INTEGRATED SENSOR SOLUTIONS INC, 424B4, 1998-03-13

INTEGRATED SENSOR SOLUTIONS INC
424B4, 1998-03-13
SEMICONDUCTORS & RELATED DEVICES

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<PAGE>
PROSPECTUS

2,500,000 SHARES

[LOGO]
COMMON STOCK

All of the 2,500,000 shares of Common Stock, par value $.001 per share (the
"Common Stock"), offered hereby, are being sold by Integrated Sensor Solutions,
Inc. ("ISS" or the "Company"). Prior to this offering, there has been no public
market for the Common Stock of the Company. See "Underwriting" for a discussion
of the factors considered in determining the initial public offering price. The
Company's Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "ISNR."

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

SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
--------------------

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>
UNDERWRITING
DISCOUNTS
PRICE TO AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per share............................. $8.00 $0.56 $7.44
Total(3).............................. $20,000,000 $1,400,000 $18,600,000
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. In
addition, the Company has agreed to issue the Representatives five-year
warrants to purchase 250,000 shares of Common Stock (the "Representatives'
Warrants"). See "Underwriting."

(2) Before deducting expenses payable by the Company estimated to be $750,000,
including the Representatives' non-accountable expense allowance of
$150,000.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
375,000 additional shares of Common Stock on the same terms per share solely
to cover over-allotments, if any. If the Underwriters exercise this option
in full, the total Price to Public, the total Underwriting Discounts and
Commissions, and the total Proceeds to Company will be $23,000,000,
$1,610,000 and $21,390,000, respectively. See "Underwriting."

The shares of Common Stock are offered by the several Underwriters subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part and to withdraw, cancel or modify this offering without
notice. It is expected that delivery of the share certificates will be made in
Irvine, California, on or about March 18, 1998.

The activities of the Representatives are being jointly coordinated.

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

<TABLE>
<S> <C>
CRUTTENDEN ROTH INCORPORATED DOUGHERTY SUMMIT SECURITIES
LLC
</TABLE>

MARCH 13, 1998

<PAGE>
FRONT OF GATEFOLD

[Photos of End User Systems: Car, Truck, Factory]

[Photos of ISS Products: ASICs, Map ISD, Media Compatible Pressure ISDs]

ISS LOGO

INSIDE GATEFOLD

LEFT PAGE:

[Block Diagram of Conventional Approach to Sensor Products]

ISS Approach...

Electronic Integration

<TABLE>
<S> <C> <C>
ASIC Products ISD Products Single Chip Solutions
"One Sensor, One ASIC" "Combined Sensor and ASIC"
[Photo of ASIC] [Photo of ISD] [Photo of Monolithic Sensor]
</TABLE>

RIGHT PAGE:

Serving the needs of a demanding sensor market

ISS Business Model

[Diagram of ISS Business Model]

[Logo] Worldwide Customers

[Customer List Over World Map Graphic]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING STABILIZING BIDS AND PURCHASES, SYNDICATE SHORT COVERING
TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE
ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO. FOR A DESCRIPTION OF CERTAIN CAPITALIZED TERMS, PLEASE SEE
THE "GLOSSARY" ON PAGE 15. EXCEPT AS OTHERWISE NOTED HEREIN, INFORMATION IN THIS
PROSPECTUS ASSUMES (I) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION,
(II) NO EXERCISE OF OUTSTANDING WARRANTS TO PURCHASE SHARES OF THE COMPANY'S
COMMON STOCK, INCLUDING THE REPRESENTATIVES' WARRANTS, (III) THE CONVERSION OF
ALL OUTSTANDING SHARES OF PREFERRED STOCK INTO SHARES OF COMMON STOCK UPON THE
CLOSING OF THIS OFFERING. INFORMATION IN THIS PROSPECTUS ALSO GIVES EFFECT TO
THE OCTOBER 1997 ONE-FOR-TWO AND ONE-HALF REVERSE STOCK SPLIT. SEE "DESCRIPTION
OF CAPITAL STOCK" AND "UNDERWRITING."

THE COMPANY

Integrated Sensor Solutions, Inc. ("ISS" or the "Company") designs,
manufactures and markets high performance, intelligent sensor products that are
used in electronic control systems by customers in the automotive and industrial
markets. The Company's products are application specific integrated circuits
("ASICs") and integrated sensor devices ("ISDs"). The Company's initial focus on
automotive applications has resulted in its products being designed into a broad
range of electronic control systems such as fuel injection, tire pressure,
engine control, air bag, suspension and brake systems. While continuing its
efforts to further penetrate the automotive market, the Company has leveraged
its technology to develop products that address high volume industrial
applications including utility gas meters, refrigeration, air conditioning and
process control systems.

The Company's core competencies are its (i) ASIC design technology, (ii)
behavioral simulation software, (iii) calibration software, (iv) package design
technology and (v) manufacturing processes. The Company's mixed signal ASIC
design technology, consisting of its Intelligent Sensing Architecture and its
advanced macrocell library tailored for sensor applications, enables ISS to
rapidly develop products in which multiple system functions are integrated into
a single integrated circuit ("IC"). The Company uses its behavioral simulation
software during the development process to create and assess alternative designs
to optimize the performance of its products within the customer's system. The
Company uses its calibration software during the manufacturing process to
correct for variances in sensing elements and system environments. In addition
to its ASIC design and software technology, the Company has substantial
experience in designing packages that meet customer requirements for integration
with diverse and rugged systems. The ASIC design and software technologies,
together with its packaging expertise, enable the Company to design and
manufacture intelligent sensor products rapidly, efficiently and cost
effectively with relatively low capital expenditures.

The Company has established strategic alliances with significant
manufacturers such as Bosch, Nagano and Michelin. These strategic alliances are
intended to be long term, mutually beneficial relationships focusing on joint
technology and product development, manufacturing and exclusive or preferred
supply arrangements. As a part of its relationship with the Company, Bosch has
selected the Company to develop and supply ISDs for applications such as diesel
fuel injection, vehicle stability and electronic hydraulic brake systems.
Similarly, the Company has become the exclusive supplier of ASICs to Nagano for
use in applications such as utility gas meters for Tokyo Gas and fuel injection
systems for Mitsubishi. In addition, the Company has entered into agreements
with Michelin for the development and supply of a new generation of ISDs for
in-tire pressure applications. These alliances may also encompass a variety of
other aspects such as strategic product development, manufacturing, marketing
and/or capital investment. The Company believes that OEM technical partnering
arrangements with its customers enable the Company to combine its technology
with the systems expertise of its customers and to rapidly introduce new
products based on the technology developed through these alliances.

According to industry sources (including Dataquest, Intechno AG, Prognosis
and Selantek), the high performance automotive and industrial segments of the
market for electronic sensor products was approximately $2.1 billion in 1996,
and these segments are expected to grow to over $5.0 billion by 2001. The
Company's objective is to become a leading supplier of ASICs and ISDs for
electronic control systems in these markets. Currently, ISS has over 20
customers worldwide, including market leaders such as Bosch, John Deere, Echlin,
Honda, Knorr-Bremse, MascoTech, Michelin, Nagano and Sumitomo. Through these and
other customers, the Company's products have been designed into the vehicles of
leading manufacturers such as Fiat, Ford, Honda, Mercedes Benz, Mitsubishi,
Nissan and Peugeot and into industrial systems manufactured by companies such as
Tokyo Gas and Eaton Corporation. The Company typically enters into contracts
with customers to develop and supply products customized to satisfy their
specific system requirements. The Company also offers standard products that it
develops by leveraging the technology created in the custom design process.

The Company incorporated in California in 1989 and reincorporated in
Delaware in October 1997. The Company's principal executive offices are located
at 625 River Oaks Parkway, San Jose, California 95134, and the Company maintains
manufacturing facilities in San Jose, California and Dresden, Germany. The
Company's telephone number is (408) 324-1044 and its facsimile number is (408)
324-1054. Unless the context requires otherwise, all references to ISS or the
Company include the Company's majority-owned subsidiary ISS-Nagano GmbH.

3
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company......... 2,500,000 shares

Common Stock to be outstanding after the
offering.................................. 7,203,525 shares(1)

Use of Proceeds............................. General corporate purposes, including
repayment of indebtedness, expansion of
manufacturing operations and working capital.
See "Use of Proceeds."

Nasdaq Symbol............................... ISNR
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenues............................................... $ 4,976 $ 8,330 $ 10,304 $ 6,715 $ 11,013
Income (loss) from operations................................ (1,644) (1,202) (2,917) (3,039) 381
Net income (loss)............................................ (1,116) (751) (2,629) (2,615) 95
Pro forma diluted net income (loss) per share(2)............. $ (0.72) $ (0.77) $ 0.02
Shares used in calculation of pro forma diluted net income
(loss) per share(2)........................................ 3,632 3,394 5,003
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
AS
ACTUAL ADJUSTED(3)
--------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................................................. $ 675 $ 17,778
Working capital........................................................................... 3,039 20,889
Total assets.............................................................................. 10,422 27,525
Long-term debt and capital lease obligations, less current portion........................ 98 98
Stockholders' equity...................................................................... 4,935 22,785
</TABLE>

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

(1) Based on 4,703,525 shares outstanding at December 31, 1997, and excluding
(i) 454,860 shares reserved as of such date for issuance upon the exercise
of outstanding stock options at a weighted average exercise price of $1.62
per share, (ii) 623,108 shares reserved for future grant under the Company's
stock plans and (iii) 58,566 shares for issuance upon the exercise of
outstanding warrants at a weighted average exercise price of $6.24 per
share.

(2) See Note 1 of Notes to Consolidated Financial Statements.

(3) Adjusted to reflect the receipt by the Company of the estimated net proceeds
of $17,850,000 from the sale of 2,500,000 shares of Common Stock offered
hereby by the Company at the initial public offering price of $8.00 per
share, and the repayment to a related party of approximately $679,000 of
short-term debt plus accrued interest.

4
<PAGE>
RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE COMMON
STOCK OFFERED BY THIS PROSPECTUS. THE DISCUSSION IN THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE
DISCUSSED ELSEWHERE IN THIS PROSPECTUS.

LIMITED PROFITABILITY; HISTORY OF OPERATING LOSSES. The Company was founded
in 1989 and commenced shipments of its initial product in 1990. The Company did
not achieve profitability on a quarterly basis until the quarter ended June 30,
1997 and has never achieved profitability on an annual basis. Although the
Company achieved income from operations in the four most recent fiscal quarters,
the Company sustained net losses of $1.3 million in the quarter ended December
31, 1996, $14,000 in the quarter ended March 31, 1997 and $9,000 in the quarter
ended December 31, 1997 and $2.6 million in the fiscal year ended March 31,
1997. There can be no assurance that the Company will be profitable in the
future on a quarterly basis or that it will achieve profitability on an annual
basis. As of December 31, 1997, the Company had an accumulated deficit of
approximately $8.1 million. See "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.

DEPENDENCE ON CUSTOMER SPECIFIC PRODUCTS; LENGTHY SALES AND DEVELOPMENT
CYCLE. A substantial portion of the Company's products are designed to address
the specific needs of individual customers. As a result, the sales and
development cycle for these products can be lengthy, with the development cycle
alone ranging up to thirty months for new products in new applications in the
automotive industry and up to eighteen months for new products in new
applications in the industrial market. Because customer specific products are
developed for particular customers' applications, some of the Company's current
and future customer specific products may never be produced in high volume, or
at all, due to the Company's inability to introduce custom products in a timely
manner, delays in the introduction of the Company's customers' products, the
failure of the Company's customers' products to achieve and sustain commercial
success or the discontinuation of a customer's product line. Any of these
occurrences could have a material adverse effect on the Company's business,
financial condition or operating results. See "Business--Product Development."

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

A significant portion of the Company's product sales are made pursuant to
standard purchase orders that are cancelable without significant penalties. In
addition, purchase orders are often subject to price renegotiations and to
changes in quantities of products and delivery schedules to reflect changes in

5
<PAGE>
customers' requirements and manufacturing availability. For instance, shipments
to three of the Company's major customers were delayed in the quarter ended
December 31, 1996 which materially adversely affected the Company's operating
results for the quarter, and there can be no assurance that a similar incident
will not occur in the future. The Company's actual shipments depend in part on
the manufacturing capacity of the Company's suppliers and the availability of
products from such suppliers. The Company's expense levels are based, in part,
on its expectations as to future revenues and to a large extent are fixed in the
short term. Accordingly, the Company may be unable to adjust spending in a
timely manner to compensate for any unexpected shortfall in revenues, and any
significant shortfall of demand in relation to the Company's expectations or any
material delay or deferral of customer orders would have a material adverse
effect on the Company's business, financial condition or operating results.

As a result of the foregoing and other factors, it is likely that in some
future period the Company's operating results will fail to meet the expectations
of public market analysts or investors. In such event, or in the event that
adverse conditions prevail or are perceived to prevail generally or with respect
to the Company's business, the trading price of the Company's Common Stock could
drop significantly. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

SIGNIFICANT CUSTOMER CONCENTRATION. Historically, a relatively small number
of customers has accounted for a significant percentage of the Company's total
revenues, and the Company expects that this trend will continue. In each of
fiscal 1995, 1996, 1997 and the nine months ended December 31, 1997, the Company
has had two or more customers, which each accounted for more than 10% of total
revenues. In fiscal 1995, two customers accounted for 69% of total revenues; in
fiscal 1996, four customers accounted for 71% of total revenues; in fiscal 1997,
four customers accounted for 75% of total revenues; and in the nine months ended
December 31, 1997, three customers accounted for 67% of total revenues. The
Company's ability to achieve sales in the future will depend upon its ability to
obtain orders from, maintain relationships with and provide support to a small
number of existing and new customers. As a result, any cancellation, reduction,
rescheduling or delay in orders by or shipments to any customer or the
discontinuation or redesign by any customer of its products which currently
incorporate one or more of the Company's products would have a material adverse
effect on the Company's business, financial condition or operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Customers."

DEPENDENCE ON AUTOMOTIVE INDUSTRY; NEED TO PENETRATE NEW MARKETS. The
Company has historically derived approximately 84% of its total revenues from
products sold for applications in the automotive industry. Accordingly,
improvement in the Company's future operating results will depend in part on its
ability to increase its market share in the automotive industry. Further, the
Company believes that its operating results may be affected by the cyclical
nature of the automotive industry. Any downturn in any customer's business or
the economy in general may cause purchases of the Company's products to be
deferred, reduced or canceled resulting in a material adverse effect on the
Company's business, financial condition or operating results. The Company's
future operating results will also depend on its ability to continue to
penetrate the industrial market and to penetrate new markets such as the
consumer and office products markets. While the Company may devote substantial
resources to penetrate new markets in the future, it has not committed a
material amount of resources to such effort to date, and there can be no
assurance that the Company will commit significant resources to this effort, or
if committed, that the revenues generated from these efforts, if any, will
exceed the costs of such efforts. To the extent that the Company is unable to
penetrate new markets, its future success will be dependent upon its ability to
further penetrate the automotive industry and on the continued growth of that
industry. If the Company is unable to successfully penetrate new markets or to
expand its penetration of the automotive market, its business, financial
condition or operating results would be materially adversely affected.

DECLINING AVERAGE SELLING PRICES. The Company sells a substantial portion
of its products pursuant to exclusive contracts which typically contain
volume-pricing provisions that require the Company to reduce

6
<PAGE>

its per unit price as certain volume levels are achieved. If the Company is
unable to make corresponding product cost reductions, the resulting decline in
the average selling prices of the products sold pursuant to such contracts may
reduce the Company's product gross margin. The Company has experienced declining
average selling prices on certain of its products in the past when shipments
have reached specified volume levels, and the Company anticipates that all of
its products will eventually experience declining average selling prices over
their life cycles. Although declining average selling prices have not materially
adversely affected gross margins to date, declining average selling prices may
have a material adverse effect on gross margins in the future if the Company is
unable to reduce corresponding costs or introduce new products with higher gross
margins. If the Company is unable to reduce its costs on existing products or
introduce new products with higher margins in a timely manner, the Company's
business, financial condition or operating results will be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."

DEPENDENCE ON SENSING ELEMENT SUPPLIERS. The Company is currently dependent
upon a small number of third party vendors for substantially all of the sensing
elements incorporated into its ISDs. The Company currently purchases a pressure
sensing element incorporated in certain of its ISDs from a single source, Nagano
Keiki Co., Ltd. ("Nagano"). The Company believes that Nagano is currently the
only high volume supplier of this type of sensing element. The Company also
manufactures ISDs that incorporate sensing elements purchased solely from Lucas
NovaSensor. The Company historically has not manufactured sensing elements and
anticipates that it will continue to obtain sensing elements from third parties
for the foreseeable future. The Company's future success will be dependent upon
its ability to identify and work closely with manufacturers who are able to
provide high volume, technologically advanced and cost-effective sensing
elements. Any failure of the Company to maintain its existing relationships with
sensing element suppliers or to identify and work with new sensing element
suppliers could have a material adverse effect on the Company's business,
financial condition or operating results. See "Certain Transactions."

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

RAPID TECHNOLOGICAL CHANGE; NEED TO DEVELOP NEW PRODUCTS. The markets for
the Company's products are characterized by rapid technological change as well
as evolving industry standards that may render existing products obsolete. As a
result, the success of new products depends on a variety of factors, including
effective definition of products that meet evolving market needs, successful and
timely completion of development and introduction of these products, successful
design wins in new systems and the ability to offer products at competitive
prices. The development of new mixed signal integrated circuits is highly
complex, and from time to time the Company has experienced delays in developing
and introducing new products. There can be no assurance that the Company will be
able to define new products successfully and develop and bring to market new and
enhanced products on a timely and cost effective basis, develop or access new
process technologies, secure design wins or respond effectively to new
technological changes or new product announcements by others. A failure in any
of these areas could have a material adverse effect on the Company's business,
financial condition or operating results.

COMPETITION. The markets in which the Company competes are highly
competitive and characterized by diverse industry requirements and severe
pricing pressure in many applications. In the ASIC market, the Company competes
with analog and mixed signal semiconductor companies such as Motorola, Inc.
("Motorola"), Texas Instruments Incorporated ("TI") and Analog Devices, Inc. The
Company's products also compete indirectly with conventional hybrid circuits and
standard analog and mixed signal ICs. In the ISD market, the Company competes
with Delco, a subsidiary of General Motors ("GM"), Motorola, TI,

7
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Kavlico and Denso Corporation ("Denso"). These companies all have substantially
greater financial, technical, manufacturing, marketing, distribution, personnel
and other resources than the Company. In addition, in the industrial market, the
Company competes with many small companies that have developed specialized
electronic sensor products and formed close relationships with their customers.
The Company also competes with the in-house development staff of certain of its
current and potential customers.

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

MANAGEMENT OF GROWTH. The Company has recently experienced and may continue
to experience growth in the number of its employees and scope of its operating
and financial systems, resulting in increased responsibilities for the Company's
existing personnel and the need to hire additional personnel. The Company
increased its number of employees by 15 in calendar year 1997 and anticipates
that it may hire as many as 15 additional employees in calendar year 1998. To
manage future growth effectively, the Company will need to continue to implement
and improve its operational, financial and management information systems,
particularly those of its German subsidiary, and to hire, train, motivate,
manage and retain its employees. There can be no assurance that the Company will
be able to manage such growth effectively, and failure to do so could have a
material adverse effect on the Company's business, financial condition or
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Employees."

DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL TECHNICAL PERSONNEL. The
Company is substantially dependent upon the services of its executive officers.
The Company's future success depends on the continued contributions of such
officers, including the maintenance, enhancement and establishment of key
customer relationships and the management of operations. The loss of the
services of any of these officers by the Company could have a material adverse
effect on the Company's business, financial condition or operating results. Such
officers have not entered into employment agreements with the Company.

The Company believes that a key factor for competing successfully in the
mixed signal integrated circuit business is to attract and retain creative and
knowledgeable complementary metal oxide semiconductor ("CMOS") mixed signal
designers. The number of design engineers who have the training, creativity and
experience to design complex mixed signal integrated circuits is very limited,
and the competition for such personnel is intense. The Company's future success
will be heavily dependent upon its ability to attract and retain qualified
design, technical and management personnel. There can be no assurance that the
Company will be able to continue to attract and retain these personnel, and the
failure to do so could have a material adverse effect on the Company's business,
financial condition or operating results. See "Business--Employees."

DEPENDENCE ON SOLE SOURCE SUPPLIERS. Certain components of the Company's
current products, such as fabricated wafers, sensing elements, packages and PC
boards, are acquired from single source suppliers. The Company purchases these
components on a purchase order basis and does not carry significant inventories.
If the Company were required to change any sole source component vendor or to
add vendors, the Company could be required to requalify its products
incorporating the new components with its existing customers. The qualification
could prevent or delay product shipments which could have a material adverse
effect on the Company's business, financial condition or operating results. In
addition, the Company's reliance on sole source component vendors involves
several risks, including reduced control

8
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over the price, timely delivery, reliability and quality of the components. Any
inability of the Company to obtain timely deliveries of components of acceptable
quality or any significant increase in the prices of components for which the
Company does not have alternative sources could result in delays, cancellations
or reductions in product shipments which would have a material adverse effect on
the Company's business, financial condition or operating results. Although the
Company has not to date experienced any significant difficulty in obtaining
these components, there can be no assurance that shortages will not occur in the
future. See "--Dependence on Independent Wafer Suppliers."

DEPENDENCE ON INDEPENDENT ASSEMBLY CONTRACTORS. All of the Company's ASICs,
other than those incorporated in its ISDs, are packaged by one of two
independent contractors, one in Hong Kong, and the other in the Philippines. In
addition, the Company relies on an independent contractor in Thailand for PC
board level assembly of the electronic portion of the Company's ISDs. The
Company selects its contractors on the basis of a number of factors, including
technical capabilities, size and capacity, end-markets served, customer
references, quality certification status and economic competitiveness. The
Company negotiates prices for assembly services based on unit volumes and does
business on a purchase order basis. The Company currently has no supply
contracts with any of its assembly contractors.

The Company's reliance on independent contractors to assemble and package
its products involves significant risks, including reduced control over quality
and delivery schedules, the potential lack of adequate capacity and
discontinuance or phase-out of such contractors' assembly processes.
Historically, due to a lack of significant volumes, the Company has experienced
difficulty ensuring that independent assembly contractors would continue to
assemble or package the Company's products and that alternative independent
assembly contractors would be available in such instances. In 1994, the
independent contractor responsible for the Company's PC board level assembly
ceased its operations on very short notice which materially adversely affected
the Company's operating results for fiscal 1994 and 1995. There can be no
assurance that the Company's current or future contractors will continue to
assemble and package products for the Company or that alternate contractors will
be available to assemble or package the Company's products as necessary.
Further, because the Company's assembly contractors are located in foreign
countries, the Company is subject to certain risks generally associated with
contracting with foreign suppliers, including currency exchange fluctuations,
political and economic instability, trade restrictions and changes in tariff and
freight rates. There can be no assurance that the Company will not experience
problems in timeliness, adequacy or quality of product deliveries, any of which
could have a material adverse affect on the Company's business, financial
condition or operating results. See "Business-- Manufacturing."

DEPENDENCE ON INDEPENDENT WAFER SUPPLIERS. The Company relies on a small
number of independent foundries for the manufacture of all of its ASICs,
including those incorporated into its ISDs. None of the Company's ASICs is
currently fabricated by more than one foundry. Although processed CMOS wafer
capacity in the semiconductor industry is currently widely available, there can
be no assurance that the Company's foundries will continue to provide the
Company an adequate supply of wafers to meet its customers' demands.

The Company believes that as a result of fluctuations in demand and changing
technologies, processed wafer capacity may become limited from time to time,
resulting in greater difficulty in obtaining adequate supplies of wafers,
increased prices and increased lead times. Any increase in the demand for
processed wafers over expected levels or any failure of processed wafer supply
in the industry to grow at anticipated rates will magnify these shortages. The
Company currently receives fabricated wafers from American Microsystems, Inc.,
Micrel Semiconductor, Inc. and Silicon Systems, Inc. In an effort to secure a
second source for certain ASICs, the Company has recently begun to receive
fabricated wafers from Symbios Logic, Inc. ("Symbios") and is in the process of
qualifying products manufactured by Symbios. There can be no assurance that the
Company will be able to complete qualification of products fabricated by Symbios
in a timely manner or at all, and any such failure could have a material adverse
effect on the Company's business, financial condition or operating results.
Although the Company receives supply assurances from

9
<PAGE>

its foundry partners, the Company obtains all of its wafers on a purchase order
basis, and, as a result, there can be no assurance that wafer foundries will
allocate sufficient capacity or any capacity to the Company to meet its
processed wafer supply needs. In the event that the Company's foundry partners
are unable or unwilling to continue supplying wafers to the Company, there can
be no assurance that the Company will be able to identify and qualify additional
manufacturing sources in a timely manner, that any such additional manufacturing
sources would be able to produce wafers with acceptable manufacturing yields or
that the Company would not experience delays in product availability, quality
problems, increased costs or disruption in product development activities. The
Company is engaged in an ongoing and continuous program to reduce its product
costs by increasing the number of functional die per wafer by utilizing smaller
geometry processes and improving designs. As a result of this program, the
Company believes that it will be required to shift the fabrication of its wafers
to new semiconductor processes or potentially to new foundries. The Company
expects that the shift to new fabrication processes and foundries will occur on
a product by product basis in response to customer requests and that the cost of
such shift may be borne wholly or in part by the Company. Shifting the
manufacture of its wafers to new processes or to new foundries is a highly
complex undertaking requiring substantial commitments of engineering personnel
and other resources, which could materially adversely affect the Company's
business, financial condition or operating results. See
"Business--Manufacturing."

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

VARIABILITY OF MANUFACTURING YIELDS. Manufacturing yields of the Company's
ASICs and ISDs may vary significantly depending on a variety of factors. ASIC
yields can be adversely affected by the level of contaminants in the
manufacturing environment, impurities in the materials used and the performance
of fabrication personnel and equipment, all of which are outside the control of
the Company. ISD yields can be adversely affected by defective sensing elements,
component quality and performance of assembly personnel and equipment.
Historically, the Company has experienced fluctuations in yields of its
products, particularly during initial production of new products, which have
adversely affected product gross margin. The Company believes that any new
product lines or manufacturing processes that it undertakes may create
difficulties in achieving acceptable yields, and, as a result, the Company may
experience production problems or shipment delays which could have a material
adverse effect on the Company's business, financial condition or operating
results. Regardless of the process technology used, the manufacturing of ASICs
and ISDs is a highly complex and precise process, and there can be no assurance
that the Company will be able to achieve or maintain acceptable yields on its
products in the future. Any such failure could have a material adverse effect on
the Company's business, financial condition or operating results. See
"Business--Manufacturing."

DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS. The Company relies on a
combination of patents, maskwork rights, trade secret laws, copyrights,
trademarks and employee and third party non-disclosure agreements to protect its
intellectual property rights. The Company has been issued two patents and has
filed four patent applications in the United States and one foreign patent
application relating to ASIC designs. In addition, the Company has filed one
patent application in the United States relating to package design. There can be
no assurance that any patents will issue from any of the Company's pending
applications or that claims allowed from pending applications will be of
sufficient scope or strength, or be issued in all countries where the Company's
products can be sold, to provide meaningful protection or any commercial
advantage to the Company. Also, competitors of the Company may be able to design
around the Company's patents. The laws of certain foreign countries in which the
Company's products are or may be developed, manufactured or sold, including
various countries in Asia, may not protect the Company's

10
<PAGE>
products or intellectual property rights to the same extent as the laws of the
United States and thus make the possibility of piracy of the Company's
technology and products more likely. There can be no assurance that the steps
taken by the Company to protect its proprietary information will be adequate to
prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology.

The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions which have resulted in
significant and often protracted and expensive litigation. Although there is
currently no pending intellectual property litigation against the Company, the
Company may from time to time be notified of claims that the Company may be
infringing patents or other intellectual property rights owned by third parties.
If it is necessary or desirable, the Company may seek licenses under such
patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any licenses will
be acceptable to the Company. A failure to obtain a license from a third party
for technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of products requiring the technology.
Furthermore, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Litigation by or against the
Company could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel, whether or not such
litigation results in a favorable determination for the Company. In the event of
any adverse result in any such litigation against the Company, the Company could
be required to pay substantial damages, cease the manufacture, use and sale of
infringing products, expend significant resources to develop noninfringing
technology, discontinue the use of certain processes or obtain licenses to the
infringing technology. There can be no assurance that the Company would be
successful in such development or that such licenses would be available on
commercially reasonable terms or at all, and any such development or license
could require expenditures by the Company of substantial time and resources. In
the event that a third party makes a successful claim against the Company or its
customers and a license is not made available to the Company on commercially
reasonable terms, or at all, the Company's business, financial condition or
operating results could be materially adversely affected.

DEPENDENCE ON INTERNATIONAL SALES AND SUPPLIERS. Sales to customers located
outside the United States accounted for approximately 22.0%, 38.6%, 46.0% and
54.2% of the Company's total revenues in fiscal 1995, 1996 and 1997 and the nine
months ended December 31, 1997, respectively. The Company's sales to customers
outside the United States are subject to a variety of risks, including those
arising from fluctuations in currency exchange rates, tariffs, import
restrictions and other trade barriers, unexpected changes in regulatory and
governmental licensing requirements, longer accounts receivable payment cycles
and potentially adverse tax consequences. Because a significant portion of the
Company's international sales and in particular its European sales have to date
been made through its German subsidiary and have been denominated in Deutsche
Marks, fluctuations in the value of the Deutsche Mark relative to the U.S.
Dollar or other currencies could adversely affect the pricing of the Company's
products in foreign markets and make the Company's products relatively more
expensive. In addition, fluctuations in the Deutsche Mark could adversely affect
the profitability of sales made in Europe and therefore materially adversely
affect the Company's business, financial condition or operating results.

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

As a result of conducting business internationally, the Company is subject
to general geopolitical risks, such as political and economic instability and
changes in diplomatic and trade relationships. There can be

11
<PAGE>
no assurance that such factors will not have a material adverse effect on the
Company's business, financial condition or operating results or require the
Company to modify its current business practices. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

NEED FOR ISO 9001 AND QS-9000 CERTIFICATION. The Company currently does not
have either ISO 9001 or QS-9000 certification which increasingly are being
required by motor vehicle manufacturers. The Company has invested significant
financial and other resources to obtain such certifications, but there can be no
assurance that the Company will be successful in obtaining such certifications
in a timely manner, or at all. Although the Company has not lost any sales to
date as a result of its lack of ISO 9001 or QS-9000 certification, the lack of
such certification may make it more difficult or impossible for the Company to
qualify its products with new customers or to continue to sell products to
existing customers, either of which could have a material adverse effect on the
Company's business, financial condition or operating results. See
"Business--Manufacturing."

RISKS OF PRODUCT LIABILITY. The automotive industry is characterized by
potential risks of product liability. The use of the Company's products in
various industrial or consumer applications in the future may also subject the
Company to potential risks of product liability claims. The Company's agreements
with its customers typically contain provisions designed to limit the Company's
exposure to product liability claims, and, although the Company has not
experienced any product liability claims to date, the sale of products by the
Company may entail the risk of such claims. Further, notwithstanding liability
limitation provisions in its agreements with its customers, due to various
industry or business practices or the need to maintain good customer
relationships, the Company may be placed in a position whereby it may make
payments related to such product liability claims. The Company currently
maintains product liability insurance, but there can be no assurance that
product liability claims will be covered by such insurance or will not exceed
insurance coverage limits or that such insurance will continue to be available
on commercially reasonable terms or at all. Notwithstanding the provisions in
the agreements with its customers, a product liability claim brought against the
Company could have a material adverse effect upon the Company's reputation,
business, financial condition or operating results.

RISKS OF PRODUCT RECALLS. The automotive industry is heavily regulated by
government agencies which establish various vehicle safety standards that are
often indirectly related to the components and subcomponents in their vehicles.
To the extent that any vehicles or any parts therein are required to be or are
voluntarily recalled and the recall involves vehicles or parts that are directly
or indirectly related to any of the Company's products, the Company may be
required to repair or replace its products, redesign or reproduce its products
or halt production or shipment of its products. Further, any recall of vehicles
or parts directly or indirectly related to any of the Company's products may
have the effect of damaging the Company's reputation. Although no such recall
has involved the Company or its products in the past, there can be no assurance
that such a recall will not occur in the future or that if such a recall does
occur that the Company's reputation, business, financial condition or operating
results will not be materially adversely affected.

NO PRIOR TRADING MARKET; POSSIBLE PRICE VOLATILITY. Prior to this offering,
there has been no public market for the Company's Common Stock, and there can be
no assurance that an active trading market will develop or be sustained
following this offering. The initial public offering price was determined
through negotiations between the Company and the Representative of the
Underwriters and may not be indicative of the market price of the Company's
Common Stock after this offering. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price. 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 operating results, announcements of technological innovations, the
introduction of new products, new contracts or changes in pricing policies by
the Company or its competitors, developments with respect to proprietary rights,
changes in earnings estimates by analysts, conditions and trends in the
semiconductor, automotive, industrial or electronics industries, general

12
<PAGE>
market conditions and other factors. In addition, the stock market has from time
to time experienced significant price and volume fluctuations that have
particularly affected the market prices for the securities of technology
companies. These broad market fluctuations, as well as general economic, market
and political conditions, may adversely affect the market price of the Company's
Common Stock. In the past, following periods of volatility in the market price
of a company's common stock, securities class action litigation has often
occurred against such companies. 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 or operating results. There can be no assurance
that the trading price of the Common Stock will not decline below the initial
public offering price. See "Underwriting."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Immediately upon the
effectiveness of this offering, the 2,500,000 shares of Common Stock offered
hereby will be freely tradable. The sale of substantial amounts of Common Stock
in the public market following the offering made hereby could have an adverse
effect on the price of the Common Stock. Beginning 180 days after the date of
this offering, approximately 4,703,525 shares will become eligible for sale upon
the expiration of agreements not to sell such shares, subject to compliance with
Rule 144 or 701 under the Securities Act of 1933, as amended (the "Securities
Act"). Cruttenden Roth Incorporated and Dougherty Summit Securities LLC, as
Representatives of the Underwriters may, in their sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. In addition, outstanding options to purchase approximately
305,348 shares will be vested and exercisable, and the shares issuable upon
exercise thereof will become eligible for sale, approximately 180 days following
the date of this Prospectus, upon expiration of certain lock-up agreements. The
Company intends to file a registration statement on Form S-8 promptly after the
closing of this offering to register approximately 1,328,000 shares of Common
Stock reserved for issuance under its employee stock option plans and its 1997
Employee Stock Purchase Plan. Shares of Common Stock issued pursuant to these
plans after the effective date of the registration statement will be available
for sale in the public market, subject to certain lock-up agreements and the
Rule 144 volume limitations applicable to affiliates. See "Management--Benefit
Plans" and "Shares Eligible for Future Sale."

The holders of approximately 2,230,000 shares of Common Stock are entitled
to certain demand and piggyback registration rights with respect to such shares
which rights may be exercised beginning 180 days after the date of this
Prospectus. If such holders, by exercising their demand registration rights,
cause a large number of shares to be registered and sold in the public market,
such sales could have a material adverse effect on the market price for the
Company's Common Stock. If the Company were required to include shares held by
such holders in a Company initiated registration pursuant to the exercise of
their piggyback registration rights, such sale might have an adverse effect on
the Company's ability to raise needed capital. See "Shares Eligible for Future
Sale" and "Description of Capital Stock--Registration Rights."

CONTROL BY OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS. The Company's
officers, directors, principal stockholders and their affiliates will, in the
aggregate, beneficially own approximately 33.3% of the Company's outstanding
Common Stock after this offering (31.7% if the Underwriters' over-allotment
option is exercised). As a result, such persons will have, to a substantial
degree, the ability to control the vote on matters submitted to stockholders for
approval (including, but not limited to, the election of all directors, and any
merger, consolidation or sale of all or substantially all of the Company's
assets) and to control the management and affairs of the Company. Such
concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of the Company. See "Management" and "Principal
Stockholders."

POTENTIAL ISSUANCE OF PREFERRED STOCK; FACTORS INHIBITING
TAKEOVER Effective upon the closing of this offering, the Board or Directors
will have the authority to issue up to 7,000,000 shares of preferred stock and
to determine the price, designations, preferences and rights, including voting
rights, of those shares

13
<PAGE>
without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely and materially
affected by, the rights of the holders of any preferred stock that may be issued
in the future. The issuance of preferred stock, while potentially providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no current plans to issue shares of preferred stock.
The Company is subject to Section 203 of the Delaware General Corporation Law,
which restricts certain business combinations with any interested stockholder as
defined by such statute. The statute may have the effect of delaying, deferring
or preventing a change in control of the Company. See "Description of Capital
Stock."

IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Common Stock offered
hereby will suffer immediate and substantial dilution of approximately $4.84 per
share in the net tangible book value of the Common Stock from the initial public
offering price. To the extent vested options or warrants to purchase the
Company's Common Stock are exercised, there will be dilution to the purchasers
of the Common Stock in the initial public offering of approximately $4.87 per
share. See "Dilution."

14
<PAGE>
GLOSSARY

ANALOG: Pertaining to data that consist of continuously variable physical
quantities.

APPLICATION SPECIFIC INTEGRATED CIRCUIT ("ASIC"): An integrated circuit
designed, developed and intended for use by the manufacturer in a particular
application.

BEHAVIORAL SIMULATION SOFTWARE: Proprietary software of the Company used in the
development of ASICs and ISDs. This software aids designers in assessing
alternative ASIC architectures based on sensing element specifications and
product functional requirements, and in optimizing the design tradeoffs among
the sensing element, the electronics and the system.

BIPOLAR: A type of integrated circuit fabrication process developed for
precision analog products which typically require higher operating currents and
are thus limited in terms of integrating many functions into a single chip.

CALIBRATION SOFTWARE: Proprietary software of the Company used to adjust the
parameters in the ASIC to correct variances in sensing elements and system
environments in ISDs.

CHIP-ON-BOARD ("COB"): Method of attaching electronic components in unpackaged
die form to a printed circuit board, eliminating the need for separate ASIC
packaging.

COMPLEMENTARY METAL OXIDE SEMICONDUCTOR ("CMOS"): A type of integrated circuit
fabrication process that is characterized by low power consumption,
compatibility with non-volatile memory and logic, low noise and immunity to
electromagnetic interference.

DESIGN WIN: A product has achieved a design win when a manufacturer has (i)
purchased the Company's ASICs or ISDs and (ii) commenced development of a
product incorporating the purchased type of ISD or ASIC. Design wins do not
necessarily result in released products by the manufacturers.

DIGITAL: Pertaining to representation of information by encoded bits of 1's and
0's that indicate on and off states.

ELECTRONIC SENSOR: A sensor based on an electronic design (as opposed to a
mechanical or electro-mechanical device) that converts a physical parameter into
an electrical signal.

HYBRID CIRCUIT: A method of building an electronic circuit in which discrete
components are placed on the surface of a ceramic substrate that contains the
electrical interconnections. In addition to the electronic components, thick
film resistors can be screen printed onto the ceramic.

INTEGRATED CIRCUIT ("IC"): A single component that combines multiple electronic
circuit elements into a single chip.

INTELLIGENT SENSING ARCHITECTURE ("ISA"): An approach to designing and building
integrated circuits for sensing applications that allows customized solutions to
be produced at costs comparable to standardized products. All signal processing
functions as well as decision making intelligence, system level functions, and
communications circuitry can be integrated into a single chip to save cost and
space.

INTEGRATED SENSOR DEVICES ("ISDS"): Sensor products that consist of a sensing
element and an ASIC in one package.

LASER TRIMMING: Use of a laser to adjust the value of a screen-printed thick
film resistor or a deposited thin film resistor by removing part of the resistor
material in order to adjust its electrical resistance.

MACROCELL: A proven circuit block which implements a significant function such
as an amplifier, filter or data converter, in order to reduce development time
and risk.

MEDIA COMPATIBLE ISD: An ISD product in which the pressure sensing element
comes in direct contact with harsh media such as gasoline, diesel fuel, brake
fluids or other chemical compounds.

15
<PAGE>
MIXED SIGNAL: Pertaining to an ASIC design that includes both analog and
digital circuits.

NONVOLATILE MEMORY: A storage medium that retains its data in the absence of
power.

PRINTED CIRCUIT BOARD ("PC BOARD"): A substrate for interconnecting electronic
components that consists of screen-printed conductive traces on a low cost,
non-conductive substrate.

SURFACE MOUNT TECHNOLOGY: The process of attaching electronic components to a
printed circuit board in which the electrical pins on the package are soldered
to the surface of the printed circuit board as opposed to the "through hole"
method in which the pins are placed through holes in the printed circuit board
and soldered on the back side.

THICK FILM NETWORKS: Electrical circuits made from individual thick film
resistors. These networks are used to correct, via laser trimming, errors
associated with sensing element variances and errors due to changes in the
system environment.

WAFER: A substrate of single crystal silicon that is used to batch manufacture
hundreds or thousands of identical integrated circuits.

16
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock being offered by the Company hereby are estimated to be
approximately $17,850,000 ($20,640,000 if the Underwriters' over-allotment
option is exercised in full) after deducting underwriting discounts and
commissions, the Representatives' non-accountable expense allowance and other
estimated offering expenses. The Company expects that the net proceeds of this
offering will be utilized approximately as follows:

<TABLE>
<CAPTION>
APPROXIMATE AMOUNT PERCENTAGE OF
APPLICATION OF NET PROCEEDS NET PROCEEDS
- -------------------------------------------------------------------- ------------------- ---------------
<S> <C> <C>
Repayment of indebtedness to a related party........................ $ 760,000 4.3%
Expansion of manufacturing facilities............................... 10,500,000 58.8
Research and development............................................ 3,500,000 19.6
Working capital(1).................................................. 3,090,000 17.3
------------------- -----
Total........................................................... $ 17,850,000 100.0%
------------------- -----
------------------- -----
</TABLE>

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

(1) Includes approximately $2,100,000 for purchases of inventories,
approximately $500,000 for purchases of software and capital equipment not
related to manufacturing or research and development and approximately
$490,000 for the reduction of accounts payable.

The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the offering during the next 18 to 24 months. This estimate
is based on certain assumptions, including that no events occur which would
cause the Company to abandon any particular efforts, that competitive conditions
remain stable, that the Company's manufacturing facility expansion will occur as
projected and that the Company does not enter into collaborations to fund
facility expansion separately. The amounts actually expended for each purpose
may vary significantly in the event any of these assumptions prove inaccurate.
The Company reserves the right to change its use of proceeds as unanticipated
events may cause the Company to redirect its priorities and reallocate the
proceeds accordingly.

A portion of the net proceeds may also be used for investments in or
acquisitions of complementary businesses, products or technologies, although no
such transactions are presently contemplated or currently under negotiations.
Pending such uses, the Company expects to invest the net proceeds in short-term,
interest-bearing, investment grade securities.

The Company plans to finance its working capital and other capital resource
needs with its current cash and cash equivalents, cash generated from future
operations, if any, and proceeds from this offering. The Company believes that
these resources will be sufficient to satisfy its working capital and other
capital needs for at least the next 24 months.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its capital stock.
The Company currently anticipates that it will retain future earnings, if any,
to fund the development and growth of its business and does not anticipate
paying cash dividends in the foreseeable future. In addition, the Company's bank
credit agreement prohibits the Company from paying cash dividends on its Common
Stock without the bank's prior written consent.

17
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company as of
December 31, 1997 and as adjusted to reflect the sale by the Company of
2,500,000 shares of Common Stock pursuant to this offering at the initial public
offering price of $8.00 per share and the receipt by the Company of the
estimated net proceeds therefrom, after deducting estimated underwriting
discounts and commissions, the Representatives' non-accountable expense
allowance and estimated offering expenses, and the repayment to a related party
of approximately $679,000 of short-term debt plus accrued interest. The
capitalization information set forth in the table below is qualified by the more
detailed Consolidated Financial Statements and Notes thereto included elsewhere
in this Prospectus and should be read in conjunction with such Consolidated
Financial Statements and Notes.

<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current portion of capital lease obligations(1)........................................... $ 159 $ 159
Short-term debt........................................................................... 1,579 900
--------- -----------
$ 1,738 $ 1,059
--------- -----------
--------- -----------

Long-term debt and capital lease obligations, less current portion(1)..................... $ 98 $ 98

Stockholders' equity
Preferred Stock, $.001 par value per share:
Authorized: 3,400,000 actual (7,000,000 as adjusted)
Issued and outstanding: 3,219,020 actual (no shares as adjusted)...................... 3 --
Common Stock, $.001 par value per share:
Authorized: 50,000,000 actual (50,000,000 as adjusted)
Issued and outstanding: 1,484,505 actual (7,203,525 as adjusted)(2)................... 2 7
Additional paid in capital.............................................................. 13,394 31,242
Accumulated deficit..................................................................... (8,075) (8,075)
Cumulative translation adjustment....................................................... 16 16
Deferred compensation................................................................... (405) (405)
--------- -----------
Total stockholders' equity.............................................................. 4,935 22,785
--------- -----------
Total capitalization...................................................................... $ 5,033 $ 22,883
--------- -----------
--------- -----------
</TABLE>

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

(1) See Note 5 of Notes to Consolidated Financial Statements.

(2) As adjusted outstanding excludes 454,860 shares of Common Stock issuable
upon exercise of outstanding options as of December 31, 1997 at a weighted
average exercise price of $1.62 per share and 623,108 shares of Common Stock
reserved for future grant under the Company's stock plans. Also excludes
58,566 shares of Common Stock issuable upon exercise of outstanding warrants
as of December 31, 1997 at a weighted average exercise price of $6.24 per
share. See "Management-- Benefit Plans" and Note 7 of Notes to Consolidated
Financial Statements.

18
<PAGE>
DILUTION

The net tangible book value of the Company's Common Stock as of December 31,
1997 was $4,934,658, or $1.05 per share based on 4,703,525 shares outstanding
after conversion of Preferred Stock. Net tangible book value per share
represents the amount of the Company's total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding. Net
tangible book value dilution per share represents the difference between the
amount per share paid by purchasers of Common Stock in this offering and the net
tangible book value per share of Common Stock immediately after completion of
this offering. After giving effect to the sale by the Company of the 2,500,000
shares of Common Stock offered hereby at the initial public offering price of
$8.00 per share and after deducting the estimated underwriting discounts and
commissions, the Representative's non-accountable expense allowance and
estimated offering expenses payable by the Company, the net tangible book value
of the Company as of December 31, 1997 would have been $22,784,658 or $3.16 per
share. This represents an immediate increase in net tangible book value of $2.11
per share to existing stockholders and an immediate substantial dilution in net
tangible book value of 60.5% or $4.84 per share to new investors in this
offering. Dilution per share represents the difference between the price per
share paid by the new investors and the net tangible book value per share after
giving effect to the offering. The following table illustrates the per share
dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share............................... $ 8.00
Net tangible book value as of December 31, 1997..................... $ 1.05
Increase per share attributable to the offering..................... $ 2.11
---------
Net tangible book value after the offering............................ 3.16
---------
Dilution per share to new investors $ 4.84
---------
---------
</TABLE>

The following table sets forth, as of December 31, 1997, the difference
between the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share paid by the existing
holders of Common Stock and by the new investors, before deducting the estimated
underwriting discount, the Representative's non-accountable expense allowance
and estimated offering expenses payable by the Company, at the initial public
offering price of $8.00 per share:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..................... 4,703,525 65.3% $ 13,435,352 40.2% $ 2.86
New investors............................. 2,500,000 34.7 20,000,000 59.8 8.00
---------- ----- ------------- -----
Total..................................... 7,203,525 100.0% $ 33,435,352 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>

The foregoing computations exclude 454,860 shares of Common Stock issuable
upon exercise of outstanding options as of December 31, 1997 at a weighted
average exercise price of $1.62 per share and 623,108 shares of Common Stock
reserved for future grant under the Company's stock plans. The foregoing
computations also exclude 58,566 shares of Common Stock issuable upon exercise
of outstanding warrants as of December 31, 1997. See "Management--Benefit
Plans," "Description of Capital Stock" and Note 7 of Notes to Consolidated
Financial Statements.

The following table illustrates the per share dilution assuming all
currently exercisable options and warrants were exercised at December 31, 1997:

<TABLE>
<S> <C> <C>
Initial public offering price per share............................... $ 8.00
Net tangible book value as of December 31, 1997..................... $ 1.12
Increase per share attributable to the offering..................... $ 2.01
---------
Net tangible book value after the offering............................ 3.13
---------
Dilution per share to new investors $ 4.87
---------
---------
</TABLE>

The foregoing table includes 222,642 shares of Common Stock issuable upon
the exercise of vested options as of December 31, 1997 at a weighted average
exercise price of $1.23 per share. It also includes 58,566 shares of Common
Stock issuable upon the exercise of outstanding warrants at December 31, 1997 at
an exercise price of $6.24. The table excludes the impact of 400,466 options
which are currently not vested.

19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The selected consolidated financial data set forth below as of March 31,
1996 and 1997 and for the fiscal years ended March 31, 1995, 1996 and 1997, have
been derived from consolidated financial statements of the Company which have
been audited by Ernst & Young LLP, independent auditors, whose report thereon is
included elsewhere herein. The consolidated balance sheet data set forth below
as of March 31, 1995 has been derived from audited financial statements not
included in this Prospectus. The selected financial data as of December 31, 1997
and for the nine months ended December 31, 1996 and 1997 has been derived from
the unaudited financial statements of the Company included elsewhere in this
Prospectus. In the opinion of management, all adjustments, consisting of only
normal recurring accruals, considered necessary for a fair presentation have
been made. These historical results are not necessarily indicative of the
results to be expected in the future. The following table is qualified by
reference to and should be read in conjunction with the consolidated financial
statements, related notes thereto and other financial data included elsewhere
herein.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Product revenues............................................ $ 3,669 $ 5,337 $ 8,049 $ 5,174 $ 7,873
Contract revenues........................................... 1,307 2,993 2,255 1,541 3,140
--------- --------- --------- --------- ---------
Total revenues................................................ 4,976 8,330 10,304 6,715 11,013

Cost of revenues:
Cost of product revenues.................................... 3,624 5,250 7,292 5,433 5,328
Cost of contract revenues................................... 996 2,150 2,731 2,024 2,571
--------- --------- --------- --------- ---------
Total cost of revenues........................................ 4,620 7,400 10,023 7,457 7,899
--------- --------- --------- --------- ---------
Gross profit.................................................. 356 930 281 (742) 3,114
Operating expenses:
Research and development.................................... 701 742 1,438 1,034 1,265
Sales, general and administrative........................... 1,299 1,390 1,760 1,263 1,468
--------- --------- --------- --------- ---------
Total operating expenses...................................... 2,000 2,132 3,198 2,297 2,733
--------- --------- --------- --------- ---------

Income (loss) from operations................................. (1,644) (1,202) (2,917) (3,039) 381
Interest expense.............................................. (96) (226) (260) (199) (159)
Other income.................................................. 587 366 27 92 (11)
Minority interest in net (income) loss of
ISS-Nagano GmbH............................................. 37 311 521 531 (116)
--------- --------- --------- --------- ---------
Net income (loss)............................................. $ (1,116) $ (751) $ (2,629) $ (2,615) $ 95
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma basic and diluted net income (loss) per share....... $ (0.72) $ (0.77) $ 0.02
--------- --------- ---------
--------- --------- ---------
Shares used in calculation of pro forma basic net income
(loss) per share............................................ 3,632 3,394 4,584
--------- --------- ---------
--------- --------- ---------
Shares used in calculation of pro forma diluted net income
(loss) per share............................................ 3,632 3,394 5,003
--------- --------- ---------
--------- --------- ---------
</TABLE>

<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
------------------------------- DECEMBER 31,
1995 1996 1997 1997
--------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................................ $ 847 $ 521 $ 2,059 $ 675
Working capital.................................................. 1,056 150 2,139 3,039
Total assets..................................................... 5,625 5,687 8,709 10,422
Long-term obligations............................................ 24 22 197 98
Total stockholders' equity....................................... 1,849 1,141 3,683 4,935
</TABLE>

20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

ISS designs, manufactures and markets high performance, intelligent sensor
products that are used in electronic control systems by customers in the
automotive and industrial markets. The Company was incorporated in March 1989
and was principally engaged in research and development through fiscal 1993. In
fiscal 1991, the Company shipped its first product, an ASIC designed for use
with a very low pressure sensor used in industrial flow measurements. In fiscal
1992, the Company introduced its first ISD, an aftermarket product for manifold
absolute pressure ("MAP") sensor applications for General Motors automobile
engines. One of the major objectives in introducing the MAP ISDs was to
demonstrate the viability of the Company's technology in the rugged, "under the
hood" environment. The Company subsequently developed and introduced a variety
of other ASICs and ISDs. Principally as a result of an increase in product
sales, the Company's total revenues have increased from approximately $5.0
million in fiscal 1995 to $11.0 million in the first nine months of fiscal 1998.
The Company has experienced operating losses in each year since its inception
and had an accumulated deficit of $8.1 million as of December 31, 1997. Although
the Company had a net loss in the quarters ended March 31, 1997 and December 31,
1997, it achieved income from operations in each of the past four quarters.

The Company derives its revenues from sales of its ASICs and ISDs and from
product development contracts. Beginning in fiscal 1995, product sales have
accounted for a significant majority of the Company's revenues, and the Company
anticipates that the percentage will increase in the future. The Company sells a
substantial portion of its products pursuant to long-term, exclusive contracts
that typically contain volume-pricing provisions that require the Company to
reduce its per unit price as certain volume levels are achieved. If the Company
is unable to make corresponding product cost reductions, the resulting decline
in the average selling prices of the Company's products sold pursuant to such
contracts will reduce the Company's product gross margin. The Company
anticipates that all of its products will experience declining average selling
prices over their life cycles with a similar potential impact on product gross
margin if the Company is unable to reduce corresponding costs or introduce new
products with higher gross margins. The Company's strategy is to improve its
product gross margin despite the declining average selling prices by reducing
cost of product revenues, introducing new products with higher gross margins and
addressing new markets. See "Risk Factors--Declining Average Selling Prices."

The Company's cost of product revenues includes the costs of wafer
fabrication, raw materials, third party assembly and direct and indirect costs
of procurement, scheduling, testing, calibration of ISDs, housing assembly for
ISDs and quality assurance. The Company is actively attempting to reduce these
costs by, among other things, improving yields on existing products, fabricating
its ASICs on larger wafers using smaller geometries and performing more
manufacturing, assembly and test operations in-house. In addition, to the extent
that the volume of product shipments increases, the Company may be able to
obtain volume discounts to lower its costs of raw materials, components and
services. Higher volumes may also result in allocation of fixed costs over a
larger revenue base and a corresponding reduction in per unit product costs.
Nonetheless, the Company's ability to reduce product costs may be adversely
affected by a number of factors outside the Company's control including, among
other things, fluctuations in manufacturing yields and availability and cost of
manufacturing and assembly capacity and of raw materials. In the past, the
Company has experienced significant, unanticipated price increases for wafer
fabrication and significant assembly supply disruptions which materially
adversely affected the Company's operating results. In addition to its efforts
to reduce cost of product revenues, the Company believes it can mitigate the
effects of declining average selling prices by continually introducing new
products and addressing new markets with existing and new products. The Company
has made significant investments in its product development resources to address
these issues. There can be no assurance, however, that the Company will be able
to reduce its product costs or introduce new products in a timely manner to
maintain or increase its current product gross margin levels. Any failure to
maintain such gross margins could have a material

21
<PAGE>
adverse effect on the Company's business, financial condition or operating
results. See "Risk Factors-- Declining Average Selling Prices."

The Company's revenues in any period are substantially dependent upon sales
to and product development contracts with a small number of customers. Revenues
from customers that represented at least 10% of total revenues in each of fiscal
1995, 1996, 1997 and the nine months ended December 31, 1997 accounted for 69%,
71%, 75% and 67% of total revenues, respectively. The Company expects that this
trend will continue for the foreseeable future. See "Risk Factors--Significant
Customer Concentration."

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED MARCH ENDED
31, DECEMBER 31,
------------------- ------------
1995 1996 1997 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues.................................................... 73.7% 64.1% 78.1% 77.1% 71.5%
Contract revenues................................................... 26.3 35.9 21.9 22.9 28.5
----- ----- ----- ----- -----
Total revenues........................................................ 100.0 100.0 100.0 100.0 100.0

Cost of revenues:
Cost of product revenues............................................ 72.8 63.0 70.8 80.9 48.4
Cost of contract revenues........................................... 20.0 25.8 26.5 30.2 23.3
----- ----- ----- ----- -----
Total cost of revenues................................................ 92.8 88.8 97.3 111.1 71.7
----- ----- ----- ----- -----
Gross margin.......................................................... 7.2 11.2 2.7 (11.1) 28.3

Operating expenses:
Research and development............................................ 14.1 8.9 13.9 15.4 11.5
Sales, general and administrative................................... 26.1 16.7 17.1 18.8 13.3
----- ----- ----- ----- -----
Total operating expenses.............................................. 40.2 25.6 31.0 34.2 24.8
----- ----- ----- ----- -----

Income (loss) from operations......................................... (33.0) (14.4) (28.3) (45.3) 3.5
Interest expense...................................................... (1.9) (2.7) (2.5) (2.9) (1.5)
Other income (expense)................................................ 11.8 4.4 0.3 1.4 --
Minority interest in net (income) loss of
ISS-Nagano GmbH..................................................... 0.7 3.7 5.0 7.9 (1.1)
----- ----- ----- ----- -----
Net income (loss)..................................................... (22.4)% (9.0)% (25.5)% (38.9)% 0.9%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>

22
<PAGE>
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996

REVENUES

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

PRODUCT REVENUES. Product revenues increased by 52.2% from $5.2 million in
the nine months ended December 31, 1996 to $7.9 million in the nine months ended
December 31, 1997. This increase resulted primarily from an increase in
shipments of MAP ISDs and media compatible ISDs. The Company expects that
product revenues will increase as a percentage of total revenues in the future.

CONTRACT REVENUES. Revenues from product development contracts increased by
103.8% from $1.5 million in the nine months ended December 31, 1996 to $3.1
million in the nine months ended December 31, 1997. This increase was due to the
achievement of significant milestones under new product development contracts.
The Company's contract revenues have fluctuated in the past and may continue to
fluctuate depending on the number and size of product development contracts and
the timing of related milestones and deliverables. The Company anticipates that
contract revenues will decrease as a percentage of total revenues over time as
the Company's product offering increases. However, because the Company's product
portfolio expands as a direct result of product development contracts, the
Company intends to enter into new product development contracts with its
customers in the future.

International revenues (export revenues and revenues from the Company's
German subsidiary) were $2.9 million and $6.0 million in the nine months ended
December 31, 1996 and 1997, respectively, representing 43.5% and 54.2% of total
revenues, respectively, in each period. The increase in international revenues
was principally the result of increased sales in Germany and export sales in
Canada and Japan. The Company intends to continue to expand its international
operations and to enter additional international markets. The Company's sales in
Asia have been concentrated in Japan to date, but the Company has initiated
marketing efforts to penetrate additional Asian markets. All of the Company's
sales in Europe are denominated in Deutsche Marks. Accordingly, a portion of the
Company's international revenues is subject to foreign currency fluctuation
risks, and fluctuations in the value of the Deutsche Mark could adversely affect
the profitability of sales made in Europe and therefore materially adversely
affect the Company's business, financial condition or operating results. The
Company has not engaged in any hedging transactions to minimize its risk to
foreign currency fluctuations. The Company may, however, engage in such
transactions in the future.

COST OF REVENUES

COST OF PRODUCT REVENUES. The following table sets forth the Company's
product revenues and the associated costs in the nine months ended December 31,
1996 and 1997.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER
31,
--------------
1996 1997
------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Product revenues.......................................................................... $5,174 $7,873
Cost of product revenues.................................................................. 5,433 5,328
------ ------
Product gross profit...................................................................... $ (259) $2,545
------ ------
------ ------
Product gross margin...................................................................... (5.0)% 32.3%
------ ------
------ ------
</TABLE>

23
<PAGE>
The Company's product gross margin improved from (5.0%) in the nine months
ended December 31, 1996 to 32.3% in the nine months ended December 31, 1997,
primarily as a result of improved gross margin on the Company's MAP product line
and the introduction of new ISDs with higher gross margin. The improved gross
margin on the MAP product line resulted from a design change to incorporate a
new ASIC that reduced component costs and improved yields. In addition, higher
volume shipments, primarily of MAP products, resulted in allocation of fixed
costs over a higher revenue base. Product gross margin was also favorably
affected by the commencement of higher volume shipments of media compatible ISDs
which have higher average selling prices than the Company's other ISDs. Such
shipments were primarily to customers in Germany. The Company expects to
commence volume shipments of media compatible ISDs to North American customers
in late calendar 1998.

COST OF CONTRACT REVENUES. Cost of contract revenues is comprised
principally of compensation for engineering personnel and related costs. The
cost of contract revenues is recorded as incurred. Cost of contract revenues
increased from $2.0 million in the nine months ended December 31, 1996 to $2.6
million in the nine months ended December 31, 1997 as the result of increased
development contract activities. The product development contracts are primarily
intended to develop new products and not necessarily to increase the Company's
profitability through funds earned under these contracts. Accordingly, the
Company expects that the gross margin on contract revenues will fluctuate
substantially from period to period because expenses are recorded as incurred,
while recognition of revenues occurs only when contractual milestones are
reached. The Company does not anticipate that gross margin on contract revenues
will grow or even remain positive in future periods.

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
include compensation and associated costs relating to development personnel not
assigned to product development contract projects, as well as depreciation of
certain equipment and development costs related to software, test and
manufacturing. Research and development costs are expensed as incurred. Research
and development expenses increased in absolute dollars from $1.0 million in the
nine months ended December 31, 1996 to $1.3 million in the nine months ended
December 31, 1997, but decreased as a percentage of revenues due to the higher
level of revenues. The Company believes that research and development is
critical to the Company's future success, and the Company intends to make
continued significant investments in research and development. Research and
development expenses are expected to increase in absolute dollars but may
fluctuate as a percentage of revenues depending on a variety of factors
including the product development contract activity in future periods.

SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses consist of compensation for sales, marketing, finance
and administration personnel, commissions paid to sales representatives and
promotional activities. Sales, general and administrative expenses increased
from $1.3 million in the nine months ended December 31, 1996 to $1.5 million in
the nine months ended December 31, 1997. To the extent that the Company is
successful in expanding its operations and as a result of becoming a public
entity, the Company expects sales, general and administrative expenses to
increase in absolute dollars in future periods. Sales, general and
administrative expenses have historically been relatively low as a percentage of
revenues due to the Company's strategy of developing custom products for
specific customers and due to its use of technical personnel in the sales
process. To the extent that the Company's offering of standard products
increases and the Company markets these products through conventional means such
as advertising in product catalogues, the Company's sales, general and
administrative expenses may increase in absolute dollars, although total sales,
general and administrative expenses are not expected to increase as a percentage
product revenues.

24
<PAGE>
INTEREST EXPENSE

Interest expense decreased from $200,000 in the nine months ended December
31, 1996 to $159,000 in the nine months ended December 31, 1997 due to lower
borrowings in the first nine months of fiscal 1997.

OTHER INCOME

Other income in the nine months ended December 31, 1996 consisted primarily
of a recognized gain of $172,000 from the final installment of the sale of an
interest in the Company's subsidiary and foreign exchange losses of $80,000 on
trade payables and notes to related parties denominated in foreign
currencies. Other expense for the nine months ended December 31, 1997 was
immaterial. The Company has not engaged in any hedging transactions to minimize
its risk to foreign currency fluctuations. The Company may, however, engage in
such transactions in the future.

MINORITY INTEREST IN NET (INCOME) LOSS OF ISS-NAGANO GMBH

Minority interest in net (income) loss of ISS-Nagano GmbH represents the
portion of net income or loss of the Company's majority-owned German subsidiary,
ISS-Nagano GmbH ("ISS-Nagano") which is attributed to the interest of minority
shareholders of that entity. Otherwise, all operating results of ISS-Nagano are
consolidated with the Company's. The portion of ISS-Nagano's net loss
attributable to the minority shareholders' interest for the nine months ended
December 31, 1996 was $531,000, which resulted in a corresponding $531,000
decrease in the Company's net loss for that period. The portion of ISS-Nagano's
net income attributable to the minority shareholders' interest for the nine
months ended December 31, 1997 was $116,000, which resulted in a corresponding
$116,000 decrease in the Company's net income for that period.

On July 31, 1997, the Company entered into an agreement to increase its
ownership of ISS-Nagano by converting approximately $1.0 million in long-term
intercompany indebtedness owed by ISS-Nagano into an increased equity interest.
Accordingly, the Company now owns 74% of the equity of ISS-Nagano. For periods
subsequent to July 1997, 26% of ISS-Nagano's net income (loss) has been
attributed to the minority stockholders' interest.

COMPARISON OF YEARS ENDED MARCH 31, 1995, 1996 AND 1997

REVENUES

PRODUCT REVENUES. Product revenues increased by 50.8% from $5.3 million in
fiscal 1996 to $8.0 million in fiscal 1997. This increase was principally the
result of shipments of new custom ASICs and ISDs and increased unit shipments of
existing custom products. The increase in product revenues in fiscal 1997 was
also the result of the introduction of the Company's first standard products.
Product revenues increased by 45.5% from $3.7 million in fiscal 1995 to $5.3
million in fiscal 1996. This increase was principally the result of the
introduction of the Company's media compatible ISDs and increased sales of
ASICs.

CONTRACT REVENUES. Contract revenues decreased by 24.7% from $3.0 million
in fiscal 1996 to $2.3 million in fiscal 1997. This decrease was due to the
significant number of new product development contracts which were initiated in
fiscal 1996 that continued through fiscal 1997. Based on completed milestones,
most of the revenue under these contracts was recognized in fiscal 1996.
Contract revenues increased by 128.9% from $1.3 million in fiscal 1995 to $3.0
million in fiscal 1996 principally as the result of the initiation of new
product development contracts in fiscal 1996.

International revenues (export revenues and revenues of ISS-Nagano) were
$1.1 million, $3.2 million and $4.7 million in fiscal 1995, 1996 and 1997,
respectively, representing 22.0%, 38.6% and 46.0% of total revenues,
respectively, in each year. The increase in international revenues from fiscal
1995 to fiscal 1996

25
<PAGE>
was due to increased sales in Japan and Germany. The increase in international
revenues from fiscal 1996 to fiscal 1997 was principally the result of increased
sales in Germany.

COST OF REVENUES

COST OF PRODUCT REVENUES. The Company's product gross margin improved from
1.6% in fiscal 1996 to 9.4% in fiscal 1997 primarily as a result of a reduction
in material costs and improved yields of the MAP ISDs during the fourth quarter
of fiscal 1997. The introduction in the fourth quarter of fiscal 1997 of new
ASICs with higher product gross margin also contributed to the improvement in
product gross margin. These improvements were partially offset by an increase in
manufacturing support costs in fiscal 1997 related to implementation of in-house
test capabilities, product and process engineering to support yield enhancement
programs and qualification of an offshore assembly vendor. The Company's product
gross margin remained relatively constant at 1.2% and 1.6% in fiscal 1995 and
fiscal 1996, respectively. The low product gross margins during the periods were
principally the result of high costs associated with the commencement of volume
production and the allocation of fixed costs over a relatively small revenue
base.

COST OF CONTRACT REVENUES. Cost of contract revenues increased from $2.1
million in fiscal 1996 to $2.7 million in fiscal 1997 but declined as a
percentage of total revenues as a result of increased product revenues. Cost of
contract revenues increased from $996,000 in fiscal 1995 to $2.1 million in
fiscal 1996 due to a significant increase in the number of new product
development contracts initiated in fiscal 1996.

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by 93.9% from $742,000 in fiscal 1996 to $1.4 million in fiscal 1997.
The Company's research and development expenses increased in fiscal 1997 as a
result of implementing in-house test capabilities and expanding research and
development activities in Germany. Research and development expenses increased
in absolute dollars from $701,000 in fiscal 1995 to $742,000 in fiscal 1996 but
decreased as a percentage of total revenues from 14.1% in fiscal 1995 to 8.9%
for fiscal 1996. The decrease as a percentage of revenues was partially due to
the effect of the grant from the German government and partially due to an
increase in the number of product development contracts in fiscal 1996 which
absorbed resources that would otherwise have been allocated to research and
development.

SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses increased by 26.6% from $1.4 million in fiscal 1996 to
$1.8 million in fiscal 1997. This increase was principally due to increased
personnel, sales commission and travel expenses associated with the increased
level of operations. Sales, general and administrative expenses were relatively
constant in absolute dollars in fiscal 1995 and fiscal 1996 but decreased as a
percentage of revenues from 26.1% to 16.7% due to the increase in revenues.

INTEREST EXPENSE

Interest expense increased from $96,000 in fiscal 1995 to $226,000 in fiscal
1996 and to $260,000 in fiscal 1997 due to higher average borrowings.

OTHER INCOME (EXPENSE)

Other income decreased from $587,000 in fiscal 1995 to $366,000 in fiscal
1996 and to $27,000 in fiscal 1997. Other income in fiscal 1995 consisted
primarily of a gain of $166,000 from the first installment of the sale of a
minority interest in ISS-Nagano and of a $343,000 grant from the German
government. Other income in fiscal 1996 consisted primarily of $235,000 of gain
recognized from the second and third installments of the sale of a minority
interest in ISS-Nagano and a $165,000 foreign exchange gain on trade payables
and notes to related parties denominated in foreign currencies. Other income in
fiscal 1997 consisted primarily of $172,000 of gain recognized from the fourth
installment of the sale of a minority

26
<PAGE>
interest in ISS-Nagano which was partially offset by a $144,000 foreign exchange
loss on trade payables and notes to related parties denominated in foreign
currencies.

MINORITY INTEREST IN NET (INCOME) LOSS OF ISS-NAGANO GMBH

Minority interest in net loss of ISS-Nagano GmbH increased from $37,000 in
fiscal 1995 to $311,000 in fiscal 1996 and to $521,000 in fiscal 1997 due to the
increased net losses of ISS-Nagano. As a result, the Company's net loss was
reduced by corresponding amounts in each respective fiscal year.

INCOME TAXES

Due to the Company's loss position, there was no provision for income taxes
in fiscal 1995, 1996 or 1997. For federal tax purposes as of March 31, 1997, the
Company had net operating loss and research and development credit carryforwards
of approximately $6.5 million and $114,000, respectively, which will expire in
fiscal years 2005 through 2012. For California tax purposes as of March 31,
1997, the Company had net operating loss and research and development credit
carryforwards of approximately $3.0 million and $67,000, respectively, which
will expire in fiscal years 1998 through 2002. The Company also has net
operating loss carryforwards of $525,000 in ISS-Nagano as of March 31, 1997.

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

At March 31, 1997, the Company had net deferred tax assets of $3.0 million
relating principally to the net operating loss carryforwards and capitalized
research costs. Realization of deferred tax assets is dependent on future
earnings, if any, the timing of which is uncertain. A valuation allowance has
been recorded for the entire net deferred tax asset as a result of uncertainties
regarding the realization of the assets due to the lack of earnings history of
the Company.

YEAR 2000 COMPLIANCE

The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two digit year value to 00. This issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. Management
is in the process of working with its software vendors to assure that the
Company is prepared for the year 2000. Management does not anticipate that the
Company will incur material operating expenses or be required to make any
material investment in computer systems improvements to be year 2000 compliant.
However, uncertainty exists concerning the potential costs and effects
associated with any year 2000 compliance. The Company is currently implementing
an upgrade to its management information system that the Company believes is
year 2000 compliant. Any year 2000 compliance problem of either the Company or
its customers or vendors could materially adversely affect the Company's
business, financial condition or operating results.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued Statement No.
130, REPORTING COMPREHENSIVE INCOME (FAS No. 130), and Statement No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (FAS No.
131). FAS No. 130 establishes rules for reporting and displaying comprehensive
income. FAS No. 131 will require the Company to use the "management approach" in
disclosing segment information. Both statements are effective for the Company
during fiscal year 1999.

27
<PAGE>
The Company does not believe that the adoption of either FAS No. 130 or FAS No.
131 will have material impact on the Company's business, financial condition or
operating results.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth selected consolidated statements of
operations data for each of the seven quarters in the period ended December 31,
1997, as well as the percentage of the Company's total revenues represented by
such data. The unaudited consolidated financial statements have been prepared on
the same basis as the audited consolidated financial statements contained herein
and include all adjustments, consisting only of normal recurring adjustments,
that the Company considers necessary for a fair presentation of such information
when read in conjunction with the audited Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Prospectus. The operating results for
any interim period are not necessarily indicative of results to be expected for
any future period.

28
<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED,
-----------------------------------------------------------------------------------
JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1996 1996 1996 1997 1997 1997 1997
----------- --------- --------- ----------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenues.......................... $ 1,753 $ 2,052 $ 1,369 $ 2,875 $ 2,553 $ 2,415 $ 2,905
Contract revenues......................... 710 435 396 714 948 1,095 1,097
----------- --------- --------- ----------- ----------- --------- -----------
Total revenues.............................. 2,463 2,487 1,765 3,589 3,501 3,510 4,002
Cost of revenues:
Cost of product revenues.................. 1,837 1,673 1,923 1,859 1,848 1,607 1,873
Cost of contract revenues................. 640 768 616 707 689 889 994
----------- --------- --------- ----------- ----------- --------- -----------
Total cost of revenues...................... 2,477 2,441 2,539 2,566 2,537 2,496 2,867
Operating expenses:
Research and development.................. 324 391 319 404 355 484 426
Sales, general and administrative......... 422 424 417 497 438 496 533
----------- --------- --------- ----------- ----------- --------- -----------
Total operating expenses.................... 746 815 736 901 793 980 959
----------- --------- --------- ----------- ----------- --------- -----------
Income (loss) from operations............... (760) (769) (1,510) 122 171 34 176
Interest expense............................ (83) (69) (47) (61) (54) (51) (54)
Other income (expense)...................... 72 (6) 26 (65) 4 61 (76)
Minority interest in net (income) loss of
ISS-Nagano GmbH........................... 125 171 235 (10) (30) (31) (55)
----------- --------- --------- ----------- ----------- --------- -----------
Net income (loss)........................... $ (646) $ (673) $ (1,296) $ (14) $ 91 $ 13 $ (9)
----------- --------- --------- ----------- ----------- --------- -----------
----------- --------- --------- ----------- ----------- --------- -----------
</TABLE>

AS A PERCENTAGE OF TOTAL REVENUES

Revenues:
Product revenues.......................... 71.2% 82.5% 77.6% 80.1% 72.9% 68.8% 72.6%
Contract revenues......................... 28.8 17.5 22.4 19.9 27.1 31.2 27.4
----------- --------- --------- ----------- ----------- --------- -----------
Total revenues.............................. 100 100 100 100 100 100 100

Cost of revenues:
Cost of product revenues.................. 74.6 67.3 109.0 51.8 52.8 45.8 46.8
Cost of contract revenues................. 26.0 30.9 34.9 19.7 19.7 25.3 24.8
----------- --------- --------- ----------- ----------- --------- -----------
Total cost of revenues...................... 100.6 98.2 143.9 71.5 72.5 71.1 71.6
Operating expenses:
Research and development.................. 13.2 15.7 18.1 11.3 10.1 13.8 10.7
Sales, general and administrative......... 17.1 17.0 23.6 13.8 12.5 14.1 13.3
----------- --------- --------- ----------- ----------- --------- -----------
Total operating expenses.................... 30.3 32.7 41.7 25.1 22.6 27.9 24.0
----------- --------- --------- ----------- ----------- --------- -----------
Income (loss) from operations............... (30.9) (30.9) (85.6) 3.4 4.9 1.0 4.4
Interest expense............................ (3.3) (2.8) (2.7) (1.6) (1.5) (1.4) (1.3)
Other income (expense)...................... 2.9 (0.3) 1.4 (1.8) 0.1 1.7 (1.9)
Minority interest in net (income) loss of
ISS-Nagano GmbH........................... 5.1 6.9 13.4 (0.3) (0.9) (0.9) (1.4)
----------- --------- --------- ----------- ----------- --------- -----------
Net income (loss)........................... (26.2)% (27.1)% (73.5)% (0.3)% 2.6% 0.4% (0.2)%
----------- --------- --------- ----------- ----------- --------- -----------
----------- --------- --------- ----------- ----------- --------- -----------
</TABLE>

29
<PAGE>
The Company's operating results in the quarter ended December 31, 1996 were
materially adversely affected by, among other things, significant shipment
delays to three of its major customers. Shipments of MAP ISDs and of ASICs to
certain customers were delayed due to these customers' year-end inventory
adjustments. Anticipated shipments of certain ISDs to Bosch were also delayed
while the Company completed a product redesign requested by Bosch to enable
compatibility with additional engine control computers. Because a significant
amount of the Company's costs are relatively fixed, the revenue shortfall caused
by the shipment delays resulted in a substantial operating loss in the quarter.

Revenue in the quarter ended March 31, 1997 increased substantially over the
prior quarter as the Company shipped, in addition to its normal shipments, a
portion of the MAP ISDs and substantially all of the Bosch ISDs that were
delayed. In addition, the Company made substantial unit shipments of a standard
ASIC which had a significant impact on total revenues for the quarter.

Product gross margin in the quarter ended March 31, 1997 also improved
substantially over the prior quarter primarily as a result of improved gross
margin on the Company's MAP product line and the shipment of ISDs with higher
gross margins. The improved gross margin on the MAP product line resulted from a
design change to incorporate a new ASIC that reduced component costs and
improved yields. In addition, higher volume shipments, primarily of MAP
products, resulted in allocation of fixed costs over a higher revenue base.
Product gross margin was also favorably affected by the commencement of higher
volume shipments of media compatible ISDs which have higher average selling
prices than the Company's other ISDs. Further, the increased shipments of ASICs
in the quarter also favorably affected product gross margin because ASICs
typically have higher gross margins than ISDs.

The product revenues in the quarter ended March 31, 1997 were higher than
product revenues in the quarter ended June 30, 1997 because a significant amount
of the anticipated shipments for the quarter ended December 31, 1996 were
shipped in the fourth quarter ended March 31, 1997. Product revenues were
relatively constant in the quarter ended September 30, 1997 due to production
constraints. Product revenues increased by 20.3% for the quarter ended December
31, 1997 as compared to the quarter ended September 30, 1997 as the Company
addressed certain of its production constraints and increased shipments of its
media compatible ISDs. Product gross margin decreased slightly in the quarter
ended June 30, 1997 but remained significantly higher than product gross margins
in previous periods as shown in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
-----------------------------------------------------------------
JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1996 1996 1996 1997 1997 1997
-------- --------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Product revenues............................................ $1,753 $ 2,052 $ 1,369 $2,875 $2,553 $ 2,415
Cost of product revenues.................................... 1,837 1,673 1,923 1,859 1,848 1,607
-------- --------- -------- -------- -------- ---------
Product gross profit........................................ (84) 379 (554) 1,016 705 808
Product gross margin........................................ (4.8)% 18.5% (40.5)% 35.3% 27.6% 33.5%

DEC. 31,
1997
--------

<S> <C>
Product revenues............................................ $ 2,905
Cost of product revenues.................................... 1,873
--------
Product gross profit........................................ 1,032
Product gross margin........................................ 35.5%
</TABLE>

The decrease in product gross margin in the quarter ended June 30, 1997 was
primarily due to change in product mix as the Company made increased shipments
of ISDs which typically have lower gross margins than ASICs. The Company
anticipates that the average selling prices of its products may fluctuate
significantly in future periods, generally declining over time. Any significant
decrease in average selling prices could result in a material decline in the
Company's product gross margin if the Company is unable to implement cost
reductions or introduce new products with higher product gross margin. See "Risk
Factors--Declining Average Selling Prices."

The Company's revenues and operating results have varied on a quarterly and
an annual basis in the past and may vary significantly in the future. The
Company's revenues and operating results are difficult to forecast and could be
materially adversely affected by many factors, some of which are outside the
control of the Company, including, among others, the timing, deferral or
cancellation of customer orders and

30
<PAGE>
related shipments, the relatively long sales and development cycles for the
Company's products, competitive pressures on selling prices, availability of
foundry capacity, availability of raw materials, fluctuations in yields, changes
in product mix, changes in the lead time required to ship products after receipt
of an order, the Company's ability to introduce new products and technologies on
a timely basis, introduction of products and technologies by the Company's
competitors and customers, market acceptance of the Company's and its customers'
products, the ability to obtain product development contracts and the amount and
timing of recognition of product development contract revenue and expense
associated with such contracts, quality control of products sold, personnel
changes and difficulties in attracting and retaining qualified technical
personnel, foreign currency exchange rates and economic conditions generally and
in the automotive and industrial markets.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations principally through
sales of equity securities, product revenues and contract revenues. At December
31, 1997, the Company had cash and cash equivalents of $675,000 and working
capital of $3.0 million. The Company also has available a $2.0 million bank line
of credit agreement secured by the assets of the Company that permits borrowings
of the lesser of $2.0 million or 75% of eligible accounts receivable. Eligible
accounts receivable are defined as those outstanding less than 90 days from date
of invoice. Borrowings under the line of credit bear interest at the bank's
prime rate plus 0.75%. The Company also has available a $250,000 term loan
facility for capital equipment that bears interest at the bank's prime rate plus
1.5%. At December 31, 1997, the Company had outstanding borrowings of $900,000
under the line of credit agreement, $257,000 under various capital equipment
lease financing arrangements and notes payable to a related party of $679,000.
See Notes 3, 4 and 5 of Notes to Consolidated Financial Statements.

Net cash used in operating activities was $1.5 million, $1.7 million, $2.7
million and $939,000 in fiscal 1995, 1996 and 1997 and the nine months ended
December 31, 1997, respectively. For fiscal 1997, net cash used in operations
was primarily attributable to the net loss adjusted for non-cash items, an
increase in accounts receivable partially offset by an increase in accounts
payable and other accrued liabilities. For the nine months ended December 31,
1997, cash used in operating activities was primarily attributable to increases
in accounts receivable and inventories partially offset by net income adjusted
for non-cash items. The increase in accounts receivable at December 31, 1997 was
due, in part, to an increase in product shipments and, in part, to the
achievement of significant milestones under product development contracts in the
month of December. Inventory levels increased at December 31, 1997 in order to
meet expected customer demands.

Net cash used in investing activities was $899,000, $974,000, $1.1 million
and $675,000 in fiscal 1995, 1996, 1997 and the nine months ended December 31,
1997, respectively. Cash used in investing activities was primarily for the
purchase of equipment.

Net cash provided by financing activities was $2.3 million, $2.3 million,
$5.4 million and $230,000 in fiscal 1995, 1996, 1997 and the nine months ended
December 31, 1997, respectively. In fiscal 1997, cash provided by financing
activities was primarily due to the sale of convertible preferred stock and
proceeds from the issuance of notes payable. For the nine months ended December
31, 1997, the Company raised cash from financing activities of approximately
$501,000 through stock sales which was partially offset by payments on notes
payable and capital lease obligations.

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

31
<PAGE>
BUSINESS

OVERVIEW

ISS designs, manufactures and markets high performance, intelligent sensor
products that are used in electronic control systems by customers in the
automotive and industrial markets. The Company's objective is to become a
leading supplier of ASICs and ISDs for electronic control systems in these
markets. Currently, ISS has over 20 customers worldwide, including market
leaders such as Bosch, John Deere, Echlin, Honda, Knorr-Bremse, MascoTech,
Michelin, Nagano and Sumitomo. Through these and other customers, the Company's
products have been designed into the vehicles of leading manufacturers such as
Fiat, Ford, Honda, Mercedes Benz, Mitsubishi, Nissan and Peugeot as well as into
industrial systems manufactured by companies such as Tokyo Gas and Eaton
Corporation.

The Company's core competencies are its (i) ASIC design technology, (ii)
behavioral simulation software, (iii) calibration software, (iv) package design
technology and (v) manufacturing processes. The ASIC design and software
technologies, together with the Company's packaging expertise, enable ISS to
design ASICs and ISDs that meet customer requirements for integration with
diverse and rugged systems and to manufacture them efficiently and cost
effectively with relatively low capital expenditures.

The Company has established strategic alliances with a number of significant
manufacturers such as Bosch, Nagano and Michelin. These strategic alliances are
intended to be long term, mutually beneficial relationships focusing on joint
technology and product development, manufacturing and exclusive or preferred
supply arrangements. The Company believes that OEM technical partnering
arrangements with its customers allow the Company to combine its technology with
the systems expertise of its customers and to rapidly introduce new products
based on the technology developed through these alliances.

INDUSTRY BACKGROUND

According to industry sources (including Dataquest, Intechno AG, Prognosis
and Selantek), the high performance automotive and industrial segments of the
market for electronic sensor products were estimated to be approximately $2.1
billion in 1996, and these segments are expected to grow to over $5.0 billion by
2001. Companies in the automotive and industrial markets are increasingly
incorporating electronic sensors into their products to respond to developments
in the competitive global marketplace. For example, a typical automobile
manufactured today contains approximately 20 electronic sensors with some
vehicles having as many as 60 electronic sensors. Electronic sensors can enable
manufacturers to satisfy customer demands for longer warranties, increased
product performance, reliability and energy efficiency and to comply with
environmental, safety and other governmental regulations.

Sensors rely on sensing elements that convert physical variables such as
pressure, speed, acceleration and temperature into electrical signals that
provide information that can be the basis of action such as deploying an airbag,
sounding an alarm or changing the amount of fuel supplied to an engine. The
first widely used sensors were electro-mechanical devices that provided only
basic on/off functions. Recent technological advances have enabled the
deployment of electronic sensing elements with outputs that continuously vary in
proportion to the sensed variable. These electronic sensing elements can be
combined with electronic circuits to provide dramatic reductions in size and
weight compared to older electro-mechanical devices. With these improvements,
companies in the automotive industry increasingly use electronic sensors in new
and enhanced applications such as safety, emissions control, engine management
and other systems. Similarly, companies in industrial markets are incorporating
electronic sensors into new and enhanced applications such as process control,
test and measurement, refrigeration, utility metering and HVAC systems.

Electronic sensing elements require substantial electronics to process or
condition their outputs in order to make them useful over varying operating
conditions and to convert the signals into a form that is compatible with the
processor or computer controlling the system. Conventional signal conditioning

32
<PAGE>
electronics make use of precision analog bipolar integrated circuits to
interface with the sensing element. These ICs are commonly used in conjunction
with discrete components mounted on a ceramic substrate. This hybrid circuit
configuration results in relatively large size, high cost and reduced
reliability due to the large component count required. In addition, the
analog-only nature of these circuits is not compatible with the single-chip
integration of complex system functions that manufacturers are demanding in
sensor products to facilitate wide deployment of advanced systems. These
features include self and system diagnostics, fault detection and communications
capabilities. The Company believes that these needs create a significant market
opportunity for its ASICs and ISDs.

THE ISS SOLUTION

To meet the emerging needs of this market, ISS designs, manufactures and
sells proprietary ASICs and ISDs which enable customers in the automotive and
industrial markets to deploy advanced, high performance electronic control
systems. The ASICs are designed using commercially available CMOS processes
which enable all functions--from interface with sensing element to signal
conditioning as well as system functions--to be implemented in a single ASIC.
Further, these ASICs work with the Company's proprietary software for sensor
calibration. The Company's ASICs are also packaged with commercially available
sensing elements to produce ISDs that meet each customer's specifications. The
Company's products have been designed into a broad range of high performance,
high volume automotive control systems such as fuel injection and transmission
systems, automotive safety systems such as air bags, anti-lock brakes and
suspension systems, and industrial systems such as gas flow, refrigeration and
hydraulic control systems.

The Company's core competencies are its (i) ASIC design technology, (ii)
behavioral simulation software, (iii) calibration software, (iv) package design
technology and (v) manufacturing processes. The Company's mixed signal ASIC
design technology, consisting of its Intelligent Sensing Architecture and its
advanced macrocell library tailored for sensor applications, enables ISS to
rapidly develop products in which multiple system functions are integrated into
a single IC. The Company uses its behavioral simulation software during the
development process to create and assess alternative designs to optimize the
performance of its products within the customer's system. The Company uses its
calibration software during the manufacturing process to correct for variances
in sensing elements and system environments. In addition to its ASIC design and
software technology, the Company has substantial experience in designing
packages that meet customer requirements for integration with diverse and rugged
systems. The ASIC design and software technologies, together with the Company's
packaging expertise, enable ISS to design and manufacture intelligent sensor
products efficiently and cost effectively with relatively low capital
expenditures.

An integral part of the ISS solution is its customer approach and strategy.
The Company's strategy is to identify leading manufacturers within each of its
target market segments, work with these customers to understand their needs and
develop jointly with these customers product solutions that offer a combination
of high performance, increased functionality and cost savings. By combining its
technology with its customers' systems expertise, ISS and its customers can
achieve concurrent engineering, system partitioning and optimum product
definition. The Company believes that providing its customers access to highly
trained ISS engineers, who assist in defining, designing and qualifying customer
systems, fosters shared goals and shared responsibilities for making these
customers' systems successful. The Company has entered into such relationships
with a number of companies including Bosch, Michelin and Sumitomo in the
automotive market and Nagano in the industrial market. An additional benefit of
working with leading manufacturers is the ability to gain insight into their
next generation product requirements. The Company believes that its
relationships with market leaders position the Company to sell products to other
significant market participants.

33
<PAGE>
STRATEGY

The Company's objective is to be a leading supplier of innovative and
proprietary ASICs and ISDs for high performance electronic control systems. The
key elements of the Company's strategy to achieve this objective are:

EXPAND AND LEVERAGE STRATEGIC ALLIANCES. An important element of the
Company's strategy is to form alliances and joint development arrangements
with suppliers and customers to create ASICs and ISDs that are designed into
high performance, high volume products and systems. The Company believes
that strong strategic alliances enable it to sell multiple products to
select manufacturers in the automotive and industrial markets. By working
with such customers, the Company gains an understanding of the customers'
product development strategies and insight into their future needs. Forming
alliances with industry leaders also increases the Company's visibility and
acceptance of the Company's products and technologies in the marketplace.

LEVERAGE LOW COST ISD MANUFACTURING PROCESSES. The Company's technologies
enable it to manufacture its ISDs on automated, high volume, low cost
assembly lines. Because of the relatively low capital expenditures required
to construct these facilities, the Company can locate them in close
proximity to its customers. The Company has established one such facility in
Dresden, Germany which has enhanced the Company's relationships with its
German customers by enabling the Company to provide them with quick response
and effective technical support. The Company intends to establish additional
manufacturing operations near other customer bases in North America, Asia
and Europe.

MAINTAIN TECHNOLOGICAL LEADERSHIP. The Company's Intelligent Sensing
Architecture, advanced macrocell library, behavioral simulation software,
calibration software and ISD package design technology and manufacturing
know-how enable it to develop and manufacture ASICs and ISDs with high
levels of accuracy, functionality and performance. The Company plans to
continue to enhance its core technologies and to integrate them with new
generations of sensing elements, such as fiber optic and chemical sensing
elements. The Company is entering the production phase of its low power
ASICs, wireless sensing products and single chip sensor solutions in which
the sensing element is integrated into the Company's ASIC. The Company is
also exploring technologies to enable in-system programmability and to
extend the range of operating conditions for electronic control systems
incorporating its ISDs.

INCREASE PRODUCT OFFERINGS AND PENETRATE NEW MARKETS. The Company intends
to develop and introduce new ASICs and ISDs for the automotive, industrial,
office and consumer markets. Building on the technology developed for custom
products, the Company can shorten the development time of similar products
for new applications and markets and rapidly introduce standard products.
ISS believes that continuously developing and introducing new ASICs and ISDs
will enable the Company to enter markets at a competitive price point with
opportunities for future cost reductions to strengthen the Company's
competitive position. The Company also believes that it can expand into new
industrial applications and identify and exploit office and consumer markets
with new products based on its proprietary technology.

CAPITALIZE ON FABLESS SEMICONDUCTOR MODEL. ISS does not own or operate a
semiconductor fabrication facility and relies on third parties for the
manufacture of its ASICs. The Company's fabless business model allows it to
focus its resources on developing new technologies and products, while
minimizing capital and operating infrastructure requirements. The Company
seeks to leverage the flexibility of its fabless semiconductor business
model to lower technology and production risks and increase profitability.
In addition, the Company's reliance on mainstream semiconductor
manufacturing technologies rather than newer, more expensive manufacturing
processes reduces the risks inherent in newer, less proven process
technologies.

34
<PAGE>
PRODUCT DEVELOPMENT

A principal element of the Company's business strategy is to work closely
with its customers to develop custom ASICs and ISDs. The Company's joint
development arrangements generally provide that the customer funds a portion of
the Company's development efforts and obtains an exclusive right to the
resulting product subject to certain limitations and provided that the customer
satisfies certain minimum volume requirements. The Company retains intellectual
property rights to the underlying technology and frequently retains the right to
sell the products for use in non-competing applications.

The development cycle for a new product in a new application in the
automotive industry begins with a three to six month period during which the
Company and the customer engage in technical and business discussions about
capabilities and requirements. Following this, the Company and the customer
enter a three to twelve month product development period followed by a six to
twelve month period for field trials and qualification. At the other extreme,
the development cycle of an existing product in a new application in the
industrial market can be as short as four to six months as shown in the diagram
below. Once ASICs or ISDs are designed into systems, the production life is
quite long. For example, in the automotive industry, a product's production life
typically ranges from five to seven years, and customers rarely request
retooling or redesign during this time. Because of the complexity, length and
cost of the product development cycle for both the Company and its customers,
competitors cannot replace the Company's product unless both the competitor and
the customer make significant investments of time and resources. Therefore,
achieving a design win that leads to a production release can enable the Company
to enjoy the supply position for the duration of the production phase.

The following diagram illustrates the Company's typical life cycle for new
applications for new and existing products:

[FLOW CHART OF DEVELOPMENT AND PRODUCTION CYCLES]

35
<PAGE>
The majority of the Company's standard products have been derived from
custom products for other markets or applications. The Company has also
developed standard products without customer assistance to address particular
markets, sensing elements or types of electronic control systems. The Company's
standard products help it address a broader market and can provide a platform
for rapidly developing custom products with similar features.

Because the Company's existing products address the functional requirements
of a variety of electronic control systems, the Company is often able to shorten
the product development cycle for similar products addressing new applications.
For example, if one of the Company's existing ASICs satisfies most but not all
of a customer's requirements, the Company can modify the product to create a new
ASIC that specifically addresses that customer's needs. Similarly, if an
existing ISD addresses most but not all of the requirements of an application
that does not compete with the principal application of the ISD, the Company can
use the existing ISD design to create a new modified ISD. The Company believes
that its ability to shorten product development times by leveraging existing
product designs increases its ability to develop and introduce new products
rapidly and cost-effectively.

PRODUCTS

The Company's two product lines are application specific integrated circuits
("ASICs") and integrated sensor devices ("ISDs"). These product lines include
both standard products and customized solutions that have been developed to
address the needs of a broad range of specific applications and to enhance the
value of customer systems. The Company develops its custom products by working
closely with its customers and builds on this experience to create standard
products.

APPLICATION SPECIFIC INTEGRATED CIRCUITS

The Company designs, manufactures and markets ASICs for individual sale and
ISDs that incorporate its ASICs. ASICs incorporated into the Company's ISDs
complement selected sensing elements and integrate signal conditioning,
calibration, diagnostics, fault detection and other system functions. In this
way the Company leverages its ASICs and design, manufacturing and packaging
processes into proprietary value-added products.

The Company's ASICs are sold to manufacturers that integrate these ASICs
into their own ISDs and electronic control systems. Custom ASICs are developed
pursuant to arrangements with specific customers for incorporation into
particular electronic control systems. For example, the Company has developed
custom ASICs for use in gas flow meters that detect leaks and measure gas flow
for certain Japanese utility companies. These ASICs are designed to work with
very low power consumption battery powered systems. These ASICs amplify, correct
and filter very low level analog signals from the sensing elements and convert
them to digital form for processing by the meter. Another custom ASIC is used
with accelerometers in air bag systems. This ASIC amplifies and corrects the
accelerometer sensing element signal and performs diagnostics to alert the
electronic control computer in the event of a sensing element problem.

The Company's standard ASICs are sold to a variety of customers, including
sensing element manufacturers and systems integrators, for use in a broad range
of electronic control systems. For example, the Company's SCA2095 is a signal
conditioning ASIC used by manufacturers of resistive sensing elements such as
pressure transducers, strain gauges and accelerometers. Because the SCA2095 is a
single chip that permits digital calibration of sensor variances, it is less
expensive and easier to integrate with a variety of sensing elements than
conventional sensor electronics. The average selling prices of the Company's
ASICs range from approximately $1.50 to $8.00 per unit depending on the volume.

36
<PAGE>
The Company has a variety of ASIC products in production, in qualification
and under development, including those shown in the following table:

- -------------------------------------------------------------------------------------------
MARKET APPLICATION STATUS
Automotive Airbag crash sensor In Production
Oil pressure sensor
Pressure sensor with frequency output
Vehicle Stability In Qualification
Automotive accelerometer Under
Navigation Development
Brake System
Industrial Temperature control and instrumentation In Production
Hydraulic control system
OEM pressure sensors
Industrial pressure sensor
Low power pressure monitoring for gas meter In Qualification
Low power gas flow monitor for natural gas
Low power gas flow monitor for propane Under Development
</TABLE>

INTEGRATED SENSOR DEVICES

The Company's ISDs consist of commercially available or custom sensing
elements that are packaged together with the Company's proprietary ASICs. The
Company sells ISDs to customers in the automotive and industrial markets for
incorporation into a wide variety of electronic control systems in vehicles and
industrial systems. The Company has several families of ISDs, examples of which
are manifold absolute pressure ("MAP") sensors, tire pressure sensors and media
compatible pressure sensors for fuel systems. The MAP ISDs are sold into the
aftermarket for use in engine control in Ford, Chrysler and GM automobile
engines to measure the vacuum in the intake manifold enabling the engine control
computer to measure and adjust the air/fuel ratio.

Certain of the media compatible ISDs are incorporated into a new generation
of diesel fuel injection systems known as "common rail." In these systems, the
diesel fuel is pumped into a manifold at very high pressures (over 20,000 psi).
This pressurized fuel is then delivered along a common rail through the fuel
injectors into each cylinder. The Company's ISD measures the common rail
pressure and communicates this information to the system control computer which
then adjusts the pressure. Engines incorporating common rail injection systems
with the Company's ISDs are quieter, produce more power, use less fuel

37
<PAGE>

and emit less carbon monoxide than conventional diesel engines. The following is
a picture of the common rail diesel fuel injection system which incorporates the
Company's ISD.

[LOGO]

The Company is currently developing a new family of ISDs for tire
performance monitoring. These products measure and transmit tire pressure,
temperature and identification to a remote transceiver over a wireless link for
tire performance monitoring and trend analysis. The Company's tire performance
monitoring ISDs feature a "single-chip sensor" construction in which pressure
and temperature sensing elements are combined on a single chip along with ASIC
functions, including analog sensor signal conditioning circuits, nonvolatile
memory for tire identification and sensor data storage, digital logic and
transceiver communications circuits. The Company expects to introduce a low
power wireless, valve stem-mounted ISD into the aftermarket in calendar 1998.
The Company also expects to introduce OEM in-tire products for both on-road
trucks as well as off-road construction and other heavy duty vehicles in
calendar 1999. The average selling prices of the Company's ISDs range from
approximately $9.00 to $50.00 per unit depending on the volume.

38
<PAGE>
The Company has a number of ISDs in production, in qualification and under
development, including those shown in the following table:

- -------------------------------------------------------------------------------------------
MARKET APPLICATION STATUS
Automotive MAP for automotive engine management In Production
XKP pressure sensor for natural gas engine control
Dual pressure sensor for pneumatic braking system
XKP pressure sensor for common rail diesel fuel injection
HVP pressure sensor for common rail diesel fuel injection
Tire performance monitor--valve stem-mounted In Qualification
Pressure sensor for vehicle chassis control
HVP pressure sensor for braking systems
Tire performance monitor--in-tire installation Under
Gasoline direct injection pressure sensor Development
Pressure sensor for electronic hydraulic braking system
Tire performance monitor--offroad vehicles
Combined pressure and temperature sensor
Pressure sensor for common rail diesel fuel injection
Industrial XKP pressure sensor for industrial applications including In Production
hydraulic control, agricultural sprayers, compressor
control, and others
HVP pressure sensor for refrigeration control system In Qualification
Industrial pressure sensor Under
XKP pressure sensor with built-in temperature sensor Development
</TABLE>

CUSTOMERS

The Company sells its ASICs and ISDs to customers in North America, Europe
and Asia. Although the majority of the Company's customers are suppliers in the
automotive industry, the Company's customer base also includes industrial system
manufacturers, sensing element manufacturers and vehicle manufacturers. Most of
the Company's customers are suppliers that purchase components and subassemblies
such as ASICs and ISDs and perform system integration functions for vehicle
makers and industrial equipment manufacturers.

To establish a supply relationship with a customer, the Company typically
must satisfy exacting product requirements and qualify its manufacturing lines.
Although this process is lengthy and can be costly for the Company and the
customer, it often results in a long-term supply arrangement and can create a
barrier to entry for other suppliers. To improve its ability to satisfy
customers' product and manufacturing requirements, the Company works closely
with its customers' engineering teams to develop and implement advanced
manufacturing processes. The Company has undertaken programs to implement ISO
9001 and QS-9000 quality systems in order to minimize the time required to
qualify its products and manufacturing lines with customers.

39
<PAGE>
The Company's customers include the following companies:

Allied Signal Freightliner MascoTech
Bosch GFI Control Systems Michelin
Daimler/Benz Honda Nagano
John Deere Hydraulic Ring Omron
Eaton Corporation Johnson Controls Sumitomo
Echlin Knorr-Bremse White
EG&G/IC Sensors Lucas Diesel Industries
Systems

The Company's revenues in any period are substantially dependent upon a
relatively small number of large customer orders. The Company expects that this
trend will continue. See "Risk Factors--Significant Customer Concentration."

STRATEGIC ALLIANCES

The Company considers strategic alliances a key part of its overall business
strategy and plans to maintain and strengthen its existing relationships and to
develop additional relationships to accomplish its business objectives. Examples
of the Company's strategic alliances include the following.

ROBERT BOSCH GMBH

Robert Bosch GmbH is a Germany-based multi-national supplier of automobile
systems and subsystems with annual revenues in excess of $27 billion. In 1995,
Bosch contracted with ISS to design an ISD with the ability to measure very high
pressures in a common rail diesel fuel injection system. The Company worked
closely with Bosch system designers and used its behavioral simulation software,
ASIC design technology and macrocell library to develop a customized ISD that
satisfied Bosch's specifications. The Company was able to solve problems Bosch
had encountered with previous development attempts and now manufactures the ISDs
used in Bosch's common rail diesel fuel injection systems. As a result of the
successful development of the diesel injection ISD, Bosch requested that ISS
compete for the design of an ISD for a vehicle stability system and ultimately
selected the Company to design and manufacture the ISD for this system.
Following these successful programs, Bosch has expanded its involvement with the
Company and engaged ISS to design and supply ISDs for both an electronic
hydraulic brake system and a gasoline direct fuel injection system. The Company
believes that its strong relationship with Bosch may result in design wins in
more of Bosch's widely distributed products.

To enhance the relationship with Bosch, the Company encourages its
management, engineers and sales and marketing personnel to work closely with
Bosch managers, system designers and sales and marketing executives. Further,
because these efforts have lead to an alliance which goes beyond that of a
typical customer or supplier, the Company has attained a level of market
credibility and access to significant system expertise that would otherwise be
unavailable to the Company. The Company intends to build additional
relationships modeled on the Bosch alliance with manufacturers that do not
directly compete with Bosch.

NAGANO KEIKI CO., LTD.

Nagano Keiki Co., Ltd. is a Japan-based supplier of sensors and ISDs with
annual revenues in excess of $200 million. In calendar years 1990 and 1991, the
Company developed two custom ASICs for Nagano for industrial and automotive
applications. During the course of working with Nagano to develop these ASICs,
the Company became familiar with Nagano's proprietary stainless steel pressure
sensing element technology and developed ISDs integrating the Company's ASICs
with Nagano's sensing elements for automotive applications. The resulting ISDs
are compatible with a wide range of harsh media such as gasoline, diesel fuel,
refrigerants and hydraulic fluids. These media-compatible ISDs are an important
strategic element of the Company's product portfolio.

40
<PAGE>
The Company has developed six custom ASICs for Nagano, including the two
initial products, and Nagano has become a major customer of the Company. Nagano
also purchases standard ASICs from the Company. The relationship between the
Company and Nagano has facilitated Nagano's entry into the Japanese automotive
market as a supplier of high performance ISDs.

As a result of these successful collaborations, Nagano has expanded its
relationship with the Company through equity investments in the Company and its
German subsidiary. The subsidiary is focused on the manufacture of ISDs that
incorporate Nagano's sensing elements and the Company's ASICs. Finally, the
Company and Nagano are currently engaged in joint product development and
marketing efforts. Through this arrangement, Nagano manufactures and markets the
resulting products in Japan, while ISS manufactures and markets these products
in North America and Europe.

MICHELIN

Michelin is a multi-national tire manufacturer with significant North
American operations and annual revenues of approximately $14 billion. The
Company has entered into an agreement with Michelin of North America for the
development and supply of a new product for Earthmover tire performance
monitoring. This product measures and transmits tire pressure, temperature and
identification to a remote transceiver over a wireless link for tire performance
monitoring and trend analysis. The Company's relationship with Michelin is
expanding through close engineering cooperation involving programs in which the
Company's core competencies are combined with Michelin's complementary
expertise.

COMPETITION

The markets in which the Company competes are highly competitive and
characterized by diverse industry requirements and severe pricing pressure in
many applications. In the ASIC market, the Company competes with analog and
mixed signal semiconductor companies such as Motorola, TI and Analog Devices.
The Company's products also compete indirectly with conventional hybrid circuits
and standard analog and mixed signal ICs. In the ISD market, the Company
competes with Delco, a subsidiary of GM, Motorola, TI, Kavlico and Denso. These
companies all have substantially greater financial, technical, manufacturing,
marketing, distribution, personnel and other resources than the Company. In
addition, in the industrial market, the Company competes with many small
companies that have developed specialized electronic sensor products and formed
close relationships with their customers. The Company also competes with the
in-house development staff of certain of its current and potential customers.

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

The Company believes that the principal competitive factors affecting its
markets include price, supply assurance, product performance and quality,
flexibility and responsiveness. The Company believes that it competes favorably
with respect to these competitive factors. The Company's technology and products
have been well accepted by leaders in the automotive and industrial markets.
Through strategic alliances the Company is uniquely positioned to address the
emerging needs of the market. Finally, the singular focus on sensor applications
enables the Company to respond quickly to meet the customers' needs. See "Risk
Factors--Competition."

TECHNOLOGY

The Company's technology is driven by the demands of the automotive and high
volume industrial markets for high performance, electronic sensor products. The
Company is committed to maintaining

41
<PAGE>
leading edge technology in the areas of mixed signal ASIC design, behavioral
simulation software, calibration software, package design and manufacturing
know-how. The Company's technologies facilitate cost-effective development and
timely introduction of products designed to address customer needs.

The Company's mixed signal ASIC design technology, based on its Intelligent
Sensing Architecture, enables the Company to integrate signal conditioning,
calibration, diagnostics, networking and other system functions into a single
IC. The use of a single IC results in a "one sensor-one ASIC" structure, forming
an intelligent sensor that can interface with a variety of control devices in
high performance electronic control systems. The Company designs its ASICs using
its proprietary macrocell library which contains proven circuit blocks optimized
to perform sensor signal conditioning functions such as amplification, error
correction and filtering. The macrocell library also contains system level
functions including diagnostics, analog-to-digital conversion and output
formatting. The Company's ASICs utilize CMOS fabrication processes to combine
high performance analog sensor interfaces with digital system functions and
nonvolatile memory, eliminating the need for bipolar ICs, ceramic substrates,
thick film networks and laser trimming that are characteristic of traditional
hybrid circuits.

The Company uses its behavioral simulation software during the product
development process to create and assess alternative designs to optimize the
performance of its products within the customer's system. In addition, the
software demonstrates how potential configurations can be achieved with
different architectures, development times, manufacturing methods and costs.
This process provides the opportunity to identify the product features that
address the technical and time-to-market requirements of the customer's specific
application.

The Company uses its proprietary calibration software to correct for errors
associated with various sensing elements and system environmental conditions. As
a result, the Company can construct its ISDs using ASICs combined with low cost
sensing elements that have broad variances, while increasing system accuracy.
This software is embedded in the Company's automated test and calibration
systems which can simultaneously calibrate and characterize hundreds of ISDs
over specified operating conditions.

In addition to its ASIC design and software technology, the Company has
substantial package design expertise and manufacturing know-how. The Company
designs the packages that house its ISDs to meet customer requirements for
integration with diverse and rugged systems such as engines, tires, brakes and
compressors. The Company's packaging process consists of assembling the sensing
element with the ASIC, enclosing these components in a metal or plastic housing,
and establishing an electrical connector to interface with the customer's
control system. Packaging is a critical element in ISD design because packaging
can affect the sensing element, thereby affecting the performance of the ISD.
Package design also has a significant impact on product reliability, durability
and assembly costs. The Company's advanced packaging techniques enable it to
produce reliable, durable products in a cost effective manner.

The Company's ASIC design, software and package design are brought together
in the Company's proprietary ISD manufacturing process, which includes sensing
element assembly and automated calibration and testing. The Company's
manufacturing lines in Germany are automated to implement a zero defect
philosophy and enable it to satisfy customer demands rapidly and efficiently.
Further, the automated manufacturing lines have low labor costs and leverage the
Company's calibration software to reduce capital equipment requirements.
Therefore the Company has the ability to establish manufacturing sites near its
customer base with relatively low capital investments.

MANUFACTURING

The Company focuses its capital and human resources on those operations that
leverage its proprietary technology, provide significant added value or are key
determinants of product quality. The Company complements its internal operations
with products and services from a small base of strategic, long-term suppliers.
The Company outsources widely available, commodity services to benefit from
economies of scale.

42
<PAGE>
The Company has adopted the "fabless" model in its approach to ASIC
manufacturing. Consistent with this approach, the Company does not own or
operate a semiconductor manufacturing facility. Instead, the Company has
established relationships with three CMOS wafer foundries that supply the bulk
of its semiconductor needs. In addition, the Company manages ASIC package
assembly through leading suppliers in the Philippines and Hong Kong. The Company
conducts most of its ASIC wafer sort and all of its ASIC final product testing
and outgoing quality assurance at its facility in San Jose, California. This
approach enables the Company to concentrate its resources on product development
and technology where it believes it has significant competitive advantages,
eliminating the high cost of owning and operating a semiconductor wafer
fabrication facility.

The Company currently relies on American Microsystems, Inc., Micrel
Semiconductor, Inc. and Silicon Systems, Inc. for the fabrication of essentially
all of its ASICs, including those incorporated into its ISDs. The Company is
currently qualifying products from a fourth foundry, Symbios Logic. The
Company's ASIC design technology does not rely on state-of-the-art or specialty
semiconductor processes and instead uses CMOS wafer fabrication processes that
are a generation behind the leading edge processes in high demand by the
computer and communications industries. As a result, fluctuations in the supply
and demand for wafer fabrication capacity have less impact on the Company than
on companies whose products require the more advanced, small geometry processes.
Nonetheless, continued access to high quality wafer foundry capacity is critical
to the Company's ability to meet customer demands. The Company has from time to
time experienced lower than anticipated manufacturing yields and long supply
lead times from its foundry suppliers.

The Company's ISDs incorporate electronic subassemblies in which the
Company's ASICs are assembled together with sensing elements. This PC
board-level assembly is performed by an independent vendor in Thailand that
ships the subassemblies to ISS for ISD product-level assembly, calibration, test
and final quality assurance monitoring. These latter operations are carried out
in-house by ISS personnel. These operations are critical, value-added steps that
use proprietary ISS manufacturing technology necessary for the control of
outgoing product quality, production yields and delivery to customers.

The Company's ISDs are assembled, calibrated and tested at the Company's
facilities in California and Germany. The Company's calibration software and its
automated manufacturing lines in Germany are designed to enable a much
simplified manufacturing flow, lowering product cost and reducing the capital
requirements for establishing and expanding manufacturing facilities. In a fully
automated test and calibration system operating under control of the Company's
software, hundreds of ISDs can be simultaneously measured, calibrated and
characterized over specified operating conditions.

ISD packaging and assembly technologies are key determinants of both
performance and cost in ISDs. The Company's ISDs utilize standard PC board
substrates and widely available surface mount and chip-on-board technologies,
replacing the costly ceramics and thick film printing operations commonly used.
In the assembly of its ISDs, the Company employs variations on standard product
assembly technologies such as wirebonding, soldering, dispense/cure and
crimping. The use of standard assembly technologies has permitted the Company to
focus on the development and implementation of technologies that define critical
performance parameters such as sensing element mounting and passivation,
materials selection and automated white light soldering. The Company has also
developed techniques in the areas of design for manufacturability and zero
defect philosophy assembly. ISS maintains significant in-house expertise in
mechanical and electrical design, including insert injection molded plastics, PC
board design and layout, automated manufacturing and production tools and
fixtures.

The Company's technology brings significant benefits to the manufacturing
process. ISDs, which leverage the Company's ASIC design and software technology,
require relatively low capital expenditures in the manufacturing process due to
low component count, automated calibration and innovative package design. The
relatively low capital intensity of the manufacturing lines makes it possible to
locate manufacturing operations close to customer bases to meet just-in-time
delivery requirements and to enhance customer relationships.

43
<PAGE>
The Company has been a qualified supplier to various automotive
manufacturers for a number of years and has commenced the process to obtain ISO
9001 and QS-9000 certification. ISO 9001 is a quality assurance model that is
used by companies in the course of the design, production, inspection, test,
installation and service processes. The ISO quality specifications are
comprehensive and internationally supported. QS-9000 is the Quality Management
System that automakers are increasingly requiring of their suppliers. QS-9000 is
an ISO 9001-based system that incorporates industry specific features agreed
upon by Chrysler, Ford and GM. These quality systems are designed to reduce
errors and cost while improving design control and productivity. The Company has
targeted completion of the ISO and QS accreditation processes in calendar 1998.
See "Risk Factors--Dependence on Sole Source Suppliers," "--Dependence on
Independent Wafer Suppliers," and "--Need for ISO 9001 and QS-9000
Certification."

RESEARCH AND DEVELOPMENT

As of December 31, 1997, the Company's research and development organization
consisted of 37 full-time employees. During 1995, 1996 and 1997 and the nine
months ended December 31, 1997, research and development expenses were
approximately $701,000, $742,000, $1.4 million and $1.3 million, respectively.
In addition, during 1995, 1996 and 1997 and the nine months ended December 31,
1997, the Company had $996,000, $2.1 million, $2.7 million and $2.6 million of
costs related to contract revenue.

The Company has committed, and expects to continue to commit in the future,
substantial resources to research and development in areas including wireless
communications, next generation ASIC designs, software, package design,
manufacturing automation, test systems and standard product development. In
particular, the Company's research and development focus areas include
monolithic sensors, multiple sensing elements in a single ISD and system level
products. Concurrently, the Company intends to continue research and development
efforts pursuant to joint development arrangements for custom products where the
customer provides significant funding. In addition to the advantages it gains by
working closely with its customers, its joint development strategy allows the
Company to commit substantial resources to research and development without
diverting a significant portion of its capital resources. The Company intends to
continue to follow this strategy in the future.

The Company's future success will depend in part upon its ability to develop
new products on a timely basis that keep pace with technological developments,
emerging industry standards and increasingly sophisticated needs of its
customers. There can be no assurance that the Company will be successful in
developing new products that respond to technological change or evolving
industry standards or that the Company will not experience difficulties that
could delay or prevent the successful development of these products. If the
Company is unable, for technological or other reasons, to develop new products,
the Company's business, financial condition or operating results could be
materially adversely affected.

SALES AND MARKETING

The Company focuses its marketing efforts on potential and existing
customers that are leaders in selected segments of the automotive and industrial
markets. The objective is to develop and maintain long-term, strategic customer
partnerships that lead to multiple programs across a range of applications. This
is achieved, in part, by establishing and maintaining close ties at all levels,
including strong management and engineering relationships which complement the
traditional marketing and sales purchasing interface. Marketing personnel work
closely with customers to identify high volume opportunities which require high
performance products that leverage the Company's technology. The Company's
marketing and sales staff has the requisite technical expertise and industry
knowledge in order to support the lengthy and complex design-in process. To
complement its sales and marketing staff, the Company utilizes its engineering
staff to assist customers in defining, designing and qualifying the Company's
products in the context of the customer's system. Company engineers provide
continuous customer support from pre-sales activities to applications and
product definition through product development, qualification and
post-production technical support. The Company believes that the depth and
quality of this technical support are key to

44
<PAGE>
improving customers' time to market, maintaining a high level of customer
satisfaction and encouraging customers to provide additional product
opportunities to ISS as an exclusive or preferred supplier. Furthermore, the
Company has established a program management function in which ISS provides a
single point customer contact for all key customer program issues. The Company
plans to extend and expand this program management concept as a means to further
improve focus and coordination between the customer and all Company departments.

Typically, the Company sells more than one product to the same customer to
address multiple applications. Because of this marketing approach, the Company
expects that its customer base will remain relatively small consisting of large,
well known companies. A substantial majority of the Company's sales are made
through direct sales without commission. This trend is expected to continue.
Further, the Company expects that advertising and promotional activities will
remain limited, with primary focus on standard products and corporate awareness
and positioning. For standard products, the Company relies on marketing
techniques such as press releases and public relations, trade shows, technical
conferences and a web site.

Consistent with this strategy, the Company employed six marketing and sales
personnel as of December 31, 1997. The Company has also retained seven
independent sales representative organizations in selected U.S. regions. Sales
representatives/distributors in France, Germany, Italy and Switzerland as well
as Japan and Korea, also support the Company's sales efforts with targeted
accounts. The Company expects that its marketing and sales expenses will remain
a relatively small percentage of total revenues.

PROPRIETARY RIGHTS

The Company relies on a combination of patents, maskwork rights, trade
secret laws, copyrights, trademarks and employee and third party non-disclosure
agreements to protect its intellectual property rights. In addition, the Company
limits the access of its wafer fabrication suppliers to information necessary to
process the wafers and does not allow access to the proprietary circuit designs.
The software used for the behavioral simulation and calibration is proprietary
to the Company and resides only in systems developed by the Company. Further,
the Company believes that its technology is not easily duplicated and is
difficult to reverse engineer due to limited access to system know-how and the
coupling of its ASICs with software.

The Company has been issued two patents and has four patent applications in
the United States and one foreign patent application relating to ASIC designs.
In addition, the Company has one patent application in the United States
relating to package design. There can be no assurance that any patents will
issue from any of the Company's pending applications or that claims allowed from
pending applications will be of sufficient scope or strength, or be issued in
all countries where the Company's products can be sold, to provide meaningful
protection or any commercial advantage to the Company. Also, competitors of the
Company may be able to design around the Company's patents. The laws of certain
foreign countries in which the Company's products are or may be developed,
manufactured or sold, including various countries in Asia, may not protect the
Company's products or intellectual property rights to the same extent as through
the laws of the United States and thus make the possibility of piracy of the
Company's technology and products more likely. Although the Company is not aware
of the development, distribution or sale of any illegal copies of the Company's
products, any infringements of its patents, copyrights or trademarks, or any
violation of its trade secrets or confidentiality procedures to date, there can
be no assurance that the steps taken by the Company to protect its proprietary
information will be adequate to prevent misappropriation of its technology or
that the Company's competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology.

45
<PAGE>
intellectual property rights owned by third parties. If it is necessary or
desirable, the Company may seek licenses under such patents or other
intellectual property rights. However, there can be no assurance that licenses
will be offered or that the terms of any licenses will be acceptable to the
Company. A failure to obtain a license from a third party for technology used by
the Company could cause the Company to incur substantial liabilities and to
suspend the manufacture of products requiring the technology. Furthermore, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation by or against the Company could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation results in a
favorable determination for the Company. In the event of any adverse result in
such litigation, the Company could be required to pay substantial damages, cease
the manufacture, use and sale of infringing products, expend significant
resources to develop noninfringing technology, discontinue the use of certain
processes or obtain licenses to the infringing technology. There can be no
assurance that the Company would be successful in such development or that such
licenses would be available on reasonable terms or at all, and any such
development or license could require expenditures by the Company of substantial
time and resources. In the event that a third party makes a successful claim
against the Company or its customers and a license is not made available to the
Company on commercially reasonable terms, the Company's business, financial
condition or operating results would be adversely effected.

FACILITIES

The Company's principal administrative, sales, marketing, engineering,
research and development facility is located in 18,000 square feet of space in
San Jose, California. The space is leased by the Company through June 1999. The
Company also leases a 12,000 square foot manufacturing and sales facility in
Dresden, Germany. The Dresden facility is occupied under a lease that expires
August 1, 2000. The Company believes that its current facilities are adequate
for its needs through the end of fiscal 1999, and that, should it be needed,
suitable additional or alternative space will be available in the future on
commercially reasonable terms.

EMPLOYEES

As of December 31, 1997, the Company had 98 full-time employees, including
36 employees in Germany. Of its total work force, 37 are engaged in research and
development activities, 31 are engaged in manufacturing operations, 12 are
engaged in manufacturing engineering and quality assurance and 18 are engaged in
sales, marketing, support and administrative activities. None of the Company's
employees is represented by a labor union with respect to his or her employment
by the Company. The Company has experienced no work stoppages and believes that
its relations with its employees are good.

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<PAGE>
MANAGEMENT

The following table sets forth the executive officers and directors of the
Company as of December 31, 1997:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Manher D. Naik..................... 55 President, Chief Executive Officer and Chairman of the Board of
Directors
Donald E. Paulus................... 40 Chief Operating Officer
Ramesh Sirsi, Ph.D................. 53 Executive Vice President, Marketing and Sales
David Satterfield.................. 45 Vice President, Finance and Administration
Yutaka Mori........................ 56 Director
Vinod K. Sood(1)................... 61 Director
Y.S. Fu(1)(2)...................... 49 Director
Shigeru Miyashita.................. 62 Director
Stuart D. Boyd(2).................. 41 Director
</TABLE>

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

(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

MANHER D. NAIK founded the Company in March 1989 and has served as
President, Chief Executive Officer and Chairman of the Board of Directors since
March 1989. From August 1979 through March 1989 Mr. Naik served as Vice
President of Strategic Marketing of National Semiconductor Corporation, a
semiconductor manufacturer. Mr. Naik received a BS in Mechanical Engineering
from the Indian Institute of Technology, an MS degree in Industrial Engineering
from Cornell University, and an MBA degree from Pepperdine University.

DONALD E. PAULUS joined the Company as Vice President of Engineering
Operations in December 1990 and currently serves as Chief Operating Officer.
Prior to joining the Company, beginning in January 1989, Mr. Paulus served as
Product Line Director at Sierra Semiconductor Corporation, now known as PMC-
Sierra, Inc., a company specializing in mixed signal integrated circuits. From
December 1984 to January 1989, Mr. Paulus served as a Design Manager with
Honeywell Inc.'s Solid State Electronics Division. From June 1979 to December
1984, Mr. Paulus served as a Member of the Technical Staff and as an Engineering
Supervisor at AT&T Bell Laboratories. Mr. Paulus received a BSEE degree from
Lehigh University, an MSEE degree from Stanford University and an MBA from the
University of Colorado.

RAMESH SIRSI, PH.D. joined the Company in September 1994 and has served as
Executive Vice President, Marketing and Sales since September 1994. Prior to
joining the Company, beginning in March 1989, Dr. Sirsi served as Director of
Marketing at Siemens Components, Inc., an electronic component manufacturer.
From October 1984 to July 1988, Dr. Sirsi served as a Product Line Director at
Honeywell Inc. From January 1978 to October 1984, Dr. Sirsi served as Director
of Telecommunications IC product development at Harris Corporation. From June
1973 to December 1977, he was employed by Bell Northern Research as a Member of
the Technical Staff. Dr. Sirsi received his BSEE degree from Bangalore
University and his MSEE and Ph.D. degrees from Carleton University.

DAVID SATTERFIELD joined the Company in April 1994 and has served as Vice
President, Finance and Administration and Secretary since April 1994. Prior to
joining the Company, beginning in June 1992, Mr. Satterfield served as Corporate
Controller of Austek Microsystems Limited, Inc., a semiconductor manufacturer.
From April 1991 to June 1992, Mr. Satterfield served as Corporate Controller of
Free-Flow Packaging Corporation, a packaging company. From June 1985 to April
1991, Mr. Satterfield served as Corporate Controller of Micro Power Systems,
Inc., a semiconductor manufacturer. Mr. Satterfield holds a BS degree in
accounting from San Jose State University.

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<PAGE>
YUTAKA MORI has served as a director of the Company since August 1996. Mr.
Mori has been the General Manager of Corporate Planning at TDK Corporation, a
manufacturer of electronic components, since January 1997. Prior to that time,
beginning in July 1996, Mr. Mori was the President and Chief Executive Officer
of TDK Semiconductor Corporation, a fabless ASIC company. From November 1994 to
June 1996, Mr. Mori served as President and Chief Executive Officer of Silicon
Systems, Inc., a semiconductor manufacturer. From May 1989 to October 1994, Mr.
Mori served as Senior Vice President of Corporate Planning at Silicon Systems,
Inc.

VINOD K. SOOD has served as a director of the Company since March 1989. Mr.
Sood has been self-employed as an advisor and director to technology and
telecommunication companies since 1992. From 1969 to 1992, Mr. Sood was the
Project Administrator/Principal Engineer of the Overseas Projects Division at
General Electric Nuclear. Mr. Sood is also currently a director at a privately
held software company.

Y.S. FU has served as a director of the Company since February 1997. Mr. Fu
has been a Partner of WK Technology Fund, an investment company, since 1995.
Prior to that time, beginning in 1993, Mr. Fu served as Senior Vice
President--OEM (Worldwide) of Logic Technology, Inc. and from 1986 to 1993
served as Chairman/General Manager (Far East Region) of Logic Technology, Inc.
From 1982 to 1986, Mr. Fu was Plant Manager at Qume.

SHIGERU MIYASHITA has served as a director of the Company since February
1997. Mr. Miyashita has been the General Corporate Manager at Nagano Keiki Co.,
Ltd. since April 1992.

STUART D. BOYD has served as a director of the Company since June 1997. Mr.
Boyd has been the Vice President, Associate General Counsel and Assistant
Secretary at Breed Technologies, Inc., an automotive safety system and component
manufacturer, since March 1992.

All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. The Company's
Certificate of Incorporation provides that, upon closing of the offering
contemplated by this Prospectus, the Board of Directors will be divided into
three classes, with each class serving staggered three-year terms. There are no
family relationships among the directors or executive officers of the Company.

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EXECUTIVE COMPENSATION

The following summary compensation table sets forth the compensation paid or
accrued by the Company during the fiscal year ended March 31, 1997 to the
Company's chief executive officer and each of the two other executive officers
whose total compensation for services in all capacities to the Company exceeded
$100,000 during such year (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION -------------
SECURITIES
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY(1) BONUS OPTIONS
- ------------------------------------------------------------------------------ ---------- ----------- -------------
<S> <C> <C> <C>
Manher D. Naik ............................................................... $ 136,667 -- 40,000
President and Chief Executive Officer

Donald E. Paulus ............................................................. 116,400 -- 14,000
Chief Operating Officer

Ramesh Sirsi ................................................................. 104,850 -- 32,000
Executive Vice President, Marketing and Sales
</TABLE>

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

(1) Includes amounts deferred at the election of the Named Executive Officer
pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended.

STOCK OPTION INFORMATION

The following table sets forth certain information with respect to grants of
options to purchase the Company's Common Stock made during the fiscal year ended
March 31, 1997 to the Named Executive Officers:

OPTION GRANTS IN FISCAL YEAR 1997

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(1) FISCAL YEAR(2) PER SHARE(3) DATE
- ----------------------------------------------- ------------------- ----------------- ------------- ------------
<S> <C> <C> <C> <C>
Manher D. Naik................................. 40,000 21.80% $ 1.13 05/16/2001

Donald E. Paulus............................... 14,000 7.63 2.00 03/10/2002

Ramesh Sirsi................................... 12,000 6.54 1.13 05/16/2001

20,000 10.90 2.00 03/10/2002
</TABLE>

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

(1) Options granted in fiscal 1997 generally vest over a four-year period: 1/8
of the total number of shares subject to each option vest and become
exercisable six months after the vesting start date, which is stated in the
option agreement; and 1/48 vest and become exercisable monthly thereafter.
Each option may be terminated earlier upon the cessation of the individual's
employment with the Company.

(2) The Company granted options to purchase 183,520 shares of Common Stock
during fiscal 1997.

(3) All options were granted at an exercise price equal to the fair market value
of the Company's Common Stock as determined by the Board of Directors of the
Company on the date of grant.

49
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND FISCAL YEAR-END OPTION
VALUES

The following table sets forth for each of the Named Executive Officers
certain information concerning options exercised during the fiscal year ended
March 31, 1997 and the number of shares subject to both exercisable and
unexercisable stock options as of March 31, 1997. Also reported are values for
"in-the-money" options that represent the positive spread between the respective
exercise prices of outstanding options and the fair market value of the
Company's Common Stock as of March 31, 1997. No options or stock appreciation
rights were exercised during the fiscal year ended March 31, 1997.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END (2)
---------------------------- --------------------------
NAME EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Manher D. Naik.......................................... 26,041 43,958 $ 56,966 $ 96,159
Donald E. Paulus........................................ 24,500 15,500 72,344 3,281
Ramesh Sirsi............................................ 24,500 47,500 53,594 77,344
</TABLE>

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

(1) Exercisable in accordance with the vesting provisions described above in
Note 1 to the table entitled "Option Grants in Fiscal Year 1997."

(2) Calculated by determining the difference between the fair market value of
the securities underlying the option at March 31, 1997 ($2.00 as determined
by the Company's Board of Directors) and the exercise price of the Named
Executive Officer's option.

DIRECTOR COMPENSATION

The directors generally do not receive cash compensation for their services
as directors. However, Vinod K. Sood receives compensation of $150 per board
meeting. In addition, the Company's directors are eligible to receive option
grants under the Company's 1997 Stock Option Plan.

BENEFIT PLANS

1997 STOCK OPTION PLAN. The Board of Directors has reserved 800,000 shares
of Common Stock for issuance under the Company's 1997 Stock Option Plan (the
"1997 Plan"). As of December 31, 1997, there were outstanding options to
purchase 168,160 shares of Common Stock under the 1997 Plan of which 30,004
shares of Common Stock subject to those options were vested and exercisable.
Options may be granted to the Company's employees (including officers),
directors and consultants, although only employees and officers and directors
who are also employees may receive "incentive stock options" intended to satisfy
the requirements of Section 442 of the Internal Revenue Code of 1986, as
amended. Nonemployees, including nonemployee directors, may receive nonstatutory
stock options, which do not qualify for such treatment. The exercise price of
incentive stock options under the 1997 Plan must at least equal the fair market
value of the Common Stock on the date of grant, while the exercise price of
nonstatutory options must at least equal 85% of such market value and must be no
less than 100% of such market value if such options are to qualify for certain
tax treatment as performance based compensation. Options granted under the 1997
Plan generally vest over a four-year period of service: 1/8 of the total number
of shares subject to each option vest and become exercisable six months after
the vesting start date, which is stated in the option agreement; and 1/48 vest
and become exercisable monthly thereafter. The term of each option is no more
than ten years from the date of grant unless terminated sooner pursuant to the
provisions of the 1997 Plan. In the event of a change of control of the Company,
including a merger or sale of substantially all of the Company's assets,
outstanding options will become fully vested and exercisable unless they are
assumed by the acquiring corporation.

PRIOR PLAN. Prior to the adoption of the 1997 Plan, the Company granted
options to purchase shares of Common Stock under a separate option plan (the
"Prior Plan"), the terms of which are substantially

50
<PAGE>
identical to the 1997 Plan. As of December 31, 1997, there were outstanding
options to purchase 286,700 shares of Common Stock under the Prior Plan of which
192,638 were vested and exercisable. The Company does not anticipate granting
any additional options to purchase Common Stock under the Prior Plan, and any
shares subject to options under the Prior Plan which terminate or are canceled
will not be issued or used for new options.

1997 EMPLOYEE STOCK PURCHASE PLAN. A total of 250,000 shares of the
Company's Common Stock have been reserved for issuance under the Company's 1997
Employee Stock Purchase Plan (the "Purchase Plan"), none of which have yet been
issued. The Purchase Plan permits eligible employees to purchase Common Stock at
a discount, but only through payroll deductions, not to exceed ten percent (10%)
of each participant's total cash earnings during concurrent 24-month offering
periods. Each offering period will be divided into four consecutive six-month
purchase periods. The price at which stock is purchased under the Purchase Plan
is equal to 85% of the fair market value of the Common Stock on the first day of
the offering period or the last day of the purchase period, whichever is lower.
The initial offering period will commence on the effective date of this
offering.

LIMITATIONS OF DIRECTORS' LIABILITY AND INDEMNIFICATION

Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Certificate of Incorporation which provide
that directors of the Company shall not be personally liable for monetary
damages to the Company or its stockholders for a breach of fiduciary duty as a
director, except for liability as a result of (i) a breach of the director's
duty of loyalty to the Company or its stockholders; (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) an act related to the unlawful stock repurchase or payment of a
dividend under Section 174 of Delaware General Corporation Law; and (iv)
transactions from which the director derived an improper personal benefit. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission.

The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by resolution, agreement or
otherwise, to the full extent permitted under Delaware law. The Company has
entered into separate indemnification agreements with its directors and officers
which may, in some cases, be broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. The
indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.

Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.

At present, there is no pending litigation or proceeding involving a
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 which may result in a claim for such indemnification.

51
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1997, and as adjusted
to reflect the sale of the shares offered hereby (i) by each person who is known
by the Company to own beneficially more than 5% of the Company's Common Stock,
(ii) by each of the Named Executive Officers and (iii) by all officers and
directors as a group. Except pursuant to applicable community property laws or
as indicated in the footnotes to this table, each stockholder identified in the
table possesses sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by such stockholder. Unless otherwise
noted, the address for the individuals listed below is: c/o Integrated Sensor
Solutions, Inc., 625 River Oaks Parkway, San Jose, CA 95134.

<TABLE>
<CAPTION>
SHARES
SHARES BENEFICIALLY BENEFICIALLY
OWNED AFTER
OWNED BEFORE OFFERING OFFERING
----------------------- ---------------
BENEFICIAL OWNER(1) NUMBER PERCENT PERCENT
- ------------------------------------------------------------------------------ ---------- ----------- ---------------
<S> <C> <C> <C>
Breed Technologies, Inc.(2) .................................................. 530,038 11.3% 7.4%
Stuart A. Boyd
5300 Old Tampa Highway
P.O. Box 33050
Lakewood, FL 33807-3050

WK Technology Fund(3) ........................................................ 502,039 10.7 7.0
Y.S. Fu
10th Floor, 115, Sec. 3
Ming Sheng E. Road
Taipei, Taiwan, R.O.C.

TDK Semiconductor Corporation(4) ............................................. 445,524 9.5 6.2
Yutaka Mori
14351 Myford Road
Tustin, CA 92780-7068

Nagano Keiki Co., Ltd.(5) .................................................... 291,007 6.2 4.0
Shigeru Miyashita
1-30-4 Higashimagome
Ohta-ku
Tokyo 162
JAPAN

Vinod K. Sood(6) ............................................................. 180,621 3.8 2.5

Manher D. Naik(7) ............................................................ 245,444 5.2 3.4

Donald E. Paulus(8) .......................................................... 149,083 3.2 2.1

Ramesh Sirsi(9) .............................................................. 68,083 1.4 *

All directors and executive officers as a group (9 persons)(10) .............. 2,443,507 50.5 33.3
</TABLE>

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

* Denotes less than 1%

(1) Percent ownership is based on: (i) before this offering, 4,703,525 shares
of Common Stock, plus any shares issuable pursuant to options or warrants
held by the person in question which may be exercised within 60 days of
December 31, 1997; and (ii) after this offering, 7,203,525 shares of Common
Stock outstanding plus any shares issuable pursuant to options held by the
person in question which may be exercised within 60 days of December 31,
1997.

52
<PAGE>
(2) Includes 530,038 shares held by Breed Technologies, Inc. Stuart Boyd, a
director of the Company, is an officer of Breed Technologies, Inc. with
certain voting and investment power over such shares. Although Mr. Boyd may
be deemed to be a beneficial owner of such shares, he disclaims all such
beneficial ownership except to the extent of any pecuniary interest therein
which he may have.

(3) Includes 502,039 shares held by WK Technology Fund and affiliated funds.
Y.S. Fu, a director of the Company, is a partner of WK Technology Fund with
certain voting and investment power over such shares. Although Mr. Fu may be
deemed to be a beneficial owner of such shares he disclaims all such
beneficial ownership except to the extent of any pecuniary interest therein
which he may have.

(4) Includes 445,524 shares held by TDK Semiconductor Corporation. Yutaka Mori,
a director of the Company, is an officer of TDK Semiconductor Corporation
with certain voting and investment power over such shares. Although Mr. Mori
may be deemed to be a beneficial owner of such shares, he disclaims all such
beneficial ownership except to the extent of any pecuniary interest therein
which he may have.

(5) Includes 291,007 shares held by Nagano Keiki Co., Ltd. Shigeru Miyashita, a
director of the Company, is an officer of Nagano Keiki Co., Ltd. Although
Mr. Miyashita may be deemed to be a beneficial owner of such shares, he
disclaims all such beneficial ownership except to the extent of any
pecuniary interest therein which he may have.

(6) Includes 178,704 shares held by the Sood Family Trust and 1,917 shares
subject to options which are exercisable within 60 days of December 31,
1997.

(7) Includes 193,360 shares held by the Manher & Gita M. Naik Family Trust and
52,084 shares subject to options which are exercisable within 60 days of
December 31, 1997.

(8) Includes 9,083 shares subject to options which are exercisable within 60
days of December 31, 1997.

(9) Includes 42,083 shares subject to options which are exercisable within 60
days of December 31, 1997.

(10) Includes 138,834 shares subject to options which are exercisable within 60
days of December 31, 1997.

53
<PAGE>
CERTAIN TRANSACTIONS

Since December 31, 1995, there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which the Company
was or is to be a party in which the amount involved exceeds $60,000 and in
which any director, executive officer or beneficial holder of more than 5% of
any class of voting securities of the Company or members of such person's
immediate family had or will have a direct or indirect material interest other
than the transactions described below.

In December 1996 and October 1997, the Company sold 249,616 and 12,111
shares of Series E Preferred Stock, respectively, at a price of $3.78 per share.
In addition, in December 1996, the Company issued warrants to purchase shares of
Series F Preferred Stock at $6.38 per share. In December 1996, February 1997 and
June 1997, the Company sold 766,818 shares of Series F Preferred Stock at a
price of $6.13 per share. The following executive officers, directors,
beneficial holders of more than 5% of a class of the Company's capital stock and
immediate family members of such persons purchased Series E and Series F
Preferred Stock:

<TABLE>
<CAPTION>
WARRANTS TO
SERIES E PURCHASE SERIES SERIES F
PREFERRED F PREFERRED PREFERRED
EXECUTIVE OFFICERS, DIRECTORS AND 5% STOCKHOLDERS(1) STOCK STOCK STOCK
- -------------------------------------------------------------- -------------- ---------------- --------------
<S> <C> <C> <C>
Nagano Keiki Co., Ltd.(2)..................................... 131,007(3)
TDK Semiconductor Corporation(2).............................. 17,978(4)
WK Technology Fund(2)......................................... 48,978(5) 453,057(6)
Vinod K. Sood(7).............................................. 34,493(8)
</TABLE>

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

(1) See notes to table of beneficial ownership in "Principal Stockholders" for
information relating to the beneficial ownership of such shares.

(2) A beneficial holder of more than 5% of a class of the Company's capital
stock.

(3) Represents shares of Series E Preferred Stock issued in exchange for the
cancellation of indebtedness.

(4) Represents shares of Series E Preferred Stock issued in exchange for the
cancellation of indebtedness.

(5) Represents warrants to purchase 13,714 shares held by WK Technology Fund,
10,285 shares held by WK Technology Fund II, 18,612 shares held by WK
Technology Fund III and 6,367 shares held by WK Technology Fund IV. These
warrants were exercised in November 1997.

(6) Represents 123,591 shares held by WK Technology Fund, 103,306 shares held by
WK Technology Fund II, 155,836 shares held by WK Technology Fund III and
70,326 shares held by WK Technology Fund IV.

(7) A director of the Company.

(8) Represents shares issued in exchange for the cancellation of the Company's
Promissory Note dated June 15, 1996 in the amount of $211,268.75 payable to
the Sood Family Trust.

During fiscal 1996 and 1997, respectively, the Company designed and
manufactured specific products for Breed Technologies, Inc. which resulted in
sales of approximately $1,233,000 and $181,000 to Breed Technologies, Inc. of
which approximately $310,000 and $0 is included in the accounts receivable
balance at March 31, 1996 and 1997, respectively.

During fiscal years 1996 and 1997, the Company purchased goods and services
from TDK Semiconductor Corporation resulting in payments of $2,005,000 and
$2,323,000, respectively. At March 31, 1996 and 1997, the accounts payable
balance included approximately $396,000 and $304,000 payable to TDK
Semiconductor Corporation. Included in the notes payable balance at March 31,
1996 and 1997, were approximately $679,000 and $679,000 payable to TDK. On April
15, 1993, the Company issued a promissory note to TDK Semiconductor Corporation
in the amount of $500,000 with an interest rate of 9% per year. On June 14,
1995, the Company repaid the principal amount of the loan and issued 41,488

54
<PAGE>
shares of Common Stock to TDK Semiconductor Corporation in exchange for the
cancellation of accrued and unpaid interest on such indebtedness. On December
15, 1995, the Company issued a promissory note to TDK Semiconductor Corporation
in the amount of $679,000 with an interest rate of 10% per year. As of February
1, 1998, the Company and TDK have amended and restated the December 15, 1995
promissory note to capitalize all interest due to date and to specify a new
maturity date. The principal amount of the amended and restated promissory note
is $760,000, which bears interest at 10% per year, and all amounts thereunder
are due and payable on the earlier of (i) June 30, 1998 or (ii) the date of the
Company's initial public offering. In December 1996, the Company issued Series E
Preferred Stock to TDK Semiconductor Corporation in exchange for the
cancellation of interest payments for the fiscal year ended March 31, 1997 in
the amount of $67,868 on the December 1995 promissory note.

During fiscal 1996 and 1997, the Company performed development services for
and sold ASICs to Nagano resulting in approximately $692,000, and $1,119,000 of
revenues in those periods, of which approximately $136,000 and $709,000 are
included in the accounts receivable balance at March 31, 1996 and 1997,
respectively. Included in the accounts payable balance at March 31 1996, and
1997 are approximately $303,000 and $381,000, respectively, payable to Nagano
for purchases of sensing elements of $376,000 and $630,000 during fiscal 1996
and 1997, respectively. In addition, included in the notes payable balance at
March 31, 1996 and 1997 are approximately $466,000 and $437,000, respectively,
payable to Nagano. In August 1995, the Company issued a promissory note to
Nagano in the amount of $453,000 with an interest rate of 9.5% per year. In
December 1996 and October 1997, the Company issued Series E Preferred Stock to
Nagano in exchange for the cancellation of interest and principal amounts due
and payable on the August 1995 promissory note. On November 1, 1996, the Company
issued a promissory note to Nagano in the amount of $437,000 with an interest
rate of 10% per year. The Company repaid all interest and principal on the
November 1996 promissory note on May 30, 1997. On July 31, 1997, the Company
entered into an agreement to increase its ownership of ISS-Nagano by converting
approximately $1.0 million in long-term intercompany indebtedness owed by
ISS-Nagano into an increased equity interest. Accordingly, the Company now owns
74% of the equity of ISS-Nagano. For periods subsequent to July 1997, 26% of
ISS-Nagano's net income (loss) has been attributed to the minority shareholders'
interest.

55
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock and 7,000,000 shares of Preferred Stock, $.001 par value per share.
Each outstanding share of Preferred Stock will be converted into one share of
Common Stock upon the closing of the offering being made hereby. Upon such
conversion, such Preferred Stock will revert to authorized but unissued shares
of preferred stock. The following summary of certain provisions of the Common
Stock and the Preferred Stock of the Company does not purport to be complete and
is subject to, and qualified in its entirety by, the Certificate of
Incorporation and the Bylaws of the Company that are included as exhibits to the
Registration Statement of which this Prospectus forms a part and by the
provisions of applicable law.

COMMON STOCK

As of December 31, 1997, there were 4,703,525 shares of Common Stock
outstanding held of record by approximately 110 stockholders, as adjusted to
reflect the conversion of the outstanding shares of Preferred Stock upon the
closing of this offering. The holders of Common Stock are entitled to one vote
for each share held of record on all matters submitted to a vote of the holders
of Common Stock. Subject to preferences that may be applicable to any
outstanding shares of Preferred Stock, the holders of Common Stock are entitled
to receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available for the payment of dividends. In the
event of a 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 and liquidation preferences of any outstanding shares of
Preferred Stock. Holders of Common Stock have no preemptive rights or rights to
convert their Common Stock into any other securities. 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 issued upon completion of this offering will be fully paid and
non-assessable.

PREFERRED STOCK

Pursuant to the Company's Certificate of Incorporation, upon closing of the
offering contemplated by this Prospectus, the Board of Directors will have the
authority, without further action by the stockholders, to issue up to 7,000,000
shares of preferred stock in one or more series and to determine or alter the
designation, powers, preferences, privileges and relative participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater than
the rights of the Common Stock. The Board of Directors, without stockholder
approval, can issue preferred stock with voting, conversion or other rights that
could adversely affect the voting power and other rights of the holders of
Common Stock. Preferred stock could thus be issued quickly with terms calculated
to delay or prevent a change in control of the Company or make removal of
management more difficult. Additionally, the issuance of preferred stock may
have the effect of decreasing the market price of the Common Stock and may
adversely affect the voting and other rights of the holders of Common Stock. At
present, there are no shares of preferred stock outstanding, and the Company has
no plans to issue any of the preferred stock.

REPRESENTATIVES' WARRANTS

Upon completion of the offering contemplated by this Prospectus, the Company
will issue to the Representatives the Representatives' Warrants to purchase up
to 250,000 shares of Common Stock at an exercise price per share equal to 120%
of the price to public in this offering. The Representatives' Warrants are
exercisable for a period of five years from the date of this Prospectus
commencing one year after the effective date of the Registration Statement of
which this Prospectus forms a part. The holders of the Representatives' Warrants
have the right, on one occasion while such warrants are exercisable, to require
the Company at the Company's expense to register under the Securities Act the
offer and sale of

56
<PAGE>
the shares of Common Stock underlying the Representatives' Warrants. In
addition, holders of the Representatives' Warrants may include the shares of
Common Stock underlying the Representatives' Warrants in any registration (other
than on Form S-8) filed by the Company while such Warrants are exercisable. See
"Underwriting."

REGISTRATION RIGHTS

After this offering, the holders of 2,230,000 shares of Common Stock will be
entitled to certain rights with respect to the registration of such shares under
the Securities Act. Under the terms of the agreement between the Company and the
holders of such registrable securities, if the Company proposes to register any
of its securities under the Securities Act, either for its own account or for
the account of other securityholders exercising registration rights, such
holders are entitled to notice of such registration and are entitled to include
shares of such Common Stock therein. Subject to certain limitations in the
agreement, the holders of more than 50% of such shares may require, on two
occasions, that the Company use its best efforts to register such shares for
public resale, subject to certain limitations. Further, holders may require the
Company to file additional registration statements on Form S-3 at the Company's
expense. These rights are subject to certain conditions and limitations, among
them the right of the underwriters of an offering to limit the number of shares
included in such registration in certain circumstances.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

The Company is a Delaware corporation and thus subject to Section 203 of the
Delaware General Corporation Law ("Section 203"), which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any "business
combination" (as defined) with any interested stockholder (defined generally as
a person owning 15% or more of a corporation's outstanding voting stock) for a
period of three years following the date that such stockholder became an
interested stockholder, unless: (i) prior to such date, the Board of Directors
of the corporation approved either the business combination or the transaction
that resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder. The existence of this
provision would be expected to have an anti-takeover effect, including attempts
that might result in a premium over the market price for the shares of Common
Stock held by stockholders.

Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as an entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.

57
<PAGE>
The Company's Certificate of Incorporation provides that all stockholder
action must be effected at a duly called meeting of stockholders and not by a
consent in writing. In addition, the Company's Certificate of Incorporation and
Bylaws provide that only the Company's Chief Executive Officer, a majority of
the members of the Company's Board of Directors or holders of at least 10% of
the outstanding voting power may call a special meeting of stockholders. These
provisions of the Certificate of Incorporation and Bylaws could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions also may have the effect of preventing changes
in the management of the Company.

TRANSFER AGENT AND REGISTRAR

U.S. Stock Transfer Corporation has been appointed as the transfer agent and
registrar for the Company.

58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

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

Upon completion of this offering, the Company will have outstanding
approximately 7,203,525 shares of Common Stock. Of these shares, the 2,500,000
shares sold in this offering will be freely tradeable without restriction under
the Securities Act, unless purchased by "affiliates" of the Company as that term
is defined in Rule 144 under the Securities Act. The remaining 4,703,525 shares
of Common Stock held by existing stockholders were issued and sold by the
Company in reliance on exemptions from the registration requirements of the
Securities Act. These shares may be sold in the public market only if registered
or pursuant to an exemption from registration such as Rule 144, 144(k) or 701
under the Securities Act. The Company's executive officers and directors
(including funds affiliated with directors), who following the offering together
will beneficially own an aggregate of 2,443,507 shares of the Company's Common
Stock (including shares subject to options held by such persons), have executed
lock-up agreements with the Underwriters providing that they will not directly
or indirectly sell, contract to sell, grant any option to purchase or otherwise
transfer or dispose of any securities of the Company until 180 days after the
effective date of this offering. All other stockholders have entered into
written agreements with the Company imposing similar restrictions on transfers,
and the Company has agreed with Cruttenden Roth Incorporated and Dougherty
Summit Securities LLC that it will not release any stockholders from such
agreements. Cruttenden Roth Incorporated and Dougherty Summit Securities LLC
may, in their sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements.

As a result of the foregoing lock-up agreements, only the 2,500,000 shares
of the Company's Common Stock being offered hereby will be eligible for resale
without restriction on the effective date of this offering. Approximately
4,703,525 shares will be eligible for resale, pursuant to either Rule 701 or
Rule 144, beginning 180 days after the effective date of this offering. The
remaining shares will become eligible for resale from time to time thereafter as
the requisite holding periods required by Rule 144 are met.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted shares for at least one year (including
the holding period of any prior owner except an affiliate) is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 72,000 shares immediately after this
offering) or (ii) the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares to be sold for at least two years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.

Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with the holding period requirements of Rule 144. Any employee,
officer or director of or consultant to the Company who purchased his or her
shares pursuant to a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701. Rule 701 further provides that
non-affiliates may sell such shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or notice
provisions of Rule 144. Each holder of Rule 701 shares is required to wait until
90 days after the date of this Prospectus before selling such shares.

59
<PAGE>
Shortly after this offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock subject to
outstanding options under the Company's option plans or reserved for issuance
under the Purchase Plan. Based upon the number of shares subject to outstanding
options at December 31, 1997 and reserved for future issuance under all such
plans, such registration statement would cover approximately, 1,328,000 shares.
This registration statement will automatically become effective upon filing.
Accordingly, shares registered under such registration statement will, subject
to Rule 144 volume limitations applicable to affiliates of the Company, be
available for sale in the open market immediately following the expiration of
lock-up agreements.

60
<PAGE>
UNDERWRITING

Upon the terms and subject to the conditions set forth in an underwriting
agreement (the "Underwriting Agreement"), the Underwriters named below, for whom
Cruttenden Roth Incorporated and Dougherty Summit Securities LLC are acting as
co-managers and representatives (the "Representatives"), have severally agreed
to purchase from the Company an aggregate of 2,500,000 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
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Cruttenden Roth Incorporated..................................................... 912,500
Dougherty Summit Securities LLC.................................................. 912,500
Cowen & Company.................................................................. 100,000
Hambrecht & Quist LLC............................................................ 100,000
NationsBanc Montgomery Securities LLC............................................ 100,000
Advest, Inc...................................................................... 50,000
Cleary, Gull, Reiland & McDevitt Inc............................................. 50,000
Gruntal & Co., L.L.C............................................................. 50,000
Josephthal & Co. Inc............................................................. 50,000
Needham & Company, Inc........................................................... 50,000
Pennsylvania Merchant Group...................................................... 50,000
Dominick & Dominick, Incorporated................................................ 25,000
Hanifen, Imhoff Inc.............................................................. 25,000
Trautman, Kramer & Company, Inc.................................................. 25,000
----------
Total.......................................................................... 2,500,000
----------
----------
</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 overallotment option described below) must be so
purchased.

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

The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price 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 $.30 per share. The Underwriters may
allow, and such dealers may reallow, a concession not to exceed $.10 per share
to any other Underwriter and certain other dealers. After the initial public
distribution of the shares offered hereby, the offering price and other selling
terms may be changed by the Representatives. The Representatives have advised
the Company that the Underwriters do not intend to confirm any shares to any
accounts over which they exercise discretionary control.

The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 375,000
additional shares of Common Stock at the initial public offering price less
underwriting discounts and commissions. Such option may be exercised solely for
the purpose of converting overallotments, if any, in connection with the
offering of the shares offered hereby. 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 additional shares proportionate to
such Underwriter's initial commitment as indicated in the preceding table.

61
<PAGE>
The offering of the shares offered hereby is made for delivery when, as and
if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering without notice. The Underwriters
reserve the right to reject an order for the purchase of shares in whole or in
part.

The Company has agreed to pay the Representatives a non-accountable expense
allowance of $150,000 to cover certain underwriting costs and due diligence
expenses related to this offering and to sell to the Representatives for nominal
consideration the Representatives' Warrants to purchase from the Company up to
250,000 shares of Common Stock (subject to certain antidilution adjustments) at
an exercise price per share equal to 120% of the initial public offering price
per share. The exercise price may be paid in cash or on a cashless net issuance
basis by foregoing receipt of a number of shares otherwise issuable upon
exercise having a fair market value equal to the aggregate exercise price. The
Representatives' Warrants will be exercisable for a period beginning one year
from the date of this Prospectus until five years from the date of this
Prospectus. The Representatives' Warrants may not be sold, transferred,
assigned, pledged or hypothecated by the Representatives for a period of one
year from the date of issuance except to officers and partners of the
Representatives, the Underwriters or officers and partners of the Underwriters.
In addition, the Company has granted certain demand and piggyback registration
rights to the holders of the Representatives' Warrants, which enable them to
register resale of the Common Stock underlying the Representatives' Warrants
under the Securities Act.

The Company, all directors and executive officers of the Company, and
certain stockholders and optionholders of the Company have agreed that, without
the prior written consent of the Representatives, they will not, with certain
limited exceptions, directly or indirectly, offer, sell, contract to sell, grant
any option to purchase or otherwise dispose of any shares of 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, for a period of 180 days after the
Effective Date, other than the shares of Common Stock offered hereby. See
"Shares Eligible for Future Sale."

In connection with this offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M under the Securities Exchange Act of 1934, as
amended, pursuant to which such persons may bid for or purchase shares of Common
Stock for the purpose of stabilizing the market price for shares of Common
Stock. The Underwriters also may create a short position for the account of the
Underwriters by selling more shares of Common Stock in connection with this
offering than they are committed to purchase from the Company and in such case
may purchase shares of Common Stock in the open market following the completion
of this offering to cover all or a portion of the shares of Common Stock or by
exercising the Underwriters' over-allotment option referred to above. In
addition, the Representatives, on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the other Underwriters
whereby it may reclaim for an Underwriter (or a dealer participating in this
offering) for the account of the other Underwriters, the selling concession with
respect to shares of Common Stock that are distributed in this offering but
subsequently purchased for the account of the Underwriters in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the price of the Common Stock at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required, and, if they are undertaken, may be discontinued at any
time.

Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock offered hereby has
been determined by negotiation between the Company and the Representatives.
Among the factors considered in determining the initial public offering price
were prevailing market conditions, revenues and earnings of the Company, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and

62
<PAGE>
prospects of the Company, the present state of the Company's business
operations, the history of and prospects for the Company's business and the
industry in which it competes, the Company's management and other factors deemed
relevant.

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Gray Cary Ware & Freidenrich LLP, Palo
Alto, California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Brobeck Phleger & Harrison LLP, Newport
Beach, California.

EXPERTS

The consolidated financial statements of Integrated Sensor Solutions, Inc.
at March 31, 1996 and 1997 and for each of the three years in the period ended
March 31, 1997, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission, a
Registration Statement on Form SB-2 relating to the 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 and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed therewith. A copy of the Registration Statement may be inspected by anyone
without charge at the Commission's principal office located at 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies of all or any part thereof may be
obtained from the Public Reference Branch of the Commission upon the payment of
certain fees prescribed by the Commission. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission
(http://www.sec.gov).

Upon completion of this offering, the Company will subject to the
information requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and in accordance therewith will file reports, proxy statements
and other information may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: New York
Regional Office, Seven World Trade Center, New York, New York 10048, and Chicago
Regional Office, 500 West Madison Street, Chicago, Illinois 606761. Copies of
such materials can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of the
prescribed fees. The Company's Common Stock has been approved for quotation on
the Nasdaq National Market. Reports, proxy statements and other information
concerning the Company may be inspected at the National Association of
Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006. The
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's Web site
http:// www.sec.gov.

The Company intends to furnish its stockholders annual reports containing
financial statements audited by its independent auditors and quarterly reports
containing unaudited financial statements for each of the first three quarters
of each year.

63
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................... F-2

Consolidated Balance Sheets.......................................... F-3

Consolidated Statements of Operations................................ F-4

Consolidated Statements of Stockholders' Equity...................... F-5

Consolidated Statements of Cash Flows................................ F-6

Notes to Consolidated Financial Statements........................... F-7
</TABLE>

F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Integrated Sensor Solutions, Inc.

We have audited the accompanying consolidated balance sheets of Integrated
Sensor Solutions, Inc. as of March 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 1997. These 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Integrated Sensor Solutions, Inc. at March 31, 1996 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1997, in conformity with generally accepted
accounting principles.

ERNST & YOUNG LLP

San Jose, California
June 15, 1997,
except for Note 12,
as to which the date is
October 14, 1997

F-2
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31,
----------------------
1996 1997
---------- ---------- DECEMBER 31, PRO FORMA
1997 STOCKHOLDERS'
------------- EQUITY
DECEMBER 31, 1997
(UNAUDITED) ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents.......................... $ 520,508 $2,059,050 $ 675,031
Accounts receivable--trade, net of allowance for
doubtful accounts of $0, $164,000, and $0 at
March 31, 1996, March 31, 1997, and December 31,
1997, respectively............................... 1,134,846 2,225,548 4,056,094
Accounts receivable from related parties........... 834,888 884,295 780,593
Inventories........................................ 1,607,524 1,679,107 2,601,268
Prepaid expenses................................... 156,858 63,730 143,050
---------- ---------- -------------
Total current assets................................. 4,254,624 6,911,730 8,256,036
Property and equipment, at cost:
Machinery and equipment............................ 2,331,752 3,535,424 4,124,526
Furniture and fixtures............................. 192,921 219,387 245,347
Leasehold improvements............................. 49,437 131,009 191,618
Software........................................... 155,445 234,345 274,638
---------- ---------- -------------
2,729,555 4,120,165 4,836,129
Less accumulated depreciation and amortization....... 1,297,304 2,323,196 2,956,461
---------- ---------- -------------
1,432,251 1,796,969 1,879,668
Other assets......................................... -- -- 286,092
---------- ---------- -------------
Total assets......................................... $5,686,875 $8,708,699 $10,421,796
---------- ---------- -------------
---------- ---------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit..................................... $ 600,000 $ 600,000 $ 900,000
Notes payable to related parties................... 1,526,504 1,515,365 678,684
Accounts payable--trade............................ 780,328 1,245,521 1,667,880
Accounts payable to related parties................ 698,707 684,634 722,474
Accrued payroll and related expenses............... 134,438 131,421 179,155
Other accrued liabilities.......................... 355,880 436,652 909,547
Current portion of capital lease obligations....... 8,697 158,772 159,357
---------- ---------- -------------
Total current liabilities............................ 4,104,554 4,772,365 5,217,097
Long-term portion of capital lease obligations....... 22,075 197,149 97,889
Minority interest in subsidiary...................... 419,525 56,028 172,152
Commitments
Stockholders' equity:
Noncumulative convertible preferred stock, $0.001
par value issuable in series (aggregate
liquidation preference of $11,210,322 at March
31, 1997 and $12,117,148 December 31, 1997,
respectively)
Authorized shares - 3,400,000 at December 31,
1997 and 7,000,000 pro forma
Issued and outstanding shares--2,121,497 at March
31, 1996, 3,066,317 at March 31, 1997,
3,219,020 at December 31, 1997, and none pro
forma.......................................... 2,122 3,066 3,219 $ --
Common stock, $0.001 par value:
Authorized shares--6,200,000 at March 31, 1997
and 50,000,000 at December 31, 1997
Issued and outstanding shares 1,280,913 at
March 31, 1996, 1,390,680 at March 31, 1997,
1,484,505 at December 31, 1997, and 4,703,525
pro forma...................................... 1,281 1,391 1,485 4,704
Additional paid-in capital......................... 6,652,311 12,199,411 13,394,491 13,394,491
Accumulated deficit................................ (5,541,998) (8,170,843) (8,075,373) (8,075,373)
Cumulative translation adjustment.................. 27,005 (68,758) 16,451 16,451
Deferred compensation.............................. -- (281,110) (405,615) (405,615)
---------- ---------- ------------- ------------------
Total stockholders' equity........................... 1,140,721 3,683,157 4,934,658 $ 4,934,658
---------- ---------- ------------- ------------------
------------------
Total liabilities and stockholders' equity........... $5,686,875 $8,708,699 $10,421,796
---------- ---------- -------------
---------- ---------- -------------
</TABLE>

See accompanying notes.

F-3
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------------------- ---------------------------
1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenue............................... $ 3,668,851 $ 5,336,771 $ 8,049,359 $ 5,174,000 $ 7,873,467
Contract revenue.............................. 1,307,593 2,993,319 2,254,720 1,541,014 3,140,027
------------- ------------- ------------- ------------- ------------
Total revenues (related party revenues of
$1,300,000, $2,404,000, $1,506,000, $777,000
and $1,365,000 for 1995, 1996, 1997 and
December 31, 1996 and 1997.................... 4,976,444 8,330,090 10,304,079 6,715,014 11,013,494

Cost of revenues:
Cost of product revenue (Note 9).............. 3,624,128 5,250,504 7,292,491 5,432,924 5,327,747
Cost of contract revenue...................... 996,454 2,149,917 2,731,063 2,024,126 2,571,655
------------- ------------- ------------- ------------- ------------
Total cost of revenues.......................... 4,620,582 7,400,421 10,023,554 7,457,050 7,899,402
------------- ------------- ------------- ------------- ------------
Gross profit (loss)............................. 355,862 929,669 280,525 (742,036) 3,114,092

Operating expenses:
Research and development...................... 700,674 741,577 1,438,212 1,034,040 1,265,460
Sales, general, and administrative............ 1,298,919 1,389,894 1,759,774 1,262,478 1,467,639
------------- ------------- ------------- ------------- ------------
Total operating expenses........................ 1,999,593 2,131,471 3,197,986 2,296,518 2,733,099
------------- ------------- ------------- ------------- ------------
Income (loss) from operations................... (1,643,731) (1,201,802) (2,917,461) (3,038,554) 380,993

Interest expense................................ (96,318) (225,957) (259,735) (199,641) (159,297)
Other income (expense).......................... 586,913 366,129 27,525 91,756 (10,102)
Minority interest in net (income) loss of joint
venture....................................... 37,201 311,000 520,826 531,174 (116,124)
------------- ------------- ------------- ------------- ------------
Net income (loss)............................... $ (1,115,935) $ (750,630) $ (2,628,845) $ (2,615,265) $ 95,470
------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------
Pro forma basic and diluted net income (loss)
per share..................................... $ (0.72) $ (0.77) $ 0.02
------------- ------------- ------------
------------- ------------- ------------
Shares used in computing pro forma basic net
income (loss) per share....................... 3,631,727 3,393,738 4,584,024
------------- ------------- ------------
------------- ------------- ------------
Shares used in computing pro forma diluted net
income (loss) per share....................... 3,631,727 3,393,738 5,003,407
------------- ------------- ------------
------------- ------------- ------------
</TABLE>

See accompanying notes.

F-4
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NONCUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance at March 25, 1994............................... 1,591,459 $ 1,592 528,687 $ 529 $ 4,031,942
Issuance of common stock for notes payable and accrued
interest............................................ -- -- 407,654 408 458,212
Issuance of common stock upon exercise of stock
options............................................. -- -- 171,217 171 40,598
Issuance of Series D preferred stock, net of issuance
costs of $14,198 for cash........................... 530,038 530 -- -- 1,985,272
Issuance of common stock for services................. -- -- 3,000 3 3,372
Translation adjustment................................ -- -- -- -- --
Net loss.............................................. -- -- -- -- --
--------- ----------- --------- ----------- --------------
Balance at March 31, 1995............................... 2,121,497 2,122 1,110,558 1,111 6,519,396
Issuance of common stock upon exercise of stock
options............................................. -- -- 103,400 103 29,009
Issuance of common stock for extension of payment
terms............................................... -- -- 66,955 67 103,906
Translation adjustment................................ -- -- -- -- --
Net loss.............................................. -- -- -- -- --
--------- ----------- --------- ----------- --------------
Balance at March 31, 1996............................... 2,121,497 2,122 1,280,913 1,281 6,652,311
Issuance of common stock upon exercise of stock
options............................................. -- -- 109,767 110 76,430
Issuance of Series E preferred stock for notes payable
and accrued interest................................ 249,616 249 -- -- 942,056
Issuance of Series F preferred stock for notes
payable, accrued interest, and cash, net of $11,959
of issuance costs................................... 695,204 695 -- -- 4,247,504
Deferred compensation................................. -- -- -- -- 281,110
Translation adjustment................................ -- -- -- -- --
Net loss.............................................. -- -- -- -- --
--------- ----------- --------- ----------- --------------
Balance at March 31, 1997............................... 3,066,317 3,066 1,390,680 1,391 12,199,411
Issuance of common stock upon exercise of stock
options (unaudited)................................. -- -- 93,825 94 71,568
Issuance of preferred stock for notes payable and
accrued interest (unaudited)........................ 83,725 84 -- -- 482,265
Issuance of Series F preferred stock upon conversion
of warrants, net of $10,000 of issuance costs
(unaudited)......................................... 68,978 69 -- -- 429,672
Deferred compensation (unaudited)..................... -- -- -- -- 211,575
Amortization of deferred compensation (unaudited)..... -- -- -- -- --
Translation adjustment (unaudited).................... -- -- -- -- --
Net income (unaudited)................................ -- -- -- -- --
--------- ----------- --------- ----------- --------------
Balance at December 31, 1997 (unaudited)................ 3,219,020 $ 3,219 1,484,505 $ 1,485 $ 13,394,491
--------- ----------- --------- ----------- --------------
--------- ----------- --------- ----------- --------------

CUMULATIVE TOTAL
ACCUMULATED TRANSLATION DEFERRED STOCKHOLDERS'
DEFICIT ADJUSTMENT COMPENSATION EQUITY
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Balance at March 25, 1994............................... $(3,675,433) $ -- $ -- $ 358,630
Issuance of common stock for notes payable and accrued
interest............................................ -- -- -- 458,620
Issuance of common stock upon exercise of stock
options............................................. -- -- -- 40,769
Issuance of Series D preferred stock, net of issuance
costs of $14,198 for cash........................... -- -- -- 1,985,802
Issuance of common stock for services................. -- -- -- 3,375
Translation adjustment................................ -- 117,655 -- 117,655
Net loss.............................................. (1,115,935) -- -- (1,115,935)
------------ ----------- ------------- ------------
Balance at March 31, 1995............................... (4,791,368) 117,655 -- 1,848,916
Issuance of common stock upon exercise of stock
options............................................. -- -- -- 29,112
Issuance of common stock for extension of payment
terms............................................... -- -- -- 103,973
Translation adjustment................................ -- (90,650) -- (90,650)
Net loss.............................................. (750,630) -- -- (750,630)
------------ ----------- ------------- ------------
Balance at March 31, 1996............................... (5,541,998) 27,005 -- 1,140,721
Issuance of common stock upon exercise of stock
options............................................. -- -- -- 76,540
Issuance of Series E preferred stock for notes payable
and accrued interest................................ -- -- -- 942,305
Issuance of Series F preferred stock for notes
payable, accrued interest, and cash, net of $11,959
of issuance costs................................... -- -- -- 4,248,199
Deferred compensation................................. -- -- (281,110) --
Translation adjustment................................ -- (95,763) -- (95,763)
Net loss.............................................. (2,628,845) -- -- (2,628,845)
------------ ----------- ------------- ------------
Balance at March 31, 1997............................... (8,170,843) (68,758) (281,110) 3,683,157
Issuance of common stock upon exercise of stock
options (unaudited)................................. -- -- -- 71,662
Issuance of preferred stock for notes payable and
accrued interest (unaudited)........................ -- -- -- 482,349
Issuance of Series F preferred stock upon conversion
of warrants, net of $10,000 of issuance costs
(unaudited)......................................... -- -- -- 429,741
Deferred compensation (unaudited)..................... -- -- (211,575) --
Amortization of deferred compensation (unaudited)..... -- -- 87,070 87,070
Translation adjustment (unaudited).................... -- 85,209 -- 85,209
Net income (unaudited)................................ 95,470 -- -- 95,470
------------ ----------- ------------- ------------
Balance at December 31, 1997 (unaudited)................ $(8,075,373) $ 16,451 $ (405,615) $4,934,658
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
</TABLE>

See accompanying notes.

F-5
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
---------------------------------- ----------------------
1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................................. $(1,115,935) $ (750,630) $(2,628,845) $(2,615,265) $ 95,470
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization.............................. 409,997 769,743 1,025,892 597,317 633,265
Amortization of deferred compensation...................... -- -- -- -- 87,070
Issuance of common stock for services...................... 3,375 -- -- -- --
Minority interest in net income (loss) of joint venture.... (37,201) (311,000) (520,826) (531,174) 116,124
Gain on sale of interest in joint venture.................. (166,032) (235,472) (171,618) (171,618) --
Foreign currency (gains) losses............................ -- (165,000) 143,921 79,862 (14,391)
Changes in operating assets and liabilities:
Accounts receivable...................................... (704,071) (79,700) (1,358,435) 145,373 (1,676,990)
Inventories.............................................. (957,619) (163,988) (95,289) 253,802 (900,552)
Prepaid expenses and other assets........................ (50,214) (70,522) 92,228 130,349 (361,847)
Accounts payable......................................... 1,483,917 (862,773) 577,743 (195,842) 480,056
Accrued payroll and related expenses..................... 15,705 18,518 (3,017) 51,559 47,734
Deferred revenue......................................... (182,209) (53,732) (3,568) 17,333 --
Other accrued liabilities................................ (240,445) 210,254 219,480 79,342 555,243
---------- ---------- ---------- ---------- ----------
Net cash used in operating activities.......................... (1,540,732) (1,694,302) (2,722,334) (2,158,962) (938,818)

INVESTING ACTIVITIES
Purchase of property and equipment............................. (748,563) (1,124,317) (1,092,413) (716,476) (721,168)
Proceeds from sale of property and equipment................... -- -- -- -- 46,205
Proceeds from sale of short-term investment.................... (150,000) 150,000 -- -- --
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities.......................... (898,563) (974,317) (1,092,413) (716,476) (674,963)

FINANCING ACTIVITIES
Borrowings under line of credit................................ -- 600,000 600,000 600,000 300,000
Proceeds from notes payable.................................... 250,000 1,757,377 1,086,681 1,086,681 --
Payments on line of credit..................................... -- -- (600,000) (600,000) --
Payments of principal on notes payable......................... (270,005) (750,000) -- -- (431,965)
Payments of principal on capital lease obligations............. (4,524) (9,890) (126,922) (56,619) (139,676)
Issuance of convertible preferred stock, net of issuance
costs........................................................ 1,985,802 -- 3,988,043 2,999,940 429,741
Net proceeds from issuance of common stock..................... 40,769 29,112 76,540 17,962 71,662
Net proceeds from investment in joint venture.................. 322,830 715,199 328,947 328,947 --
---------- ---------- ---------- ---------- ----------
Net cash provided by financing activities...................... 2,324,872 2,341,798 5,353,289 4,376,911 229,762
---------- ---------- ---------- ---------- ----------
Increase (decrease) in cash and cash equivalents............... (114,423) (326,821) 1,538,542 1,501,473 (1,384,019)
Cash and cash equivalents at beginning of year................. 961,752 847,329 520,508 520,508 2,059,050
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of year....................... $ 847,329 $ 520,508 $2,059,050 $2,021,981 $ 675,031
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid.................................................. $ 27,082 $ 164,255 $ 118,135 $ 75,653 $ 99,707
Taxes paid..................................................... $ 1,021 $ -- $ -- $ -- $ --

SCHEDULE OF NONCASH FINANCING ACTIVITIES
Capital asset additions under capital leases................... $ 35,914 $ 9,272 $ 298,197 $ 23,205 $ 41,001
Accounts payable converted to capital leases................... $ -- $ -- $ 153,874 $ 153,874 $ --
Issuance of preferred stock for payment of notes payable....... $ 458,620 $ -- $1,067,321 $1,067,321 $ 400,000
Issuance of preferred stock for payment of interest on notes
payable...................................................... $ -- $ 103,973 $ 135,140 $ 135,140 $ 82,349
</TABLE>

See accompanying notes.

F-6
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

Integrated Sensor Solutions, Inc. (ISS or the Company) designs, manufactures
and markets high performance, intelligent sensor products that are used in
electronic control systems by customers in the automotive and industrial
markets. The Company was incorporated in March 1989 and was principally engaged
in research and development through 1993.

BASIS OF PRESENTATION

The consolidated financial statements through March 31, 1997 include the
accounts of the Company and ISS-Nagano GmbH, its approximately 52% owned
subsidiary (see Note 2), after elimination of all intercompany accounts and
transactions.

On July 31, 1997, the Company entered into an agreement to increase its
ownership of ISS-Nagano GmbH by converting approximately $1,000,000 in long-term
intercompany indebtedness owed by ISS-Nagano GmbH into an increased equity
interest. Accordingly, the Company now owns 74% of the equity of ISS-Nagano
GmbH. For periods subsequent to July 31, 1997, 26% of ISS-Nagano GmbH's net
income (loss) has been attributed to the minority shareholders' interest.

As of March 31, 1997, the Company had an accumulated deficit of $8,170,843
and had used cash of $2,722,334 in operations for the fiscal year then ended.
Management believes that the March 31, 1997 working capital of $2,139,365 and
its line of credit together with the results of operations will be sufficient to
support the Company's planned activities through the end of fiscal 1998. The
Company believes that, to the extent existing resources and anticipated revenues
are insufficient to fund the Company's planned activities, additional debt or
equity financing will be available from existing investors and others.

FOREIGN CURRENCY TRANSLATION

The financial statements of ISS-Nagano GmbH are denominated in Deutsche
Marks which is its functional currency in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation" (FAS 52). All assets
and liabilities in the balance sheets of ISS-Nagano GmbH are translated into
U.S. Dollar equivalents at exchange rates as follows: (1) balance sheet accounts
at year-end rates and (2) statement of operations accounts at weighted average
exchange rates for the year. Translation gains or losses are recorded in
stockholders' equity, and the transaction gains and losses are included in other
income. The Company has not undertaken hedging transactions to cover its
currency transaction exposure. In 1996 and 1997, the Company recognized a
transaction gain of $165,000 and a transaction loss of $144,000, respectively,
on trade payables and notes to related parties denominated in foreign
currencies.

CASH EQUIVALENTS

Cash equivalents consist of short-term, highly liquid financial instruments
that are readily convertible to cash and have original maturities of three
months or less at the time of acquisition.

F-7
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING EXPENSE

The cost of advertising is generally expensed as incurred. The Company's
advertising costs through December 31, 1997 have been immaterial.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of the Company's long-term debt is estimated using a
discounted cash flow analysis based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements.

INVENTORIES

Inventories are stated at the lower of standard cost (which approximates
actual cost on a first-in, first-out basis) or market. The major components of
inventory are as follows:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------------------------- ------------
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Raw materials...................................... $ 1,269,494 $ 1,422,396 $1,630,481
Work-in-process.................................... 120,941 123,813 638,875
Finished goods..................................... 217,089 132,898 331,912
------------ ------------ ------------
$ 1,607,524 $ 1,679,107 $2,601,268
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

PROPERTY AND EQUIPMENT

Property and equipment are depreciated over the estimated useful lives of
the assets (generally three to five years) using the straight-line method.
Equipment under capital leases and leasehold improvements are amortized using
the straight-line method, based on the shorter of the estimated useful lives of
the assets or the term of the lease.

REVENUES

Revenues from product shipments are recognized as products are shipped. The
Company performs research and product development work under development
contracts. Due to technological risk factors, the costs of these contracts are
expensed as incurred and revenues are recognized when applicable customer
milestones have been met, including deliverables, and in any case, not in excess
of the amount that would be recognized using the percentage of completion
method. Costs incurred under development contracts are included in cost of
contract revenues in the consolidated statements of operations.

NET INCOME (LOSS) PER SHARE

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to

F-8
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

the previously reported fully diluted earnings per share. In February 1998 the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 98,
EARNINGS PER SHARE. Staff Accounting Bulletin No. 98 affected the treatment of
certain stock and warrants ("cheap stock") issued within a one year period prior
to an initial public offering. Earnings per share amounts presented have been
restated to conform to requirements of Statement No. 128 and Staff Accounting
Bulletin No. 98.

PRO FORMA NET LOSS PER SHARE AND UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY

Pro forma net income (loss) per share has been computed as described above
and also gives effect even if antidilutive to the conversion of convertible
preferred shares not included above that will automatically convert upon
completion of the Company's initial public offering (using the if-converted
method) from the original date of issuance. In the event of a public offering of
the Company's Common Stock, all of the convertible preferred stock outstanding
as of the closing date will be converted into an aggregate of 3,219,020 shares
of common stock, based on the shares of convertible preferred stock outstanding
at December 31, 1997. Unaudited pro forma stockholders' equity at December 31,
1997, as adjusted for the conversion of preferred stock, is disclosed on the
balance sheet.

MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISKS

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

Significant customers accounted for the following percentages of net
revenues:

<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEARS ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------------------------------- ------------------------------------
1995 1996 1997 1996 1997
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Customer A.................... 53% 31% 22% 24% 25%
Customer B.................... 16% 13% < 10% < 10% --
Customer C.................... < 10% < 10% 11% < 10% 12%
Customer D.................... < 10% 17% 22% 22% 30%
Customer E.................... < 10% 10% 20% 23% < 10%
Customer F.................... -- -- < 10% < 10% < 10%
</TABLE>

F-9
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION

Certain amounts in the 1995 and 1996 consolidated financial statements have
been reclassified to conform to the 1997 presentation.

LONG-LIVED ASSETS

In 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" (FAS 121). FAS 121 requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future undiscounted cash flows attributable to such
assets. FAS 121 was effective for the fiscal year ended March 31, 1997. The
adoption of FAS 121 did not have a material impact on the Company's financial
position or results of operations.

ACCOUNTING FOR EMPLOYEE STOCK OPTIONS

The Company accounts for its employee stock compensation plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25). In October
1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123), which the Company adopted in fiscal 1997. Under FAS 123, companies may
elect, but are not required, to use a fair value methodology to recognize
compensation expense for all stock-based awards. In 1997, the Company
implemented the disclosure-only provisions of FAS 123 (see Note 7).

USE OF ESTIMATES

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

INTERIM FINANCIAL INFORMATION

The interim financial information at December 31, 1997 and for the nine
months ended December 31, 1996 and 1997 is unaudited but, in the opinion of
management, includes all adjustments, consisting only of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and results of operations for the interim periods. The
results of operations for the nine months ended December 31, 1997 are not
necessarily indicative of the results to be expected for the full fiscal year.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued Statement No.
130, REPORTING COMPREHENSIVE INCOME (FAS No. 130) and Statement No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (FAS No.
131). FAS No. 130 establishes rules for reporting and displaying comprehensive
income. FAS No. 131 will require the Company to use the "management approach" in
disclosing segment information. Both statements are effective for the Company
during fiscal 1999. The

F-10
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company does not believe that the adoption of either FAS No. 130 or FAS No. 131
will have a material impact on the Company's results of operations, cash flows,
or financial position.

2. ISS-NAGANO GMBH

In July 1993, the Company organized a German entity, ISS GmbH, in which ISS
retained a 79% interest. In December 1994, a related party purchased 34% of ISS
GmbH for approximately $1,290,000 (2,000,000 Deutsche Marks). As a result of
this transaction, the entity was renamed ISS-Nagano GmbH, and the Company's
ownership interest therein was reduced to 52%. Under the terms of the purchase
arrangement, the related party was obligated to pay for the stock in four
installments of 500,000 Deutsche Marks each. The sale has resulted in ISS
recognizing a gain of approximately $166,000, $235,000, and $172,000 in fiscal
1995, 1996, and 1997, respectively, and $172,000 for the nine months ended
December 31, 1996, which is included in other income in the accompanying
consolidated statement of operations. The gain on the sale was fully recognized
as of June 30, 1996. ISS-Nagano GmbH is engaged in the manufacturing and
marketing of integrated sensor devices (ISDs).

From 1994 through 1997, the Company received approximately $1,961,000 in
research grants from two divisions of the German government as part of the
organization of ISS-Nagano GmbH. The grants have been provided to support the
research and development of ISS-Nagano GmbH and have been applied against its
operating expenditures and fixed asset purchases. The subsidiary must maintain
certain employment levels as part of the agreements and have restrictions
related to the purchasing of fixed assets. The Company has maintained operations
in compliance with the guidelines of the agreements. Penalties that may arise
related to the restrictions would not have a material impact on the consolidated
statement of operations.

The Company received $45,000 and $189,000 in grant revenue for the fiscal
years ended March 31, 1996 and 1997, respectively, and $144,000 and $0 for the
nine months ended December 31, 1996 and 1997, respectively, as reimbursement for
operating expenses incurred related primarily to research and development
expenses. This grant revenue has been offset against research and development
expenses for presentation in these financial statements. During the fiscal year
ended March 31, 1995, the Company received $654,000 in grant revenue of which
$311,000 was used to reduce research and development expenses. The remaining
$343,000 of grant revenue for fiscal 1995 has been included in other income.

F-11
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)

3. NOTES PAYABLE

Notes payable consisted of the following:

<TABLE>
<CAPTION>
MARCH 31,
-------------------------- DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Promissory note with related party, subordinated
to the bank line, bearing interest at 10% per
annum; with principal and interest due and payable
upon the earlier of an initial public offering by the
Company or June 30, 1998.............................. $ 678,684 $ 678,684 $ 678,684

Promissory note with related party, subordinated
to the bank line, denominated in Yen,
bearing interest at 10% per annum; with
principal plus interest due on April 30, 1997.
This note was repaid on May 30, 1997.................. -- 436,681 --

Promissory notes with related party, subordinated
to the bank line, bearing interest at 9.75% per
annum; with principal due and payable on
June 15, 1997. All principal and accumulated
interest were converted to Series F Preferred
Stock upon maturity of the note at $6.13 per
share................................................. -- 400,000 --

Promissory note with related party, denominated
in Yen, bearing interest at 10% per
annum; with principal due and payable on
July 31, 1996. All principal and accumulated
interest were converted to Series E Preferred
Stock upon maturity of the note at $3.78 per
share................................................. 381,750 -- --

Promissory note with related party, denominated
in Yen, bearing interest at 9.5% per
annum; with principal plus interest due on
August 31, 1996. All principal and interest were
converted to Series E Preferred Stock upon
maturity of the note at $3.78 per share............... 466,070 -- --
------------ ------------ ------------
$ 1,526,504 $ 1,515,365 $ 678,684
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

F-12
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)

4. LINE OF CREDIT

The Company has a bank line of credit that expired on July 9, 1997.
Borrowings under the line, which are limited to the lesser of $1,000,000 or 75%
of eligible accounts receivable, bear interest at the bank's prime rate plus
1.75% (10.75% at March 31, 1996 and 10.25% at March 31, 1997) and are secured by
the assets of the Company. The credit agreement requires the Company to maintain
certain financial ratios, minimum working capital, minimum tangible net worth,
and minimum profitability levels. The Company was not in compliance with one of
the covenants at March 31, 1997 and December 31, 1997 and obtained waivers. As
of March 31, 1996 and 1997 and December 31, 1997, the Company had borrowings
totaling $600,000, $600,000 and $900,000, respectively, under the line of
credit.

On August 22, 1997, the Company's bank line of credit agreement was amended
to a maximum of the lesser of $2,000,000 or 75% of eligible accounts receivable.
Eligible accounts receivable are defined as those outstanding less than 90 days
from date of invoice. Borrowings under the line of credit bear interest at the
bank's prime rate plus 0.75% and are secured by the assets of the Company. The
Company also has available a $250,000 term loan facility for equipment that
bears interest at the bank's prime rate plus 1.50%. The facility requires the
Company to maintain certain financial covenants including profitability for each
fiscal quarter beginning July 31, 1997. The Company was not in compliance with
one of the covenants at December 31, 1997 and obtained a waiver.

5. CAPITAL LEASES

At March 31, 1996 and 1997 and December 31, 1997, equipment under capital
leases amounted to $43,825, $495,896, and $536,897, respectively. Lease terms
ranged from three to five years. Accumulated amortization on these assets at
March 31, 1996 and 1997 and December 31, 1997 was $10,675, $104,357, and
$230,514, respectively. The majority of these assets are financed under the
Company's $750,000 capital lease line. At March 31, 1997 and December 31, 1997,
$377,456 and $352,118, respectively, remained available under the lease line.

The following is a schedule of future minimum fiscal lease payments under
capital leases:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
---------- ------------
<S> <C> <C>
1998 (three months for December 31)................................ $ 214,177 $ 49,483
1999............................................................... 177,751 191,799
2000............................................................... 65,150 77,408
2001............................................................... -- 5,416
2002............................................................... -- 1,690
---------- ------------
Total minimum lease payments....................................... 457,078 325,796
Amount representing interest....................................... 101,157 68,550
---------- ------------
355,921 257,246
Less current portion............................................... 158,772 159,357
---------- ------------
$ 197,149 $ 97,889
---------- ------------
---------- ------------
</TABLE>

F-13
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)

6. COMMITMENTS

The Company has facility operating leases that expire through fiscal 2001.
Future fiscal minimum lease and maintenance payments are as follows:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
---------- -------------
<S> <C> <C>
1998(three months for December 31)................................. $ 328,787 $ 82,615
1999............................................................... 333,143 336,329
2000............................................................... 151,238 151,496
2001............................................................... 41,800 41,800
---------- -------------
$ 854,968 $ 612,240
---------- -------------
---------- -------------
</TABLE>

Total rent expense for the years ended March 31, 1995, 1996, and 1997 was
approximately $121,000, $261,000, and $246,000, respectively. Rent expense for
the nine month periods ended December 31, 1996 and 1997 was approximately
$195,000 and $210,000, respectively.

As of March 31, 1997 and December 31, 1997, the Company had outstanding
noncancelable purchase orders of approximately $1,500,000 and $3,969,000,
primarily relating to inventory purchases.

7. STOCKHOLDERS' EQUITY

CONVERTIBLE PREFERRED STOCK

Convertible Preferred Stock at March 31, 1996 and 1997 and December 31, 1997
is as follows:

<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING
-------------------------------------
AUTHORIZED MARCH 31, DECEMBER 31,
SERIES SHARES 1996 1997 1997
- ---------------------------------------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
A....................................... 800,000 800,000 800,000 800,000
B....................................... 271,465 271,459 271,459 271,459
C....................................... 536,000 520,000 520,000 520,000
D....................................... 530,038 530,038 530,038 530,038
E....................................... 261,729 -- 249,616 261,727
F....................................... 960,732 -- 695,204 835,796
Undesignated............................ 640,036 -- -- --
---------- ---------- ---------- -------------
Total Preferred Stock................... 4,000,000 2,121,497 3,066,317 3,219,020
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
</TABLE>

Each share of Series A, B, C, D, E, and F Preferred Stock is convertible at
the holder's option into one share of Common Stock, and such conversion is
subject to adjustment under the antidilution provisions as stated in the
Certificate of Incorporation. The holders of the Company's outstanding Preferred
Stock have elected to convert all outstanding shares of Preferred Stock into an
equal number of common shares in the event of a public offering of the Company's
common stock prior to March 31, 1998 provided that the aggregate gross proceeds
to the Company are not less than $8,000,000 and the public offering price per
share is not less than $7.50.

F-14
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)

7. STOCKHOLDERS' EQUITY (CONTINUED)
The holder of each share of Series A, B, C, D, E, and F Preferred Stock
shall be entitled to receive, prior and in preference to any declaration and
payment of any dividend on the common stock, noncumulative dividends at an
annual rate equal to $0.031, $0.188, $0.625 $0.378, $0.378, and $0.613 per
share, respectively. Through December 31, 1997, there have been no dividends
declared.

The Series A, B, C, D, E, and F preferred stockholders are entitled to
liquidation preferences of $0.31, $1.88, $6.25, $3.78, $3.78, and $6.13,
respectively, plus any declared but unpaid dividends for each share of Series A,
B, C, D, E, and F Preferred Stock then held. After payment of these liquidation
preferences, the remaining assets will be distributed to the common
stockholders. The holders of preferred shares are entitled to the number of
votes that they would be entitled to if their preferred shares had been
converted into common shares.

WARRANTS

In connection with the issuance of Series C Preferred Stock, the Company
granted warrants to purchase 16,326 shares of Series C Preferred Stock. The
warrants are exercisable at $6.13 per share and have an expiration date of June
1, 2001. In connection with the issuance of Series F Preferred Stock, the
Company granted warrants to purchase 68,978 shares of Series F Preferred Stock.
During November 1997, these warrants were exercised. In connection with the
Company's capital lease line, the Company issued warrants to purchase 30,000
shares of Series F Preferred Stock. The warrants are exercisable at $6.25 per
share and have an expiration date of May 21, 2006. On August 22, 1997 in
connection with the renewal of its line of credit, the Company issued warrants
to purchase 12,240 shares of Series F Preferred Stock at an exercise price of
$6.38 per share which expire on August 21, 2001.

The fair value of the warrants issued in conjunction with the Company's line
of credit and capital lease line was immaterial.

STOCK OPTION PLANS

The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires the use of option valuation models that are not developed for use
in valuing employee stock options. Under APB Opinion No. 25, when the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the grant date, there is no compensation expense recognized.

Pro forma information regarding net income (loss) is required by FAS 123,
which also requires that the information be determined as if the Company has
accounted for its employee stock options granted subsequent to March 31, 1995
under the fair value method of that statement. The fair value for these

F-15
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)

7. STOCKHOLDERS' EQUITY (CONTINUED)
options was estimated at the date of grant using the minimum value method with
the following weighted average assumptions:

<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Expected dividend yield.................................................. 0.00% 0.00%
Risk-free interest rate.................................................. 5.96% 6.30%
Weighted average expected life........................................... 4 years 4 years
</TABLE>

Option valuation models were developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The pro forma
effect of applying FAS 123 was not material to the Company's reported net loss
in fiscal 1996 or 1997. Because FAS 123 is applicable only to options granted
subsequent to March 31, 1995, its pro forma effect will not be fully reflected
until fiscal 1999 and thereafter.

During fiscal 1990, the Company adopted a stock option plan (the 1990 Plan)
whereby a committee, as appointed by the Board of Directors, may grant incentive
and nonstatutory stock options. The options granted under the 1990 Plan are
exercisable, vest at the discretion of the committee, and expire no later than
ten years from the date of grant. Such options may be granted at an exercise
price of not less than 100% or 85% of fair market value as determined by the
committee for incentive stock options and nonstatutory stock options,
respectively.

During fiscal 1997, the Company adopted a stock option plan (the 1997 Plan).
The provisions of the 1997 Plan are similar to those of the 1990 Plan.

F-16
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)

7. STOCKHOLDERS' EQUITY (CONTINUED)
Activity under the stock option plans is as follows:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------
WEIGHTED
OPTIONS RANGE OF AVERAGE
AVAILABLE NUMBER OF EXERCISE PRICES EXERCISE
FOR GRANT SHARES PER SHARE PRICE
---------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
Balance at March 25, 1994................ 694,970 556,000 $ 0.15-$1.125
Options granted........................ (150,000) 150,000 $ 1.125
Options exercised...................... -- (171,217) $ 0.15-$1.125
Options canceled....................... 15,800 (15,800) $ 0.75-$1.125
---------- -----------
Balance at March 31, 1995................ 560,770 518,983 $ 0.15-$1.125
Options granted........................ (94,400) 94,400 $ 1.125
Options exercised...................... -- (103,400) $ 0.275
Options canceled....................... 65,283 (65,283) $ 0.825
---------- -----------
Balance at March 31, 1996................ 531,653 444,700 $ 0.95
Authorized............................. 307,313 -- $ --
Options granted........................ (183,520) 183,520 $ 1.45
Options exercised...................... -- (109,767) $ 0.70
Options canceled....................... 44,036 (44,036) $ 1.05
---------- -----------
Balance at March 31, 1997................ 699,482 474,417 $ 1.20
Options granted........................ (84,640) 84,640 $ 3.25
Options exercised...................... -- (93,825) $ 0.76
Options canceled....................... 8,266 (10,372) $ 4.01
---------- -----------
Balance at December 31, 1997............. 623,108 454,860 $ 1.62
---------- -----------
---------- -----------
</TABLE>

There were 243,452 options exercisable at March 31, 1997 at prices ranging
from $0.75 to $2.00. The weighted average fair value of grants made in fiscal
1996 and 1997 was $0.25 and $0.30, respectively. The average remaining
contractual life of all options outstanding at March 31, 1997 was 2.9 years.

DEFERRED COMPENSATION

For certain options granted in late fiscal 1997 and the first half of fiscal
1998, the Company recognized as deferred compensation the excess of the deemed
value for accounting purposes of the common stock issuable upon exercise of such
options over the aggregate price of such options. The deemed value for
accounting purposes represents the fair value at the date of grant. The
compensation expense will be amortized ratably over the vesting period of the
option.

F-17
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)

7. STOCKHOLDERS' EQUITY (CONTINUED)
SHARES RESERVED

Common Stock reserved for future issuance was as follows:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
---------- -------------
<S> <C> <C>
Stock option plans:
Outstanding..................................................... 474,417 454,860
Reserved for future grants...................................... 699,482 623,108
---------- -------------
1,173,899 1,077,968
Series C Preferred Stock warrants................................. 16,326 16,326
Series F Preferred Stock warrants................................. 98,978 42,240
Conversion of Preferred Stock..................................... 3,066,325 3,219,020
---------- -------------
4,355,528 4,355,554
---------- -------------
---------- -------------
</TABLE>

8. INCOME TAXES

Due to the Company's loss position, there was no provision for income taxes
for fiscal 1995, 1996, or 1997. For the nine months ended December 31, 1997 the
Company recorded no tax provision as the Company can utilize net operating loss
carryforwards to offset any taxes due.

Deferred income taxes reflect the net tax effects of operating loss and
credit carryforwards and temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the Company's deferred tax assets
are as follows:

<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............................. $ 1,063,000 $ 2,630,000
Research credit carryforwards................................. 147,000 159,000
Capitalized research costs.................................... 468,000 236,000
Other temporary differences................................... 77,000 7,000
------------- -------------
Total deferred tax assets....................................... 1,775,000 3,032,000
Valuation allowance for deferred tax assets..................... (1,775,000) (3,032,000)
------------- -------------
Net deferred tax assets......................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>

The change in the valuation allowance was a net decrease of $5,000 for
fiscal 1995 and a net increase of $85,000 and $1,257,000 for fiscal 1996 and
1997.

For federal tax purposes at March 31, 1997, the Company has net operating
loss and research and development credit carryforwards of approximately
$6,500,000 and $114,000, respectively, which will expire in the fiscal years
2005 through 2012. For California tax purposes at March 31, 1997, the Company
has net operating loss and research and development credit carryforwards of
approximately $3,000,000 and

F-18
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)

8. INCOME TAXES (CONTINUED)
$67,000, respectively, which will expire in the fiscal years 1998 through 2002.
The Company also has at March 31, 1997 net operating loss carryforwards of
approximately $525,000 in its German subsidiary.

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

9. RELATED PARTY TRANSACTIONS

During the years ended March 31, 1995, 1996, and 1997 and the nine months
ended December 31, 1996 and 1997, the Company made sales of approximately
$800,000, $1,233,000, $181,000, $181,000, and $0 respectively, to a related
party of which approximately $310,000, $0, and $0 is included in the accounts
receivable balance at March 31, 1996, and 1997, and December 31, 1997,
respectively.

In addition, at March 31, 1996, and 1997 and December 31, 1997, the accounts
payable balance includes approximately $396,000, $304,000, and $13,000 due a
related party on purchases of $2,005,000, $2,323,000, $1,857,000, and $237,000
during the years ended March 31, 1996 and 1997 and the nine months ended
December 31, 1996 and 1997, respectively. Included in the notes payable balance
at March 31, 1996, and 1997 and December 31, 1997 is approximately $679,000, due
the related party.

During the years ended March 31, 1995, 1996, and 1997 and the nine months
ended December 31, 1996 and 1997, the Company made sales of approximately
$500,000, $692,000, $1,119,000, $569,000, and $1,264,000, respectively, to
another related party of which approximately $136,000, $709,000, and $691,000 is
included in the accounts receivable balance at March 31, 1996, 1997 and December
31, 1997, respectively. Included in the accounts payable balance at March 31,
1996, 1997 and December 31, 1997, is approximately $303,000, $381,000, and
$709,000, respectively, due the related party. The Company purchased $213,000,
$376,000, $630,000, $318,000 and $976,000 of materials from the related party in
fiscal 1995, 1996, 1997 and the nine months ended December 31, 1996 and 1997,
respectively. In addition, included in the notes payable balance at March 31,
1996 and 1997 are approximately $466,000 and $437,000, respectively, due the
related party.

During the years ended March 31, 1996 and 1997 and the nine months ended
December 31, 1996 and 1997, the Company made sales of approximately $479,000,
$206,000, $27,000 and $101,000, respectively, to another related party of which
approximately $389,000, $175,000 and $90,000 is included in the accounts
receivable balance at March 31, 1996 and 1997 and December 31, 1997,
respectively. Included in the notes payable balance at March 31, 1996 is
approximately $382,000, due the related party.

F-19
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)

10. GEOGRAPHIC AND SEGMENT INFORMATION

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

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1995
---------------------------------------------------------
ADJUSTMENTS/
UNITED STATES GERMANY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers........................ $ 4,719,800 $ 256,644 $ -- $ 4,976,444
Transfers between geographic areas..................... 137,371 -- (137,371) --
------------- ------------ ------------- -------------
Total net sales........................................ $ 4,857,171 $ 256,644 $ (137,371) $ 4,976,444
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Operating loss......................................... $ (1,319,427) $ (541,485) $ 217,181 $ (1,643,731)
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Identifiable assets.................................... $ 4,777,264 $ 1,541,956 $ (693,750) $ 5,625,470
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1996
---------------------------------------------------------
ADJUSTMENTS/
UNITED STATES GERMANY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers........................ $ 6,921,837 $ 1,408,253 $ -- $ 8,330,090
Transfers between geographic areas..................... 687,277 230,519 (917,796) --
------------- ------------ ------------- -------------
Total net sales........................................ $ 7,609,114 $ 1,638,772 $ (917,796) $ 8,330,090
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Operating loss......................................... $ (633,708) $ (712,763) $ 144,669 $ (1,201,802)
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Identifiable assets.................................... $ 5,317,132 $ 1,906,090 $ (1,536,347) $ 5,686,875
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1997
---------------------------------------------------------
ADJUSTMENTS/
UNITED STATES GERMANY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers........................ $ 7,685,002 $ 2,619,077 $ -- $ 10,304,079
Transfers between geographic areas..................... 1,668,258 594,861 (2,263,119) --
------------- ------------ ------------- -------------
Total net sales........................................ $ 9,353,260 $ 3,213,938 $ (2,263,119) $ 10,304,079
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Operating loss......................................... $ (1,921,330) $ (893,303) $ (102,828) $ (2,917,461)
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Identifiable assets.................................... $ 9,169,204 $ 2,290,287 $ (2,750,792) $ 8,708,699
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>

F-20
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)

10. GEOGRAPHIC AND SEGMENT INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31, 1996
----------------------------------------------------------
ADJUSTMENTS/
UNITED STATES GERMANY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers....................... $ 4,993,092 $ 1,721,922 $ -- $ 6,715,014
Transfers between geographic areas.................... 1,334,834 354,120 (1,688,954) --
------------- ------------- ------------- -------------
Total net sales....................................... $ 6,327,926 $ 2,076,042 $ (1,688,954) $ 6,715,014
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Operating loss........................................ $ (2,019,514) $ (1,031,591) $ 12,551 $ (3,038,554)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Identifiable assets................................... $ 7,145,644 $ 1,672,045 $ (2,095,306) $ 6,722,383
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31, 1997
---------------------------------------------------------
ADJUSTMENTS/
UNITED STATES GERMANY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers....................... $ 7,129,706 $ 3,883,788 $ -- $ 11,013,494
Transfers between geographic areas.................... 1,061,222 531,143 (1,592,365) --
------------- ------------ ------------- -------------
Total net sales....................................... $ 8,190,928 $ 4,414,931 $ (1,592,365) $ 11,013,494
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Operating income (loss)............................... $ 142,250 $ 249,487 $ (10,744) $ 380,993
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Identifiable assets................................... $ 9,158,128 $ 4,063,945 $ (2,800,277) $ 10,421,796
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>

Export revenues consisting of sales from the Company's U.S. operating
subsidiary to nonaffiliated customers were as follows:

<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER
YEARS ENDED MARCH 31, 31,
-------------------------------------- --------------------------
1995 1996 1997 1996 1997
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Canada....................................... $ 307,000 $ 299,000 $ 188,000 $ 157,000 $ 289,000
Japan and Korea.............................. 531,000 1,509,000 1,936,000 1,044,000 1,800,000
---------- ------------ ------------ ------------ ------------
Total........................................ $ 838,000 $ 1,808,000 $ 2,124,000 $ 1,201,000 $ 2,089,000
---------- ------------ ------------ ------------ ------------
---------- ------------ ------------ ------------ ------------
</TABLE>

F-21
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)

11. INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted income
(loss) per share:

<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER
YEARS ENDED MARCH 31, 31,
------------------------------------------ ---------------------------
1995 1996 1997 1996 1997
------------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Numerator for basic, diluted and pro
forma:
Net income (loss)......................... $ (1,115,935) $ (750,630) $ (2,628,845) $ (2,615,265) $ 95,470
------------- ------------ ------------- ------------- ------------
------------- ------------ ------------- ------------- ------------

Denominator:
Denominator for basic income (loss) per
share--weighted average common shares
outstanding............................. 827,220 1,074,984 1,275,535 1,252,783 1,426,479
Conversion of preferred stock (pro
forma).................................. -- -- -- -- 3,157,545

Effect of dilutive securities:
Employee stock options.................. -- -- -- -- 399,943
Warrants................................ -- -- -- -- 19,440
------------- ------------ ------------- ------------- ------------
Dilutive potential common shares.......... -- -- -- -- 419,383
------------- ------------ ------------- ------------- ------------
Denominator for diluted income (loss) per
share................................... 827,220 1,074,984 1,275,535 1,252,783 5,003,407
------------- ------------ ------------- ------------- ------------
Conversion of preferred stock not included
above (pro forma)....................... 2,356,192 2,140,955 --
------------- ------------- ------------
Denominator for pro forma diluted income
(loss) per share........................ 3,631,727 3,393,738 5,003,407
------------- ------------- ------------
Less effect of dilutive securities (from
above).................................. -- -- 419,383
------------- ------------- ------------
Denominator for pro forma basic income
(loss) per share........................ 3,631,727 3,393,738 4,584,024
------------- ------------- ------------
------------- ------------- ------------
Basic income (loss) per share............. $ (1.35) $ (0.70) $ (2.06) $ (2.09) $ 0.07
------------- ------------ ------------- ------------- ------------
------------- ------------ ------------- ------------- ------------
Diluted income (loss) per share........... $ (1.35) $ (0.70) $ (2.06) $ (2.09) $ 0.02
------------- ------------ ------------- ------------- ------------
------------- ------------ ------------- ------------- ------------
Pro forma basic and diluted income (loss)
per share............................... $ (0.72) $ (0.77) $ 0.02
------------- ------------- ------------
------------- ------------- ------------
</TABLE>

12. SUBSEQUENT EVENTS

In October 1997, the Board of Directors and stockholders approved a
one-for-two and one-half reverse split of the Company's common and preferred
stock and reincorporation of the Company into the

F-22
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)

12. SUBSEQUENT EVENTS (CONTINUED)
State of Delaware. All share and per share amounts in the accompanying
consolidated financial statements have been adjusted retroactively.

The Company's Certificate of Incorporation authorizes 7,000,000 shares of
preferred stock. Upon the closing of the offering contemplated by this
Prospectus, the Board of Directors will have the authority, without further
action by the stockholders, to issue up to 7,000,000 shares of preferred stock
in one or more series and determine or alter the designation, powers,
preferences, privileges and relative participating, optional or special rights
and the qualifications, limitations or restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights of common stock.

On August 8, 1997, the Company's Board of Directors approved an employee
stock purchase plan. A total of 250,000 shares of the Company's common stock
have been reserved for issuance under the Company's 1997 Employee Stock Purchase
Plan (the Purchase Plan). The Purchase Plan permits eligible employees to
purchase common stock at a discount, but only through payroll deductions, during
concurrent 24-month offering periods. Each offering period will be divided into
four consecutive six-month purchase periods. The price at which stock is
purchased under the Purchase Plan is equal to 85% of the fair market value of
the common stock on the first day of the offering period or the last day of the
purchase period, whichever is lower. The initial offering period will commence
on the effective date of the offering contemplated by this Prospectus.

F-23
<PAGE>
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------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.

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

TABLE OF CONTENTS

Prospectus Summary....................................................... 3
Risk Factors............................................................. 5
Glossary................................................................. 15
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.......................................................... 21
Business................................................................. 32
Management............................................................... 47
Principal Stockholders................................................... 52
Certain Transactions..................................................... 54
Description of Capital Stock............................................. 56
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 61
Legal Matters............................................................ 63
Experts.................................................................. 63
Additional Information................................................... 63
Index to Consolidated Financial Statements............................... F-1

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

UNTIL APRIL 7, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

2,500,000 SHARES

[LOGO]

COMMON STOCK

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

PROSPECTUS

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

CRUTTENDEN ROTH INCORPORATED

DOUGHERTY SUMMIT SECURITIES LLC

MARCH 13, 1998

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