a level necessary to
offset operating expenses, if relationships with creditors, suppliers and
actual or potential customers do not improve or if the ISO 9002 certification
is not maintained, the Company's overall business, financial condition and
results of operations could be materially adversely affected.

Prior to the acquisition of the Manteca Operation by the Company, the
Company and its personnel had no experience in providing semiconductor
packaging services. Moreover, in February 1998, the Company transferred one of
its founders to oversee the Manteca Operation. This individual has no
experience in operating a provider of semiconductor packaging services. Any
prolonged inability to attract and retain qualified personnel to manage the
Manteca Operation could cause the Company to divert significant management
resources from its testing business, which has historically represented
substantially all of the Company's revenue. Any such diversion could have a
material adverse effect on the Company's business, financial condition and
results of operations.

NO ASSURANCE OF SUCCESSFUL EXPANSION OF OPERATIONS; MANAGEMENT OF RECENT
GROWTH

The Company has experienced and is continuing to experience growth in the
number of its employees, the scope of its operations and the complexity of its
business and operations. This growth, which has included the acquisitions of
DTS and the Manteca Operation in September 1997 and the expansion of the
Company's operations in Hong Kong and Singapore, is expected to continue to
strain the Company's managerial, financial, manufacturing and other resources.
The Company's ability to manage any future growth effectively will require it
to attract, train, motivate and manage new employees successfully, to
integrate new employees into its overall operations and to continue to
implement and improve its financial and operational systems. In this regard,
the Company hired its first full time Chief Financial Officer in late calendar
1997. Neither the Company's Chief Financial Officer, nor any of the employees
in its finance department, has worked in a similar capacity for a public
company. The Company may experience certain inefficiencies as it integrates
new operations and manages geographically dispersed operations. In addition,
certain customers have required and may continue to require rapid increases in
services from the Company, which have placed and may continue to place a
significant burden on the Company's resources. The Company will continue to be
required to manage its assets and operations efficiently. There can be no
assurance that the Company will be able to manage its expansion effectively.
Any failure to increase and improve its operational, financial and management
systems could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business--
Employees."

FUTURE ACQUISITIONS

The Company's business strategy includes the expansion of its business
capabilities, including potentially through acquisitions, joint ventures and
other corporate alliances. Acquisitions involve numerous risks, including
difficulties in assimilating the operations and financial condition, products,
personnel and cultures of the acquired companies; difficulties in managing
geographically disparate units effectively; diverting management attention
from other day-to-day business concerns; difficulties entering markets or
business in which the Company has limited or no direct experience; and the
potential loss of key employees of the acquired companies. In addition,
acquisitions may result in dilutive issuances of equity securities; the
incurrence of additional debt; a reduction of existing cash balances;
amortization expenses related to goodwill and other intangible assets; and
other charges to operations that may have a material adverse effect on the
Company's business, results of operations and financial condition. For
example, the Alphatec Acquisition resulted in the incurrence of significant
debt and amortization expenses related to goodwill and other intangible
assets, and other charges to operations. Moreover, there can be no assurance
that any equity or debt financings proposed in connection with any acquisition
would be available to the Company on acceptable terms, or at all. Although the
Company intends to carefully analyze any acquisition opportunity before
committing its resources, there can be no assurance that any acquisition that

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<PAGE>

is completed will result in long-term benefits to the Company or that the
Company will be able to manage the resulting businesses effectively.

LIMITED INDEMNIFICATION PROTECTION RELATED TO THE ALPHATEC ACQUISITION

In connection with the Alphatec Acquisition, Alphatec contractually agreed
to retain certain potential liabilities relating to the Manteca Operation and
DTS and to indemnify the Company for damages that may be incurred by the
Company with respect to such potential liabilities, including, without
limitation, liabilities relating to environmental matters, litigation, trade
payables, and tax and employment matters. If the Company were unable to
enforce such indemnification obligations against Alphatec, or if Alphatec did
not have sufficient assets to pay for Alphatec's obligations, third parties
could assert claims for retained or other liabilities against the Company. In
addition, it is possible that creditors of Alphatec may pursue the Company for
the liabilities of Alphatec on a "successor liability" theory or otherwise.
The inability to successfully seek recourse and recover against Alphatec and
the inability of the Company to defend itself against claims of third parties,
could cause the Company to incur significant damages, fees and expenses, could
divert significant management time and attention and could materially
adversely affect relationships with its customers and suppliers. Any such
outcome would have a material adverse effect on the Company's business,
financial condition and results of operations.

EXPOSURE TO RAPID TECHNOLOGICAL CHANGE

The semiconductor, PC and related industries are characterized by rapid
technological change, including rapid increases in the diversity and
complexity of ICs. This in turn requires rapid changes in the services offered
by IC testing companies. Accordingly, the Company expects that it will need to
continue to offer increasingly advanced IC testing procedures and services to
its customers. The Company's efforts to develop advanced testing programs and
procedures and to obtain and maintain advanced testing equipment will require
significant capital expenditures in future years. Any failure by the Company
to develop and enhance advanced testing procedures, or to obtain advanced
testing equipment as technology changes, would have a material adverse effect
on the Company's business, financial conditions and results of operations. In
addition, advances in technology typically lead to rapid and significant price
erosion of ICs, which may lead to pricing pressure on testing services for
these ICs. Any failure by the Company to increase its testing efficiencies in
response to such pricing pressures would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

RISKS RELATING TO COMPLEXITY OF TESTING PROCESSES

IC testing is a complex process involving significant technological and
process expertise. In order to improve capacity utilization rates and
efficiencies, the Company maintains advanced and costly equipment and develops
conversion software programs which enable it to test certain ICs on multiple
equipment platforms. Any failure by the Company to successfully develop
conversion software programs could materially adversely affect its operating
efficiencies. In addition, the Company's testing operations take place in test
areas where air purity, temperature and humidity are controlled. The inability
of the Company to control its testing environment could cause tested ICs or
wafers to become nonfunctional. The Company has from time-to-time experienced,
and may in the future experience, production interruptions due to technical
problems occurring during the semiconductor testing process. Any interruption
in the Company's operations resulting from prolonged production interruptions
could have a material adverse effect on its business, financial condition and
results of operations. See "Business--Facilities."

NEW TESTING FACILITY IN SINGAPORE

The Company is currently utilizing a temporary facility in Singapore, where
it currently operates two of its testers for its one customer in such
facility. The Company anticipates that it will move its current Singapore
testing operations to a larger leased facility in Singapore in mid-to late-
1998. The Company plans to continue to increase its testing capacity and to
secure additional customers in Singapore. There can be no assurance that the
Company will attract new customers in Singapore. If the Company's revenues do
not increase commensurate

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<PAGE>

with anticipated increases in capacity and expenses in Singapore, the
Company's business, financial condition and results of operations could be
materially adversely affected. See "Business--Facilities."

ABILITY TO OBTAIN TESTING EQUIPMENT IN A TIMELY MANNER

The semiconductor testing and packaging business is capital intensive and
requires investment in highly automated, expensive capital equipment
manufactured by a limited number of suppliers, many of which are located in
Asia or Europe. The market for capital equipment used in semiconductor testing
has been, from time-to-time, characterized by intense demand, limited supply
and long delivery cycles. The Company's operations and expansion plans are
highly dependent upon its ability to obtain a significant amount of such
capital equipment from a limited number of suppliers, including Credence
Systems Corporation, Hewlett-Packard Company, LTX Corporation and Teradyne
Corporation. The Company has no binding supply agreements with any such
suppliers and acquires its testing equipment on a purchase order basis, which
exposes the Company to substantial risks. For example, increased levels of
demand in the capital equipment market may cause an increase in the price of
equipment and may lengthen delivery cycles, either of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, adverse fluctuations in foreign currency
exchange rates, particularly the Japanese yen, could result in increased
prices for certain equipment purchased by the Company, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Services."

DEPENDENCE ON KEY PERSONNEL AND AVAILABILITY OF SKILLED WORKFORCE

The Company's future operating results depend to a large extent upon the
continued services of its key executives and other skilled personnel. The
Company is not the beneficiary of any "key person" life insurance policy on
any such person. Moreover, none of the Company's key personnel is a party to
any employment agreement or noncompetition agreement with the Company, except
certain personnel of DTS who joined the Company in connection with the
Alphatec Acquisition. There can be no assurance that any such agreements are
enforceable against such persons. Further, all of the Company's founders are
fully vested in their ownership interests in the Company. Although the Company
has granted stock options to certain of its key employees who are not founders
in order to provide incentives for such employees to remain with the Company,
there can be no assurance that the Company will be able to retain its key
employees.

The Company's future operating results also depend in significant part upon
the Company's ability to attract and retain qualified management,
manufacturing, quality assurance, engineering, marketing, sales and support
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. There may be only a limited number of persons with the requisite
skills to serve in these positions, and it may be increasingly difficult for
the Company to hire such personnel over time. The loss of some or all of such
personnel, the loss of key engineers or other professionals, or the failure of
the Company to recruit, train and retrain employees could have a material
adverse effect on the Company's business, financial condition and results of
operations.

The Company may experience employee turnover due to several factors,
including an expanding economy within the geographic area in which the Company
maintains its principal business offices. High levels of employee turnover
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Employees."

INTELLECTUAL PROPERTY PROTECTION AND INFRINGEMENT

The Company's future results of operations are dependent in part upon its
proprietary technology. The Company has no patents and relies principally on
confidentiality procedures, contractual provisions and trade secret laws to
protect its intellectual property rights. There can be no assurance that any
intellectual property rights owned by the Company will not be invalidated,
circumvented or challenged or that the rights granted thereunder will provide
competitive advantages to the Company. Further, there can be no assurance that
others will not develop technologies that are similar or superior to the
Company's technology or that duplicate the Company's technology. As the
Company expands its international operations, effective intellectual property
protection may be unavailable or limited in certain foreign countries. There
can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology. Litigation may be necessary in the future

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<PAGE>

to enforce the Company's intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations.

ENVIRONMENTAL REGULATIONS

Federal, state and local regulations in the United States and regulations in
other countries in which the Company operates impose various controls on the
storage, handling, discharge and disposal of chemicals used in the
manufacturing processes. The Company believes that its activities conform to
present environmental and land use regulations applicable to its operations
and current facilities. Increasing public attention has, however, been focused
on the environmental impact of semiconductor manufacturing operations, and the
risk to neighbors of chemical releases from such operations. The adoption of
new regulations or different interpretations of existing regulations, or any
failure by the Company to comply with applicable environmental and land use
regulations or to restrict the discharge of hazardous substances, could
subject the Company to future liability, require increased capital
expenditures, curtail expansion plans or suspend the Company's operations.
Compliance with such laws could result in significant costs which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, the adoption of new regulations or
different interpretations of existing regulations applicable to the Company's
customers that are engaged in semiconductor manufacturing operations could
cause such customers to curtail or suspend their manufacturing operations,
which could result in a decrease in their demand for the Company's services.
Any such decrease in demand could have a material adverse effect on the
Company's business, financial condition and results of operations.

LIQUIDITY AND FUTURE CAPITAL REQUIREMENTS

The Company plans to continue to incur substantial costs associated with the
expansion of its testing capacity and facilities. The Company believes that
the net proceeds from the sale of the Common Stock in this offering, together
with existing cash balances, anticipated cash flow from operations and
potentially available equipment lease financing, will be sufficient to meet
its projected capital expenditures, working capital and other cash
requirements for at least the next twelve months. There can be no assurance,
however, that lower than expected revenues, increased expenses, increased
costs associated with the purchase or maintenance of capital equipment,
decisions to increase planned capacity or other events will not cause the
Company to seek additional capital, or to seek capital earlier than currently
expected. The timing and amount of the Company's actual capital requirements
cannot be precisely determined and will depend upon a number of factors,
including demand for the Company's services, availability of capital
equipment, fluctuations in foreign currency exchange rates, changes in the
condition of, and competitive factors in, the semiconductor, PC and related
industries. There can be no assurance that additional capital will be
available to the Company when needed or at all, or, if available, will be
available on satisfactory terms. The Company's ability to incur additional
indebtedness will be significantly limited as substantially all of its assets
are secured by its principal bank lenders. Failure to obtain any additional
capital in a timely manner could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

CONTINUED CONTROL BY EXISTING SHAREHOLDERS; EFFECTS OF CERTAIN ANTI-TAKEOVER
PROVISIONS

The Company's officers and directors and their respective affiliates will,
in the aggregate, own approximately 73.3% (or 75.0%, assuming the inclusion of
options previously granted to such affiliates) of the Company's outstanding
shares of Common Stock after this offering. As a result, such shareholders,
acting together, will be able to effectively control all matters requiring
approval by the shareholders of the Company, including the election of at
least a majority of the members of the Board of Directors, proxy contests,
mergers or asset sales involving the Company, tender offers, open market
purchase programs or other purchases of Common Stock that could give
shareholders of the Company the opportunity to realize a premium over the then
prevailing market price for their shares of Common Stock. In addition, such
continued control, together with certain provisions of the Company's Articles
of Incorporation, including the Company's classified Board structure, equity
incentive plans and bylaws and California law, could also have the effect of
delaying, deferring or preventing a change in

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<PAGE>

control of the Company, may discourage bids for the Common Stock at a premium
over the market price and may adversely affect the market price of the Common
Stock. The rights of holders of Common Stock will be subject to, and may be
adversely affected by, the rights of holders of preferred stock that may be
issued from time to time. The issuance of preferred stock could have the
effect of making it more difficult for a third party to acquire control of the
Company. See "Principal and Selling Shareholders."

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have outstanding an
aggregate of 22,500,000 shares of Common Stock, assuming the issuance of the
5,000,000 shares of Common Stock offered hereby and no exercise of the
Underwriters' over-allotment option. Of the total outstanding shares of Common
Stock, all 6,000,000 shares of Common Stock sold in this offering will be
freely tradeable without restriction or further registration under the Act,
unless purchased by "affiliates" of the Company, as that term is defined in
Rule 144 under the Act. The remaining 16,500,000 shares will be "restricted
securities" as defined in Rule 144 (the "Restricted Shares"). In the absence
of any agreement to the contrary, the Restricted Shares may be sold in the
public market beginning 90 days after the date of this Prospectus.
Furthermore, the Company intends to register on a Registration Statement on
Form S-8 at the date of this Prospectus, a total of 4,500,000 shares of Common
Stock subject to outstanding options or reserved for issuance under the 1998
Stock Incentive Plan and 600,000 shares of Common Stock reserved for issuance
under the 1998 Employee Stock Purchase Plan. See "Management--1998 Stock
Incentive Plan" and "--1998 Employee Stock Purchase Plan." The Company, its
directors and executive officers and each of its shareholders have agreed with
the representatives of the Underwriters, subject to certain limited
exceptions, not to offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock, or securities convertible into or exchangeable or
exercisable for shares of Common Stock, for a period of 180 days after the
date of this Prospectus without the written consent of Donaldson, Lufkin &
Jenrette Securities Corporation, which consent may be given in such
institution's sole discretion. The number of outstanding shares that will be
available for sale in the public market, after giving effect to the lock-up
agreements, will be as follows: (i) no shares of Common Stock, other than the
6,000,000 shares offered hereby, will be eligible for sale as of the effective
date of this offering, (ii) 16,500,000 shares will be eligible for sale
beginning 180 days after the effective date of this offering and (iii)
approximately 981,375 shares issuable upon the exercise of vested options will
be eligible for sale beginning 180 days after the effective date of this
offering. Sales of substantial amounts of such Common Stock or other
securities, or the prospect of such sales, could materially adversely affect
the market price of the Common Stock and the Company's ability to raise
capital through an offering of securities. See "Shares Eligible for Future
Sale."

ABSENCE OF PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF COMMON STOCK
PRICE

Prior to the consummation of this offering, there has been no public market
for the Common Stock. There can be no assurance that an active trading market
will develop or, if developed, will be maintained. The initial public offering
price of the Common Stock will be determined by negotiations among the
Company, the Selling Shareholders and the representatives of the Underwriters
based on several factors, and may not be indicative of the market price of the
Common Stock after the offering. See "Underwriting." In addition, the market
price of the Common Stock is likely to be highly volatile and may be
significantly affected by factors such as actual or anticipated fluctuations
in the Company's results of operations, the introduction of new services by
the Company or its competitors, conditions and trends in the semiconductor, PC
and related industries or the market for testing and packaging services,
changes in or failure by the Company to meet securities analysts' expectations
and general market conditions. In addition, the stock market from time-to-time
has experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stock of technology and
other comparable companies. These broad market fluctuations may adversely
affect the market price of the Common Stock. In the past, following periods of
volatility in the market price of a particular company's securities,
securities class action litigation has been brought against that company.
There can be no assurance that such litigation will not occur in the future
with respect to the Company. Such litigation could result in substantial costs
and a diversion of management's attention and resources, which could have a
material adverse effect upon the Company's business, financial condition and
results of operations.

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<PAGE>

MATERIAL BENEFIT TO INSIDERS

Directors, executive officers and their affiliates of the Company are
selling an aggregate of 1,000,000 shares in this offering, for aggregate gross
proceeds of $13.0 million. See "Management--Executive Officers, Directors and
Key Employee," "Principal and Selling Shareholders" and "Certain Relationships
and Related Transactions."

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. The Company
has assessed its software and advanced testing equipment and does not
currently expect that any significant modifications will be required for such
software or equipment. Moreover, the Company does not currently believe that
the total cost of any potential modifications will be material. There can be
no assurance, however, that the Company or its vendors will be able to modify
timely and successfully their respective services and systems to comply with
year 2000 requirements. Any failure to become year 2000 compliant on the part
of the Company or its vendors, or the incurrence by the Company or its vendors
of any costs associated with related litigation, could have a material adverse
effect on the Company's business, financial condition and results of
operations.

LIMITATIONS ON DIVIDENDS

The Company has not declared or paid cash dividends on its Common Stock, and
the Company anticipates that any future earnings will be retained for
investment in its business. Any payment of cash dividends in the future will
be at the discretion of the Company's Board of Directors and will depend upon,
among other things, the Company's earnings, financial condition, capital
requirements, extent of indebtedness and contractual restrictions. The
Company's agreements with its lenders prohibits the payment of cash dividends.
See "Dividend Policy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

IMMEDIATE SUBSTANTIAL DILUTION

Investors participating in this offering will incur an immediate substantial
dilution of approximately 70.5% of their investment in the Common Stock in
that the net tangible book value of the Common Stock after the offering will
be approximately $3.84 per share as compared to an assumed initial public
offering price of $13.00 per share. See "Dilution."

CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS

This Prospectus may contain certain forward-looking statements, including
without limitation, statements concerning the Company's operations, economic
performance and financial condition, including in particular, statements
relating to the Company's growth strategy. The words "believe," "expect,"
"anticipate" and other similar expressions generally identify any such
forward-looking statements. Prospective investors are cautioned not to place
undue reliance on any such forward-looking statements. Any such forward-
looking statements are based largely on the Company's current expectations and
are subject to a number of risks and uncertainties, including, without
limitation, those identified under this section entitled "Risk Factors" and
elsewhere in this Prospectus. Actual results could differ materially from any
such forward-looking statements. In addition, important factors to consider in
evaluating such forward-looking statements include changes in external market
factors, changes in the Company's business or growth strategy or an inability
to execute its strategy due to changes in its industry or the economy
generally, changes with respect to the Company's current competitors or the
emergence of new competitors and various competitive factors. In light of
these risks and uncertainties, there can be no assurance that the matters
referred to in any such forward-looking statements contained in this
Prospectus will in fact occur.

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<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 5,000,000 shares of
Common Stock offered hereby are estimated to be approximately $58,500,000,
assuming an initial public offering price of $13.00 per share and after
deduction of the underwriting discounts and commissions and estimated related
offering expenses payable by the Company.

The Company currently intends to use the net proceeds from this offering to
repay an aggregate of $22.7 million of existing indebtedness (plus accrued
interest) outstanding under various term loans, promissory notes and its line
of credit, which bear interest at the prime rate plus applicable margins of up
to 0.75% and mature from 1998 to 2003. All $22.7 million of such indebtedness
was incurred in fiscal 1997 and was used to fund the Alphatec Acquisition. The
remaining proceeds will be used for capital expenditures of approximately $21
million to expand capacity in the remainder of fiscal 1998 and other working
capital and general corporate purposes, including the payment of $1.6 million
of accrued bonuses to Messrs. Raissi and Grammer. A portion of the net
proceeds may also be used for strategic acquisitions of businesses, products
or technologies complementary to those of the Company. There are currently no
negotiations, commitments or agreements with respect to any acquisitions.
Pending such uses, the Company intends to invest the net proceeds in short-
term, investment-grade, interest-bearing securities.

The Company will not receive any proceeds from the sale of Common Stock by
the Selling Shareholders. See "Principal and Selling Shareholders."

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its Common Stock.
The Company currently does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future. In addition, the Company is prohibited
by certain agreements from paying cash dividends. See Note 4 of Notes to
Consolidated Financial Statements of the Company.

17
<PAGE>

CAPITALIZATION

The following table sets forth at April 30, 1998: (i) the actual short-term
debt, including current portion of long-term debt, and the total
capitalization of the Company and (ii) the short-term debt, including current
portion of long-term debt, and the total capitalization of the Company as
adjusted to reflect the sale by the Company of 5,000,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $13.00 per
share, after deduction of the underwriting discounts and commissions and
estimated offering expenses payable by the Company, and the application of a
portion of the proceeds therefrom to retire $22.7 million of outstanding
indebtedness. This table should be read in conjunction with the consolidated
financial statements of the Company, including the notes thereto, appearing
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF APRIL 30, 1998
-----------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Short-term debt, including current portion of long-term
debt.................................................. $ 17,565 $ 3,266
========== ==========
Long-term debt, less current portion................... $ 18,995 $ 10,585
Shareholders' equity:
Preferred Stock, 3,000,000 shares, $.001 par value
per share, authorized; none issued and outstanding
actual and as adjusted ............................. -- --
Common Stock, 50,000,000 shares, $.001 par value per
share, authorized; 17,500,000 shares issued and
outstanding actual; 22,500,000 shares issued and
outstanding as adjusted(1).......................... 18 23
Additional paid-in capital........................... 546 59,041
Retained earnings.................................... 29,379 29,379
---------- ----------
Total shareholders' equity......................... 29,943 88,443
---------- ----------
Total capitalization................................... $ 48,938 $ 99,028
========== ==========
</TABLE>
- ---------------------
(1) Based on the number of shares of Common Stock outstanding as of April 30,
1998. Excludes as of April 30, 1998: (i) 2,902,800 shares of Common Stock
issuable upon exercise of options currently outstanding under the
Company's 1998 Stock Incentive Plan at a weighted average exercise price
of $8.08 per share; (ii) 1,597,200 shares of Common Stock issuable upon
exercise of options reserved for future issuance under the Company's 1998
Stock Incentive Plan; and (iii) 600,000 shares of Common Stock reserved
for future issuance under the Company's 1998 Employee Stock Purchase Plan.
See "Management--1998 Stock Incentive Plan" and "--1998 Employee Stock
Purchase Plan" and Notes 5 and 10 of Notes to Consolidated Financial
Statements of the Company.

18
<PAGE>

DILUTION

Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in the net tangible book value per share of Common Stock.
The net tangible book value of the Company as of April 30, 1998 was
$27,854,000, or $1.59 per share of Common Stock. "Net tangible book value" per
share represents the amount of total tangible assets of the Company reduced by
the amount of its total liabilities and divided by the total number of shares
of Common Stock outstanding. Without taking into account any other changes in
such net tangible book value after April 30, 1998, other than to give effect
to the sale by the Company of 5,000,000 shares offered hereby at an assumed
initial public offering price of $13.00 per share resulting in estimated net
proceeds of $58,500,000 to the Company. The pro forma net tangible book value
of the Company as of April 30, 1998 would have been approximately $86,354,000,
or $3.84 per share. This represents an immediate increase in such net tangible
book value of $2.25 per share to existing shareholders and an immediate
dilution of $9.16 per share to new shareholders. The following table
illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $13.00
Net tangible book value per share as of April 30, 1998....... $1.59
Increase attributable per share attributable to new
investors................................................... 2.25
-----
Pro forma net tangible book value per share after the
offering...................................................... 3.84
------
Dilution to new investors...................................... $ 9.16
======
</TABLE>

The following table summarizes, on a pro forma basis as of April 30, 1998,
the differences between the existing shareholders and the new shareholders
with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price
paid per share, based upon an assumed public offering price of $13.00 per
share (before deducting the underwriting discounts and commissions and
estimated offering expenses payable by the Company):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
AMOUNT PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing
shareholders(1)........ 17,500,000 77.8% $ 564,000 0.9% $ 0.03
New public
investors(1)........... 5,000,000 22.2 65,000,000 99.1 13.00
---------- ----- ----------- -----
Total................. 22,500,000 100.0% $65,564,000 100.0%
========== ===== =========== =====
</TABLE>
- ---------------------
(1) Sales by the Selling Shareholders in this offering will reduce the number
of shares of Common Stock held by existing shareholders to 16,500,000
shares or to approximately 73.3% of the total number of shares of Common
Stock outstanding after this offering (16,500,000 shares or approximately
70.5% of the total number of shares of Common Stock outstanding after this
offering if the Underwriters' over-allotment option is exercised in full)
and will increase the number of shares held by new investors to 6,000,000
or to approximately 26.7% of the total number of shares of Common Stock
outstanding after this offering (6,900,000 shares, or approximately 29.5%
of the total number of shares of Common Stock outstanding after this
offering, if the Underwriters' over-allotment option is exercised in
full). See "Principal and Selling Shareholders."

The above computations are based on the number of shares of Common Stock
outstanding as of April 30, 1998. Excludes as of April 30, 1998: (i) 2,902,800
shares of Common Stock issuable upon exercise of options currently outstanding
under the Company's 1998 Stock Incentive Plan at a weighted average exercise
price of $8.08 per share; (ii) 1,597,200 shares of Common Stock issuable upon
exercise of options available for future issuance under the Company's 1998
Stock Incentive Plan; and (iii) 600,000 shares of Common Stock reserved for
future issuance under the Company's 1998 Employee Stock Purchase Plan. See
"Management--1998 Stock Incentive Plan" and "--1998 Employee Stock Purchase
Plan" and Notes 5 and 10 of Notes to Consolidated Financial Statements of the
Company.

19
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth below is qualified in its
entirety by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements of the Company, including the notes thereto,
which appear elsewhere in this Prospectus. The selected consolidated statement
of operations data presented below for each of the years ended October 31,
1995, 1996 and 1997 and the consolidated balance sheet data presented below as
of October 31, 1996 and 1997 are derived from the audited consolidated
financial statements of the Company included elsewhere in this Prospectus. The
consolidated statement of operations data for the year ended October 31, 1994
and the consolidated balance sheet data as of October 31, 1995 are derived
from audited consolidated financial statements of the Company not included
herein. The consolidated statements of operations data for the year ended
October 31, 1993 and the consolidated balance sheet data as of October 31,
1993 and 1994 are derived from unaudited consolidated financial statements not
included herein. The consolidated statement of operations data for the six
months ended April 30, 1997 and 1998 and the consolidated balance sheet data
as of April 30, 1998 are derived from unaudited consolidated financial
statements of the Company included elsewhere in this Prospectus. The unaudited
consolidated financial statements of the Company include all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position and results of
operations for these periods. The consolidated statement of operations data
for the six months ended April 30, 1998 are not necessarily indicative of the
results that may be expected for the entire year ending October 31, 1998.

20
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
------------------------------------------- ------------------
1993 1994 1995 1996 1997(1) 1997 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $13,440 $15,548 $22,321 $25,354 $35,532 $12,675 $40,538
Cost of revenues....... 6,557 6,760 8,953 12,094 17,950 6,917 19,065
------- ------- ------- ------- ------- ------- -------
Gross profit........... 6,883 8,788 13,368 13,260 17,582 5,758 21,473
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development.......... 571 601 1,048 1,111 1,097 457 1,322
Selling, general and
administrative....... 2,871 3,852 3,843 3,932 7,229 1,839 8,128
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 3,442 4,453 4,891 5,043 8,326 2,296 9,450
------- ------- ------- ------- ------- ------- -------
Income from
operations............ 3,441 4,335 8,477 8,217 9,256 3,462 12,023
Other income (expense):
Interest and other
income, net.......... 311 398 523 504 804 258 30
Interest expense...... (412) (374) (403) (530) (741) (282) (1,695)
------- ------- ------- ------- ------- ------- -------
Total other income
(expense)........... (101) 24 120 (26) 63 (24) (1,665)
------- ------- ------- ------- ------- ------- -------
Income before income
taxes................. 3,340 4,359 8,597 8,191 9,319 3,438 10,358
Provision for income
taxes................. 1,354 1,891 3,667 3,343 3,579 1,320 3,937
------- ------- ------- ------- ------- ------- -------
Net income............. $ 1,986 $ 2,468 $ 4,930 $ 4,848 $ 5,740 $ 2,118 $ 6,421
======= ======= ======= ======= ======= ======= =======
Net income per
share(2):
Basic................. $ 0.11 $ 0.14 $ 0.28 $ 0.28 $ 0.33 $ 0.12 $ 0.37
======= ======= ======= ======= ======= ======= =======
Diluted............... $ 0.11 $ 0.14 $ 0.28 $ 0.28 $ 0.33 $ 0.12 $ 0.36
======= ======= ======= ======= ======= ======= =======
Number of shares used
in per share
calculations(2):
Basic................. 17,500 17,500 17,500 17,500 17,500 17,500 17,500
Diluted............... 17,500 17,500 17,500 17,500 17,500 17,500 18,001
<CAPTION>
AS OF OCTOBER 31, AS OF
------------------------------------------- APRIL 30,
1993 1994 1995 1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 1,759 $ 2,457 $ 6,130 $ 4,655 $ 4,969 $ 7,694
Working capital
(deficiency).......... 13 2,679 2,937 3,020 (8,665) (15,485)
Total assets........... 12,975 14,658 24,713 29,995 70,843 88,496
Short-term debt,
including current
portion of long-term
debt.................. -- 451 880 1,414 14,861 17,565
Long-term debt, less
current portion....... 3,800 3,756 4,534 4,595 17,189 18,995
Retained earnings...... 4,975 7,440 12,370 17,218 22,958 29,379
Total shareholders'
equity................ 5,515 8,004 12,934 17,782 23,522 29,943
</TABLE>
- --------------------
(1) Results of operations data for fiscal 1997 include the post-Alphatec
Acquisition results of operations of DTS and the Manteca Operation, which
were acquired in September 1997 and accounted for under the purchase method
of accounting. See Note 2 of Notes to Consolidated Financial Statements of
the Company.
(2) See Note 1 of Notes to Consolidated Financial Statements of the Company for
an explanation of the method used to determine the number of shares used in
computing net income per share.

21
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to the other information in this Prospectus, the following
discussion should be considered carefully in evaluating the Company and its
business before purchasing the Common Stock offered by this Prospectus.
Sections of this Prospectus, including this section and the sections entitled
"Business" may contain forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements as a result
of the risk factors set forth under "Risk Factors" and elsewhere in this
Prospectus. Any forward-looking statements are made as of the date of this
Prospectus and the Company assumes no obligation to update such forward-
looking statements or to update the reasons why actual results could differ or
have differed materially from those anticipated in such forward-looking
statements.

OVERVIEW

The Company provides a broad range of integrated circuit ("IC") testing and
evaluation services. The Company also offers semiconductor packaging services
at its Manteca, California facility. Historically, the Company has focused on
final testing of primarily high performance logic and mixed-signal ICs. The
Company also provides a variety of additional services related to IC testing,
including wafer sort, production monitoring, reliability analysis and software
development. The Company began providing testing services in the United States
in 1983 and significantly increased its testing capacity in 1997. In order to
address international opportunities, the Company established a testing
presence in Hong Kong in 1995 and began testing operations in Singapore in
March 1998. In the first six months of fiscal 1998, approximately 82.9% of the
Company's revenues were derived from operations in the United States, with the
remainder derived from the Company's operations in Hong Kong and Singapore.

To expand its capacity and broaden its range of services, effective
September 11, 1997, the Company purchased for approximately $31.2 million,
including acquisition costs, certain assets of Alphatec USA, Inc. ("Alphatec")
(the "Alphatec Acquisition"). The Alphatec Acquisition was financed by various
term loans and short-term borrowings. The transaction was accounted for using
the purchase method of accounting and, on this basis, the excess purchase
price over the estimated fair value of the tangible assets acquired and
liabilities assumed was allocated to goodwill in the amount of $1.6 million
and a covenant not to compete in the amount of $1.0 million. The assets
acquired in the Alphatec Acquisition included 100% of the capital stock of
Digital Testing Services, Inc. ("DTS"), and selected assets and liabilities of
Alphatec relating to its Manteca, California packaging operation (the "Manteca
Operation"). DTS provides a broad range of semiconductor testing and
validation services throughout the semiconductor production process, with a
primary focus on the initial development stage. The Manteca Operation provides
semiconductor packaging services, including quickturn and prototype packaging.
The consolidated financial statements of the Company include the results of
the operations acquired in the Alphatec Acquisition from the date of
acquisition.

The Company has made significant investments to increase its testing
capacity. The Company's focus has primarily been on increasing capacity for
testing higher complexity ICs. Since the Company generally charges for its
services per hour of tester time, testing more complex, high-performance
devices tends to generate higher revenues and margins, because testing
services related to such products are priced significantly higher per CPU
second and involve longer testing times than testing less complex or lower
performance products. The Company expects to continue to make substantial
investments in expanding its capacity in the future.

As a result of the capital intensive nature of the Company's business, the
Company's operations are characterized by high fixed costs. Consequently,
gross margins can be significantly impacted by capacity utilization rates. As
the Company expands its capacity, margins can be negatively affected for a
period of time until utilization rates can be optimized. The Company attempts
to improve its capacity utilization rates by (i) repositioning older test
equipment to test less complex and lower performance products; (ii) developing
test conversion programs, which allow the Company to test ICs on multiple
platforms; (iii) developing internal maintenance capabilities, which help to
decrease down time of the Company's testing equipment; and (iv) using

22
<PAGE>

existing test equipment to provide other services, such as wafer sort. The
Company's ability to maintain or enhance its gross margins will continue to be
dependent, in part, on its ability to effectively manage capacity utilization
rates.

The average selling price for the Company's services, calculated on a hourly
basis, historically has not fluctuated to a significant degree. However, the
average selling price per device tested has varied and is expected to continue
to vary due to a number of factors, including the level of device complexity
and the time required to test each device. The Company expects that average
selling prices for its services may decline in the future, principally due to
intense competitive conditions and other factors. A decline in average selling
prices of the Company's services, if not offset by reductions in the cost of
providing those services or by a shift to testing higher margin products,
would decrease the Company's gross margin and could have a material adverse
effect on the Company's business, financial condition and results of
operations.

The Company's customer base is comprised primarily of vertically integrated
semiconductor companies and fabless semiconductor companies. The Company's
customers include C-Cube Microsystems, Inc., Cirrus Logic, Hana Technologies,
Hewlett-Packard Company, LSI Logic, Motorola, Inc., National Semiconductor
Corporation, Philips Electronics, N.V., S3 Incorporated and Xilinx, Inc. Hana
Technologies accounted for 21.4%, 30.2% and 17.0% of the Company's revenues in
fiscal 1996, fiscal 1997 and the six months ended April 30, 1998,
respectively. A significant portion of the business that the Company derives
from Hana Technologies relates to testing services for LSI Logic.
Additionally, LSI Logic directly accounted for 29.5% and 16.1% of the
Company's revenues in fiscal 1995 and fiscal 1996, respectively. Cirrus Logic
accounted for 12.3% of the Company's revenues in the six months ended April
30, 1998. No other customer accounted for more than 10% of the Company's
revenues during these periods.

Prior to being acquired by the Company, the Manteca Operation had generated
significant losses from operations, had disproportionately high operating
expenses, had experienced delays in paying creditors and suppliers and had
difficulties satisfying customer demand. In response to these conditions,
prior to the Company's acquisition of the Manteca Operation, Alphatec reduced
its workforce at the Manteca facility by approximately 75% and significantly
reduced operating expenses to attempt to align its expenses more closely with
revenue levels. The Company expects to invest additional resources in the
Manteca Operation in order to offer its IC testing customers a wider range of
services, and is currently in the process of strengthening relationships with
key suppliers and customers. In addition, the Company has successfully renewed
the ISO 9002 certification for the Manteca Operation, which had lapsed under
Alphatec's ownership. If the revenues generated by the Manteca Operation are
not maintained at a level necessary to offset its operating expenses, if
relationships with its creditors, suppliers and customers do not improve or if
ISO 9002 certification is not maintained, the Company's overall business,
financial condition and results of operations could be materially adversely
affected. Until recently, the Manteca Operation (which accounted for
approximately 10% of the Company's revenues in the first six months of fiscal
1998) had been almost entirely dependent on two customers. One of such
customers is no longer a customer of the Manteca Operation. Revenues derived
from this former customer of the Manteca Operation were $588,000, or
approximately 14% of the Manteca Operation's total revenues in the six months
ended April 30, 1998. The Company does not expect that the loss of this
customer of the Manteca Operation by itself will have a material adverse
effect on the results of the operations of the Company, as revenues from this
customer represented less than 1.5% of the Company's consolidated revenues for
the six months ended
April 30, 1998.

23
<PAGE>

The United States dollar is the functional currency of the Company's foreign
subsidiaries and substantially all of its revenues are collected in United
States dollars. Exchange gains and losses resulting from transactions
denominated in currencies other than the United States dollar are included in
the Company's results of operations. To date, such amounts have not been
material, and the Company has not undertaken any foreign currency hedging
activities.

RESULTS OF OPERATIONS

The following table sets forth certain selected consolidated statement of
operations data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED OCTOBER 31, ENDED APRIL 30,
------------------------- ----------------
1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C>
Revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................. 40.1 47.7 50.5 54.6 47.0
------- ------- ------- ------- -------
Gross profit...................... 59.9 52.3 49.5 45.4 53.0
------- ------- ------- ------- -------
Operating expenses:
Research and development........ 4.7 4.4 3.1 3.6 3.3
Selling, general and
administrative................. 17.2 15.5 20.3 14.5 20.0
------- ------- ------- ------- -------
Total operating expenses...... 21.9 19.9 23.4 18.1 23.3
------- ------- ------- ------- -------
Income from operations............ 38.0 32.4 26.1 27.3 29.7
Other income (expense):
Interest and other income
(expense), net................. 2.3 2.0 2.3 2.0 0.1
Interest expense................ (1.8) (2.1) (2.1) (2.2) (4.3)
------- ------- ------- ------- -------
Total other income (expense).. 0.5 (0.1) 0.2 (0.2) (4.2)
------- ------- ------- ------- -------
Income before income taxes........ 38.5 32.3 26.3 27.1 25.5
Provision for income taxes........ 16.4 13.2 10.1 10.4 9.7
------- ------- ------- ------- -------
Net income........................ 22.1% 19.1% 16.2% 16.7% 15.8%
======= ======= ======= ======= =======
</TABLE>

REVENUES

Fiscal Years Ended October 31, 1995, 1996 and 1997. The Company's revenues
are comprised of revenue from final test, wafer sort, engineering, packaging,
qualification, burn-in and related services. Revenues increased from $22.3
million in fiscal 1995 to $25.4 million in fiscal 1996 and to $35.5 million in
fiscal 1997. The increase in revenues of $3.1 million or 13.6% from fiscal
1995 to fiscal 1996 was due primarily to revenues derived from the Company's
Hong Kong operations, which were established in late fiscal 1995. This
increase was partially offset by a decline in revenues of $2.1 million or 9.6%
from the Company's domestic operations due to market conditions in the
semiconductor industry. The increase in revenues of $10.2 million or 40.1%
from fiscal 1996 to fiscal 1997 was due primarily to the expansion of the
Company's testing capacity and utilization thereof, primarily in its Hong Kong
operations and, due to the inclusion of revenues from DTS and the Manteca
Operation of approximately $5.0 million for the period subsequent to the
Alphatec Acquisition.

Six Months Ended April 30, 1997 and 1998. Revenues increased by $27.8
million from $12.7 million in the six months ended April 30, 1997 to $40.5
million in the six months ended April 30, 1998, due primarily to the inclusion
of revenues of approximately $18.6 million generated by DTS and the Manteca
Operation. In addition, revenues increased due to the continued expansion and
utilization of the Company's testing capacity at all of its locations. The
Company anticipates that due to prevailing conditions in the semiconductor
market, its quarterly revenues in the near future will remain relatively flat
and may possibly decline from levels experienced in recent periods.

GROSS PROFIT

Fiscal Years Ended October 31, 1995, 1996 and 1997. Cost of revenues
includes depreciation, direct and indirect labor, materials and overhead
costs. Gross profit was $13.4 million in fiscal 1995, $13.3 million in fiscal

24
<PAGE>

1996 and $17.6 million in fiscal 1997. Gross profit as a percentage of
revenues, or gross margin, was 59.9% in fiscal 1995, 52.3% in fiscal 1996 and
49.5% in fiscal 1997. The decrease in gross margin from fiscal 1995 to fiscal
1996 was due primarily to lower capacity utilization rates in the Company's
domestic operations, partially offset by higher capacity utilization in its
Hong Kong operations. The decrease in gross margin from fiscal 1996 to fiscal
1997 was due primarily to an increase in capacity that was under-utilized due
to a general slowdown in the semiconductor industry.

Six Months Ended April 30, 1997 and 1998. Gross profit increased by 273%
from $5.8 million in the six months ended April 30, 1997 to $21.5 million in
the six months ended April 30, 1998. This increase was due primarily to
increased capacity at the Company's domestic and Hong Kong operations and the
utilization thereof, and the inclusion of the results of DTS and the Manteca
Operation. Gross margin increased from 45.4% in the six months ended April 30,
1997 to 53.0% in the six months ended April 30, 1998, reflecting an
improvement in testing capacity utilization rates at the Company's locations.
There can be no assurance that such trend will continue. The Company's gross
margin has tended to fluctuate due in part to timing of costs associated with
the acquisition of additional equipment to expand capacity and the delay
associated with utilizing such expanded capacity. As the Company continues to
expand capacity, the Company expects that its gross profit as a percentage of
revenues, or gross margin, will continue to fluctuate from period-to-period.

RESEARCH AND DEVELOPMENT

Fiscal Years Ended October 31, 1995, 1996 and 1997. Research and development
expenses consist primarily of salaries, bonuses, facilities and other employee
related costs. Research and development expenses were $1.0 million in fiscal
1995, $1.1 million in fiscal 1996 and $1.1 million in fiscal 1997. As a
percentage of revenues, research and development expenses were 4.7%, 4.4% and
3.1% in fiscal 1995, 1996 and 1997, respectively. Research and development
expenses remained relatively flat from fiscal 1995 to fiscal 1997, but
decreased as a percentage of revenues as revenues increased.

Six Months Ended April 30, 1997 and 1998. Research and development expenses
increased from $457,000 in the six months ended April 30, 1997 to $1.3 million
in the six months ended April 30, 1998. This increase was primarily a result
of the inclusion of the results of DTS and the Manteca Operation. As a
percentage of revenues, research and development expenses decreased from 3.6%
in the six months ended April 30, 1997 to 3.3% in the six months ended
April 30, 1998, primarily as a result of an increase in revenues between such
periods. The Company expects that research and development expenses may
increase in absolute dollars over historical levels. Additionally, such
expenses will continue to fluctuate as percentage of revenues from period to
period.

SELLING, GENERAL AND ADMINISTRATIVE

Fiscal Years Ended October 31, 1995, 1996 and 1997. Selling, general and
administrative expenses consist primarily of salaries, bonuses, facilities
maintenance expenses, selling and marketing expenses, other employee related
costs and amortization of goodwill and other intangibles. Selling, general and
administrative expenses were $3.8 million in fiscal 1995, $3.9 million in
fiscal 1996 and $7.2 million in fiscal 1997. As a percentage of revenues,
selling, general and administrative expenses were 17.2%, 15.5% and 20.3% in
fiscal 1995, 1996 and 1997, respectively. The increase in selling, general and
administrative expenses in fiscal 1997 compared to fiscal 1996 was due
primarily to a charge related to certain employment related bonuses
aggregating $2.0 million, and the inclusion of expenses of DTS and the Manteca
Operation aggregating $780,000.

Six Months Ended April 30, 1997 and 1998. Selling, general and
administrative expenses increased from $1.8 million in the six months ended
April 30, 1997 to $8.1 million in the six months ended April 30, 1998. As a
percentage of revenues, selling, general and administrative expenses increased
from 14.5% in the six months ended April 30, 1997 to 20.0% in the six months
ended April 30, 1998. These increases were primarily a result of the inclusion
of expenses of DTS and the Manteca Operation of approximately $3.4 million and
a charge of $1.8 million related to certain employment bonuses during the six
months ended April 30, 1998. The Company expects that selling, general and
administrative expenses may increase in absolute dollars over historical
levels. Additionally, such expenses will continue to fluctuate as a percentage
of revenues from period to period.

25
<PAGE>

EXECUTIVE PERFORMANCE RELATED AND OTHER EMPLOYMENT RELATED COMPENSATION

Historically, the Company has awarded significant amounts of performance
related and other employment related compensation to its key executives.
Performance and other employment related bonuses awarded to executives
aggregated $2.1 million, $1.9 million, $3.3 million and $1.8 million in fiscal
1995, 1996, 1997 and the six months ended April 30, 1998, respectively. In
October 1997, the Company introduced stock-based compensation for its
executives and other employees. Consequently, the Company currently
anticipates that executive performance and other employment-related cash
bonuses awarded to executives in future periods will be lower than historical
levels.

INTEREST AND OTHER INCOME, NET

Fiscal Years Ended October 31, 1995, 1996 and 1997. Interest income includes
income from certificates of deposits and other interest bearing deposits.
Other income includes rental income and capital gains or losses from the sale
of equipment. Interest and other income was $523,000, $504,000 and $804,000 in
fiscal 1995, 1996 and 1997, respectively. The increase in fiscal 1997 compared
to fiscal 1996 resulted primarily from capital gains on disposition of
equipment.

Six Months Ended April 30, 1997 and 1998. Interest and other income, net in
the six months ended April 30, 1997 was $258,000. Interest and other income,
net in the six months ended April 30, 1998 was $30,000.

INTEREST EXPENSE

Fiscal Years Ended October 31, 1995, 1996 and 1997. Interest expense
consists primarily of interest payable on capital leases and term loans
secured by the Company's facilities and equipment. The Company has
historically financed the acquisition of equipment primarily through funds
generated by operations and with limited use of capital leases. The Company
financed the Alphatec Acquisition through various term loans and short-term
lines of credit, which carry interest rates at prime plus applicable margins
of up to 0.75%. Interest expense increased from $403,000 in fiscal 1995 to
$530,000 in fiscal 1996 and to $741,000 in fiscal 1997. The increase in fiscal
1997 compared to fiscal 1996 was due primarily to the increased indebtedness
incurred in connection with the Alphatec Acquisition.

Six Months Ended April 30, 1997 and 1998. Interest expense in the six months
ended April 30, 1997 and 1998 was $282,000 and $1.7 million, respectively.
This increase was due primarily to an increase in indebtedness incurred in
connection with the Alphatec Acquisition.

PROVISION FOR INCOME TAXES

Fiscal Years Ended October 31, 1995, 1996 and 1997. The Company's provisions
for income taxes in fiscal 1995, 1996 and 1997 was $3.7 million, $3.3 million
and $3.6 million, respectively, reflecting effective tax rates of
approximately 43%, 41% and 38%, respectively. The decrease in the Company's
effective tax rate from fiscal 1995 to fiscal 1997 primarily reflects the
increase in operations in Hong Kong, where income tax rates are typically
lower than those in the United States.

Six Months Ended April 30, 1997 and 1998. The provision for income taxes in
the six months ended April 30, 1997 and 1998 was $1.3 million and $3.9
million, respectively, reflecting an effective tax rate of 38% for both
periods.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130") and Statement No. 131,
"Disclosures About Segments of An Enterprise and Related Information" ("SFAS
131"). SFAS 130 established rules for reporting and displaying comprehensive
income. SFAS 131 will require the Company to use the "management approach" in
disclosing segment information. Both statements are effective for the Company
during fiscal 1998. The Company does not believe that the adoption of either
SFAS 130 or SFAS 131 will have a material impact on the financial statement
disclosures made by the Company.

26
<PAGE>

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited consolidated statement of
operations data, both in dollar amounts and as a percentage of revenues, for
the ten quarters in the period ended April 30, 1998. The data set forth below
have been derived from unaudited consolidated financial statements of the
Company and have been prepared on the same basis as the audited financial
statements, and in the opinion of management, include all necessary
adjustments, consisting of only normal recurring adjustments, that the Company
considers necessary for a fair presentation of the results of interim periods.
The quarterly statement of operations data should be read in conjunction with
the consolidated financial statements of the Company and the notes thereto
appearing elsewhere in this Prospectus. The Company's results of operations
have varied and will continue to vary significantly from quarter to quarter
and are not necessarily indicative of the results of any future period. In
addition, as a result of the Alphatec Acquisition in September 1997, the
Company believes that historical period-to-period comparisons should not be
relied upon as an indication of future performance.

<TABLE>
<CAPTION>
FISCAL 1998
FISCAL 1996 QUARTER ENDED FISCAL 1997 QUARTER ENDED QUARTER ENDED
----------------------------------- ----------------------------------- ------------------
JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30,
1996 1996 1996 1996 1997 1997 1997 1997 1998 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $6,285 $7,048 $6,488 $5,533 $6,198 $6,477 $7,707 $15,150 $20,291 $20,247
Cost of revenues........ 3,072 3,155 3,156 2,711 3,430 3,487 3,797 7,236 9,483 9,582
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Gross profit............ 3,213 3,893 3,332 2,822 2,768 2,990 3,910 7,914 10,808 10,665
Operating expenses...... 1,208 1,319 1,256 1,260 1,152 1,144 1,260 4,770 5,662 3,788
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Income from operations.. 2,005 2,574 2,076 1,562 1,616 1,846 2,650 3,144 5,146 6,877
Other income (expense),
net.................... (20) 166 (45) (127) (65) 41 (72) 159 (902) (763)
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Income before income
taxes.................. 1,985 2,740 2,031 1,435 1,551 1,887 2,578 3,303 4,244 6,114
Provision for income
taxes.................. 810 1,119 829 585 596 724 990 1,269 1,613 2,324
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Net income.............. $1,175 $1,621 $1,202 $ 850 $ 955 $1,163 $1,588 $ 2,034 $ 2,631 $ 3,790
====== ====== ====== ====== ====== ====== ====== ======= ======= =======
Net income per share:
Basic.................. $ 0.07 $ 0.09 $ 0.07 $ 0.05 $ 0.05 $ 0.07 $ 0.09 $ 0.12 $ 0.15 $ 0.22
====== ====== ====== ====== ====== ====== ====== ======= ======= =======
Diluted................ $ 0.07 $ 0.09 $ 0.07 $ 0.05 $ 0.05 $ 0.07 $ 0.09 $ 0.12 $ 0.15 $ 0.21
====== ====== ====== ====== ====== ====== ====== ======= ======= =======
Number of shares used in
per share calculations:
Basic.................. 17,500 17,500 17,500 17,500 17,500 17,500 17,500 17,500 17,500 17,500
Diluted................ 17,500 17,500 17,500 17,500 17,500 17,500 17,500 17,500 17,783 18,219
<CAPTION>
AS A PERCENTAGE OF REVENUES
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 48.9 44.8 48.6 49.0 55.3 53.8 49.3 47.8 46.7 47.3
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Gross profit............ 51.1 55.2 51.4 51.0 44.7 46.2 50.7 52.2 53.3 52.7
Operating expenses...... 19.2 18.7 19.4 22.8 18.6 17.7 16.3 31.4 27.9 18.7
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Income from operations.. 31.9 36.5 32.0 28.2 26.1 28.5 34.4 20.8 25.4 34.0
Other income (expense),
net.................... (0.3) 2.4 (0.7) (2.3) (1.1) 0.6 (0.9) 1.0 (4.4) (3.8)
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Income before income
taxes.................. 31.6 38.9 31.3 25.9 25.0 29.1 33.5 21.8 21.0 30.2
Provision for income
taxes.................. 12.9 15.9 12.8 10.6 9.6 11.2 12.9 8.4 8.0 11.5
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Net income.............. 18.7% 23.0% 18.5% 15.3% 15.4% 17.9% 20.6% 13.4% 13.0% 18.7%
====== ====== ====== ====== ====== ====== ====== ======= ======= =======
</TABLE>

27
<PAGE>

The Company's quarterly revenues are affected by the timing and size of the
orders received from customers. Revenues in the two quarters ended October 31,
1996 and January 31, 1997 were negatively impacted by a slowdown in the
semiconductor industry which adversely affected utilization at the Company's
domestic testing facility. The Company's revenues increased significantly in
the three most recent quarters ended October 31, 1997, January 31, 1998 and
April 30, 1998 compared to the corresponding periods in the prior fiscal year,
due primarily to revenues generated by DTS and the Manteca Operation, which
were acquired in September 1997, and increased revenues derived from the
Company's other facilities.

As a result of the capital intensive nature of the Company's business, the
Company's cost structure is characterized by high fixed costs. The Company's
gross margin has tended to fluctuate due in part to timing of costs associated
with the acquisition of additional equipment to expand capacity and the delay
associated with utilizing such expanded capacity. In the quarter ended January
31, 1997, the Company's gross margin decreased to 44.7% from 51.0% in the
prior quarter, primarily due to lower capacity utilization rates and pricing
pressures as a result of a slowdown in the semiconductor industry. The
Company's gross margin improved gradually in fiscal 1997 primarily as a result
of improved capacity utilization rates. As the Company continues to expand
capacity, the Company expects that its gross margin will continue to
fluctuate.

The Company's quarterly operating expenses increased only nominally on a
quarterly basis through the quarter ended July 31, 1997. Operating expenses in
the quarters ended October 31, 1997 and January 31, 1998 increased
significantly due primarily to the inclusion of a full quarter of the results
of DTS and the Manteca Operation. In addition, in the quarters ended October
31, 1997 and January 31, 1998, the Company incurred certain employment related
bonuses aggregating $2.0 million and $1.8 million, respectively, which
resulted in a corresponding increase in operating costs. Operating expenses
decreased in the quarter ended April 30, 1998, primarily due to the absence of
employment-related bonuses which had been incurred in the preceding two
quarters as discussed above.

A variety of factors have materially affected, and are expected to continue
to materially affect, the Company's operating results. These factors include
the cyclical nature of the semiconductor, personal computer ("PC") and related
industries and the various markets that serve consumers of products
incorporating semiconductors; absence of purchase contracts and the resulting
lack of backlog from the Company's customers; intense price competition;
timing and volume of orders received by the Company; reschedulings, delays,
deferrals and cancellations of orders; evolutions in the life cycles of
customers' products; erosion of semiconductor unit prices; changes in capacity
utilization; allocation of testing capacity between the Company's facilities
and those of its customers; availability, price and changes in advanced
testing equipment; changes in costs, availability and delivery time of raw
materials and components; changes in costs and availability of labor;
effectiveness in managing production processes; fluctuations in manufacturing
yields; changes in product and service mix or devices tested or assembled;
product obsolescence; availability of financing for expansion; the ability to
develop and implement new technologies on a timely basis; the loss of key
personnel or the shortage of available skilled workers; international
political or economic events; and currency and interest rate fluctuations. The
Company's gross margin has tended to fluctuate due in part to timing of costs
associated with the acquisition of additional equipment to expand capacity and
the delay associated with utilizing such expanded capacity. Furthermore, the
Company has historically experienced, and may continue to experience,
seasonality in its revenues and operating results. This seasonality, combined
with other factors including those described above, has resulted and is likely
to continue to result in significant variability in quarterly and annual
operating results. The Company's revenues increased significantly in the
quarters ended October 31, 1997, January 31, 1998 and April 30, 1998 compared
to the corresponding periods in the prior fiscal year due primarily to
revenues generated by DTS and the Manteca Operation, which were acquired in
September 1997, and increased revenues derived from the Company's other
facilities. The Company's revenues for the quarter ended April 30, 1998
decreased slightly from the revenues for the quarter ended January 31, 1998.
The Company does not believe that recent growth rates are indicative of future
operating results and there can be no assurance that profitability or
significant revenue growth on a quarterly or annual basis will occur in the
future. The Company anticipates that due to prevailing conditions in the
semiconductor market, its quarterly revenues in the near future will remain
relatively flat and may possibly decline from levels experienced in recent
periods. See "Risk Factors--Significant Fluctuations in Operating Results."

28
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company has satisfied its liquidity needs principally from
the cash generated from operations and equipment financing arrangements. At
April 30, 1998, the Company had cash and cash equivalents of $7.7 million.

In fiscal 1995, 1996 and 1997 and the six months ended April 30, 1998, cash
generated from operating activities was $10.2 million, $6.0 million, $12.8
million and $20.0 million, respectively. Cash generated from operations
consisted primarily of net income adjusted for non-cash depreciation and
amortization charges, and changes in working capital, which in the six months
ended April 30, 1998 reflected a significant increase in accounts payable and
income taxes payable.

In fiscal 1995, 1996 and 1997 and the six months ended April 30, 1998,
capital expenditures were $8.0 million, $8.8 million, $14.1 million and $14.0
million, respectively. These capital expenditures related primarily to the
acquisition of advanced test equipment. The industry in which the Company
operates is capital intensive, and the Company expects to continue to make
significant capital expenditures to expand its capacity in the future. The
Company currently intends to use approximately $21 million of the net proceeds
from this offering for capital expenditures to expand capacity.

In fiscal 1995, 1996 and 1997, proceeds from financing activities, net of
repayments, were $1.2 million, $595,000 and $25.5 million, respectively. The
Alphatec Acquisition, which occurred in September 1997, was accounted for as a
purchase and, on this basis, the excess purchase price over the estimated fair
value of the tangible assets acquired and liabilities assumed has been
allocated to goodwill and a covenant not to compete. The Alphatec Acquisition
was financed by various term loans and short-term borrowings under the
Company's lines of credit, which are repayable at various dates through
September 2002. Approximately $5.4 million of such borrowings were originally
due on March 31, 1998, however, the due date has been extended to
September 30, 1998. The Company's outstanding borrowings are secured by all of
its assets and require compliance with certain financial covenants, including
those which restrict payment of dividends. The Company has limited borrowing
capacity under such line. In the six months ended April 30, 1998, net cash
used by financing activities totalled $3.2 million for debt repayments. The
Company's borrowings under the various term loans, notes payable and line of
credit require that the Company maintain monthly compliance with certain
financial covenants, including certain minimum cash and investment balances,
tangible net worth and domestic assets as a proportion of total assets, and
certain financial ratios, including debt to tangible net worth, liquid assets
to current liabilities and certain debt service ratios. As of April 30, 1998,
primarily as a result of the timing of equipment purchases by the Company, the
Company was not in compliance with the financial covenant regarding the
maintenance of a ratio of at least 0.7 to 1.0 of liquid assets to current
liabilities. The Company has obtained a waiver from its lender for the breach
of the covenant as of April 30, 1998. The Company plans to use a portion of
the proceeds from this offering to repay the indebtedness to which such
covenant relates.

At April 30, 1998, the Company had a working capital deficiency of
approximately $15.5 million, resulting primarily from its short-term
borrowings of approximately $9.8 million and accounts payable associated with
its purchase of capital equipment. In March 1998, the Company secured a
commitment letter for a $10.0 million line of credit for capital equipment
expiring March 1999, all of which is available for future borrowings upon the
execution of satisfactory definitive documentation. Additionally, the Company
is currently negotiating to finance recently purchased capital equipment
through a combination of leases and long-term equipment note borrowings.

The Company believes that the net proceeds from the sale of Common Stock in
this offering, a portion of which will be used to repay existing indebtedness,
together with existing cash balances, anticipated cash flow from operations
and available equipment lease financing and bank borrowings, will be
sufficient to meet its projected working capital and other cash requirements
for at least the next 12 months. There can be no assurance, however, that
lower than expected revenues, increased expenses, increased costs associated
with the purchase or maintenance of capital equipment, or other events will
not cause the Company to seek more capital, or capital sooner than currently
expected. The timing and amount of the Company's actual capital requirements
will depend on a number of factors, including demand for the Company's
services, availability of capital equipment, adverse

29
<PAGE>

fluctuations in foreign currency exchange rates, changes in semiconductor
industry conditions and competitive factors. There can be no assurance that
such additional financing will be available when needed or, if available, will
be available on satisfactory terms.

YEAR 2000 COMPLIANCE

30
<PAGE>

BUSINESS

GENERAL

ISE is one of the leading independent integrated circuit ("IC") testing and
evaluation companies in the world. Unlike many of its competitors, the Company
offers a broad range of IC testing, evaluation and other services throughout
the entire semiconductor manufacturing process. These services include
software development, electrical verification, reliability analysis, failure
analysis, wafer sort, production monitoring and quickturn and prototype
packaging. A significant portion of the Company's revenues from testing
services is derived from testing complex, high-performance logic and mixed-
signal products, which are typically the higher-margin, faster growing
segments of the testing services market.

During the last twelve months, the Company has provided services to more
than 250 customers worldwide. The Company's customers include a number of the
world's leading vertically integrated and fabless semiconductor companies,
distributors and subcontractors, such as Atmel, C-Cube Microsystems, Cirrus
Logic, Hana Technologies, Hewlett-Packard, LSI Logic, Motorola, National
Semiconductor, NeoMagic, Philips Electronics, S3, Wyle Laboratories and
Xilinx.

INDUSTRY BACKGROUND

GENERAL

Continual improvements in semiconductor process and design technologies have
enabled the production of complex, highly integrated circuits with improved
price/performance, functionality and reliability. This has enabled the rapid
proliferation of a variety of semiconductor intensive applications in such
areas as the Internet, multimedia and wireless communications. In addition,
semiconductor content has increased significantly in a wide range of products,
including consumer electronic devices, automotive products and industrial
automation and control systems. As a result of these and other factors, A
leading industry research organization estimates that total worldwide
semiconductor sales were over $147 billion in 1997 and will grow to
approximately $288 billion by 2002. Further, according to such organization,
sales of complex, high-performance logic products are expected to outpace the
annual growth of the overall semiconductor market.

SEMICONDUCTOR PRODUCTION PROCESS

The production of semiconductors is a complex process that requires
increasingly sophisticated engineering and manufacturing expertise. The major
steps involved in the production of semiconductors can be characterized as
circuit design development, wafer fabrication, wafer sort, packaging and final
test. Throughout the semiconductor production process, ICs are subjected to a
variety of analyses and comprehensive tests. Such continuous analysis and
testing is critical to optimizing manufacturing process efficiencies and
product yield. The following diagram illustrates the major steps in the
semiconductor production process:

[GRAPHICAL REPRESENTATION OF SEMICONDUCTOR PRODUCTION PROCESS APPEARS HERE]

The design of an IC is developed by laying out circuit components and
interconnections using computer automated design and computer automated
engineering methodologies. During the circuit design process, design and test
engineers develop the parameters of the testing methodology and may also
develop a customized software program to test the IC for functionality and
performance. Wafer fabrication begins with the creation of a photomask, where
each layer of the circuit pattern is exposed on a photographic negative, known
as a "mask," by an electron beam or laser beam writer. These circuit patterns
are transferred to the wafers using various

31
<PAGE>

advanced processes. A fabricated wafer contains numerous die, or individual
ICs. Following wafer fabrication, a wafer sort is performed whereby each die
is individually and comprehensively tested for integrity and excluded from the
packaging process if it is non-conforming. The tested wafers are then sent for
packaging, where the processed silicon wafers are diced into separate chips
and encapsulated in plastic, ceramic or other forms of packaging. Following
packaging, each packaged device is submitted to a final electrical test to
verify that the product meets published specifications prior to shipment.

The analysis and testing that occurs during the semiconductor production
process may be broadly segmented into two stages: the Inventive Stage and the
Production Stage.

THE INVENTIVE STAGE

The Inventive Stage of IC analysis and testing occurs during the initial
development of the IC and includes (i) software development; (ii) electrical
verification; (iii) reliability analysis; and (iv) failure analysis.

Software Development. Prior to the electrical verification process, design
and test engineers develop a customized software program and related hardware
to test the IC on advanced test equipment. A customized software program is
required to test the conformance of each particular IC type to its unique
functionality and specification. As ICs continue to become increasingly
complex, testing programs have become critical to the IC design and
verification process.

Electrical Verification. During the electrical verification process, a
prototype of the designed IC (in either wafer or packaged form) is submitted
to electrical tests using advanced test equipment, customized software
programs and related hardware. These tests assess whether the prototype IC
complies with a variety of different operating specifications, including
functionality, frequency, voltage, current, timing and temperature range. This
process is essential in order to avoid costly production runs of faulty
products.

Reliability Analysis. In addition to the electrical verification process,
prototype ICs are frequently subjected to reliability testing designed to
assess the long-term reliability of the IC and its suitability of use for
intended applications. Reliability testing can include "burn-in" services,
which electrically stress a device, usually at high temperature and voltage,
for a period of time long enough to cause the failure of marginal devices.
Reliability testing improves field reliability, reduces warranty costs and
minimizes the shipment of marginal products.

Failure Analysis. In the event that the prototype IC or wafer does not
function to specifications during either the electrical verification or
reliability testing processes, it is typically subjected to failure analysis,
in which it is analyzed to determine why it did not perform as anticipated. As
part of such failure analysis, the prototype IC or wafer may be subjected to a
variety of analyses, including electron beam probing and electrical testing.
The results of these analyses are critical to improve or remedy the IC design.

Once a circuit design has been successfully validated through the above
tests and analyses the prototype is released for production.

THE PRODUCTION STAGE

The Production Stage of IC analysis and testing occurs after a prototype IC
has been released for manufacture. During this stage, all or a subset of the
analyses and testing procedures performed on the prototype IC during the
Inventive Stage are repeated throughout the volume production of the IC. For
example, electrical verification may be performed during the Production Stage
at the wafer level, whereby each individual die is electrically tested to
determine if it is acceptable for packaging (wafer sort). Conforming die are
then packaged and subjected to final electrical verification (final test). In
addition to these tests, semiconductor manufacturers may monitor production
quality and reliability on an ongoing basis.

32
<PAGE>

Production monitoring is the periodic monitoring of the integrity of the IC
fabrication and packaging processes after volume manufacturing of an IC has
commenced. Production monitoring includes: (i) fab/design validation, in which
the integrity of the circuit design is tested to determine if changes in
fabrication processes adversely affect the IC's performance; (ii) packaging
reliability monitoring, in which the packaged product is environmentally and
mechanically screened on an ongoing basis with respect to thermal, humidity
and mechanical stresses; and (iii) yield monitoring, in which failures
identified during the wafer sort and final electrical tests are analyzed to
improve the fabrication yield. Production monitoring permits products to be
monitored to commercial and industrial specifications, as well as to more
rigorous military, space and other high reliability specifications.

THE IC TESTING OPPORTUNITY

Improvements in semiconductor manufacturing process technologies have played
a key role in achieving low-cost, high volume production of highly integrated
circuits. However, the production of ICs is an extremely complex process that
requires substantial investment in specialized equipment and facilities and
sophisticated engineering and manufacturing expertise. As a result, many
semiconductor companies have begun to rely on outsourcing various steps of the
production process. Virtually every step of the semiconductor manufacturing
process can now be effectively outsourced. Currently, wafer foundry services
and IC packaging are the largest segments of the market for outsourced
semiconductor manufacturing services, while the testing services segment has
only recently emerged as a major market opportunity.

The Company believes that nearly all of the world's major vertically
integrated semiconductor companies now use independent manufacturing services
to maintain a strategic mix of internal and external manufacturing capacity.
In addition, the availability of advanced manufacturing services has enabled
the rapid growth of fabless semiconductor companies which focus on IC design
and marketing. These companies typically outsource almost all of their
manufacturing, packaging and testing requirements to focused service
providers. According to industry estimates, sales by fabless semiconductor
companies have grown from $3.2 billion in 1993 to more than $8 billion in
1997, representing 3.7% and 5.3%, respectively, of the worldwide market for
semiconductors.

By outsourcing their IC testing requirements, semiconductor companies can
(i) focus on core business activities; (ii) access leading edge testing
technologies; (iii) react more quickly to rapidly changing market conditions
and reduce time to market for new products; and (iv) reduce capital
expenditures, fixed costs and operating expenses.

Several fundamental industry trends are increasing the demand for outsourced
IC testing services. First, semiconductor companies are increasingly seeking
to shorten their time to market for new products. As testing needs are
identified for a specific product, semiconductor companies frequently do not
have the equipment or expertise to implement such testing in the volumes
required, nor sufficient time to develop these capabilities before introducing
a product to market. In addition, faster new product introductions have made
it increasingly difficult for semiconductor companies to maintain adequate
internal capacity utilization levels necessary for cost effective IC testing.
For these reasons, semiconductor companies are increasingly leveraging the
resources and capabilities of independent test companies to deliver new
products to market quickly.

Second, as ICs continue to increase in pincount, complexity and speed, they
require more sophisticated testing software programs and testing procedures
and new generations of advanced test equipment. Equipment used to test
advanced logic or mixed-signal devices, which can cost several million dollars
per tester, can become obsolete for the most advanced ICs in as little as two
years. Compared to in-house testing, an independent provider of IC testing
services can allocate its fixed cost investment across a wider portfolio of
customers and products to maximize capacity utilization. Testing service
providers can also extend the useful life of test equipment by using test
equipment which has become obsolete for testing complex high-performance
products to test lower performance products. In addition, testing companies
can gain substantial efficiencies from building specialized expertise in
software program development and procedures for IC testing, and can also take
advantage of economies of scale in purchasing equipment.

33
<PAGE>

While a substantial majority of IC testing is still performed in-house by
semiconductor companies, the Company believes that the overall growth of the
market for ICs and the trend towards outsourcing services by both vertically
integrated and fabless semiconductor companies are driving increasing demand
for independent test services, such as those provided by the Company. In the
past, the market for independent testing services was comprised of IC testing
companies which were relatively small in size and unable to offer the range of
test services and advanced equipment necessary to perform high volume testing
of complex ICs for major customers. Most test service providers currently do
not offer a full range of services in both the Inventive and Production
Stages. The Company believes a substantial market opportunity exists for an
independent IC testing company that can efficiently meet the needs of
semiconductor companies by offering a broad range of advanced test services in
both the Inventive and Production Stages.

THE ISE SOLUTION

As a result of the Company's broad range of IC testing services and its
position as one of the largest independent testing companies in the world, the
Company believes it is uniquely positioned to provide semiconductor companies
with the ability to outsource a substantial amount of their testing
requirements throughout the Inventive and Production Stages of the IC
development and production process. In contrast to all of its major
independent competitors, the Company's headquarters is located in the Silicon
Valley. In addition to its significant United States presence, the Company has
established substantial test capacity in Hong Kong and has recently commenced
testing operations in Singapore. The Company's proximity to a large number of
the world's leading semiconductor companies, together with its broad service
offerings, enables the Company to establish close working relationships with
its customers' design engineers early in the IC development process. By
establishing such early stage relationships with its customers, the Company
believes it has a significant competitive advantage in competing for high
volume future testing business.

STRATEGY

The Company's strategy is to become the leading independent provider of IC
testing and evaluation services in the world. The principal components of the
Company's strategy to achieve this objective are set forth below.

Maintain Technological Leadership. Since the Company commenced operations in
1983, it has provided testing services involving technology and expertise that
are among the most advanced in the global semiconductor industry. The Company
was a pioneer in offering parallel testing of multiple logic ICs, complex test
vector generation methodologies and cross-platform translators. The Company
intends to maintain its leading technological position by continuing to invest
in the latest and most advanced testing equipment and by recruiting qualified
engineers and technical personnel. Through its close working relationships
with customers and test equipment suppliers, the Company is also regularly
involved in the modification and initial rollout of new testing platforms, and
is often involved in the actual development of such platforms. For example,
the Company currently offers testing services on the highest pincount (512
pins) and frequency (330 MHz) testers available from Credence and Hewlett-
Packard, and was chosen as the initial rollout site for the Credence RF
testing system. The Company also provides failure analysis and circuit pattern
correction services using the latest EBEAM and Focused Ion Beam systems. The
Company believes that maintaining its leading technological position is
critical to its success and its ability to attract and retain customers.

Provide Broadest Range of Services. The Company intends to continue to
provide the broadest range of independent testing and related services to its
customers throughout the Inventive and Production Stages of the semiconductor
development and production process. These services include electrical
verification, reliability analysis, failure analysis, wafer sort and
production monitoring. In addition, during the Inventive Stage, the Company
draws upon the extensive test engineering experience of its founders and
engineers and uses its proprietary software tools to help its customers
develop optimized test programs for verification of circuit

34
<PAGE>

designs. The Company also facilitates the prototype and quickturn packaging
needs of its customers through its Manteca Operation. The Company believes
that offering a broad range of services beginning at the Inventive Stage and
continuing throughout the Production Stage provides significant benefits to
its customers, including reduced time to market and lower manufacturing costs.

Leverage Strong Relationships with Diversified Customer Base. The Company's
goal is to be the leading global provider of independent IC testing services
to a diversified group of customers. The Company's customers include companies
which have a long term strategic need to outsource their IC testing
requirements and companies which use external suppliers to meet overflow or
specialized testing needs. The Company believes that its diversified customer
base enhances the stability of its operations, increases efficiencies and
maximizes capacity utilization rates. The Company intends to leverage its
geographical proximity to its customers and the relationships formed during
the Inventive Stage to capture an increasing share of its customers' higher
volume production business.

Expand Capacity Worldwide. To take advantage of increasing demand for IC
testing services and the continued outsourcing of IC testing by semiconductor
companies, the Company plans to further expand its capacity worldwide. In
1997, the Company more than doubled its testing capacity through the
acquisition of DTS and internal growth. The Company plans to continue to
expand by increasing testing capacity in the Silicon Valley, Hong Kong and
Singapore, and by opening additional facilities outside of North America in
1998 and thereafter. The Company believes that by expanding its capacity in
international locations, it will be able to increase its participation in the
significant Asian test market. In addition, the Company intends to enter into
turnkey relationships with wafer foundries and complementary semiconductor
services subcontractors in Asia.

Focus on Testing Complex, High-Performance Logic ICs. The Company intends to
maintain its primary focus on the market for testing complex, high-performance
logic ICs, which is expected to outpace the growth of the overall
semiconductor market. Due to the increasing complexity of high-performance
ICs, and the increasing cost of advanced test equipment, the Company believes
that it is becoming less cost-effective for its customers to test these
products internally. Shorter product life cycles for high-performance ICs
discourage customers from investing in expensive test equipment that will
rapidly become obsolete. By focusing its resources on testing complex, high-
performance ICs, the Company has developed significant technical expertise and
is able to achieve economies of scale in equipment purchases and effective
equipment utilization rates. In addition, to satisfy its customers'
requirements, the Company also provides testing of lower performance products.

SERVICES

The Company offers a broad range of services, including software
development, electrical verification, reliability analysis, failure analysis,
wafer sort, production monitoring and quickturn and prototype packaging. The
Company provides its testing and test-related services on all major types of
ICs, including logic, mixed-signal, RF and memory ICs. Such products are used
in a broad range of applications, including automotive, consumer electronics,
the Internet, intranets, mass storage, military/aerospace, medical, multimedia
and wireless communications. Further, the Company is able to provide testing
services on all major IC package types. Certain of the Company's testing
facilities are qualified by U.S., European and Japanese industry standards
organizations. The Company's San Jose facility is also a military certified
facility for test and certification of components used by the U.S. Department
of Defense, military and aerospace suppliers, and the National Security
Administration for classified programs.

Advanced testing equipment is critical to providing leading edge testing
services. The Company obtains advanced testing equipment from all major test
equipment manufacturers, including Credence Systems Corporation, Hewlett-
Packard Company, LTX Corporation and Teradyne Corporation. The Company works
closely with its vendors to evaluate and obtain the latest testing equipment
and has long-term order forecasts in place to shorten the effective lead time
necessary for the delivery of new equipment. In addition, certain of the
Company's test equipment suppliers frequently use the Company's training
facilities and staff to provide training to such suppliers' existing and
prospective customers. Further, the Company works with its customers to ensure

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that it is aware of the latest IC development trends, thereby allowing the
Company to anticipate its customers' future testing needs and obtain the
appropriate advanced test equipment.

INVENTIVE STAGE SERVICES

During the Inventive Stage, the Company provides a variety of services,
including software development, electrical verification, reliability analysis
and failure analysis.

Software Development. The Company works closely with its customers to
develop test software that comprehensively tests the functionality of ICs. The
Company provides sophisticated software engineering services including test
program development, conversion and optimization, and related hardware design.
Generally, testing requires customized testing software and related hardware
to be developed for each particular product. The Company's proprietary tool,
ISEasyTest, facilitates rapid generation of test programs for digital-CMOS
ICs. These test programs incorporate multiple IDD (static) measurements of the
current contributed by the core of the IC, thereby enhancing the thoroughness
of the test. The Company also develops customized software tools for
converting programs from one equipment platform to another. In addition, the
Company focuses its efforts on developing test software with rapid execution
times. By utilizing high quality test software with rapid test execution on
the latest advanced test equipment, the Company believes it is able to offer
low per unit costs for testing.

Electrical Verification. The Company tests wafers and/or a prototype of a
packaged device to verify compliance with a variety of different operating
specifications, including functionality, frequency, voltage, timing and
temperature range. If the device functions to specification during this
process, it is released for reliability testing. In the event that the
functionality of the tested IC does not meet published specifications, the
Company works with its customers' design and test engineers to determine the
cause of the failure. If it is determined that the failure occurred due to a
defect in the circuit design, the product is subjected to failure analysis.
The Company is capable of testing ICs with up to 512 I/O pins and ICs
operating at data rates of up to 330 MHz. Electrical verification may be
provided to commercial or industrial specifications, as well as to more
rigorous military, space and other high reliability specifications.

Reliability Analysis. To ensure the continued functionality of an IC over
time and under varying conditions, the Company offers reliability testing
services during the Inventive Stage. The Company's reliability services assess
the long-term reliability of ICs and their suitability of use for intended
applications. Reliability testing provides data to improve field reliability,
reduce warranty costs and minimize the shipment of marginal products. The
Company is a leader in providing reliability test techniques that allow a
rapid evaluation, thus reducing cycle time and facilitating the rapid time to
market requirements of its customers. The Company offers reliability tests
including burn-in services, highly accelerated stress testing (HAST),
electrostatic discharge (ESD) and other accelerated shock testing techniques,
such as latch-up, gross and fine leak, 85/85, mechanical shock and thermal
shock. Once testing establishes the reliability of the IC, it is released for
manufacture. The Company also issues reliability reports on customer ICs,
which are often used by its customers as a benchmark for the IC's overall
reliability.

Failure Analysis. In the event that an IC does not meet the criteria
established by design engineers during electrical verification or reliability
testing, the Company offers its customers failure analysis services. Using the
latest in non-contact EBEAM imaging equipment, which illustrates the flow of
electrons through a device, the Company is able to aid design engineers in
determining where an error in the IC design exists. The Company then assists
the design engineers to correct the circuit design with Focused Ion Beam
equipment, which removes and replaces the defective portion of the IC,
allowing the prompt continuation of the testing process for the product.
Additional tools used by the Company for failure analysis include acoustic x-
ray and SEM imaging.

PRODUCTION STAGE SERVICES

The majority of the IC testing performed by the Company occurs during the
Production Stage, once volume manufacturing of the IC has commenced. During
this stage, the Company continues to provide electrical

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verification services (wafer sort and final test), reliability analysis and
failure analysis on ICs after they are released for manufacture. In addition,
the Company provides a variety of additional production monitoring services.

Wafer Sort. The Company commenced wafer sort services in 1984. Wafer sort
occurs immediately prior to packaging ICs and involves the electrical testing
of each die on the processed wafer to ensure conformance to customer
specifications and to improve final yields of packaged ICs. The Company also
offers performance sorting, in which die with different performance
characteristics are identified and separated. This service allows customers to
make a performance distinction prior to packaging. After the wafer sort has
been completed, conforming die are packaged.

Final Test. The Company commenced final test services in 1983. Final test
occurs after ICs are packaged and involves electrical testing and inspection
of the packaged ICs to ensure that they conform to customer specifications.
After the final test has been completed, packaged ICs are either drop-shipped
to the end-user or returned to the Company's customers.

Production Monitoring. The Company production monitoring services are
designed to assess the integrity of its customer's IC designs, wafer
fabrication and packaging processes. Such integrity is measured by performing
a subset of the reliability tests performed by the Company during the
Inventive Stage on a sample of production ICs. The results of the Company's
production monitoring services enable its customers to improve production
yields and quality by remedying, where necessary, their IC designs and wafer
fabrication and packaging processes.

OTHER SERVICES

Semiconductor Packaging Services. The Company provides a range of
semiconductor packaging services through its facility located in Manteca,
California. During the IC packaging process, an individual die is encapsulated
in plastic or other material to protect the die from damage and to facilitate
electrical connections and thermal dissipation. The Company's packaging
capabilities include three package types: MQUAD; quad flat packages ("QFP");
and ball grid array ("BGA") packages. In addition, through its Hong Kong
subsidiary, the Company provides turnkey packaging services and high volume
testing in collaboration with Hana Technologies, an independent semiconductor
packaging service provider.

The Company's Manteca Operation is focused on providing high value-added
quickturn and prototype packaging services. Because semiconductor
manufacturers continually attempt to shorten their time to market for new
products, many semiconductor manufacturers require quickturn and rapid
prototype packaging services like those provided by the Company. The Company's
geographical proximity to Silicon Valley facilitates such quick turnaround
design and prototype production. The Company believes that its ability to
offer such packaging services will become an increasingly important
competitive advantage by enabling the Company to develop close relationships
with customers early in the development process.

In addition to its quickturn and prototype business, the Company operates a
captive packaging line for Delphi Electronics, a subsidiary of General Motors
("Delphi"). Delphi owns the equipment used in its packaging line, while the
Company provides materials and staffing. The Delphi line packages sensors used
in automotive applications.

CUSTOMERS AND MARKETING

During the last twelve months, the Company has provided services to more
than 250 customers worldwide, consisting primarily of vertically integrated
semiconductor companies and fabless semiconductor companies. In the aggregate,
the top five customers accounted for 58.4%, 60.4%, 54.2% and 45.9% of total
revenues in fiscal 1995, 1996 and 1997 and the first six months of fiscal
1998, respectively. Hana Technologies accounted for 21.4%, 30.2% and 17.0% of
the Company's revenues in fiscal 1996, fiscal 1997 and the six months ended
April 30, 1998, respectively. A significant portion of the business that the
Company derives from Hana Technologies relates to testing services for LSI
Logic. Additionally, LSI Logic directly accounted for 29.5% and 16.1% of the

37
<PAGE>

Company's revenue in fiscal 1995 and fiscal 1996, respectively. Cirrus Logic
accounted for 12.3% of the Company's revenues in the six months ended April 30,
1998. No other customer accounted for more than 10% of the Company's revenues
during these periods. The following table sets forth certain of the Company's
customers:

8x8, Inc. ESS Technology, Inc. Pantronix Corporation
Actel Corporation Gadzoox Microsystems, Philips Electronics
Adaptec, Inc. Inc. N.V.
Advansys Inc. Hamilton Hallmark Quality
AHA, Inc. Technologies Semiconductor, Inc.
Alliance Semiconductor Hana Technologies, Quantum Effect Design
Corporation Limited Inc.
Altera Corporation Hewlett-Packard Company Rendition, Inc.
Analog Devices, Inc. Honeywell Inc. S3 Incorporated
Atmel Corporation Hughes Defense Silicon Graphics,
Auravision Corporation Communications Inc.
C-Cube Microsystems, I-Cube, Inc. Silicon Image Inc.
Inc. ICS, Inc. Slextronics, Inc.
Chip Express Integrated Silicon SMC Corporation
Corporation Solution, Inc. Synergy Microsystems,
Chips and Technologies, Intel Corporation Inc.
Inc. Level One Technologies, Trident Corporation
Cirrus Logic, Inc. Inc. TriQuint
Credence Systems LSI Logic Corporation Semiconductor, Inc.
Corporation Marvel Semiconductor, TRW Inc.
Cypress Semiconductor Inc. Tseng Labs, Inc.
Corporation Minimed Technologies, Vitesse Semiconductor
Delphi (a subsidiary of Inc. Corporation
General Motors Mosys International, Inc. WSI Corporation
Corporation) Motorola, Inc. Wyle Laboratories,
DynaChip Corporation National Semiconductor Inc.
Epic Corporation Corporation Xilinx, Inc.
NeoMagic Corporation Zoran Corporation
Novalog, Inc. Zycad Corporation
Oak Technology, Inc.
Orbit Semiconductor Inc.

The Company has based and will continue to base its marketing efforts on the
established expertise and experience of its founders and senior management,
their level of participation in the semiconductor market, and the contacts that
such founders and senior management have developed among existing and potential
customers within the semiconductor industry. The Company believes that its
advanced testing technology and its reputation for high quality and reliable
services have been important factors in attracting and retaining customers. The
Company has received numerous awards from its customers recognizing the quality
of its services.

The Company's customer service group provides technical support to customers,
aids in problem solving and provides product scheduling and tracking
information before and during the processing cycles. The Company works closely
with its customers during product development by providing technical input and
guidance to assist in the development of product test programs, whether
developed by the Company or the customer. In addition, the founders and the
engineers of the Company continue to work with customers at the engineering
level throughout the semiconductor development and production process. The
Company has developed proprietary work in progress ("WIP") software that
enables its customers to obtain real-time production status of products via the
Internet. The Company believes that customer satisfaction has been critical to
its past success and will continue to be critical to achieving future growth.

Customers frequently require that the Company's facilities and procedures
undergo a stringent vendor qualification process. The qualification process
typically takes from two to six weeks, and can take longer depending on the
requirements of the customer. After the Company has been qualified by a
customer and before such customer delivers ICs to the Company for volume
testing during the Production Stage, a process known as "correlation" is
undertaken. During the correlation process, which typically takes from two days
to two weeks, the customer provides the Company with sample ICs to be tested
and either provides the Company with the test program or requests that the
Company develop a conversion program. In certain cases, the customer also
provides the Company with a data log of results of any testing of the IC which
the customer may have conducted previously. Also, from time-to-time, the
Company operates testers on consignment from certain customers.

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<PAGE>

The ability of the Company to maintain close, satisfactory relationships
with its customers is important to the ongoing success and profitability of
its business. The Company expects that it will continue to be dependent upon a
relatively limited number of customers for a significant portion of its
revenues in future periods. None of the Company's customers is presently
obligated pursuant to any contractual commitment or otherwise to purchase any
amount of the Company's test or packaging services or to provide the Company
with binding forecasts of product or service purchases for any period.
Moreover, all of the Company's customers operate in the cyclical semiconductor
industry and may vary order levels significantly from period to period.
Accordingly, there can be no assurance that any of the Company's customers
will continue to place orders with the Company in the future at the same
levels as in prior periods. See "Risk Factors--Dependence on the Highly
Cyclical Semiconductor and Personal Computer Industries" and "--Significant
Customer Concentration; Absence of Long-Term Customer Contracts."

The Company's Hong Kong subsidiary is dependent on Hana Technologies
Limited, formerly Swire Technologies ("Hana Technologies"), the Company's
largest customer, for substantially all of its revenues. Furthermore, a
significant portion of the business that the Company derives from Hana
Technologies relates to testing services for LSI Logic, which has historically
been a significant customer of the Company's domestic test operations. There
can be no assurance that any one or more of the Company's significant
customers, including the major customers of the Company's Manteca Operation or
Hong Kong subsidiary, will not reduce, cancel or delay orders or seek other
suppliers, which could have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, until
recently the Company's Manteca Operation has been almost entirely dependent on
two customers. However, one of such customers is no longer a customer of the
Manteca Operation. Revenues of approximately $588,000, or approximately 14% of
the Manteca Operation's total revenues, were derived from this former customer
of the Manteca Operation in the six months ended April 30, 1998. The Company
does not expect that the loss of this customer by itself will have a material
adverse effect on the Company's business, financial condition or results of
operations, as revenues from this customer represented less than 1.5% of the
Company's total consolidated revenues for the six months ended April 30, 1998.
Accordingly, the Company's Manteca Operation (which accounted for
approximately 10% of the Company's revenues in the first six months of fiscal
1998) is dependent on one customer for substantially all of its revenues.

The Company does not typically operate with any material backlog and, as a
result, the Company expects that in the future, revenues in any quarter will
be substantially dependent upon orders received in that quarter. The Company's
expense levels are based in part on its expectations of future revenues and
the Company may be unable to adjust costs in a timely manner to compensate for
any revenue shortfall. See "Risk Factors--Significant Customer Concentration;
Absence of Long-Term Customer Contracts."

QUALITY CONTROL AND ASSURANCE

The Company believes that its advanced testing technology and its reputation
for high quality and reliable services have been important factors in
attracting and retaining leading international semiconductor companies as
customers. The quality requirements imposed by the diversified product markets
served by the Company require the implementation and execution of quality
assurance systems that impose strict process controls, statistical in-line
monitors, supplier control, data review and management, quality controls and
corrective action systems. The Company's quality control systems are designed
to ensure that all test procedures adhere to the customer's specifications.
These systems include, among other things, quality control stations along
production lines, monitoring of the test area environment and product
inspections prior to shipment. These quality control systems are designed to
ensure high quality service to customers and testing reliability at the
Company's facilities. Certain of the Company's testing operations are
qualified by U.S., European and Japanese industry standards organizations. The
Company's San Jose facility is also military certified for test and
certification of components used by the U.S. Department of Defense, military
and aerospace suppliers, and the National Security Administration for
classified programs. See "--Customers and Marketing."

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<PAGE>

The Company's facilities in San Jose and Santa Clara have been certified as
meeting the ISO 9002 quality standards by the International Standards
Organization (ISO). Although the ISO 9002 certification for the Manteca
Operation lapsed under its previous owner, the Company has renewed such
certification. ISO 9002 standards apply to installation and production
operations. The ISO certification process involves an evaluation of a
company's production processes and its management systems.

COMPETITION

The Company competes in the independent semiconductor testing and packaging
markets principally on the basis of engineering skills, quality, reliability,
price, responsiveness and flexibility, delivery cycles and range of services
available. The Company's competitors include large independent IC services
providers, small independent IC testing and packaging companies offering niche
services, and vertically integrated semiconductor manufacturers which have in-
house testing and packaging capabilities. Large independent IC services
providers with which the Company competes include Anam Industrial Co.,
Ltd./Amkor Technology, Inc., ASAT Limited, a subsidiary of QPL Holdings, ASE
Test Limited, a subsidiary of Advanced Semiconductor Engineering, Inc., Orient
Semiconductor Electronics, Ltd., Siliconware Precision Industries Co., Ltd.,
ST Assembly Test Services Pte Ltd and Taiwan Semiconductor Manufacturing
Company Ltd., most of which have significantly larger financial, marketing,
distribution and other resources than the Company. Many of these companies
have also established relationships with current or potential customers of the
Company and have developed strategic relationships with third party providers
of complementary semiconductor services to enlarge their businesses. The
Company may be at a competitive disadvantage with such competitors that have
fostered such relationships if the Company does not continue to develop such
strategic relationships in the future. The small independent IC testing and
packaging companies with which the Company competes generally offer a limited
range of services and typically compete on the basis of price. Vertically
integrated semiconductor manufacturers that are customers of the Company
continuously evaluate the Company's services against developing or using or
continuing to use their own in-house capabilities, and most of these customers
also obtain testing services from other sources. Vertically integrated
customers may have more advanced testing technologies and typically have
greater financial, marketing, distribution and other resources than the
Company.

The Company believes that its primary competitors in the test portion of its
business are located in Asia, particularly in Korea, Taiwan, Malaysia,
Singapore and Japan. Certain of such competitors may locate testing facilities
in North America in the future. In addition, several companies have announced
plans to commence independent testing operations in Asia, and several
independent testing companies in Asia which currently offer only memory
testing services could add logic testing and wafer sort. These operations
would compete directly with the Company. Although in recent years
semiconductor companies have increasingly outsourced portions of the IC
production process, including testing, to independent companies to reduce
costs and shorten production cycles, there can be no assurance that this
outsourcing trend will continue. From time-to-time, the Company has lost
business from customers who have chosen to perform their testing operations
in-house. A reversal of, or a slowdown in, this outsourcing trend would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Highly Competitive Industry."

RESEARCH AND DEVELOPMENT

The Company believes that its research and development program is an
integral component of its business strategy. The Company's research and
development efforts have focused on improving the efficiency and technology of
its testing processes. The Company's current projects include continuing
development of software tools that enable rapid automatic generation and
cross-platform conversion of test programs to test logic and mixed signal ICs.
The Company is also continuing to improve its existing programs that provide
its customers with access to a variety of technical and operational data via
the Internet. The Company's research and development efforts also include
continuing development of interface designs to provide for high-frequency
testing by minimizing electrical noise. In addition, the Company works closely
with its customers in designing and modifying testing software and works with
equipment vendors to increase the efficiency and reliability of testing
equipment.

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<PAGE>

The Company incurred research and development expenses of $1.0 million, $1.1
million, $1.1 million and $1.3 million in fiscal 1995, 1996 and 1997 and the
first six months of fiscal 1998, respectively, representing approximately
4.7%, 4.4%, 3.1% and 3.3% of revenues, respectively. The Company has
historically expensed all research and development costs as incurred and none
are currently capitalized.

The semiconductor industry is characterized by rapid increases in the
diversity and complexity of semiconductor products. As a result, the Company
expects that it will need to offer, on an ongoing basis, more advanced testing
technologies and procedures in order to respond to competitive industry
conditions and customer requirements. The failure by the Company to achieve
advances in its testing technology or process or to obtain access to advanced
testing technology could have a material adverse effect on its business,
financial condition and results of operations.

FACILITIES

The Company's testing operations are conducted in facilities located in San
Jose and Santa Clara, California, and in Hong Kong and Singapore. These
facilities have a total floor space of approximately 183,000 square feet and
typically operate 24 hours per day in two or three shifts, seven days per
week. The Company's packaging operations are conducted at its facility located
in Manteca, California. Substantially all of the Company's other operations,
including its principal executive offices, are located at its testing
facilities.

The Company owns two facilities totaling 86,000 square feet in San Jose,
California, its 85,000 square foot facility in Manteca, California, and 20,000
square feet of its Hong Kong facility. The Company currently leases its 71,000
square foot facility in Santa Clara, California. The lease on this facility
expires in September 2000. The Company also leases an additional 4,000 square
foot office facility in Hong Kong. The lease on this facility expires in April
1999. Currently, the Company is temporarily utilizing approximately 1,000
square feet at a customer's facility in Singapore. However, the Company is
currently negotiating a lease for additional testing facility in Singapore.
The Company expects that this lease will be effective in mid-1998 and will
terminate in 2001. The Company believes that it has adequate facilities to
accommodate its needs for at least the next 12 months.

While the Company believes that it has effectively managed its expansion in
recent years, there can be no assurance that it will be able to do so in the
future. Failure of the Company to implement its expansion plans in a timely
manner could materially adversely affect its ability to maintain, expand and
diversify its customer base, and there can be no assurance that the
implementation by the Company of its expansion plans will not materially
adversely affect its existing operations. See "Risk Factors--Expansion of
Testing Capacity; Results of Operations Affected by Capacity Utilization
Rates" and "--No Assurance of Successful Expansion of Operations; Management
of Recent Growth."

The Company's testing operations take place in testing areas where air
purity, temperature, humidity and electrostatic discharge are controlled. The
inability of the Company to control its testing environment could cause some
tested ICs or wafers to be nonfunctional. The Company has from time-to-time
experienced, and may in the future experience, production interruptions due to
technical problems in the testing process. Any interruption in the Company's
operations could have a material adverse effect on its business, financial
condition and results of operations. See "Risk Factors--Risks Relating to
Complexity of Testing Processes."

EMPLOYEES

As of April 30, 1998, the Company had 607 employees, with 453 in general
operations, 49 in engineering (including research and development), 51 in
quality assurance, 32 in sales, administration and finance and 22 in other
capacities. The Company has not entered into collective bargaining agreements
with any of its employees. The Company has not experienced any strikes or work
stoppages by its employees and believes that its relationship with its
employees is good. See "Risk Factors--Dependence on Key Personnel and
Availability of Skilled Workforce."

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LEGAL PROCEEDINGS

On May 21, 1998, Del Gilliam, a former employee of the Company, filed a
complaint against the Company, DTS and an executive officer of the Company
(the "Complaint") in the Superior Court of California, County of Santa Clara.
The Complaint alleges, among other things, that Mr. Gilliam's rights under his
employment agreement with DTS were violated and that his purported dismissal
by the Company was a result of age discrimination. The Company seeks
compensatory damages in excess of $3,000,000 as well as punitive and
exculpatory damages in respect of the age discrimination claim.

The Company has not filed an answer to the Complaint and is unable to
predict its ultimate outcome. However, the Company believes that it has
meritorious defenses to the litigation and intends to vigorously defend itself
against the lawsuit. The Company does not believe that the outcome of the
case, even if unfavorable, would have a material adverse effect on the
Company's business, financial condition or results of operations.

From time to time, the Company has been and may continue to be involved in
litigation relating to claims arising out of its operations in the normal
course of business.

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MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEE

The executive officers, directors and key employee of the Company, and their
ages and positions as of April 30, 1998, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Executive Officers and
Directors
Saeed A. Malik.......... 46 President, Chief Executive Officer and Director
Sassan Raissi........... 54 President of Digital Testing Services, Inc.
Ray G. Grammer.......... 60 Chief Financial Officer and Treasurer
Laurence F. Jorstad..... 50 Vice President, Engineering and Director
Alex M. Barrios......... 48 Vice President, Operations and Director
Zafar A. Malik.......... 43 President of Integrated Qualification Labs Division
Patrick H. Yu........... 45 Vice President, Applications Engineering
Dharam V. Ahuja......... 56 Vice President, Business Development
Muneer A. Malik......... 48 Director(1)
Terry N. Holdt.......... 54 Director(1)
Key Employee
Rabbi-ul-Islam.......... 31 General Manager, ISE Hong Kong Limited
</TABLE>
- ---------------------
(1) Member of the Compensation and Audit Committees.

Saeed A. Malik is a founder of the Company and has served as President and
Chief Executive Officer and a Director of the Company since 1983. From 1980 to
1983, Mr. Malik was a partner of International Semiconductor Engineering
("IS"), a test-engineering consulting service. Prior thereto, Mr. Malik served
in various management and test engineering capacities at American
Microsystems, Inc., Fairchild Semiconductor Corporation ("Fairchild") and
Raytheon Semiconductor, Inc. Mr. Malik is the brother of Messrs. Zafar A. and
Muneer A. Malik. Mr. Malik holds a B.S. in Physics from the University of
Karachi, an M.S. in Solid-State Physics from the University of Karachi, and an
M.A. in Political Science from California State University, San Jose.

Sassan Raissi has served as President of DTS since 1995. Dr. Raissi is a
founder of DTS and from 1987 to 1995, served as its Vice President of
Engineering and General Manager and from 1984 to 1986, served as its
President. From 1977 to 1984, Dr. Raissi served in various positions at
Fairchild, including Operations Manager for the Microprocessor Group. Dr.
Raissi holds a B.A. in Mathematics from California State University,
Sacramento, an M.S. in Mathematics from California State University, San Jose
and a doctorate in Applied Mathematics from Washington State University.

Ray G. Grammer has served as Chief Financial Officer of the Company since
November 1997. From June 1991 to October 1997, Mr. Grammer served in various
executive positions at Alphatec USA, Inc., including Chief Financial Officer
and Vice President of Business Development. From 1989 to 1991, Mr. Grammer
served as Vice President of Finance for Headland Technology, Inc., a
subsidiary of LSI Logic, Inc. From 1984 to 1990, Mr. Grammer served as
Corporate Controller of Signetics Corporation, a semiconductor manufacturer.
Mr. Grammer holds a B.S. in Business from the University of Illinois.

Laurence F. Jorstad is a founder of the Company and has served as Vice
President of Engineering, and a Director of the Company since 1983. From 1980
to 1983, Mr. Jorstad was a partner at IS. Prior thereto, Mr. Jorstad served in
various engineering capacities, including Test Engineer, at National
Semiconductor Corporation, the camera and instrument division of Fairchild and
Boeing Co. Mr. Jorstad holds a B.S. in Electrical Engineering from California
State University, San Jose.

Alex M. Barrios is a founder of the Company and has served as Vice President
of Operations and a director of the Company since 1983. From 1980 to 1983, Mr.
Barrios was a partner at IS. From 1978 to 1980, Mr. Barrios

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was an independent consultant developing test software and hardware. Prior
thereto, Mr. Barrios served in various engineering capacities at American
Microsystems, Inc. including Test Engineer from 1975 to 1978. From 1972 to
1975 he served as an Assistant Engineer at Motorola, Inc. Mr. Barrios holds an
A.A. in Electronics from Maricopa Technical Junior College.

Zafar A. Malik has served as President of the Company's Integrated
Qualification Labs Division ("IQL") since 1989. From 1985 to 1989, Mr. Malik
served as the Director of Quality at LSI Logic. From 1982 to 1985, Mr. Malik
served as Manager of Product Assurance at Ferranti Interdesign, Inc., a
semiconductor manufacturer. Mr. Malik is the brother of Messrs. Saeed A. and
Muneer A. Malik. Mr. Malik holds a B.S.C. in Finance from California State
University, San Jose and an M.B.A. from the University of Phoenix.

Patrick H. Yu is a founder of the Company and has served as its Vice
President, Applications Engineering since 1996. From 1983 to 1996, Mr. Yu
served in various management positions at the Company, including Engineering
Manager and General Manager at ISE Hong Kong Limited. From 1980 to 1983, Mr.
Yu was a partner at IS. Mr. Yu holds a B.S. in Electrical Engineering from
Purdue University.

Dharam V. Ahuja has served as Vice President, Business Development of the
Company since April 1997. Since 1987, Mr. Ahuja has served as President of
Strategic Alliance Inc., a consulting firm. From January 1997 to August 1997,
Mr. Ahuja served as Vice President of Corporate Finance of Janda, Phillips and
Garrington, an investment banking firm. Mr. Ahuja is a founder and served as
Chief Executive Officer of Hypervision, Inc., a semiconductor equipment
company, from 1989 to 1991. Mr. Ahuja is a founder and served as Chief
Executive Officer of Shiva Multisystems, Inc., a software company, from 1984
to 1987. From 1983 to 1984, Mr. Ahuja served as Executive Vice President of
Marketing and Sales for North Star Computers. From 1977 to 1982, Mr. Ahuja
served in various positions at National Semiconductor Corporation, including
Vice President of Worldwide Marketing of National Advanced Systems (now
Hitachi Data Systems Corporation). From 1967 to 1975, Mr. Ahuja served in
various positions at International Business Machines Corporation. Mr. Ahuja
holds a B.S. in Chemical Engineering from the University of Delhi and an
M.B.A. from the University of California, Los Angeles.

Muneer A. Malik has served as a Director of the Company since December 1997.
Since 1997, Mr. Malik has been a partner of Muneer A. Malik & Co. Attorneys At
Law, Advocates in Karachi, Pakistan. From 1977 to 1997, Mr. Malik was a
partner in Ahmed & Malik Attorneys at Law in Pakistan. Since 1990, Mr. Malik
has served as an advocate of the Supreme Court of Pakistan. From 1990 to 1995,
Mr. Muneer was elected as a member of the Bar Counsel in Pakistan, the highest
authority regulating attorneys in Pakistan. From 1986 to 1987, Mr. Malik was
President of the Karachi Bar Association. From 1974 to 1975, Mr. Malik was an
associate at Price Waterhouse, LLP in San Jose, California. Mr. Malik is the
brother of Messrs. Saeed A. and Zafar A. Malik. Mr. Malik holds a B.S. in
Business Administration from California State University, San Jose and a J.D.
from Santa Clara University.

Terry N. Holdt has served as a Director of the Company since December 1997.
Since January 1998, Mr. Holdt has been President, Chief Executive Officer and
Chairman of the Board of Directors of S3 Incorporated, a multimedia and
graphics company. From August 1996 to January 1998, Mr. Holdt served as Vice
Chairman of S3 Incorporated. From January 1992 to August 1996, Mr. Holdt
served as President and Chief Executive Officer of S3 Incorporated. Mr. Holdt
was Chairman of the Board of Paradigm Technology, Inc., a semiconductor
company, from June 1991 to January 1992 and was its President and Chief
Executive Officer from June 1988 to May 1991. From 1986 to 1988, Mr. Holdt
held various executive positions, including President, at Linear Corporation,
a manufacturer of electronic telemetry and infrared security systems. From
1981 to 1985, Mr. Holdt held various executive positions at Western Digital
Corporation, a manufacturer of computer peripherals, where he was most
recently Executive Vice President and Chief Operating Officer. Mr. Holdt has
served as a Director of S3 Incorporated, since January 1992. Mr. Holdt holds a
B.S.E.E. and an M.S.E.E. from the University of Illinois.

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<PAGE>

Rabbi-ul-Islam has served as General Manager of ISE Hong Kong Limited since
November 1997. From 1995 to 1997, Mr. Islam served in various positions at the
Company, including test engineer, staff engineer and operation manager. From
1993 to 1995, Mr. Islam served as a design engineer of Hong Kong Connector
Company Ltd. Mr. Islam holds a B.S. and an M.S. in Engineering from the
Beijing University of Posts and Telecommunications.

BOARD OF DIRECTORS

The Company's Board of Directors consists of five directors, including two
non-employee directors. Each director is elected for a period of one year at
the Company's annual meeting of shareholders and serves until the next annual
meeting or until his successor is duly elected and qualified. The executive
officers serve at the discretion of the Board of Directors. Messrs. Saeed A.
Malik, Zafar A. Malik and Muneer A. Malik are brothers. In addition to their
participation in the 1998 Stock Incentive Plan, non-employee directors are
reimbursed for expenses incurred in connection with attending Board and
committee meetings and receive $1,000 for each Board meeting attended and $250
for each committee meeting attended (provided such committee meeting does not
occur on the same day as a Board meeting). Mr. Muneer A. Malik and Mr. Holdt
will also receive a per annum fee of $30,000 for serving on the Board of
Directors. Effective upon their election to the Board of Directors on December
31, 1997, each such non-employee Board member received a nonqualified stock
option grant for 52,500 shares of Common Stock at $10.40 per share. Directors
are not otherwise compensated for their services as directors.

Upon the closing of this offering, the Company's Second Amended and Restated
Articles of Incorporation (the "Amended Articles") will provide for a
classified Board of Directors consisting of two classes of directors, each
serving staggered two-year terms. As a result, approximately one-half of the
Company's Board of Directors will be elected each year. The Amended Articles
have been approved by the Company's shareholders of record prior to this
offering. Under California law, in order to implement a classified Board of
Directors, the Company must satisfy numerous listing and trading criteria,
including the provision that the Company must have 800 or more shareholders of
record. Once the Company complies with such criteria, at the Company's next
ensuing Annual Meeting of Shareholders approximately one-half of the nominees
to the Board will be elected for one-year terms, and one-half will be elected
for two-year terms. Thereafter, all directors will be elected for two-year
terms.

In December 1997, the Board established an Audit Committee and a
Compensation Committee. The Audit Committee, which reviews the Company's
annual audit and meets with the Company's independent accountants to review
the Company's internal controls and financial management practices, currently
consists of Messrs. Muneer A. Malik and Holdt. The Compensation Committee,
which recommends to the Board compensation for certain of the Company's
personnel and administers the Company's stock plans, currently consists of
Messrs. Muneer A. Malik and Holdt. Prior to the formation of the Compensation
Committee, decisions regarding compensation of executive officers were made by
the Board of Directors as a whole.

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<PAGE>

EXECUTIVE COMPENSATION

The following table provides certain summary information concerning the
compensation paid or accrued by the Company and its subsidiaries to or on
behalf of the Company's Chief Executive Officer and each of the four other
most highly paid executive officers whose aggregate compensaton during the
last fiscal year exceeded, or would have exceeded on an annualized basis,
$100,000 (hereinafter referred to as the Named Executive Officers) for
services rendered in all capacities to the Company and its subsidiaries for
the fiscal year ended October 31, 1997 (no option grants were made to, and no
options were exercised by, the Named Executive Officers during the last fiscal
year):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
NAME AND PRESENT PRINCIPAL POSITION SALARY BONUS
<S> <C> <C>
Saeed A. Malik............................................. $ 217,800 $ 320,000
President and Chief Executive Officer
Laurence F. Jorstad........................................ 188,760 220,000
Vice President, Engineering
Alex M. Barrios............................................ 156,200 180,000
Vice President, Operations
Patrick H. Yu.............................................. 110,000 180,000
Vice President, Applications Engineering
Zafar A. Malik............................................. 72,589 220,000
President of IQL Division
</TABLE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee of the Company's Board of
Directors are Mr. Holdt and Mr. Muneer A. Malik. No executive officer of the
Company serves on the board of directors or compensation committee of any
entity which has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.

1998 STOCK INCENTIVE PLAN

The Company's 1998 Stock Incentive Plan (the "1998 Plan") is intended to
serve as the successor equity incentive program to the Company's 1997 Stock
Option/Stock Issuance Plan (the "Predecessor Plan"). The 1998 Plan was adopted
by the Board of Directors and was approved by the shareholders on April 2,
1998. The 1998 Plan became effective on April 2, 1998 (the "Plan Effective
Date").

A total of 4,500,000 shares of Common Stock have been authorized for
issuance under the 1998 Plan. Such share reserve consists of the number of
shares available for issuance under the Predecessor Plan on the date the
Underwriting Agreement for this offering is executed (the "Underwriting
Date"), including the shares subject to outstanding options plus an additional
1,000,000 shares. In addition, the number of shares of Common Stock reserved
for issuance under the 1998 Plan will automatically be increased on the first
trading day of each calendar year, beginning in calendar year 1999, by an
amount equal to the lesser of three percent (3%) of the total number of shares
of Common Stock outstanding on the last trading day of the preceding calendar
year or 1,000,000 shares. In no event, however, may any one participant in the
1998 Plan receive after the Underwriting Date option grants, separately
exercisable stock appreciation rights or direct stock issuances for more than
500,000 shares of Common Stock in the aggregate per calendar year.

On the Underwriting Date, outstanding options and unvested shares issued
under the Predecessor Plan will be incorporated into the 1998 Plan, and no
further option grants will be made under the Predecessor Plan. The
incorporated options will continue to be governed by their existing terms,
unless the Plan Administrator elects to

46
<PAGE>

extend one or more features of the 1998 Plan to those options. Except as
otherwise noted below, the incorporated options have substantially the same
terms as will be in effect for grants made under the Discretionary Option
Grant Program of the 1998 Plan.

The 1998 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members
and consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock at an exercise price not less than
100% of their fair market value on the grant date, (ii) the Stock Issuance
Program under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly, through the purchase of
such shares at a price not less than 100% of their fair market value at the
time of issuance or as a bonus tied to the performance of services, (iii) the
Salary Investment Option Grant Program which may, in the Plan Administrator's
sole discretion, be activated for one or more calendar years and, if so
activated, will allow executive officers and other highly compensated
employees the opportunity to apply a portion of their base salary to the
acquisition of special below-market stock option grants, (iv) the Automatic
Option Grant Program under which option grants will automatically be made at
periodic intervals to eligible non-employee Board members to purchase shares
of Common Stock at an exercise price equal to 100% of their fair market value
on the grant date and (v) the Director Fee Option Grant Program which may, in
the Plan Administrator's sole discretion, be activated for one or more
calendar years and, if so activated, will allow non-employee Board members the
opportunity to apply a portion of the annual retainer fee otherwise payable to
them in cash each year to the acquisition of special below-market option
grants.

The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee. The Compensation Committee as
Plan Administrator will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances under those
programs, the time or times when such option grants or stock issuances are to
be made, the number of shares subject to each such grant or issuance, the
status of any granted option as either an incentive stock option or a non-
statutory stock option under the Federal tax laws, the vesting schedule to be
in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding. However, any discretionary
option grants or stock issuances to members of the Compensation Committee
shall be made by a disinterested majority of the Board. The Compensation
Committee will also have the exclusive authority to select the executive
officers and other highly compensated employees who may participate in the
Salary Investment Option Grant Program in the event that such program is
activated for one or more calendar years, but neither the Compensation
Committee nor the Board will exercise any administrative discretion with
respect to option grants under the Salary Investment Option Grant Program or
under the Automatic Option Grant or Director Fee Option Grant Program for the
non-employee Board members. All grants under those three latter programs will
be made in strict compliance with the express provisions of each such program.

The exercise price for the shares of Common Stock subject to option grants
made under the 1998 Plan may be paid in cash or in shares of Common Stock
valued at fair market value on the exercise date. The option may also be
exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the Plan Administrator may provide financial assistance
to one or more optionees in the exercise of their outstanding options or the
purchase of their unvested shares by allowing such individuals to deliver a
full recourse, interest-bearing promissory note in payment of the exercise
price and any associated withholding taxes incurred in connection with such
exercise or purchase.

The Plan Administrator will have the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) in return for the grant of new
options for the same or different number of option shares with an exercise
price per share based upon the fair market value of the Common Stock on the
new grant date.

Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from
the Company equal to the excess of (i) the fair market value of the vested
shares of Common Stock subject to

47
<PAGE>

the surrendered option over (ii) the aggregate exercise price payable for such
shares. Such appreciation distribution may be made in cash or in shares of
Common Stock. None of the incorporated options from the Predecessor Plan
contain any stock appreciation rights.

In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not
to be assumed by the successor corporation will automatically accelerate in
full, and all unvested shares under the Discretionary Option Grant and Stock
Issuance Programs will immediately vest, except to the extent the Company's
repurchase rights with respect to those shares are to be assigned to the
successor corporation. The Plan Administrator will have complete discretion to
grant one or more options under the Discretionary Option Grant Program which
will become fully exercisable for all of the option shares in the event those
options are assumed in the acquisition and the optionee's service with the
Company or the acquiring entity terminates within a designated period
following such acquisition. The vesting of outstanding shares under the Stock
Issuance Program may be accelerated upon similar terms and conditions. The
Plan Administrator will also have the authority to grant options which will
immediately vest upon an acquisition of the Company, whether or not those
options are assumed by the successor corporation. The Plan Administrator is
also authorized in its sole discretion under the Discretionary Option Grant
and Stock Issuance Programs to grant options and to structure repurchase
rights so that the shares subject to those options or repurchase rights may
immediately vest in connection with a change in control of the Company
(whether by successful tender offer for more than fifty percent (50%) of the
outstanding voting stock or a change in the majority of the Board by reason of
one or more contested elections for Board membership), with such vesting to
occur either at the time of such change in control or upon the subsequent
termination of the individual's service within a designated period (not to
exceed eighteen months) following such change in control. The options
incorporated from the Predecessor Plan have similar acceleration features. In
addition, the Plan Administrator will have the sole discretion to extend the
acceleration provisions of the 1998 Plan to those options.

In the event the Plan Administrator elects to activate the Salary Investment
Option Grant Program for one or more calendar years, each executive officer
and other highly compensated employee of the Company selected for
participation may elect, prior to the start of the calendar year, to reduce
his or her base salary for that calendar year by a specified dollar amount not
less than $10,000 nor more than $50,000. If such election is approved by the
Plan Administrator, the individual will automatically be granted, on the first
trading day in January of the calendar year for which that salary reduction is
to be in effect, a non-statutory option to purchase that number of shares of
Common Stock determined by dividing the salary reduction amount by two-thirds
of the fair market value per share of Common Stock on the grant date. The
option will be exercisable at a price per share equal to one-third of the fair
market value of the option shares on the grant date. As a result, the total
spread on the option shares at the time of grant (the fair market value of the
option shares on the grant date less the aggregate exercise price payable for
those shares) will be equal to the amount of salary invested in that option.
The option will vest in a series of twelve (12) equal monthly installments
over the calendar year for which the salary reduction is to be in effect and
will be subject to full and immediate vesting upon certain changes in the
ownership or control of the Company.

Under the Automatic Option Grant Program, each individual who first becomes
a non-employee Board member at any time after the Underwriting Date will
automatically receive an option grant for 25,000 shares on the date such
individual joins the Board, provided such individual has not been in the prior
employ of the Company. In addition, on the date of each Annual Stockholders
Meeting held after the Underwriting Date, each non-employee Board member who
is to continue to serve as a non-employee Board member either before or after
the Underwriting Date will automatically be granted an option to purchase
2,500 shares of Common Stock, provided such individual has served on the Board
for at least six months.

Each automatic grant for the non-employee Board members will have a term of
10 years, subject to earlier termination following the optionee's cessation of
Board service. Each automatic option will be immediately exercisable for all
of the option shares; however, any unvested shares purchased under the option
will be subject to repurchase by the Company, at the exercise price paid per
share, should the optionee cease Board service prior to vesting in those
shares. Each automatic option grant will vest over a four-year period as
follows: 25% of

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<PAGE>

the Option Shares will vest on the one (1) year anniversary of the option
grant date, and the balance of the Option Shares will vest in twelve (12)
successive and equal quarterly installments upon the individual's completion
of each quarter of continuous Board service measured from the one (1) year
anniversary of the option grant date. However, the shares subject to each
automatic grant will immediately vest in full upon certain changes in control
or ownership of the Company or upon the optionee's death or disability while a
Board member.

Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member will have the opportunity to apply all or a
portion of any annual retainer fee otherwise payable in cash to the
acquisition of a below-market option grant. The option grant will
automatically be made on the first trading day in January in the year for
which the retainer fee would otherwise be payable in cash. The option will
have an exercise price per share equal to one-third of the fair market value
of the option shares on the grant date, and the number of shares subject to
the option will be determined by dividing the amount of the retainer fee
applied to the program by two-thirds of the fair market value per share of
Common Stock on the grant date. As a result, the total spread on the option
(the fair market value of the option shares on the grant date less the
aggregate exercise price payable for those shares) will be equal to the
portion of the retainer fee invested in that option. The option will become
exercisable for the option shares in a series of twelve (12) equal monthly
installments over the calendar year for which the election is to be in effect.
However, the option will become immediately exercisable for all the option
shares upon (i) certain changes in the ownership or control of the Company or
(ii) the death or disability of the optionee while serving as a Board member.

The shares subject to each option under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will immediately
vest upon (i) an acquisition of the Company by merger or asset sale or (ii)
the successful completion of a tender offer for more than 50% of the Company's
outstanding voting stock or a change in the majority of the Board effected
through one or more contested elections for Board membership.

Limited stock appreciation rights will automatically be included as part of
each grant made under the Automatic Option Grant, Salary Investment Option
Grant and Director Fee Option Grant Programs and may be granted to one or more
officers of the Company as part of their option grants under the Discretionary
Option Grant Program. Options with such a limited stock appreciation right may
be surrendered to the Company upon the successful completion of a hostile
tender offer for more than 50% of the Company's outstanding voting stock. In
return for the surrendered option, the optionee will be entitled to a cash
distribution from the Company in an amount per surrendered option share equal
to the excess of (i) the highest price per share of Common Stock paid in
connection with the tender offer over (ii) the exercise price payable for such
share.

The Board may amend or modify the 1998 Plan at any time, subject to any
required shareholder approval. The 1998 Plan will terminate on the earliest of
(i) April 1, 2008, (ii) the date on which all shares available for issuance
under the 1998 Plan have been issued as fully-vested shares or (iii) the
termination of all outstanding options in connection with certain changes in
control or ownership of the Company.

1998 EMPLOYEE STOCK PURCHASE PLAN

The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board and approved by the shareholders on April 2, 1998 and
will become effective immediately upon the execution of the Underwriting
Agreement for this offering. The Purchase Plan is designed to allow eligible
employees of the Company and participating subsidiaries to purchase shares of
Common Stock, at semi-annual intervals, through their periodic payroll
deductions under the Purchase Plan, and an initial reserve of 600,000 shares
of Common Stock has been established for this purpose. The reserve will be
increased, beginning in calendar year 1999, by an amount equal to the lesser
of three percent (3%) of the total number of shares of Common Stock
outstanding on the last trading day of the preceding calendar year or
1,000,000 shares.

The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration for 24 months. However, the initial
offering period will begin on the execution date of the Underwriting

49
<PAGE>

Agreement and will end on the last business day in July 2000. The next
offering period will commence on the first business day in August 2000, and
subsequent offering periods will commence as designated by the Plan
Administrator.

Individuals who are eligible employees (scheduled to work more than 20 hours
per week for more than 5 calendar months per year) on the start date of any
offering period may enter the Purchase Plan on that start date or on any
subsequent semi-annual entry date (the first business day of February or
August each year). Individuals who become eligible employees after the start
date of the offering period may join the Purchase Plan on any subsequent semi-
annual entry date within that offering period.

Payroll deductions may not exceed 10% of base salary, and the accumulated
payroll deductions of each participant will be applied to the purchase of
shares on his or her behalf on each semi-annual purchase date (generally the
last business day in January and July each year) at a purchase price per share
equal to 85% of the lower of (i) the fair market value of the Common Stock on
the participant's entry date into the offering period or (ii) the fair market
value on the semi-annual purchase date. The initial purchase date under the
Purchase Plan will be January 29, 1999. In no event, however, may any one
participant purchase more than 1,500 shares, nor may all participants in the
aggregate purchase more than 150,000 shares on any one semi-annual purchase
date.

Should the fair market value per share of Common Stock on any purchase date
be less than the fair market value per share on the start date of the two-year
offering period, then that offering period will automatically terminate, and a
new two-year offering period will begin on the next business day, with all
participants in the terminated offering to be automatically transferred to the
new offering period.

In the event the Company is acquired by merger or asset sale, all
outstanding purchase rights will automatically be exercised immediately prior
to the effective date of such acquisition. The purchase price will be equal to
85% of the lower of (i) the fair market value per share of Common Stock on the
participant's entry date into the offering period in which such acquisition
occurs or (ii) the fair market value per share of Common Stock immediately
prior to such acquisition.

The Purchase Plan will terminate on the earlier of (i) the last business day
of July 2008, (ii) the date on which all shares available for issuance under
the Purchase Plan shall have been sold pursuant to purchase rights exercised
thereunder or (iii) the date on which all purchase rights are exercised in
connection with an acquisition of the Company by merger or asset sale.

The Board may at any time alter, suspend or discontinue the Purchase Plan.
However, certain amendments to the Purchase Plan may require shareholder
approval.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS

In October 1997, the Company entered into an employment and non-competition
agreement with Dr. Raissi for a term ending on September 30, 2000. The annual
base salary for Dr. Raissi is $175,000. The employment agreement provides that
the Board may increase the annual base salary of Dr. Raissi as appropriate.
The Company paid $2,000,000 to Dr. Raissi as a sign-on bonus pursuant to the
employment and non-competition agreement. In addition, the Company will pay
$1,500,000 to Dr. Raissi as a result of his completion by January 31, 1998 of
certain performance objectives relating to the integration of ISE and DTS. In
the event the Company terminates the agreement other than for cause, the
Company must pay to Dr. Raissi, in addition to all accrued and unpaid salary
and benefits, his salary and certain benefits for three months from the date
of such termination. If the Company terminates Dr. Raissi's employment for
cause or if Dr. Raissi terminates his employment for any reason whatsoever,
then Dr. Raissi will be entitled to receive only his accrued but unpaid salary
through the date of such termination.

In November 1997, the Company entered into an employment and non-competition
agreement with Mr. Grammer for a term ending on September 30, 2000. The annual
base salary of Mr. Grammer is $175,000. The

50
<PAGE>

employment agreement provides that the Board may increase the annual base
salary of Mr. Grammer as appropriate. The Company paid $175,000 to Mr. Grammer
as a sign-on bonus pursuant to the employment and non-competition agreement.
In addition, the Company will pay $100,000 to Mr. Grammer as a result of his
completion by January 31, 1998 of certain performance objectives relating to
the integration of ISE and DTS. In the event the Company terminates the
agreement other than for cause, the Company must pay to Mr. Grammer, in
addition to all accrued and unpaid salary and benefits, his salary and certain
benefits for three months from the date of such termination. If the Company
terminates Mr. Grammer's employment for cause or if Mr. Grammer terminates his
employment for any reason whatsoever, then Mr. Grammer will be entitled to
receive only accrued but unpaid salary through the date of such termination.

DIRECTOR REMUNERATION

Non-employee directors elected to the Board of Directors prior to the
Underwriting Date receive an annual fee of $30,000, as well as $1,000 for each
Board meeting attended while serving on the Board of Directors, and $250 for
each committee meeting attended (provided such committee meeting does not
occur on the same day as a Board meeting), and are reimbursed for expenses
they incur in attending Board and committee meetings. Each non-employee Board
member elected or appointed after the Underwriting Date shall be entitled to
the same fees for attendance at Board and committee meetings, but not the
annual cash fee.

Under the Automatic Option Grant Program, each individual who first becomes
a non-employee Board member at any time after the Underwriting Date will
automatically be granted an option to purchase 25,000 shares on the date such
individual joins the Board, provided such individual has not been previously
employed by the Company. In addition, on the date of each annual shareholders
meeting held after the Plan Effective Date, each non-employee Board member who
is to continue to serve as a non-employee Board member will automatically be
granted an option to purchase 2,500 shares of Common Stock, provided such
individual has served on the Board for at least six months. Each granted
option will have an exercise price per share equal to the fair market value
per share on the grant date. Each automatic grant for the non-employee Board
members will have a term of 10 years, subject to earlier termination following
the optionee's cessation of Board service. Each automatic option will be
immediately exercisable for all of the option shares; however, any unvested
shares purchased under the option will be subject to repurchase by the
Company, at the exercise price paid per share, should the optionee cease Board
service prior to the vesting of any such shares. Each 25,000-share and 2,500-
share automatic option grant will vest over a four-year period of continuous
service on the Board of Directors, twenty-five percent (25%) at the end of one
full year of continuous service from the option grant date and quarterly
thereafter for the following twelve (12) quarters in equal amounts until fully
vested four (4) years after the option grant date. However, the shares subject
to each automatic grant will immediately vest in full upon certain changes in
control or ownership of the Company or upon the optionee's death or disability
during such individual's service on the Board. For further information
concerning the Automatic Option Grant Program, see "Management--1998 Stock
Incentive Plan."

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Bylaws provide that the Company will indemnify its directors
and officers to the fullest extent permitted by California law. The Company is
also empowered under its Amended and Restated Articles of Incorporation to
enter into indemnification agreements with its directors, officers, employees
and agents and to purchase insurance on behalf of any person whom it is
required or permitted to indemnify. Pursuant to this provision, the Company
has entered into an indemnification agreement with each of its directors and
officers.

In addition, the Company's Amended and Restated Articles of Incorporation
provide that to the fullest extent permitted by California law, the Company's
directors will not be personally liable for monetary damages for breach of the
directors' fiduciary duty of care to the Company and its shareholders. This
provision in the Articles of Incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as an
injunction or other forms of non-monetary relief would remain available under
California law. Each director will continue to be subject to liability for
breach of the director's duty of loyalty to the Company, for

51
<PAGE>

acts or omissions involving intentional misconduct or knowing and culpable
violations of law, for acts or omissions that the director believes to be
contrary to the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, for any
transaction from which the director derived an improper personal benefit, for
acts or omissions involving a reckless disregard for the director's duty to
the Company or its shareholders when the director was aware or should have
been aware of a risk of serious injury to the Company or its shareholders, for
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Company or its
shareholders, for improper transactions between the director and the Company,
for improper distributions to shareholders and loans to directors and
officers, or for acts or omissions by the director as an officer. This
provision also does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.

At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a claim for such
indemnification.

52
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In October 1997, the Company entered into an employment and non-competition
agreement with Dr. Raissi for a term ending on September 30, 2000. The Company
has paid $2,000,000 to Dr. Raissi as a sign-on bonus pursuant to his
employment agreement. In addition, the Company agreed to pay $1,500,000 to Dr.
Raissi as a result of his completion by January 31, 1998 of certain
performance objectives relating to the integration of ISE and DTS, which
amount has not yet been paid. See "Management--Employment Contracts and
Termination of Employment and Change of Control Arrangements."

In November 1997, the Company entered into an employment and non-competition
agreement with Mr. Grammer for a term ending on September 30, 2000. The
Company has paid $175,000 to Mr. Grammer as a sign-on bonus pursuant to an
employment and non-competition agreement. In addition, the Company agreed to
pay $100,000 to Mr. Grammer as a result of his completion by January 31, 1998
of certain performance objectives relating to the integration of ISE and DTS,
which amount has not yet been paid. See "Management--Employment Contracts and
Termination of Employment and Change of Control Arrangements."

The Company has entered into an indemnification agreement with each of the
directors and officers of the Company pursuant to which the Company will
indemnify such directors and officers for all matters related to their status
or service as a director or officer to the maximum extent permissible under
California law.

Mr. Holdt, a director of the Company, is the President, Chief Executive
Officer and Chairman of the Board of S3 Incorporated. In fiscal 1995, 1996 and
1997 and the first six months of fiscal 1998, the Company sold approximately
$1,907,000, $1,635,000, $2,552,000 and $1,053,000, respectively, of products
and services to S3 Incorporated. The accounts receivable from S3 Incorporated
was approximately $220,000, $372,000, $646,000 and $237,000 at October 31,
1995, 1996, 1997 and April 30, 1998, respectively.

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal shareholders and affiliates
will be approved by a majority of the Board of Directors, including a majority
of the independent and disinterested outside directors on the Board of
Directors, and will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.

53
<PAGE>

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth at April 30, 1998 certain information with
respect to the beneficial ownership of the Common Stock, and as adjusted to
reflect the sale of Common Stock offered hereby for (i) each person who is
known by the Company to beneficially own 5% or more of the Common Stock, (ii)
each of the Company's directors, (iii) each of the executive officers named in
the Summary Compensation Table above, (iv) all directors, named executive
officers and current officers as a group and (v) the Selling Shareholders.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1)(2) AFTER OFFERING(1)(2)
------------------------- NUMBER OF -----------------------
NUMBER OF SHARES BEING NUMBER OF
NAME SHARES(3) PERCENT OFFERED SHARES PERCENT
<S> <C> <C> <C> <C> <C>
Saeed A. Malik(3)(4).... 4,748,849 27.1% 271,600 4,477,249 19.9%
Laurence F. and Terri L.
Jorstad Living Trust
Dated April 30,
1998(4)(5)............. 4,748,849 27.1 271,600 4,477,249 19.9
Alex M. Barrios(4)...... 4,748,849 27.1 271,600 4,477,249 19.9
Zafar A. Malik(4)(6).... 1,582,969 9.0 90,100 1,492,869 6.6
Patrick H. Yu(4)........ 1,582,969 9.0 90,100 1,492,869 6.6
Dharam V. Ahuja(7)...... 437,514 2.5 5,000 432,514 1.9
Muneer A. Malik(8)...... 52,500 * 0 52,500 *
Terry N. Holdt(9)....... 52,500 * 0 52,500 *
All directors, named
executive officers and
current officers as a
group (10
persons)(10)........... 18,975,000 100.0% 1,000,000 17,975,000 75.0%
</TABLE>
- ---------------------
* Less than 1.0%
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
(2) The number of shares of Common Stock deemed outstanding prior to and
after this offering includes the shares issuable pursuant to stock
options that may be exercised by the respective person or group within 60
days after April 30, 1998. Shares issuable pursuant to such options are
deemed outstanding for computing the percentage of the person holding
such options, but are not deemed outstanding for computing the percentage
of any other person. The number of shares of Common Stock outstanding
after this offering includes the 5,000,000 shares of Common Stock offered
by the Company hereby.
(3) Includes 545,249 shares issuable upon exercise of Common Stock purchase
warrants granted by Mr. Saeed A. Malik to his dependent children
exercisable within sixty (60) days of April 30, 1998. Shares beneficially
owned exclude shares held by Messrs. Zafar A. and Muneer A. Malik.
(4) Such person's address is c/o ISE Labs, Inc., 2095 Ringwood Avenue, San
Jose, CA 95131.
(5) Consists of 4,748,849 shares of Common Stock held in the Laurence F. and
Terri L. Jorstad Living Trust dated April 30, 1998, created by Mr.
Jorstad and his spouse. Such persons are the trustees of and the primary
beneficiaries of such living trust.
(6) Shares beneficially owned exclude shares held by Messrs. Saeed A. Malik
and Muneer A. Malik.
(7) Includes 350,000 shares of Common Stock issuable upon the exercise of
immediately exercisable options which are subject to a right of
repurchase in favor of the Company with respect to all 350,000 shares.
(8) Consists of 52,500 shares of Common Stock issuable upon the exercise of
immediately exercisable options which are subject to a right of
repurchase in favor of the Company with respect to all 52,500 shares.
Shares beneficially owned exclude shares held by Messrs. Zafar A. Malik
and Saeed A. Malik.
(9) Consists of 52,500 shares of Common Stock issuable upon the exercise of
immediately exercisable options which are subject to a right of
repurchase in favor of the Company with respect to all 52,500 shares.
(10) Includes 1,475,000 shares of Common Stock issuable upon the exercise of
immediately exercisable options which are subject to a right of
repurchase in favor of the Company with respect to all 1,475,000 shares.
Also see Notes 3, 7, 8 and 9 above.

54
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, $.001 par value per
share and 3,000,000 shares of Preferred Stock, $.001 par value per share.

COMMON STOCK

As of April 30, 1998, there were 17,500,000 shares of Common Stock
outstanding which were held of record by 6 shareholders. There will be
22,500,000 shares of Common Stock outstanding after giving effect to the sale
by the Company of 5,000,000 shares of Common Stock offered hereby. The holders
of Common Stock are entitled to one vote per share on all matters to be voted
upon by the shareholders, except that all such holders are entitled to
cumulate their votes in the election of directors. Each shareholder voting for
the election of directors may cumulate such shareholder's votes and give one
candidate the number of votes equal to the number of directors to be elected
multiplied by the number of votes to which the shareholder's shares are
entitled, or distribute such shareholder's votes on the same principle among
as many candidates as the shareholder may select, provided that votes cannot
be cast for more than the number of director positions subject to such
election. However, no shareholder shall be entitled to cumulate votes unless
the names of candidates for which votes are being cumulated have been placed
in nomination prior to the voting and the shareholder, or any other
shareholder, has given notice prior to the commencement of the voting of such
shareholder's intention to cumulate the shareholder's votes. These cumulative
voting provisions will terminate if and when the Company meets certain listing
and trading standards, including a requirement for 800 record holders of the
Company's securities as of the record date of the Company's most recent annual
meeting of shareholders. This provision may have the effect of delaying,
deferring or preventing a change in control of the Company. Subject to
preferences that may be applicable to any outstanding preferred stock that may
come into existence, the holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time-to-time by the
Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of any liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be outstanding upon completion of this offering will
be fully paid and nonassessable.

PREFERRED STOCK

The Company's Articles of Incorporation authorizes 3,000,000 shares of
Preferred Stock. The Board of Directors has the authority to issue the
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the number of shares constituting any
series or the designation of such series, without further vote or action by
the shareholders. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the shareholders and may adversely affect the voting and
other rights of the holders of Common Stock. The issuance of Preferred Stock
with voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others. At
present, the Company has no plans to issue any of the Preferred Stock.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar of the Common Stock will be Boston
Equiserve Limited Partnership.

55
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the shares of
Common Stock of the Company. Future sales of substantial number of shares of
Common Stock in the public market could materially adversely affect prevailing
market prices.

The Company's executive officers and directors and all of its shareholders,
holding in the aggregate 17,500,000 shares of Common Stock, have agreed
pursuant to certain agreements (the "Lockup Agreement"), that they will not,
subject to certain exceptions, directly or indirectly, offer, sell, contract
to sell, grant any option to purchase or otherwise dispose of any Common Stock
or any securities convertible into or exercisable or exchangeable for Common
Stock, or in any manner transfer all or a portion of the economic consequences
associated with the ownership of the Common Stock, without the prior consent
of Donaldson, Lufkin & Jenrette Securities Corporation for a period of 180
days following the date of this Prospectus (the "180 day Lockup Period"),
except that the Company may, without such consent, issue shares upon the
exercise of outstanding options or grant certain options pursuant to the 1998
Stock Incentive Plan or issue shares of Common Stock pursuant to the Company's
Employee Stock Purchase Plan. Following the expiration of the 180 day Lockup
Period, all 16,500,000 shares of outstanding Common Stock that are not being
sold in this offering will be available for sale in the public market subject
to compliance with Rule 144 or Rule 701.

In general, under Rule 144 as currently in effect, an affiliate of the
Company or a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least one (1) year, including
the holding period of any prior owner except an affiliate, would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of one percent (1%) of the then outstanding shares of the
Company's Common Stock (approximately 225,000 shares immediately after the
offering) or the average weekly trading volume of the Company's Common Stock
on the Nasdaq Stock Market during the four (4) calendar weeks preceding the
filing of a Form 144 with respect such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. Any person (or
persons whose shares are aggregated) who is not deemed to have been an
affiliate of the Company at any time during the ninety (90) days preceding a
sale, and who has beneficially owned shares for at least two (2) years
(including any period of ownership of preceding non-affiliated holders), would
be entitled to sell such shares under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, public information requirements or
notice requirements.

The Company plans to file, upon the effective date of the offering made
hereby, a registration statement on Form S-8 under the Act covering the
5,100,000 shares of Common Stock reserved for issuance under its 1998 Stock
Incentive Plan and the 1998 Employee Stock Purchase Plan. See "Management--
1998 Stock Incentive Plan" and "--1998 Employee Stock Purchase Plan." Shares
registered under such registration statement would be available for sale in
the open market in the future unless such shares are subject to vesting
restrictions with the Company or the contractual restrictions described above.

The Company has also agreed not to offer, sell, contract to sell or
otherwise dispose of shares of Common Stock or any securities convertible into
Common Stock for a period of thirty days after the date of this Prospectus,
without the prior written consent of the Donaldson, Lufkin & Jenrette
Securities Corporation, subject to certain limited exceptions.

56
<PAGE>

UNDERWRITING

Subject to certain terms and conditions contained in an underwriting
agreement (the "Underwriting Agreement"), a syndicate of underwriters named
below (the "Underwriters") for whom Donaldson, Lufkin & Jenrette Securities
Corporation and BT Alex. Brown Incorporated are acting as representatives (the
"Representatives"), have severally agreed to purchase from the Company and the
Selling Shareholders an aggregate of 6,000,000 shares of Common Stock. The
number of shares of Common Stock that each Underwriter has agreed to purchase
is set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...................
BT Alex. Brown Incorporated...........................................
---------
Total............................................................... 6,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. If any of
the shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such shares of Common Stock (other than the shares
of Common Stock covered by the over-allotment option described below) must be
so purchased.

Prior to this offering, there has been no established trading market for the
Common Stock. The initial public offering price to the public for the Common
Stock offered hereby will be determined by negotiation among the Company, the
Selling Shareholders and the Representatives. The factors to be considered in
determining the initial public offering price to the public will include the
history of and the prospects for the industry in which the Company competes,
the Company's management, the past and present operations of the Company, the
historical results of operations of the Company, the prospects for future
earnings of the Company, the general condition of the securities markets at
the time of this offering and the recent market prices of securities of
generally comparable companies.

The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.

The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public initially at the price to the public set forth on the
cover page of this Prospectus and to certain dealers (who may include the
Underwriters) at such price less a concession not to exceed $ per share. The
Underwriters may allow, and such dealers may reallow, discounts not in excess
of $ per share to any other Underwriter and certain other dealers.

57
<PAGE>

The Company has granted to the Underwriters an option to purchase up to an
aggregate of 900,000 additional shares of Common Stock at the initial public
offering price less underwriting discounts and commissions solely to cover
over-allotments, if any. Such option may be exercised in whole or in part from
time to time during the 30 day period after the date of this Prospectus. To
the extent that the Underwriters exercise such option, each of the
Underwriters will be committed, subject to certain conditions, to purchase a
number of option shares proportionate to such Underwriter's initial commitment
as indicated in the preceding table.

The Company, its officers and directors and all of the Company's
shareholders have agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exchangeable for Common Stock during the 180-day lockup period without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation,
provided that the Company may grant options and issue shares of Common Stock
upon the exercise of options under its 1998 Stock Incentive Plan and 1998
Employee Stock Purchase Plan. See "Shares Eligible for Future Sale."

The Company has agreed to pay to Donaldson, Lufkin & Jenrette Securities
Corporation a nonaccountable expense allowance of $750,000 in connection with
this offering. From time to time, in the ordinary course of business,
Donaldson, Lufkin & Jenrette Securities Corporation has provided and may in
the future provide financial advisory or other services to the Company. To
date, Donaldson, Lufkin & Jenrette Securities Corporation has not received any
fees in connection with such services.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Shareholders by Brobeck, Phleger & Harrison LLP, Palo
Alto, California. Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California, is acting as counsel to the Underwriters in connection
with this offering.

EXPERTS

The consolidated financial statements of ISE Labs, Inc. as of October 31,
1996 and 1997 and for each of the three years in the period ended October 31,
1997 included in this Prospectus have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.

The consolidated statements of operations, of shareholders deficit and of
cash flows, of Alphatec USA, Inc. for the years ended December 31, 1994, 1995
and 1996 included in this Prospectus have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.

58
<PAGE>

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission, a
Registration Statement on Form S-1 (together with all amendments, schedules
and exhibits thereto, the "Registration Statement") under the Securities Act
of 1933, as amended, with respect to the shares of Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Securities and Exchange Commission (the
"SEC"). For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete; with respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement,
including the exhibits thereto, may be inspected, without charge, at the
public reference facilities maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices at 500 West Madison Street, Chicago, IL 60661, and 7 World
Trade Center, New York, New York 10048. Copies of such material can also be
obtained from the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Registration Statement
may also be accessed through the EDGAR terminals in the SEC's public reference
facilities in Washington, D.C. or through the SEC's World Wide Web site at
http://www.sec.gov.

The Company intends to furnish holders of the Common Stock with annual
reports containing consolidated financial statements audited by an independent
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing interim unaudited financial information.

59
<PAGE>

ISE LABS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
ISE LABS, INC.

Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Income.......................................... F-4
Consolidated Statements of Shareholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7

ALPHATEC USA, INC.

Report of Independent Accountants.......................................... F-16
Consolidated Statements of Operations...................................... F-17
Consolidated Statements of Shareholders' Deficit........................... F-18
Consolidated Statements of Cash Flows...................................... F-19
Notes to Consolidated Financial Statements................................. F-20

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

Unaudited Pro Forma Combined Statement of Operations....................... F-28
Notes to Unaudited Pro Forma Combined Statement of Operations.............. F-29
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
ISE Labs, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of ISE Labs,
Inc. and its subsidiaries at October 31, 1996 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended October 31, 1997 in conformity with generally accepted accounting
principles. These consolidated financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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 the opinion expressed above.

/s/ Price Waterhouse LLP.

Price Waterhouse LLP
San Jose, California
December 12, 1997,
except for Note 10,
which is as of
April 2, 1998

F-2
<PAGE>

ISE LABS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
--------------- -----------
1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 4,655 $ 4,969 $ 7,694
Accounts receivable, net of allowance for
doubtful accounts and returns of $96, $1,127 and
$1,466 (unaudited).............................. 4,475 12,743 12,728
Inventories--raw materials....................... -- 78 232
Prepaid expenses and other current assets........ 115 1,086 765
Deferred income taxes............................ 102 254 317
------- ------- -------
Total current assets........................... 9,347 19,130 21,736
Property, plant and equipment, net................. 19,161 49,222 64,671
Intangible assets, net............................. -- 2,491 2,089
Other non-current assets........................... 1,487 -- --
------- ------- -------
Total.......................................... $29,995 $70,843 $88,496
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt.................................. $ -- $ 9,812 $ 9,812
Accounts payable................................. 1,145 5,668 11,103
Accrued liabilities.............................. 2,892 6,186 4,736
Income taxes payable............................. 876 1,080 3,817
Current portion of long-term debt................ 1,414 5,049 7,753
------- ------- -------
Total current liabilities...................... 6,327 27,795 37,221
Deferred income taxes.............................. 1,291 2,337 2,337
Long-term debt, less current portion............... 4,595 17,189 18,995
------- ------- -------
Total liabilities.............................. 12,213 47,321 58,553
------- ------- -------
Commitments (Note 7)
Shareholders' Equity:
Common stock, $0.001 par value; 50,000,000 shares
authorized; 17,500,000 shares issued and
outstanding..................................... 18 18 18
Additional paid in capital....................... 546 546 546
Retained earnings................................ 17,218 22,958 29,379
------- ------- -------
Total shareholders' equity..................... 17,782 23,522 29,943
------- ------- -------
Total.......................................... $29,995 $70,843 $88,496
======= ======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-3
<PAGE>

ISE LABS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED OCTOBER 31, APRIL 30,
------------------------- ------------------
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues....................... $22,321 $25,354 $35,532 $ 12,675 $ 40,538
Cost of revenues............... 8,953 12,094 17,950 6,917 19,065
------- ------- ------- -------- --------
Gross profit................... 13,368 13,260 17,582 5,758 21,473
------- ------- ------- -------- --------
Operating expenses:
Research and development..... 1,048 1,111 1,097 457 1,322
Selling, general and
administrative.............. 3,843 3,932 7,229 1,839 8,128
------- ------- ------- -------- --------
Total operating expenses... 4,891 5,043 8,326 2,296 9,450
------- ------- ------- -------- --------
Income from operations......... 8,477 8,217 9,256 3,462 12,023
------- ------- ------- -------- --------
Other income (expense):
Interest and other income,
net......................... 523 504 804 258 30
Interest expense............. (403) (530) (741) (282) (1,695)
------- ------- ------- -------- --------
Total other income
(expense)................. 120 (26) 63 (24) (1,665)
------- ------- ------- -------- --------
Income before income taxes..... 8,597 8,191 9,319 3,438 10,358
Provision for income taxes..... 3,667 3,343 3,579 1,320 3,937
------- ------- ------- -------- --------
Net income..................... $ 4,930 $ 4,848 $ 5,740 $ 2,118 $ 6,421
======= ======= ======= ======== ========
Net income per share:
Basic........................ $ 0.28 $ 0.28 $ 0.33 $ 0.12 $ 0.37
======= ======= ======= ======== ========
Diluted...................... $ 0.28 $ 0.28 $ 0.33 $ 0.12 $ 0.36
======= ======= ======= ======== ========
Shares used in computing net
income per share:
Basic........................ 17,500 17,500 17,500 17,500 17,500
======= ======= ======= ======== ========
Diluted...................... 17,500 17,500 17,500 17,500 18,001
======= ======= ======= ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-4
<PAGE>

ISE LABS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN RETAINED SHAREHOLDERS'
SHARES BALANCE CAPITAL EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
Balance as of October 31,
1994.................... 17,500,000 $18 $546 $ 7,440 $ 8,004
Net income............. -- -- -- 4,930 4,930
---------- --- ---- ------- -------
Balance as of October 31,
1995.................... 17,500,000 18 546 12,370 12,934
Net income............. -- -- -- 4,848 4,848
---------- --- ---- ------- -------
Balance as of October 31,
1996.................... 17,500,000 18 546 17,218 17,782
Net income............. -- -- -- 5,740 5,740
---------- --- ---- ------- -------
Balance as of October 31,
1997.................... 17,500,000 18 546 22,958 23,522
Net income
(unaudited)........... -- -- -- 6,421 6,421
---------- --- ---- ------- -------
Balance as of April 30,
1998 (unaudited)........ 17,500,000 $18 $546 $29,379 $29,943
========== === ==== ======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE>

ISE LABS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
-------------------------- -----------------
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income..................... $ 4,930 $ 4,848 $ 5,740 $ 2,118 $ 6,421
Reconciliation to net cash
provided by operating
activities:
Depreciation and
amortization................. 2,016 3,829 6,269 2,559 6,719
Deferred income taxes......... 243 141 242 196 (63)
Changes in assets and
liabilities:
Accounts receivable.......... (1,191) (1,212) (3,315) (728) 15
Inventory.................... -- -- 16 -- (154)
Prepaid expenses and other
current assets.............. 544 (53) (821) 26 321
Other non-current assets..... -- (1,212) (363) 1,487 --
Accounts payable............. 2,036 (1,216) 2,125 318 5,435
Accrued liabilities.......... 1,382 (167) 2,035 (1,856) (1,450)
Income taxes payable......... 236 997 857 (240) 2,737
------- ------- -------- ------- --------
Net cash provided by
operating activities....... 10,196 5,955 12,785 3,880 19,981
------- ------- -------- ------- --------
Cash flows from investing
activities:
Acquisition of property, plant
and equipment................. (7,984) (8,750) (14,132) (6,406) (14,025)
Proceeds from sale of
equipment..................... 254 725 1,245 1,245 --
Acquisition of certain assets
of Alphatec USA, net of cash
acquired...................... -- -- (25,036) -- --
------- ------- -------- ------- --------
Net cash used in investing
activities................. (7,730) (8,025) (37,923) (5,161) (14,025)
------- ------- -------- ------- --------
Cash flows from financing
activities:
Proceeds from loans............ 1,820 1,684 29,074 1,473 --
Repayments of long-term debt... (613) (1,089) (3,622) (910) (3,231)
------- ------- -------- ------- --------
Net cash provided by (used
in) financing activities... 1,207 595 25,452 563 (3,231)
------- ------- -------- ------- --------
Net increase (decrease) in cash
and equivalents................ 3,673 (1,475) 314 (718) 2,725
Cash and equivalents at
beginning of period............ 2,457 6,130 4,655 4,655 4,969
------- ------- -------- ------- --------
Cash and equivalents at end of
period......................... $ 6,130 $ 4,655 $ 4,969 $ 3,937 $ 7,694
======= ======= ======== ======= ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest......... $ 402 $ 501 $ 663 $ 282 $ 1,623
Cash paid for income taxes..... 2,630 2,205 1,525 945 1,300
Property, plant and equipment
acquired under capital
leases........................ -- -- -- -- 7,741
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-6
<PAGE>

ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:

GENERAL

ISE Labs, Inc. (the "Company") was incorporated in California in 1983 and is
engaged in providing testing and assembly of integrated circuits to customers
in the semiconductor industry. The Company has operations in Silicon Valley
and Manteca, California, and provides testing services to customers in Hong
Kong through its subsidiary, ISE Labs Hong Kong Limited.

Effective September 11, 1997, the Company acquired the semiconductor
assembly operations of Alphatec USA, Inc. and all of its equity in its wholly
owned subsidiary, Digital Testing Services, Inc., a provider of integrated
circuit test and engineering services to the semiconductor industry. The
acquisition was accounted for as a purchase. (See Note 2).

BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of ISE Labs, Inc.
and its wholly owned subsidiaries, ISE Labs Hong Kong Limited, ISE Technology,
Inc. and Digital Testing Services, Inc. All significant intercompany balances
and transactions have been eliminated on consolidation.

MANAGEMENT ESTIMATES AND ASSUMPTIONS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts and expenses during the reported period.
Actual results could differ from these estimates.

FOREIGN CURRENCY

The functional currency of the Company's Hong Kong operations is U.S.
dollars. Gains and losses from foreign currency translation are included in
the results of operations and have not been material to date. The Company has
not undertaken any foreign currency hedging activities.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original maturities
of three months or less on the date of purchase to be cash equivalents. Cash
equivalents also include various certificates of deposit with maturities of
three months or less totaling $1,101,000 and $0 at October 31, 1996 and 1997,
respectively.

REVENUE RECOGNITION

The Company recognizes revenue upon completion of assembly and test services
and shipment of the customer's products back to the customer.

INVENTORY

Inventories are stated at the lower of cost or market value, cost being
determined using the first in first out method.

F-7
<PAGE>

ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Depreciation on
equipment is computed using the straight-line method over estimated useful
lives of three to five years. Depreciation on buildings is computed using the
straight-line method over an estimated useful life of thirty one years.
Building improvements are amortized on a straight-line basis over the shorter
of the useful life of the improvement or the life of the building.

INTANGIBLE ASSETS

Goodwill represents the excess of the purchase price of the acquired
business over the fair value of the identifiable net assets acquired and is
amortized using the straight-line method over a period of five years.

Covenant not to compete is amortized using the straight-line basis over an
estimated useful life of three years.

LONG-LIVED ASSETS

Pursuant to Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
disposed of" ("SFAS 121"), the Company reviews long-lived assets, including
the identifiable intangible assets and goodwill for recoverability and will
reserve for impairment whenever events or changes in circumstances indicate
the carrying amount of the assets may not be fully recoverable. Recoverability
of these assets is determined by comparing the forecasted undiscounted net
cash flows of the operation to which the assets relate to the carrying amount
including associated intangible assets of such operation. If the operation is
determined to be unable to recover the carrying amount of its assets, then
intangible assets are written down first, followed by the other long-lived
assets of the operation, to fair value. Fair value is determined based on
discounted cash flows or appraised values, depending upon the nature of the
assets.

STOCK-BASED COMPENSATION

The Company accounts for stock-based employee compensation arrangements,
including options granted to non-employee directors, using the intrinsic value
method as prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations
thereof. Accordingly, compensation cost for stock options is measured as the
excess, if any, of the market price of the Company's stock at the date of
grant over the stock option exercise price. Options granted to consultants are
accounted for using the fair value method prescribed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). In addition, the Company complies with the disclosure provisions of
SFAS 123.

INCOME TAXES

The Company utilizes the asset and liability approach for financial
accounting and reporting of income taxes. Deferred income taxes reflect the
net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. No provision for U.S. deferred income taxes is made
for the undistributed earnings of the Company's foreign subsidiary to the
extent such earnings are deemed to be indefinitely reinvested in such
operations.

FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents
and accounts receivable. The Company places its cash and cash equivalents with
major financial institutions. The Company's sales are derived from customers
in the semiconductor industry. The Company performs ongoing credit evaluations
of its customers and provides reserves for potential credit losses when
considered necessary. To date, the Company has not experienced any significant
losses as a result

F-8
<PAGE>

ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

of uncollectible accounts. The Company holds product and certain equipment on
consignment from its customers while services are being performed and
maintains insurance against risk of loss.

The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate their fair values due to their relatively short
maturities. The carrying value of long-term debt approximates fair value as
the interest rates approximate current market rates of similar debt. The
Company does not hold or issue financial instruments for trading purposes.

NET INCOME PER SHARE

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). The Company has presented earnings per share for all periods to
comply with the new standard. SFAS 128 requires the presentation of basic and
diluted earnings per share. Basic net income per share is computed using the
weighted-average number of common shares outstanding during the period.
Diluted net income per share includes the effect of dilutive potential common
shares (options) issued during the period (using the treasury stock method).

The following table sets forth the computation of basic and diluted net
income per share:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
OCTOBER 30, ENDED APRIL 30,
----------------------- ---------------
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income............................. $ 4,930 $ 4,848 $ 5,740 $ 2,118 $ 6,421
======= ======= ======= ======= =======
Weighted average shares outstanding.... 17,500 17,500 17,500 17,500 17,500
Dilutive effect of stock options....... 501
------- ------- ------- ------- -------
Shares used in diluted computation..... 17,500 17,500 17,500 17,500 18,001
======= ======= ======= ======= =======
Basic earnings per share............... $ 0.28 $ 0.28 $ 0.33 $ 0.12 $ 0.37
======= ======= ======= ======= =======
Diluted earnings per share............. $ 0.28 $ 0.28 $ 0.33 $ 0.12 $ 0.36
======= ======= ======= ======= =======
</TABLE>

Anti-dilutive options totaling 2,549,600 at an exercise price of $7.80 were
excluded from the computation of diluted earnings per share for the year ended
October 31, 1997 as the exercise price was higher than the average fair value
of the common stock for the entire fiscal year.

Supplemental net income per share to reflect the impact of retirement of
debt from the proceeds of the initial public offering has not been presented,
as the per share amounts are not materially different from those showing on
the income statement.

STOCK SPLIT

On November 4, 1997, the Company implemented a 54.524948 for 1 stock split.
The share and per share amounts have been retroactively restated for all
periods presented.

COMPREHENSIVE INCOME

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("SFAS 130"). This statement will be
effective for the Company's fiscal year ending October 31, 1999. The statement
establishes presentation and disclosure requirements for reporting
comprehensive income. Comprehensive income includes charges or credits to
equity that are not the result of transactions with shareholders. The Company
plans to adopt the disclosure requirements and report

F-9
<PAGE>

ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

comprehensive income as part of the Consolidated Statements of Shareholders'
Equity as permitted under SFAS 130, and currently expects there to be no
material impact on the Company's financial statements disclosures as a result
of the adoption of this new accounting standard.

SEGMENT REPORTING

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This statement will be effective for the Company's fiscal year
ending October 31, 1999. The statement requires the Company to report certain
financial information about operating segments in financial statements of the
Company and in condensed financial statements for interim periods. It also
requires that the Company report certain information about its services, the
geographic areas in which it operates and its major customers. The method
specified in SFAS 131 for determining what information to report is referred
to as the "management approach". The management approach is based on the way
that management organizes the segments within the enterprise for making
operating decisions and assessing performance. The adoption of SFAS 131 will
not have a significant impact on segment disclosures of the Company.

INTERIM RESULTS (UNAUDITED)

The accompanying consolidated balance sheet as of April 30, 1998, the
consolidated statements of income and of cash flows for the six months ended
April 30, 1997 and 1998 and the consolidated statement of shareholders' equity
for the six months ended April 30, 1998 are unaudited.

In the opinion of management, these statements have been prepared on the
same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the results of interim periods. The data disclosed in notes to
the consolidated financial statements for these periods are unaudited.

NOTE 2--ACQUISITION OF ALPHATEC USA:

Effective September 11, 1997, the Company acquired certain assets of the
semiconductor assembly operations of Alphatec USA, Inc. ("Alphatec") and all
its equity in its wholly owned subsidiary Digital Testing Services Inc.
("DTS") a provider of integrated circuit test and engineering services to the
semiconductor industry. The transaction was accounted for as a purchase. The
consolidated financial statements of the Company include the results of
operations of Alphatec since the date of acquisition. The purchase price was
approximately $31.2 million, including acquisition costs. In connection with
the acquisition, the Company assumed certain liabilities and acquired cash of
Alphatec resulting in a net cash payment of approximately $25.0 million to
Alphatec. The purchase price was allocated based on an independent appraisal
of the property, plant and equipment to the fair value of assets acquired
which included $28.6 million of tangible assets. The excess of the purchase
price over the fair value of the net tangible assets acquired was allocated to
goodwill and a covenant not to compete of approximately $1.6 million and $1.0
million, respectively. Goodwill is being amortized over five years and the
covenant not to compete over three years, both using the straight-line basis.

The unaudited consolidated results of operations on a pro forma basis for
the years ended October 31, 1996 and 1997 prepared on the basis as if Alphatec
were acquired at the beginning of the Company's fiscal years 1996 and 1997 are
as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------
1996 1997
<S> <C> <C>
Revenues............................................ $86,347 $ 74,602
Net income (loss)................................... 1,028 (13,162)
Net income (loss) per share (Basic and Diluted)..... 0.06 (0.75)
</TABLE>

F-10
<PAGE>

ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 3--BALANCE SHEET COMPONENTS:

<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
------------------ -----------
1996 1997 1998
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Property, plant and equipment:
Machinery and equipment.................. $ 24,041 $ 55,036 $ 75,284
Furniture and fixtures................... 95 297 339
Buildings................................ 4,665 7,445 7,445
Building improvements.................... 265 1,182 1,189
-------- -------- --------
29,066 63,960 84,197
Less accumulated depreciation and
amortization............................ (11,491) (17,124) (21,972)
-------- -------- --------
17,575 46,836 62,225
Land..................................... 1,586 2,386 2,386
-------- -------- --------
$ 19,161 $ 49,222 $ 64,671
======== ======== ========
Accrued liabilities:
Accrued employee compensation............ $ 2,217 $ 2,313 $ 2,108
Other.................................... 675 3,873 2,628
-------- -------- --------
$ 2,892 $ 6,186 $ 4,736
======== ======== ========
</TABLE>

NOTE 4--DEBT:

<TABLE>
<CAPTION>
OCTOBER 31,
-----------------
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Equipment loans at prime rate (8.5% at October 31, 1997),
due through 2002........................................ $ 3,152 $ --
Mortgage loan at prime rate (8.5% at October 31, 1997),
due through August 2003................................. 2,857 2,454
Borrowings under line of credit of $8 million at 8.5% per
annum, which expires on September 30, 1998,............. -- 4,412
Note payable at prime rate plus applicable margin up to
0.75% (9.0% at October 31, 1997), due March 1998........ -- 5,400
Note payable at 9.97% per annum, due through April 1999.. -- 534
Note payable at prime rate (8.5% at October 31, 1997),
due through January 2001................................ -- 4,650
Note payable at prime rate plus applicable margin up to
0.75% (9.0% at October 31, 1997), due through September
2002.................................................... -- 14,600
------- --------
6,009 32,050
Current portion of long term debt and short term debt.... (1,414) (14,861)
------- --------
Long term debt, less current portion..................... $ 4,595 $ 17,189
======= ========
</TABLE>

Borrowings under the above arrangements are secured by all assets of the
Company and require compliance with certain financial tests and ratios.

F-11
<PAGE>

ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Under the terms of the 9.0% Note Payable due 2002, beginning in March 1998
and continuing until June 1999, the Company is required to make payments on
account equaling 25% of the Company's consolidated net income after taxes
excluding depreciation and amortization for the preceding quarter, until the
Company has made principal payments totaling $6 million. The Company is also
required to make payments to bring the total principal paid to $6 million on
the earlier of June 1999, on the sale of equity securities of more than $10
million or in the event of sale of certain property, plant and equipment.

The following table summarizes future minimum principal payments on long
term debt as of October 31, 1997 (in thousands):

<TABLE>
<CAPTION>
FISCAL YEAR ENDING OCTOBER 31,
<S> <C>
1998................................................................ $ 5,049
1999................................................................ 5,016
2000................................................................ 4,750
2001................................................................ 3,789
2002................................................................ 3,172
Thereafter.......................................................... 462
-------
$22,238
=======
</TABLE>

NOTE 5--STOCK OPTIONS:

In October 1997, the Board of Directors and shareholders adopted the 1997
Stock Option/Stock Issuance Plan (the "1997 Plan") which provides for granting
of incentive stock options ("ISOs") and nonqualified stock options ("NSOs") to
purchase shares of common stock to employees, consultants and advisors of the
Company. In accordance with the 1997 Plan, the stated exercise price shall be
not less than 100% and 85% of the estimated fair market value of common stock
on the date of grant for ISOs and NSOs, respectively, as a determined by the
Board of Directors. The 1997 Plan provides that the options shall be
exercisable over a period not to exceed ten years. Options granted under the
1997 Plan are immediately exercisable and generally vest 25% one year after
the date of grant and in equal quarterly amounts thereafter for the subsequent
12 quarters.

The following table summarizes activities under the 1997 Plan:

<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
AVAILABLE STOCK OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
<S> <C> <C> <C>
Balance at October 31, 1996................. -- -- --
Options authorized.......................... 4,500,000 -- --
Options granted............................. (2,549,600) 2,549,600 $ 7.80
---------- ---------
Balance at October 31, 1997................. 1,950,400 2,549,600 7.80
Options granted (unaudited)................. (353,200) 353,200 10.11
---------- ---------
Balance at April 30, 1998 (unaudited)....... 1,597,200 2,902,800 8.08
========== =========
Options vested at October 31, 1997.......... --
</TABLE>

All options were granted with exercise prices equal to the estimated fair
market value of the Company's Common Stock at the date of grant, as determined
by its board of directors.

The following table summarizes the stock options outstanding and exercisable
at October 31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER CONTRACTUAL NUMBER CONTRACTUAL
OUTSTANDING LIFE EXERCISABLE LIFE
RANGE OF EXERCISE PRICES AT 10/31/97 (YEARS) AT 10/31/97 (YEARS)
<S> <C> <C> <C> <C>
$7.80...................... 2,549,600 10 2,549,600 10
</TABLE>

F-12
<PAGE>

ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FAIR VALUE DISCLOSURES

The weighted average minimum value of options granted during fiscal 1997 was
$1.89 per share.

The minimum value of options at date of grant was estimated using the Black-
Scholes model with the following assumptions:
<TABLE>
<CAPTION>
1997
<S> <C>
Expected life (years)................................................. 5
Risk-free rate........................................................ 5.56%
Dividend yield........................................................ --
</TABLE>

Had compensation cost for the Company's stock options been determined based
on the minimum value of such options at the grant date as prescribed by SFAS
No. 123, the impact on the Company's net income and net income per share for
the year ended October 31, 1997 would not have been materially different.

NOTE 6--INCOME TAXES:

Consolidated income before income taxes includes non U.S. income (loss) of
approximately $(32,000), $1,338,000, and $3,773,000 in fiscal 1995, 1996 and
1997, respectively.

The provision for income taxes for the years ended October 31, 1995, 1996
and 1997 consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
31,
---------------------
1995 1996 1997
<S> <C> <C> <C>
Current:
United States........................................ $3,424 $2,740 $2,639
Foreign.............................................. -- 105 46
------ ------ ------
3,424 2,845 2,685
------ ------ ------
Deferred:
United States........................................ 240 514 551
Foreign.............................................. 3 (16) 343
------ ------ ------
243 498 894
------ ------ ------
Total.................................................. $3,667 $3,343 $3,579
====== ====== ======
</TABLE>

The Company's net deferred tax assets and liabilities consist of the
following (in thousands):

<TABLE>
<CAPTION>
OCTOBER 31,
----------------
1996 1997
<S> <C> <C>
Deferred tax assets:
Provisions and reserves................................. $ 102 $ 254
Deferred tax liabilities:
Depreciation............................................ (934) (1,328)
Unremitted foreign income............................... (357) (1,009)
------- -------
(1,291) (2,337)
------- -------
Net deferred taxes...................................... $(1,189) $(2,083)
======= =======
</TABLE>

F-13
<PAGE>

ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following is a reconciliation of the Company's effective tax rate to the
U.S. federal income tax rate of 34%:

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------
1995 1996 1997
<S> <C> <C> <C>
Tax at statutory rates............................ 34% 34% 34 %
State income tax, net of federal benefit.......... 6% 6% 6 %
Benefit of lower tax rate on foreign income....... -- -- (2)%
Other............................................. 3% 1% --
------- ------- --------
43% 41% 38 %
======= ======= ========
</TABLE>

The Company has generated approximately $2.6 million of income from foreign
operations for which no U.S. tax has been provided. These earnings are
considered to be permanently reinvested outside of the United States.

NOTE 7--COMMITMENTS:

The Company leases office space and equipment under noncancelable operating
lease agreements. The future minimum lease payments under these leases as of
October 31, 1997 were as follows (in thousands):

<TABLE>
<CAPTION>
OPERATING
FISCAL YEAR ENDING OCTOBER 31, LEASE PAYMENTS
<S> <C>
1998.......................................................... $ 3,999
1999.......................................................... 4,006
2000.......................................................... 3,346
2001.......................................................... 1,228
2002.......................................................... 85
-------
$12,664
=======
</TABLE>

Rental expense for the years ended October 31, 1995, 1996 and 1997 was
$353,000, $124,000 and $516,000, respectively.

The Company rents certain of its owned land and buildings under a
noncancelable operating lease which expires in July 1998. Total rental income
related to this lease was $317,000, $291,000 and $226,000 for the years ended
October 31, 1995, 1996 and 1997, respectively, and is included in other
income. Rents receivable under this lease aggregate $113,000 for the year
ending October 31, 1998.

NOTE 8--MAJOR CUSTOMERS:

Revenues from one customer represented approximately 30% and 16% of total
revenues for the years ended October 31, 1995 and 1996, respectively. Revenues
from another customer represented approximately 21% and 30% of total revenues
for the years ended October 31, 1996 and 1997, respectively. Receivables from
two customers represented 24% and 26% of total receivables at October 31,
1996. Receivables from three customers represented 10%, 13% and 23% of total
receivables at October 31, 1997.

F-14
<PAGE>

ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 9--GEOGRAPHIC INFORMATION:

The Company's operations by geographical region were as follows (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------
1995 1996 1997
<S> <C> <C> <C>
Revenues:
United States..................................... $22,042 $19,929 $24,784
Hong Kong......................................... 279 5,425 10,748
------- ------- -------
$22,321 $25,354 $35,532
======= ======= =======
Operating income (loss):
United States..................................... $ 8,509 $ 6,879 $ 5,483
Hong Kong......................................... (32) 1,338 3,773
------- ------- -------
$ 8,477 $ 8,217 $ 9,256
======= ======= =======
<CAPTION>
OCTOBER 31,
---------------
1996 1997
<S> <C> <C> <C>
Identifiable assets:
United States..................................... $21,695 $57,840
Hong Kong......................................... 8,300 13,003
------- -------
$29,995 $70,843
======= =======
</TABLE>

Revenues are designated to the region which records the sales.

NOTE 10--SUBSEQUENT EVENTS:

NON EMPLOYEE DIRECTORS

On December 31, 1997, the Company appointed two outside directors, one of
whom is related to the Company's President and Chief Executive Officer. Upon
appointment, each non-employee Board member received a non-qualified stock
option grant for 52,500 shares of the Company's common stock at $10.40 per
share.

One of the non-employee directors of the Company is the President, Chief
Executive Officer and Chairman of the Board of S3 Incorporated. In the years
ended October 31, 1995, 1996, 1997 and the first six months of fiscal 1998,
the Company sold approximately $1,907,000, $1,635,000, $2,552,000, and
$1,053,000 (unaudited), respectively, of products and services to S3
Incorporated. The accounts receivable from S3 Incorporated was approximately
$372,000, $646,000 and $237,000 (unaudited) at October 31, 1996, and 1997 and
April 30, 1998, respectively.

EMPLOYEE STOCK PLANS

On April 2, 1998, the Company's shareholders approved the 1998 Stock
Incentive Plan (the "1998 Plan") to succeed the Company's 1997 Plan. A total
of 4,500,000 shares of common stock have been authorized for issuance under
the 1998 Plan, including the options granted and outstanding under the 1997
Plan. The shareholders also approved the 1998 Employee Stock Purchase Plan
(the "Stock Purchase Plan"). A total of 600,000 shares are reserved for future
issuance under the Stock Purchase Plan, which will become effective upon the
closing of the initial public offering.

Under the 1998 Plan, each individual who first becomes a non-employee Board
member at any time after the Underwriting Date will automatically receive an
option grant for 25,000 shares on the date such individual joins the Board,
provided such individual has not been in the prior employ of the Company. In
addition, on the date of each Annual Stockholders Meeting held after the
Underwriting Date, each non-employee Board member will automatically be
granted an option to purchase 2,500 shares of Common Stock, provided such
individual has served on the Board for at least six months.

F-15
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholder of
Alphatec USA, Inc.

In our opinion, the accompanying consolidated statements of operations, of
shareholders' deficit and of cash flows of Alphatec USA, Inc. (a wholly-owned
subsidiary of Alphatec Electronics Co. Ltd.) and its subsidiary, present
fairly, in all material respects, the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of Alphatec USA's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, 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 the
opinion expressed above.

/s/ Price Waterhouse LLP

Price Waterhouse LLP
San Jose, California
February 7, 1997

F-16
<PAGE>

ALPHATEC USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -----------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues......................... $38,128 $55,038 $61,521 $30,342 $ 21,589
Cost of revenues................. 38,328 53,332 61,795 29,966 25,217
------- ------- ------- ------- --------
Gross profit (loss).............. (200) 1,706 (274) 376 (3,628)
------- ------- ------- ------- --------
Operating expenses:
Research and development....... 267 332 463 281 451
Selling and marketing.......... 959 1,228 587 343 145
General and administrative..... 1,038 3,412 1,952 1,580 3,421
Impairment of property, plant
and equipment................. -- -- -- -- 9,348
------- ------- ------- ------- --------
Total operating expenses..... 2,264 4,972 3,002 2,204 13,365
------- ------- ------- ------- --------
Loss from operations............. (2,464) (3,266) (3,276) (1,828) (16,993)
Interest expense, net............ 914 412 1,624 570 1,249
------- ------- ------- ------- --------
Net loss......................... $(3,378) $(3,678) $(4,900) $(2,398) $(18,242)
======= ======= ======= ======= ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-17
<PAGE>

ALPHATEC USA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1993....................... 5,000,000 $5,000 $ -- $ (4,324) $ 676
Net loss.................... -- -- -- (3,378) (3,378)
--------- ------ ------- -------- --------
Balance at December 31,
1994....................... 5,000,000 5,000 -- (7,702) (2,702)
Conversion of shareholder
debt, accounts payable and
accrued interest to
equity..................... -- -- 14,704 -- 14,704
Additional contributed
capital.................... -- -- 15,000 -- 15,000
Net loss.................... -- -- -- (3,678) (3,678)
--------- ------ ------- -------- --------
Balance at December 31,
1995....................... 5,000,000 5,000 29,704 (11,380) 23,324
Interest on loan from
related party contributed
to capital................. -- -- 191 -- 191
Net loss.................... -- -- -- (4,900) (4,900)
--------- ------ ------- -------- --------
Balance at December 31,
1996....................... 5,000,000 5,000 29,895 (16,280) 18,615
Interest on loan from
related party contributed
to capital (unaudited)..... -- -- 123 -- 123
Net loss (unaudited)........ -- -- -- (18,242) (18,242)
--------- ------ ------- -------- --------
Balance at June 30, 1997
(unaudited)................ 5,000,000 $5,000 $30,018 $(34,522) $ 496
========= ====== ======= ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-18
<PAGE>

ALPHATEC USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- ------------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss..................... $(3,378) $ (3,678) $ (4,900) $ (2,398) $(18,242)
Adjustments to reconcile net
loss to net cash flows from
operating activities:
Depreciation and
amortization.............. 1,892 3,739 6,806 3,060 3,949
Amortization of license and
loan fees................. 68 182 61 30 30
Loss (gain) on sale of
equipment................. (56) 34 186 -- --
Interest accrued on advance
from related party........ 387 -- 191 -- 123
Impairment of property,
plant and equipment....... -- -- -- -- 9,348
Changes in assets and
liabilities, net of
effects from acquisition
of Digital Testing
Services, Inc.
Accounts receivable....... 297 (3,172) (590) (493) 1,599
Receivable from related
party.................... (61) (885) 584 (105) 993
Inventories............... 1,244 (3,125) 1,628 654 2,609
Prepaid expenses and other
assets................... 157 (659) (2,454) 5 2,572
Accounts payable.......... (2,508) 8,005 (1,005) 128 1,103
Accrued expenses.......... 349 122 (2,068) 4,096 693
------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities.............. (1,609) 563 (1,561) 4,977 4,777
------- -------- -------- -------- --------
Cash flows from investing
activities:
Acquisition of property,
plant and equipment......... (3,729) (13,126) (11,249) (17,171) (3,982)
Proceeds from sale of
equipment................... 205 1,877 820 -- --
Acquisition of Digital
Testing Services, Inc. net
of cash acquired............ -- (5,509) -- -- --
------- -------- -------- -------- --------
Net cash used in
investing activities.... (3,524) (16,758) (10,429) (17,171) (3,982)
------- -------- -------- -------- --------
Cash flows from financing
activities:
Borrowings from
shareholders................ 3,513 -- -- -- --
Net borrowings (repayments)
under revolving line of
credit...................... 292 5,090 104 (1,105) (1,887)
Proceeds from (payments on)
equipment term loan......... 573 (122) 5,669 6,084 702
Payment of capital lease
obligations................. (120) (543) (1,473) (380) (244)
Advance from related party... 523 -- 4,477 4,477 1,325
Proceeds from additional
contributed capital......... -- 15,000 -- -- --
------- -------- -------- -------- --------
Net cash provided by
(used in) financing
activities.............. 4,781 19,425 8,777 9,076 (104)
------- -------- -------- -------- --------
Net (decrease) increase in
cash......................... (352) 3,230 (3,213) (3,118) 691
Cash and cash equivalents at
beginning of period.......... 353 1 3,231 3,231 18
------- -------- -------- -------- --------
Cash and cash equivalents at
end of period................ $ 1 $ 3,231 $ 18 $ 113 $ 709
======= ======== ======== ======== ========
Supplemental disclosure of
cash flow information:
Cash paid during the period
for interest................ $ 486 $ 605 $ 1,433 $ 570 $ 1,249
Obligations incurred under
capitalized leases.......... 800 1,670 -- -- 3,869
Conversion of shareholder
debt and accounts payable to
equity...................... -- 14,704 191 -- 123
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-19
<PAGE>

ALPHATEC USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--ALPHATEC USA:

ALPHATEC USA

Alphatec USA, Inc. ("Alphatec USA"), formerly Indy Electronics, Inc., was
incorporated in California in March 1993. Alphatec USA performs semiconductor
assembly on a subcontract basis for semiconductor manufacturers. On May 12,
1995 Alphatec USA acquired Digital Testing Services, Inc. ("DTS"), which
provides integrated circuit test and engineering services (see Note 3).

Alphatec USA is a wholly-owned subsidiary of the Alphatec Electronics Co.
Ltd. ("Alphatec"), a company based in Thailand. Alphatec has several
subsidiaries and a number of related companies. These companies are related
through certain shared ownership, management and a common significant
shareholder. The common significant shareholder was the sole shareholder of
Alphatec USA prior to 1995. During 1995, Alphatec commenced the process of
acquiring Alphatec USA. The acquisition was accomplished in two steps. In the
first step, in March 1995, Alphatec USA's then sole shareholder transferred
the outstanding stock to Janall Investment Limited ("Janall") a Hong Kong
investment company. In the second step, Alphatec acquired the outstanding
stock of Alphatec USA from Janall in July 1996. The accompanying financial
statements of Alphatec USA do not reflect any impact of the above noted
changes in ownership, as such changes represented transfer of entities under
common control.

Certain management functions of Alphatec USA are shared with those of
Alphatec and other related companies. As disclosed in Note 4, an allocation of
all joint operational costs has been charged to the Company. The charges are
based on a proportional cost allocation which management believes is
reasonable. Management does not believe that such costs on a stand-alone basis
would have been materially different from the costs allocated.

In conjunction with the above noted changes in ownership of Alphatec USA,
outstanding debt and interest totaling approximately $10 million payable to
Alphatec USA's sole shareholder in 1995 were converted to contributed capital.
Additionally, approximately $15 million of cash was contributed as capital by
Alphatec and approximately $4.7 million of Alphatec USA's accounts payable to
Alphatec were canceled as additional contribution of capital by Alphatec.

ACQUISITION OF ALPHATEC USA (UNAUDITED)

Effective September 11, 1997, ISE Labs, Inc. ("ISE") acquired the
semiconductor assembly operations of Alphatec USA and all of its equity in
DTS. (Note 11). Pursuant to Securities and Exchange Commission financial
statement requirements, an audited balance sheet of Alphatec USA has not been
presented as Alphatec USA's balances were included in the consolidated balance
sheet of ISE Labs, Inc. at October 31, 1997.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of Alphatec USA
and its wholly owned subsidiary, DTS. All significant intercompany accounts
and transactions have been eliminated.

REVENUE RECOGNITION

Revenues from integrated circuit test and assembly foundry services are
recognized upon shipment of product back to customer.

F-20
<PAGE>

ALPHATEC USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

CASH AND CASH EQUIVALENTS

Alphatec USA considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out basis.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Depreciation and
amortization is computed using the straight-line method based upon the
estimated useful lives of the assets, generally five years for equipment and
thirty years for buildings, or the lease term of the respective assets, as
applicable.

RESTRICTED CASH

During 1995, Alphatec USA entered into an equipment leasing agreement for
which an irrevocable standby letter of credit is required. Accordingly,
Alphatec USA has maintained a $420,000 certificate of deposit with a lending
company to collateralize the letter of credit. The deposit cannot be withdrawn
until the leasing obligations have been repaid.

LONG-LIVED ASSETS

Pursuant to Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
disposed of" ("SFAS 121"), the Company reviews long-lived assets, including
the identifiable intangible assets and goodwill for recoverability and will
reserve for impairment whenever events or changes in circumstances indicate
the carrying amount of the assets may not be fully recoverable. Recoverability
of these assets is determined by comparing the forecasted undiscounted net
cash flows of the operation to which the assets relate, to the carrying amount
including associated intangible assets of such operation. If the operation is
determined to be unable to recover the carrying amount of its assets, then
intangible assets are written down first, followed by the other long-lived
assets of the operation, to fair value. Fair value is determined based on
discounted cash flows or appraised values, depending upon the nature of the
assets.

INCOME TAXES

Alphatec USA provides for income taxes using an asset and liability approach
which requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities.

USE OF ESTIMATES

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

INTERIM RESULTS (UNAUDITED)

The consolidated statements of operations and of cash flows for the six
months ended June 30, 1996 and 1997 and the consolidated statements of
shareholders' deficit for the six months ended June 30, 1997 are

F-21
<PAGE>

ALPHATEC USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

unaudited. In the opinion of management, these statements have been prepared
on the same basis as the audited financial statements and include all
adjustments, consisting of only normal recurring adjustments, necessary for
the fair presentation of the results for the interim periods. The data
disclosed in the consolidated financial statements at such dates and for such
periods are unaudited.

NOTE 3--ACQUISITION OF DIGITAL TESTING SERVICES, INC.:

On May 12, 1995, Alphatec USA acquired Digital Testing Services, Inc.
("DTS"), which provides integrated circuit test and engineering services to
semiconductor manufacturers. The purchase price was approximately $9.8
million, including acquisition costs of approximately $100,000. The
acquisition was accounted for as a purchase. The purchase price was allocated
to the acquired assets and liabilities based upon an estimate of their fair
market values which included an independent appraisal of the equipment, as of
the acquisition date as follows (in thousands):

<TABLE>
<S> <C>
Cash................................................................ $ 4,300
Accounts receivable................................................. 2,020
Equipment........................................................... 9,070
Other assets........................................................ 80
Accounts payable and accrued expenses............................... (4,041)
Capitalized lease obligations....................................... (1,620)
-------
$ 9,809
=======
</TABLE>

The results of operations of DTS are included with those of Alphatec USA for
periods subsequent to the date of the acquisition. Set forth below is the
unaudited pro forma combined summary of operations of Alphatec USA and DTS for
1994 and 1995 as though the acquisition had been made at the beginning of 1994
(in thousands).

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995
<S> <C> <C>
Revenues............................................... $ 50,200 $ 59,900
Gross profit........................................... 6,650 3,500
Income (loss) from operations.......................... 1,850 (1,700)
Net income (loss)...................................... 50 (2,180)
</TABLE>

The acquisition was financed with a $10 million capital contribution
received by Alphatec USA in March 1995 from Alphatec's sole shareholder. The
1994 pro forma combined results of operations shown above reflect imputed
interest charges of approximately $800,000 resulting from this additional
financing. No imputed interest charges were included in the 1995 pro forma
operating results as the debt was converted to equity (see Note 1).

In connection with the purchase, six key employees and former DTS
shareholders signed long-term employment contracts. These employment contracts
provide for profit sharing payments to these key employees of a certain
percentage of DTS' pretax income, as defined, for the years 1995 to 1999. The
percentage increases over that period from 20% to 40%. The 1994 and 1995 pro
forma combined results of operations shown above reflect payments charged to
compensation expense totaling $1,050,000 and $1,120,000, respectively, to
these former shareholders. In 1996, the related charge to compensation expense
was $1,853,000.

F-22
<PAGE>

ALPHATEC USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 4--RELATED PARTY TRANSACTIONS:

During 1994, 1995 and 1996, Alphatec USA entered into the following
transactions with its shareholder and the Alphatec Group (in thousands):

<TABLE>
<CAPTION>
ALPHATEC GROUP
--------------------
NOTES PAYABLE TO
SHAREHOLDER ADVANCE RECEIVABLES
<S> <C> <C> <C>
Balances due (to)/from related parties
at December 31, 1993................... $(5,618) $ -- $ 43
Borrowings from shareholder, including
interest of $387....................... (3,900) -- --
Advances to Alphatec USA ............... -- (523) --
Director's fees......................... (120) -- --
Administrative fees..................... -- -- (262)
Equipment purchases..................... -- -- (660)
Equipment sales......................... -- -- 351
Net payments............................ 120 -- 632
------- ------- -------
Balances due (to)/from related party at
December 31, 1994...................... (9,518) (523) 104
Borrowings from shareholder............. (5,186) -- --
Conversion of debt to equity............ 14,704 -- --
Director's fees......................... (120) -- --
Allocation of joint operational costs
incurred by the Company................ -- -- 589
Net advances paid by the Company........ -- -- 1,000
Net payments............................ 120 -- (104)
------- ------- -------
Balances due (to)/from related party at
December 31, 1995...................... -- (523) 1,589
Advance to/(from) related party......... -- (5,000) 1,000
Director's fees......................... (180) -- --
Allocation of joint operational costs
incurred by the Company................ -- -- 816
Net advances paid by the Company........ -- -- 1,600
Net payments............................ 180 523 (4,000)
------- ------- -------
Balances due (to)/from related party at
December 31, 1996...................... $ -- $(5,000) $ 1,005
======= ======= =======
</TABLE>

Alphatec USA has undertaken to act as an agent for Alphatec to assist with
the acquisition and implementation of MQUAD(C) manufacturing equipment on its
behalf and is to receive full reimbursement for such activities. Additionally,
during 1994, Alphatec USA entered into an agreement with Alphatec to develop
the Ball Grid Array ("BGA") package and the assembly processes necessary to
manufacture the package for both companies. Projected costs for development of
the new package have been divided equally between the companies. During 1996,
Alphatec USA recognized $523,000 as contract development revenue related to
the project.

Notes payable to the shareholder accrued interest at rates ranging from 10%
to 14% during 1994. All such interest was accrued as additional notes payable.
The debt and interest payable to the shareholder were converted to equity in
1995.

In June 1996, Alphatec USA obtained an interest free advance of $5 million
from the Alphatec Group. The advance is subordinated to the bank debt and no
repayment terms have been specified. Interest is imputed at 7% and recorded as
additional contributed capital.

During 1994, Alphatec USA and Alphatec jointly purchased a technology
license for the MQUAD(C) package assembly technology for $1 million, of which
$500,000 was paid for by Alphatec as its share of the cost of the license. The
cost of the license is being amortized on a straight-line basis over the
estimated economic life of the license of seven years.

F-23
<PAGE>

ALPHATEC USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 5--BORROWINGS:

In December 1995, Alphatec USA entered into a joint revolving line of credit
and two equipment term loans with two institutions. The revolving line of
credit was renewed in 1996 and matured in April 1997.

Under the terms of the $10 million revolving line of credit, with $5 million
to be paid severally by each institution, the outstanding balance is limited
to 80% of eligible accounts receivable plus 40% of eligible inventory. The
inventory advance is limited to $2 million. The line of credit requires
monthly interest payments which accrue at 1.25%, as amended, in excess of the
higher of the prime rate of either institution per annum. The interest rates
for the revolving line of credit at December 31, 1995 and 1996 were both 9.5%.

Under the terms of the first equipment term loan facility, the outstanding
balance is limited to an amount equal to 80% of the cost of new equipment, in
a total aggregate amount not to exceed $5 million. Under the terms of the
second equipment term loan facility, the outstanding balance is limited to an
amount equal to 70% of the "forced sale value", as defined, of specified
equipment, in a total aggregate amount not to exceed $5 million. The balances
of both term loans are being repaid monthly at a rate equal to 1/60 of the
original loan balances. The maturity dates are thirty-six months from the end
of the draw down period and thirty-six months from the closing date for the
first and second term loans, respectively. Balloon payments equivalent to any
outstanding balances are due at maturity.

Both equipment term loans require monthly interest payments which accrue at
1.75% in excess of the higher of the prime rate of either institution per
annum. The interest rates for the equipment term loans at December 31, 1996
and 1995 were both 9.5%.

On a consolidated basis, Alphatec USA is required to maintain certain
covenants, including a minimum tangible net worth, quick ratio and cash flow
coverage, as defined. Under the terms of the revolving credit facility and the
equipment term loan facilities, upon an event of default all amounts, at the
bank's discretion, become immediately due and payable. At December 31, 1995
and 1996, Alphatec USA was in default of certain covenants of the term loan.

1993 AND 1994 CREDIT FACILITIES

Under agreements with financial institutions dated October 1993 and June
1994, Alphatec USA borrowed funds under a revolving line of credit and an
equipment term loan at interest rates of prime plus 1.5% to 1.75%
(approximately 11% at December 31, 1994). Except for the first equipment term
loan, as discussed above, the agreements were terminated and the balances
repaid in June 1994 and March 1995, respectively.

F-24
<PAGE>

ALPHATEC USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 6--INCOME TAXES:

There was no provision for income taxes for the years ended December 31,
1994, 1995 and 1996 and the six months ended June 30, 1997 because of the
losses incurred. Deferred tax assets at December 31, 1995 and 1996 were as
follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
<S> <C> <C>
Net operating loss....................................... $ 2,060 $ 4,539
Reserves and accruals.................................... 742 769
------- -------
2,802 5,308
Valuation Allowance...................................... (2,802) (5,308)
------- -------
$ -- $ --
======= =======
</TABLE>

Based on factors which include a history of losses and the lack of carryback
capacity, it is more likely than not that Alphatec USA will not be able to
realized its deferred tax assets and thus a full valuation reserve has been
recorded.

At December 31, 1996, Alphatec USA had net operating loss carryforwards
available to reduce future taxable income of approximately $12 million for
federal income tax purposes. Alphatec USA's net operating loss carryforwards
expire in different years through 2011. The income tax benefit from
utilization of net operating loss carryforwards is limited due to cumulative
stock ownership changes of more than 50% over a three-year period.

NOTE 7--SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISKS:

Financial instruments which potentially subject Alphatec USA to
concentration of credit risk consist principally of bank deposits and trade
accounts receivable. Alphatec USA places its cash and cash equivalents in
checking and market rate accounts with major financial institutions and has
not recorded any losses related to these investments. Alphatec USA's assembly
and test foundry service revenue is received from semiconductor manufacturers
located primarily in the United States. Alphatec USA performs ongoing
evaluations of its customers' financial conditions and maintains allowances
for potential credit losses.

Two customers accounted for 43% and 11% of revenues for the year ended
December 31, 1994. Two customers accounted for 24% and 14% of revenues for the
year ended December 31, 1995. One customer accounted for 20% of revenues for
the year ended December 31, 1996. Revenues from export sales for the year
ended December 31, 1994, 1995 and 1996 were not significant.

F-25
<PAGE>

ALPHATEC USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8--COMMITMENTS:

Alphatec USA leases most of its manufacturing and office facilities under
noncancelable operating lease agreements that expire at various dates through
2001. These leases require Alphatec USA to pay taxes, insurance, and
maintenance expenses, and provide for renewal options at the then fair market
rental value of the property.

Future minimum lease payments for capital and noncancelable operating leases
were as follows at December 31, 1996:

<TABLE>
<CAPTION>
FISCAL YEAR CAPITAL OPERATING
(IN THOUSANDS)
<S> <C> <C>
1997....................................................... $ 244 $ 5,081
1998....................................................... 224 4,455
1999....................................................... 24 4,240
2000....................................................... 4 3,449
2001....................................................... -- 1,862
----- -------
Total minimum lease payments............................... 496 $19,087
=======
Less: amount representing interest......................... (60)
-----
Present value of net minimum payments...................... 436
Less: current portion...................................... (201)
-----
Capitalized lease obligations, less current portion........ $ 235
=====
</TABLE>

Total operating lease expense was $111,000, $327,000 and $1,907,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.

At December 31, 1996, Alphatec USA had purchase commitments aggregating
approximately $9 million, principally for the purchase of manufacturing
equipment.

NOTE 9--LITIGATION, CLAIMS AND ASSESSMENTS:

Alphatec USA is subject to legal proceedings and claims that arise in the
normal course of business. The amount of liability, if any, from such claims
cannot be determined with certainty; however, in the opinion of management,
the ultimate outcome of such claims will not have a material adverse effect on
Alphatec USA's results of operations or cash flows.

During 1995, Alphatec USA recorded a one-time pre-tax charge to general and
administration expense of $1,400,000 with respect to several claims. The
claims were settled during 1996 for a total of $312,000 and the difference was
credited against general and administrative expense in 1996.

NOTE 10--IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT: (UNAUDITED).

During the first half of 1997, Alphatec USA's management re-evaluated the
potential business prospects for the Manteca operations in view of continuing
losses experienced by such operations and soft demand conditions prevailing in
the semiconductor industry. Alphatec USA's management decided to significantly
downsize the Manteca operations and, as a result, terminated approximately 75%
of Manteca operations' work force. Alphatec USA's management believed that the
undiscounted cash flows from the downsized operations would not be sufficient
to recover the net book value of Manteca operations' fixed assets. This
resulted in the establishment of a provision for impairment totaling
$9,348,000 relating to machinery and equipment, which was recorded as an
operating expense in the six months ended June 30, 1997. The impairment was
calculated based on management's estimation of fair value of machinery and
equipment. Management estimated the fair value of machinery and equipment
based on its knowledge of the prevailing conditions in the market for used
semiconductor packaging equipment, including discussions with outside
companies engaged in selling used semiconductor equipment.

NOTE 11--SUBSEQUENT EVENT: (UNAUDITED)

Effective September 11, 1997, Alphatec USA, Inc. sold the semiconductor
assembly operations of Alphatec USA Inc., and all of its equity in Digital
Testing Services, Inc. to ISE Labs, Inc.

F-26
<PAGE>

ISE LABS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

The following unaudited pro forma combined statement of operations gives
effect to the acquisition by ISE Labs, Inc. ("ISE" or the "Company") on
September 11, 1997 of substantially all of the assets of Alphatec USA, Inc.
("Alphatec") including all of the shares of capital stock of Digital Testing
Services, Inc. in a transaction accounted for as a purchase. The unaudited pro
forma combined statement of operations is based on the individual statements
of operations of ISE for the year ended October 31, 1997, appearing elsewhere
in this Prospectus, and Alphatec for the period from November 1, 1996 through
September 10, 1997. Alphatec's operating results for the period from September
11, 1997 to October 31, 1997 are included in ISE's historical consolidated
statement of operations for the year ended October 31, 1997. Adjustments have
been made to such information to give effect to the September 11, 1997
acquisition of Alphatec, as if the acquisition had occurred on November 1,
1996.

The following unaudited pro forma combined statement of operations are not
necessarily indicative of the future results of operations of the Company or
the results of operations which would have resulted had the Company and
Alphatec been combined during the periods presented. In addition, the pro
forma results are not intended to be a projection of future results. The
unaudited pro forma combined statement of operations should be read in
conjunction with the consolidated financial statements of ISE and subsidiaries
and the financial statements of Alphatec, including the notes thereto,
appearing elsewhere in this Prospectus.

F-27
<PAGE>

ISE LABS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1997
-------------------------------------------------
ISE ALPHATEC PRO FORMA PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS COMBINED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues................... $ 35,532 $ 39,070 $ -- $ 74,602
Cost of revenues........... 17,950 41,469 (270)(a) 59,149
--------- ---------- -------- ----------
Gross profit (loss)........ 17,582 (2,399) 270 15,453
--------- ---------- -------- ----------
Operating expenses:
Research and
development............. 1,097 608 -- 1,705
Selling, general and
administrative.......... 7,229 6,540 544(b) 14,313
Impairment of plant and
machinery............... -- 9,348 -- 9,348
--------- ---------- -------- ----------
Total operating
expenses............... 8,326 16,496 544 25,366
--------- ---------- -------- ----------
Income (loss) from
operations................ 9,256 (18,895) (274) (9,913)
Interest and other income
(expense), net............ 804 -- -- 804
Interest expense........... (741) (2,193) (730)(c) (3,664)
--------- ---------- -------- ----------
Income (loss) before income
taxes..................... 9,319 (21,088) (1,004) (12,773)
Provision for income
taxes..................... 3,579 -- (3,190)(d) 389
--------- ---------- -------- ----------
Net income (loss).......... $ 5,740 $ (21,088) $ 2,186 $ (13,162)
========= ========== ======== ==========
Pro forma net loss per
share .................... $ (0.75)
==========
Number of shares used in
pro forma per share
computation............... 17,500
==========
</TABLE>

See accompanying notes

F-28
<PAGE>

ISE LABS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATION

NOTE 1--BASIS OF PRESENTATION:

The unaudited pro forma combined statement of operations has been prepared
to reflect the acquisition of Alphatec by ISE, as if the acquisition had
occurred on November 1, 1996.

ISE acquired Alphatec effective September 11, 1997 and consequently, ISE's
results of operations for the year ended October 31, 1997 include Alphatec's
results of operations for the period from September 11, 1997 to October 31,
1997. Accordingly, in preparing the pro forma combined statement of
operations, the Company combined its results of operations for the year ended
October 31, 1997 with Alphatec's results of operations for the period from
November 1, 1996 to September 10, 1997.

NOTE 2--PRO FORMA ADJUSTMENTS:

The purchase price was approximately $31.2 million, including acquisition
costs. The purchase price was allocated, based on an independent appraisal of
the property, plant and equipment, to the fair value of the assets acquired
which included $28.6 million of tangible assets. The excess of the purchase
price over the fair value of the net tangible assets acquired was allocated to
goodwill and a covenant not to compete of approximately $1.6 million and $1.0
million, respectively.

The following adjustments were applied to the historical statement of
operations to arrive at the pro forma combined statement of operations:

(a) Reflects the adjustments to depreciation of property, plant and
equipment related to recording the Alphatec assets at fair market value,
which was approximately $1.5 million less than the net book value of the
assets acquired.

(b) Reflects the additional amortization expense of $544,000 related to
intangible assets resulting from the acquisition of Alphatec over their
estimated useful lives.

(c) Reflects the additional interest expense relating to the incremental
debt assumed to finance the acquisition. The debt assumed bears interest at
prime rate plus applicable margin ranging from 0 to 0.75%. The effect on
net income (loss) before income taxes of a 1/8% variance in interest rates
would have been $12,000.

(d) Reflects the elimination of ISE's domestic income tax expense based
on the pro forma loss for the year.

F-29
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CON-
NECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR REP-
RESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY,
ANY SELLING SHAREHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CURRENT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

---------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 31
Management............................................................... 43
Certain Relationships and Related Transactions........................... 53
Principal and Selling Shareholders....................................... 54
Description of Capital Stock............................................. 55
Shares Eligible for Future Sale.......................................... 56
Underwriting............................................................. 57
Legal Matters............................................................ 58
Experts.................................................................. 58
Additional Information................................................... 59
Index to Consolidated Financial Statements............................... F-1
</TABLE>

---------------

UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, RESTRICTED SECURITIES
WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

6,000,000 SHARES

ISE LABS, INC.

COMMON STOCK
---------------
PROSPECTUS

---------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BT ALEX. BROWN
, 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

Appendix
Graphics

Inside Front Cover

ISE LABS, INC.

ISE Labs, Inc. ("ISE" or the "Company") is one of the leading independent
integrated circuit ("IC") testing and evaluation companies in the world.
Unlike many of its competitors, the Company offers a broad range of IC
testing, evaluation and other services throughout the entire semiconductor
manufacturing process. The major steps involved in the production of
semiconductors can be characterized as a circuit design development, wafer
fabrication, wafer sort, packaging and final test. Throughout the
semiconductor production process, ICs are subjected to a variety of analyses
and comprehensive tests. Such continuous analysis and testing is critical to
optimizing manufacturing process efficiencies and product yield.

Once a circuit design has been successfully validated through such tests and
analyses the prototype is released for production. The analysis and testing
that occurs during the semiconductor production process may be broadly
segmented into two stages: the Inventive Stage and the Production Stage. The
Inventive Stage of IC analysis and testing occurs during the initial
development of the IC and includes (i) software development; (ii) electrical
verification; (iii) reliability analysis; and (iv) failure analysis. The
Production Stage of IC analysis and testing occurs after a prototype IC has
been released for manufacture. During this stage, all or a subset of the
analysis and testing procedures performed on the prototype IC during the
Inventive Stage are repeated throughout the volume production of the IC. In
addition to these tests, semiconductor manufacturers may monitor production
quality and reliability on an ongoing basis.

During the last twelve months, the Company has provided services to more
than 250 customers worldwide. The Company's customers include a number of the
world's leading vertically integrated and fabless semiconductor companies,
distributors and subcontractors, such as Atmel, C-Cube Microsystems, Cirrus
Logic, Hana Technologies, Hamilton Hallmark Technologies, Hewlett-Packard, LSI
Logic, Motorola, National Semiconductor, NeoMagic, Philips Electronics, S3,
Wyle Laboratories and Xilinx.

Service Domain
. Test Methodology / Test Program
. Modify Design
. Repair
. Analyze
. Inventive Stage
. IC Design
. Wafer Manufacturing
[Picture of round wafer]
. Wafer Sort
. Back End
. Package
. Final Test
. Production Stage
. Monitor
. Failure Analysis
. Environmental Tests
. High Reliability Screening
[Picture of IC]
[Flowchart depicting service domain, set on a backdrop picture of the Company's
testing operations]
<PAGE>

Inside Front Cover

[Picture of engineers working at the Company's testing facility]

Inventive Stage
. Design
. Prototype
. Test
. Characterization and Failure Analysis
. Test Program Development
. Burn-in

Production Stage
. Wafer Manufacture
. Wafer Sort (Test)
. Packaging

Monitoring
. Final (Electrical) Test
. Burn-in
. Process Reliability Monitor
. ESD
. Latch-up
. Assembly Reliability Monitor
. Hast
. 85/85
. Mechanical Shock
. Gross and Fine Leak
. Thermal Shock

[Flowchart depicting Inventive Stage, Production Stage and Monitoring]

[Picture of "FIB" tester]
FIB

[Picture of Packaging equipment]
Packaging

[Picture of engineers working at workstations]
Software Development

[Picture of Wafer Sort tested]
Wafer Sort

[Picture of Final Test equipment]
Final Test

[Picture of Burn-in tester]
Burn-in

[Picture of engineer standing in front of a HAST tester]
HAST

[Picture of engineer standing in front of an ESD tester]
ESD

[Picture of engineer working on a Failure Analysis work station]
BEAM

<PAGE>

PAGE 30

Inventive Stage
. Design
. Prototype
. Test
. Characterization and Failure Analysis
. Test Program Development
. Burn-in

Production Stage
. Wafer Manufacture
. Wafer Sort (Test)
. Packaging

Monitoring
. Final (Electrical) Test
. Burn-in
. Process Reliability Monitor
. ESD
. Latch-up
. Assembly Reliability Monitor
. Hast
. 85/85
. Mechanical Shock
. Gross and Fine Leak
. Thermal Shock

[Flowchart depicting Inventive Stage, Production Stage and Monitoring]

<PAGE>

Inside Back Cover

[Picture of World Map]
. Hong Kong
. Singapore

[Map of Silicon Valley]
. San Francisco
. Manteca
. Santa Clara
. Silicon Valley
. San Jose

ISE Locations:

ISE Labs, Inc.
2095 Ringwood Avenue
San Jose, CA 95131 USA

ISE Labs, Inc. / DTS
3600 Peterson Way
Santa Clara, CA 95054 USA

ISE Labs Assembly
400 Industrial Park Drive
Manteca, CA 95337

ISE Labs Hong Kong Ltd.
22/D, Southeast Ind. Bldg.
611-619 Castle Peak Road
Tsuen Wan, N7, Hong Kong

ISE Labs Singapore Pte. Ltd.
Blk. 1020 Tai Seng Avenue
#7-3508/12
Singapore 534416

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth an itemized statement of all estimated costs
and expenses (all of which will be paid by the Registrant) in connection with
the issuance and distribution of the securities being registered pursuant to
this Registration Statement. All amounts are estimated except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market fee:

<TABLE>
<CAPTION>
AMOUNT TO BE
COMPANY PAID BY THE
------- ------------
<S> <C>
Securities and Exchange Commission Registration Fee........ $ 28,000
NASD Filing Fee............................................ 10,000
Nasdaq National Market Listing Fee......................... 95,000
Legal Fees and Expenses.................................... 500,000
Blue Sky Qualification Fees and Expenses................... 5,000
Accounting Fees and Expenses............................... 350,000
Printing and Engraving Expenses............................ 175,000
Transfer Agent's and Registrar's Fees and Expenses......... 10,000
Nonaccountable Expense Allowance for Donaldson, Lufkin &
Jenrette Securities Corporation........................... 750,000
Miscellaneous Fees......................................... 27,000
----------
Total.................................................. $1,950,000
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

The California General Corporation Law provides that directors will not be
liable to the Company for monetary damages arising from a breach of their
fiduciary duty as directors, including such conduct during a merger or tender
offer, in certain circumstances. See Item 17 of this Registration Statement
regarding the opinion of the Securities and Exchange Commission as to
indemnification for liabilities arising under the Securities Act of 1933, as
amended (the "Act"). Such limitation does not affect liability for any breach
of a director's duty to the Company or its shareholders (i) with respect to
approval by the director of any transaction from which he derives an improper
personal benefit, (ii) with respect to acts or omissions involving an absence
of good faith, that he believes to be contrary to the best interests of the
Company, or its shareholders, that involve intentional misconduct or a knowing
and culpable violation of law, that constitute an unexcused pattern of
inattention that amounts to an abdication of his duty to the Company or its
shareholders, or that show a reckless disregard for his duty to the Company or
its shareholders in circumstances in which he was, or should have been aware,
in the ordinary course of performing his duties, or a risk of serious injury
to the Company or its shareholders or (iii) based on transactions between the
Company and its directors or another corporation with interrelated directors
or on improper distributions, loans, or guarantees under applicable sections
of the California Corporations Code. Such limitations of liability also do not
affect the availability of equitable remedies such as injunctive relief or
rescission, although in certain circumstances equitable relief may not be
available as a practical matter. The limitation may relieve the directors of
monetary liability to the Company for grossly negligent conduct, including
conduct in situations involving attempted takeovers of the Company. No claim
or litigation is currently pending against the Company's directors that would
be affected by the limitation of liability.

Section 317 of the California Corporations Code authorizes a court to award,
or a corporation's Board of Directors to grant, indemnity to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Act. Article IX of the Second Amended and Restated
Articles of Incorporation of the Registrant (Exhibit 3.1) and Article VI,
Section 4 of the Company's Bylaws (Exhibit 3.2) provide for indemnification of
its directors and

II-1
<PAGE>

officers and other agents to the maximum extent permitted by the California
Corporations Code. The Underwriting Agreement (Exhibit 1.1) provides for
indemnification by the Underwriters of the Registrant, its directors and
executive officers and other persons for certain liabilities, including
liabilities arising under the Act. The Company also maintains insurance for
the benefit of its directors and officers that insures such persons against
certain liabilities, including liabilities under the securities laws. The
Registrant has entered into an indemnification agreement (Exhibit 10.7) with
each of its directors whereby the Company will reimburse its directors against
certain liabilities, including liabilities arising under the securities laws.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since November 1, 1994, the Company has issued options to purchase
securities without registration under the Securities Act of 1933, as amended
(the "Act") in the transactions and in reliance on the exemptions from
registration described below.

From October 20, 1997 through April 30, 1998, the Company issued options to
purchase an aggregate of 2,902,800 shares of Common Stock pursuant to grants
to certain employees, directors and service providers of the Company under the
1998 Stock Incentive Plan of the Company. These issuances were made in
reliance on Rule 701 promulgated under the Act due to the fact that they were
offered and sold pursuant to a written compensatory plan.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

II-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.4E* Amendment to Loan and Security Agreement, by and among Comerica Bank-
California, as Lenders, and the Registrant, ISE Technology Inc. and
Digital Testing Services, Inc., as Borrowers, dated April 1, 1998.
10.5* Employment and Noncompetition Agreement by and between the Registrant
and Dr. Sassan Raissi.
10.6* Employment and Noncompetition Agreement by and between the Registrant
and Ray G. Grammer.
10.7* Form of Indemnification Agreement entered into between the Registrant
and each of its officers and directors.
10.8* Finance/Capital Lease Line of Credit Agreement by and among Comerica
Leasing Corporation, as Lessor, and the Registrant, and Digital
Testing Services Inc., as Co-Lessees, dated March 30, 1998.
10.9* 1998 Stock Incentive Plan.
10.10* 1998 Employee Stock Purchase Plan.
10.11* Promissory Note in the principal amount of $2,520,000 dated August 22,
1994.
10.12* Deed of Trust (Non-Construction) & Assignment of Rents by and among
the Registrant, First Bancorp, and Sanwa Bank California, dated
August 22, 1994.
10.13* Equipment Purchase Line of Credit Agreement by and between Sanwa Bank
California and the Registrant dated August 22, 1994.
10.14* Finance/Capital Lease Line commitment letter by and between Comerica
Leasing, a Division of Comerica Bank and the Registrant dated March
30, 1998.
11.1* Statement of Computation of Net Income Per Share.
21.1* List of Subsidiaries of the Registrant.
23.1* Consent of Brobeck, Phleger & Harrison LLP (included in the opinion of
counsel filed as Exhibit 5.1 hereto).
23.2* Consent of Price Waterhouse LLP, Independent Accountants relating to
the consolidated financial statements of ISE Labs, Inc.
23.3* Consent of Price Waterhouse LLP, Independent Accountants relating to
the consolidated financial statements of Alphatec USA, Inc.
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- ---------------------
*Previously filed.

(b) Financial Statement Schedules:

Schedules are not required, are not applicable, or the required information
is shown in the consolidated financial statements or related notes.

ITEM 17. UNDERTAKINGS.

(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against

II-3
<PAGE>

public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.

(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

II-4
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT CERTIFIES
THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING OF FORM S-1 AND HAS DULY CAUSED THIS AMENDMENT NO. 3
TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN SAN JOSE, CALIFORNIA ON THIS 11TH DAY OF JUNE,
1998.

ISE Labs, Inc.

By: /s/ SAEED A. MALIK
_________________________________
SAEED A. MALIK
President and Chief Executive
Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 3 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATE INDICATED:

SIGNATURE TITLE DATE

/s/ Saeed A. Malik President and Chief June 11, 1998
- ------------------------------------- Executive Officer,
(SAEED A. MALIK) Director (Principal
Executive Officer)

Chief Financial June 11, 1998
Ray G. Grammer* Officer (Principal
- ------------------------------------- Financial and
(RAY G. GRAMMER) Accounting Officer)

Laurence F. Jorstad* Director June 11, 1998
- -------------------------------------
(LAURENCE F. JORSTAD)

Alex M. Barrios* Director June 11, 1998
- -------------------------------------
(ALEX M. BARRIOS)

Muneer A. Malik* Director June 11, 1998
- -------------------------------------
(MUNEER A. MALIK)

Terry N. Holdt* Director June 11, 1998
- -------------------------------------
(TERRY N. HOLDT)

/s/ Saeed A. Malik
*By: ________________________________
SAEED A. MALIK
Attorney-in-Fact

II-5
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1* Business Sales Agreement, dated as of August 21, 1997, by and between
the Registrant and Alphatec USA, Inc. (including Digital Testing
Services, Inc.).
3.1* Form of Second Amended and Restated Articles of Incorporation of the
Registrant.
3.2* Form of Amended and Restated Bylaws of Registrant.
3.3* Amended and Restated Articles of Incorporation of the Registrant as
currently in effect.
3.4* Bylaws of the Registrant as currently in effect.
4.1* Specimen Certificate of Common Stock.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1* Assignment and Assumption of Lease by and among RND Funding Company,
Inc., Alphatec Electronics Company Limited (Public) and Digital
Testing Services, Inc. dated as of September 12, 1997.
10.2* Lease Agreement between Kim Camp No. VII and Alphatec Electronics
Company Limited for 3600 Peterson Way, Santa Clara, California, dated
as of March 23, 1995.
10.3* Tenancy Agreement between Hing Seng Plastic Factory Limited and ISE
Labs (HK) Limited, dated as of April 25, 1996.
10.4* Loan and Security Agreement, by and among Comerica Bank-California, as
Lender, and the Registrant, ISE Technology Inc. and Digital Testing
Services, Inc., as Borrowers, dated October 2, 1997.
10.4A* Manteca Note in the principal amount of $5,400,000, dated October 2,
1997.
10.4B* Equipment Acquisition Note in the principal amount of $14,600,000,
dated October 2, 1997.
10.4C* Revolving Promissory Note in the principal amount of $8,000,000, dated
October 2, 1997.
10.4D* Equipment Refinance Note in the principal amount of $4,650,000, dated
October 2, 1997.
10.4E* Amendment to Loan and Security Agreement, by and among Comerica Bank-
California, as Lenders, and the Registrant, ISE Technology Inc. and
Digital Testing Services, Inc., as Borrowers, dated April 1, 1998.
10.5* Employment and Noncompetition Agreement by and between the Registrant
and Dr. Sassan Raissi.
10.6* Employment and Noncompetition Agreement by and between the Registrant
and Ray G. Grammer.
10.7* Form of Indemnification Agreement entered into between the Registrant
and each of its officers and directors.
10.8* Finance/Capital Lease Line of Credit Agreement by and among Comerica
Leasing Corporation, as Lessor, and the Registrant, and Digital
Testing Services Inc., as Co-Lessees, dated March 30, 1998.
10.9* 1998 Stock Incentive Plan.
10.10* 1998 Employee Stock Purchase Plan.
10.11* Promissory Note in the principal amount of $2,520,000 dated August 22,
1994.
10.12* Deed of Trust (Non-Construction) & Assignment of Rents by and among
the Registrant, First Bancorp, and Sanwa Bank California, dated
August 22, 1994.
10.13* Equipment Purchase Line of Credit Agreement by and between Sanwa Bank
California and the Registrant dated August 22, 1994.
10.14* Finance/Capital Lease Line commitment letter by and between Comerica
Leasing, a Division of Comerica Bank and the Registrant dated March
30, 1998.
11.1* Statement of Computation of Net Income Per Share.
21.1* List of Subsidiaries of the Registrant.
23.1* Consent of Brobeck, Phleger & Harrison LLP (included in the opinion of
counsel filed as Exhibit 5.1 hereto).
23.2* Consent of Price Waterhouse LLP, Independent Accountants relating to
the consolidated financial statements of ISE Labs, Inc.
23.3* Consent of Price Waterhouse LLP, Independent Accountants relating to
the consolidated financial statements of Alphatec USA, Inc.
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- ---------------------
* Previously filed.