INTEGRATED SENSOR SOLUTIONS INC, 10KSB, 1999-07-15

INTEGRATED SENSOR SOLUTIONS INC
10KSB, 1999-07-15
SEMICONDUCTORS & RELATED DEVICES

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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-KSB

[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended March 31, 1999
Or
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ___________ to ____________

Commission File Number: 0-23841

INTEGRATED SENSOR SOLUTIONS, INC.
(Name of small business issuer in its charter)

DELAWARE 77-0212047

(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

625 River Oaks Parkway, San Jose, CA 95134
(Address of principal executive offices) (Zip code)
(408) 324-1044
(Issuer's telephone number)

Securities registered under Section 12(b) of the Exchange Act:

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $.001 par value
(Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [X]

The issuer's revenues for its most recent fiscal year ended March 31, 1999 were
$23,411,000.

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of the Registrant's Common Stock on
March 31, 1999 was approximately $31,648,000. Shares of voting stock held by
each officer and director and by each person who on that date owned 5% or more
of the outstanding voting stock have been excluded for purposes of the
preceding computation, in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.

As of March 31, 1999, Registrant had 7,672,210 shares of Common Stock
outstanding.

The number of shares outstanding of the issuer's common stock as of July 12,
1999 was 7,741,806.

DOCUMENTS INCORPORATED BY REFERENCE

Transitional Small Business Disclosure Format. YES [ ] NO [X]

This Annual Report on Form 10-KSB contains 81 pages with the exhibit index
starting on page 38.

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INTEGRATED SENSOR SOLUTIONS, INC.

FORM 10-KSB

FOR THE FISCAL YEAR ENDED MARCH 31, 1999

TABLE OF CONTENTS

Page
----
<S> <C> <C>
PART I

Item 1. Description of Business....................................... 3

Item 2. Description of Property....................................... 13

Item 3. Legal Proceedings............................................. 13

Item 4. Submission of Matters to a Vote of Security Holders........... 13

PART II

Item 5. Market for Common Equity and Related Stockholder Matters...... 14

Item 6. Selected Financial Data....................................... 15

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 16

Item 8. Financial Statements and Supplementary Data................... 31

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 31

PART III

Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............. 32

Item 11. Executive Compensation........................................ 33

Item 12. Security Ownership of Certain Beneficial Owners and Management 34

Item 13. Certain Relationships and Related Transactions................ 36

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K...................................................... 39

Signatures.............................................................. 40

</TABLE>

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PART I

Forward looking statements in this Annual Report on Form 10-KSB are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements reflect the Company's current views with
respect to future events and financial performance and are subject to risks and
uncertainties that could cause the Company's actual results and financial
position to differ materially. Stockholders are cautioned that all forward-
looking statements pertaining to the Company involve risks and uncertainties,
including, without limitation, those contained in Item 7 of this report under
the caption entitled, "Management's Discussion and Analysis Of Financial
Condition and Results of Operation--Business Factors" and other risks detailed
from time to time in the Company's periodic reports and other information filed
with the Securities and Exchange Commission.

ITEM 1. DESCRIPTION OF BUSINESS

On May 3, 1999, the Company and Texas Instruments ("TI") announced that
they had entered into an agreement for TI to acquire the Company. The agreement
is for an all-cash tender offer for all outstanding shares of ISS's common
stock at $8.05 per share, or about $62 million. According to the terms of the
agreement, the company will become part of the Automotive Sensors & Controls
group of TI's Materials and Controls ("M&C") business based in Attleboro,
Massachusetts. The Company and TI currently anticipate that the transaction
will be completed the third week of July 1999. After completion, the Company
will terminate its registration under the Securities Exchange Act of 1934 and
cease filing public reports.

TI commenced the all cash tender offer on May 7, 1999, and the tender
offer was originally scheduled to expire at midnight EDT on June 4, 1999. On
July 6, 1999, 98.3 percent of the Company's shares have been tendered and TI
again extended the tender offer, this time until July 16, 1999. The tender
offer was previously scheduled to expire on Friday, July 2. About 7.6 million
shares of Integrated Sensor had been tendered by that date. German antitrust
authorities have not yet completed their review of the proposed deal. TI
intends to acquire the Company's common stock through a wholly-owned subsidiary
of TI. Any shares not purchased in the tender offer will be acquired for the
tender offer price in cash in a second-step merger.

The boards of directors of both companies have unanimously approved the
acquisition, and the Company's board of directors has recommended that the
Company's stockholders accept TI's all cash tender offer. Consummation of the
acquisition is contingent upon the tender of a majority of ISS's outstanding
common stock on a fully-diluted basis, antitrust agency approvals in the United
States and Germany and certain other conditions.

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 application specific integrated circuits ("ASICs") and
integrated sensor devices ("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 and Nagano. These strategic alliances
are intended to be long term, mutually beneficial relationships focusing on

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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

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
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

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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.

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

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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.

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. 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 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 ASICs and 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.

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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, ISDs 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 controller. 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.

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 air pressure 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 and emit less carbon monoxide than conventional diesel engines.

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 2000.
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 2000. The average selling prices of the Company's ISDs range from
approximately $9.00 to $50.00 per unit depending on the volume.

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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 achieved ISO 9001 certification and
undertaken programs to implement QS-9000 quality systems in order to minimize
the time required to qualify its products and manufacturing lines with
customers.

The Company's customers include the following companies:

<S> <C> <C>
Bosch Hokoriku Denki Michelin
Daimler/Benz Honda Nagano
John Deere Hydraulic Ring Omron
Echlin Johnson Controls Siemens
Freightliner Knorr-Bremse Snap-On-Tools
GFI Control Systems Lucas Diesel Systems Sumitomo
Hewlett-Packard

</TABLE>

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.

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

<PAGE> 9

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.

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.

Competition

The markets in which the Company competes are highly competitive and
characterized by diverse industry requirements and severe pricing pressure in
many applications. 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 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.

<PAGE> 10

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.

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, Alcatel
Microelectronics. The Company received first wafer samples in June 1999. The
Company is also qualifying products from a fifth foundry, Chartered
Semiconductor. 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

<PAGE> 11

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.

In May 1999, the Company began production of its Vehicle Stability Control
System ISD at its new automated manufacturing line in Dresden, Germany. The
line was officially inaugurated in June 1999. Also, in June 1999, the Company
commenced production on an additional automated line for the HVP media
compatible ISD.

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.

The Company has been a qualified supplier to various automotive
manufacturers for a number of years and has achieved ISO 9001 certification and
has commenced the process to obtain 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 QS accreditation
process in calendar 1999.

Research and Development

During fiscal years 1999, 1998 and 1997, research and development expenses
were approximately $4.4 million, $1.9 million and $1.4 million, respectively.
In addition, during fiscal years 1999, 1998 and 1997, the Company had $3.0
million, $4.0 million and $2.7 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,

<PAGE> 12

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
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 retained six 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

<PAGE> 13

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 six patents and has four patent applications
in the United States and three foreign patent applications.

Employees

As of March 31, 1999, the Company had 166 full-time employees, including
93 employees in Germany. 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.

ITEM 2. DESCRIPTION OF PROPERTY

The Company's principal administrative, sales, marketing, engineering,
research and development facility is located in 36,000 square feet of space in
San Jose, California. The space is leased by the Company through June 2004. 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. In May 1998, the Company's German subsidiary entered a lease
agreement for a new 28,000 square foot facility. This lease expires in 2009.

ITEM 3. LEGAL PROCEEDINGS

As of the date hereof, to the Company's knowledge, there are no legal
proceedings in which the Company is involved or litigation pending against the
Company.

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

No matters were submitted to a vote of security holders during the quarter
ended March 31, 1999.

<PAGE> 14

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a) Market Information and Recent Sales of Unregistered Securities
--------------------------------------------------------------

The Company's common stock is traded on the Nasdaq National Market tier of
the Nasdaq Stock Market under the symbol "ISNR." The following table sets
forth, for the quarter indicated, the high and low sales price per share of the
Company's common stock as reported on the Nasdaq National Market:

The range of daily closing prices per share for the Company's common stock
from March 13, 1998 to March 31, 1999 was:

Year Ended March 31, 1999: High Low
-------------------------- ---- ---
<S> <C> <C>
Fourth quarter $ 7.000 $ 2.500
Third quarter $ 4.500 $ 3.313
Second quarter $ 5.875 $ 3.422
First quarter $ 8.875 $ 4.750

Year Ended March 31, 1998: High Low
-------------------------- ---- ---

Fourth Quarter (since March 13, 1998) $ 9.063 $ 8.000

</TABLE>

The reported last sale price of the Company's common stock on the Nasdaq
National Market on July 12, 1999 was $7.9375. As of June 30, 1999, there were
approximately 110 holders of record of the Company's common stock. Because
many of such shares are held by brokers and other institutions on behalf of
stockholders, the actual number of stockholders is greater than this number of
holders of record. The Company estimates that it has approximately 11
beneficial owners of its common stock.

The Company has never paid cash dividends on its capital stock. The
Company currently expects that it will retain its future earnings for use in
the operation and expansion of its business and does not anticipate paying any
cash dividends in the foreseeable future. In addition, the Company's existing
credit facilities prohibit the payment of cash or stock dividends on the
Company's capital stock without the bank's prior written consent. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and Note 4 of Notes to
Consolidated Financial Statements contained in Item 14.

During the year ended March 31, 1999, the Company did not sell any equity
securities that were not registered under the Securities Act of 1933, as
amended.

(b) Report of offering securities and use of proceeds therefrom:
------------------------------------------------------------

The net proceeds to the Company from the sale of the 2,875,000 shares of
Common Stock in the Company's initial public offering (Registration Statement
No. 333-41351 and No. 333-47885), effective March 13, 1998, including the
underwriter's exercise of their over-allotment on April 8, 1998, were
approximately $20,391,000 after deducting underwriting discounts and
commissions, the Representatives' non-accountable expense allowance and other
offering expenses. From the date of the closing of the initial public offering
through March 31, 1999, the Company applied the net proceeds as follows:
$766,347 was used to pay indebtedness to a related party, approximately $5.5
million was used to purchase capital equipment, $801,275 was used to pay
indebtedness to another related party, $500,000 was used to pay down the line
of credit at the bank, approximately $12.8 million was used for operating
expenses and inventory purchases.

<PAGE> 15

ITEM 6. SELECTED FINANCIAL DATA

Fiscal Year Ended March 31,
---------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenues:
Product revenues.............$ 20,797 $ 11,173 $ 8,049 $ 5,337 $ 3,669
Contract revenues............ 2,614 4,052 2,255 2,993 1,307
-------- -------- -------- -------- --------
Total revenues................. 23,411 15,225 10,304 8,330 4,976
Cost of revenues:
Cost of product revenues..... 17,100 8,349 7,292 5,250 3,624
Cost of contract revenues.... 2,993 4,041 2,731 2,150 996
-------- -------- -------- -------- --------
Total cost of revenues......... 20,092 12,391 10,023 7,400 4,620
-------- -------- -------- -------- --------
Gross margin................... 3,319 2,835 281 930 356
-------- -------- -------- -------- --------
Operating expenses:
Research and development..... 4,431 1,850 1,438 742 701
Sales, general and
administrative............. 3,275 2,099 1,760 1,390 1,299
-------- -------- -------- -------- --------
Total operating expenses....... 7,706 3,949 3,198 2,132 2,000
-------- -------- -------- -------- --------
Loss from operations........... (4,388) (1,114) (2,917) (1,202) (1,644)
Interest income................ 623 - - - -
Interest expense............... (123) (232) (260) (226) (96)
Other income................... (67) 111 27 366 587
Minority interest in net
(income) loss of ISS-Nagano
GmbH.......................... 59 (23) 521 311 37
-------- -------- -------- -------- --------
Net loss.......................$ (3,896) $ (1,258) $ (2,629) $ (751)$ (1,116)
======== ======== ======== ======== ========

Basic and diluted net loss
per share....................$ (0.51) $ (0.72) $ (2.06)
======== ======== ========
Shares used in computing basic
and diluted per share amounts 7,610 1,748 1,276
======== ======== ========

March 31,
---------

1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalent.....$ 5,063 $ 17,610 $ 2,059 $ 521 $ 847
Working capital..............$ 12,226 $ 19,167 $ 2,139 $ 150 $ 1,056
Total assets.................$ 28,387 $ 27,761 $ 8,709 $ 5,687 $ 5,625
Long-term obligations........$ 147 $ 108 $ 197 $ 22 $ 24
Total stockholders' equity...$ 20,047 $ 21,235 $ 3,683 $ 1,141 $ 1,849

</TABLE>

<PAGE> 16

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

This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed in the Risk Factors section of this
Item 7 and elsewhere in this Form 10-KSB that could cause actual results to
differ materially from historical results or those anticipated. In this
report, the words "anticipates," "believes," "expects," "future," "intends,"
and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof.

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 after-market 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
$10.3 million in fiscal 1997 to $23.4 million in fiscal 1999. The Company has
experienced operating losses in each year since its inception and had an
accumulated deficit of $13.3 million as of March 31, 1999.

The Company experienced higher than anticipated product costs during
fiscal year 1999 largely due to lower production yields for ISD's produced at
its German Operation, coupled with declining average selling prices for these
products as the units volumes increased. Lower production yields were largely
due to using the existing manufacturing line for two different products, which
created, manufacturing inefficiencies.

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

<PAGE> 17

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 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 1999, 1998 and 1997 accounted for 80%, 68% and 75% of total revenues,
respectively. The Company expects that this trend will continue for the
foreseeable future.

Results of Operations

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

Year Ended March 31,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Product revenues................................. 88.8% 73.4% 78.1%
Contract revenues................................ 11.2 26.6 21.9
----- ----- -----
Total revenues..................................... 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Cost of product revenues......................... 73.0 54.8 70.8
Cost of contract revenues........................ 12.8 26.6 26.5
----- ----- -----
Total cost of revenues............................. 85.8 81.4 97.3
----- ----- -----
Gross margin....................................... 14.2 18.6 2.7
Operating expenses:
Research and development......................... 18.9 12.1 13.9
Sales, general and administrative................ 14.0 13.8 17.1
----- ----- -----
Total operating expenses........................... 32.9 25.9 31.0
Loss from operations............................... (18.7) (7.3) (28.3)

<PAGE> 18

Interest income.................................... 2.6 (1.5) (2.5)
Interest expense................................... (0.5) (1.5) (2.5)
Other income (expense)............................. (0.3) 0.7 0.3
Minority interest in net (income) loss of
ISS-Nagano GmbH................................... 0.3 (0.2) 5.0
----- ----- -----
Net loss........................................... (16.6)% (8.3)% (25.5)%
===== ===== =====

</TABLE>

Comparison of Years Ended March 31, 1999, 1998 and 1997

Revenues

Product Revenues. Product revenues increased by 86.1% to $20.8 million in
-----------------
fiscal 1999 from $11.2 million in fiscal 1998. This increase was principally
due to increased shipments of ISDs for Common Rail Diesel Injection and Vehicle
Stability Control Systems as well as ASIC's incorporated into sensors for the
gasoline direct injection systems. Reflecting the Company's long-term strategy,
product revenue increased to 88.8% of total revenues for fiscal 1999 from 73.4%
in the prior year. Product revenues increased by 38.8% to $11.2 million in
fiscal 1998 from $8.0 million in fiscal 1997. This increase was principally the
result of an increase in ISD product revenues at ISS-Nagano GmbH, the Company's
majority owned subsidiary ("ISS-Nagano"). The Company believes that product
revenue is likely to increase as a percentage of total revenue.

Contract Revenues. Contract revenues decreased by 35.5% to $2.6 million
------------------
in fiscal 1999 from $4.1 million in fiscal 1998. This decrease was primarily
due to fewer new development contracts in fiscal 1999 as the Company focused on
completing existing contract milestones. Contract revenue as a percentage of
total revenues for fiscal 1999 decreased to 11.2% from 26.6% for fiscal 1998,
respectively. Contract revenues increased by 79.7% to $4.1 million in fiscal
1998 from $2.3 million in fiscal 1997. This increase in fiscal 1998 was due to
several new product development programs initiated during the year as well as
meeting milestones from contracts initiated during fiscal 1997. The Company
expects contract revenue to continue to decrease as a percentage of total
revenues.

International revenues (export revenues and revenues of ISS-Nagano) were
$18.0 million, $8.6 million and $4.7 million in fiscal 1999, 1998 and 1997,
respectively, representing 76.7%, 56.8% and 46.0% of total revenues,
respectively, in each fiscal year. The increase in international revenues for
fiscal 1999 as compared to fiscal 1998 and fiscal 1998 as compared to fiscal
1997 was principally the result of increased sales in Germany. All of the
Company's sales in Europe are denominated in Deutschemarks. Accordingly, a
portion of the Company's international revenues is subject to foreign currency
fluctuation risks, and fluctuations in the value of the Deutschemark 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 Company's product revenue gross margin
-------------------------
decreased 7.5% to 17.8% in fiscal 1999 from 25.3% in 1998. The decline in
product gross margin in fiscal 1999 was due, in part, to the reduction in
average selling prices of ISD products for volume based contracts with
customers, as well as manufacturing inefficiencies including yield issues
associated with the production ramp-up of the Company's HVP and FDR media-
compatible ISDs. Product gross margin was also adversely affected by a write-
down of slow-moving inventory in the fourth quarter. All of these had a
materially adverse affect on gross margins and operating results. The
Company's product gross margin increased to 25.3% in fiscal 1998 from 9.4% in
fiscal 1997 primarily as a result of improved production yields, lower material
costs and higher unit volumes. The Company's gross margin decreased
significantly in the fourth quarter from prior quarters in fiscal 1998 largely
due to the ramping up of manufacturing capacity and lower production yields at
ISS-Nagano. In particular, the Company experienced yield problems associated
with the production ramp of its HVP media-compatible ISDs which materially
adversely affected the product gross margin and operating results during the
quarter ended March 31, 1998.

<PAGE> 19

Cost of Contract Revenues. The Company's contract revenue gross margin
--------------------------
decreased to 14.5% in fiscal 1999 from 0.3% in fiscal 1998. Cost of contract
revenue declined to approximately $3.0 million in fiscal 1999 from $4.0 million
in fiscal 1998. The decrease in contract revenue margins was primarily due to
fewer contact programs and a greater focus on existing programs in fiscal 1999
compared to fiscal 1998. Cost of contract revenues increased to $4.0 million in
fiscal 1998 from $2.7 million in fiscal 1997 primarily as a result of certain
costs incurred in connection with several new development programs initiated
during the year. Expenses related to contracts are recorded as incurred, while
recognition of revenues occurs when contractual milestones are reached. The
Company does not anticipate that the gross margin on contract revenues will
grow or even be positive in future periods.

Operating Expenses

Research and Development Expenses. Research and development expense
----------------------------------
consists primarily of personnel expenses, including salary and benefits, and
other product development related engineering expenses not associated with
contract revenue. Research and development expenses increased by 139.0% to
$4.4 million in fiscal 1999 from $1.9 million in fiscal 1998. This higher level
of expenses in fiscal 1999 compared to 1998 reflects an overall increase in
resources for ASIC and ISD product test development, tire pressure monitoring
programs, and an increase in resources at the Company's ISS-Nagano operations.
Research and development expenses as a percentage of total revenues increased
to 18.9% in fiscal 1999 from 12.1% in the prior fiscal year. Research and
development expenses increased by 28.6% to $1.9 million in fiscal 1998 from
$1.4 million in fiscal 1997. The Company's research and development expenses
increased in fiscal 1998 primarily as a result of adding resources throughout
the fiscal year in its German operations and in its ASIC product test
development department in order to support future production. The Company
believes that research and development is essential to the Company's ability to
increase revenues. The Company expects research and development expenses to
increase in absolute dollars but expects such expenses to decrease as a
percentage of total revenues.

Sales, General and Administrative Expenses. Sales, general and
-------------------------------------------
administrative expenses increased by 56.1% to $3.3million in fiscal 1999 from
$2.1 million in fiscal 1998. This higher level of expense reflects an increase
in personnel and professional fees necessary to manage the financial, legal and
administrative aspects of operating as a public company. Sales, general and
administrative expenses as a percentage of total revenues remained stable at
14.0% in fiscal 1999 compared to 13.8% in fiscal 1998. Sales, general and
administrative expenses increased by 19.2% to $2.1 million in fiscal 1998 from
$1.8 million in fiscal 1997. This increase was principally due to increases in
personnel and additional costs relating to the growth of the Company's business
during the fiscal year. Sales, general and administrative expenses as a
percentage of total revenues decreased to 13.8% in fiscal 1998 from 17.1% in
fiscal 1997, primarily due to the increase in revenues and the Company's
ability to leverage its base of resources to support a larger organization. The
Company expects sales, general and administrative expenses to increase in
absolute dollars, reflecting growth in operations and costs associated with
being a public entity, but to be stable or decline as a percentage of total
revenues.

Interest Income

Interest income increased to $622,800 in fiscal 1999 from none in fiscal
1998. The increase in interest income was the result of higher interest-bearing
cash balances resulting from the Company's initial public offering in March
1998.

Interest Expense

Interest expense decreased to $123,000 in fiscal 1999 from $232,000 in
fiscal 1998 due to lower average borrowings resulting from the conversion and
repayment of debt during fiscal 1998. Interest expense decreased from $260,000
in fiscal 1997 to $232,000 in fiscal 1998 due to lower average borrowings
resulting from the conversion and repayment of debt during fiscal 1998.

<PAGE> 20

Other Income (Expense), net

Other income (expense), net was ($67,000) in fiscal 1999 compared to
$111,000 in fiscal 1998. Other income changed primarily due to foreign currency
exchange losses of $16,000 in fiscal 1999 related to Deutschemark-denominated
loans that the Company has with ISS-Nagano and other expenses totaling $51,000.
Other income increased to $111,000 in fiscal 1998 from $27,000 in fiscal 1997.
Other income (expense) in fiscal 1998 consisted primarily of $47,000 in other
income and $54,000 of foreign exchange gains 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 in fiscal 1999 was $59,000
compared to $(23,000) of minority interest in net income of ISS-Nagano for
fiscal 1998. Effective November 30, 1998 the Company purchased an additional
7.5% ownership of ISS-Nagano, its German subsidiary, for approximately
$211,000. As a result of the transaction, the Company's results of operations,
subsequent to the effective date, reflect 81.5% of ISS-Nagano's net income
(loss).

In June 1999. the Company purchased the remaining interest of shares in
its subsidiary ISS-Nagano GmbH for 3.5 million DM or approximately $2.0
million.

Income Taxes

Due to the Company's loss position, there was no provision for income
taxes in fiscal 1999, 1998 or 1997. For federal tax purposes as of March 31,
1999, the Company has net operating loss and credit carryforwards of
approximately $10.6 million and $400,000 respectively, which will expire in
fiscal years 2005 through 2019. For California tax purposes, at March 31, 1999
the Company has net operating loss and credit carryforwards of approximately
$2.2 million and $277,000, respectively, which will expire in the years 2000
through 2004. The Company also has net operating loss carryforwards of $595,000
at ISS-Nagano at March 31, 1999.

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, 1999, the Company had net deferred tax assets of $5.2 million
relating principally to net operating loss carryforwards, research credit
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 Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. The Company considers a product to be in "Year 2000
compliance" if the product's performance and functionality are unaffected by
processing of dates prior to, during and after the year 2000, but only if all
products (for example, hardware, software and firmware) used with the product
properly exchange accurate date data with it. The Company has a program to
assess the capability of its products to determine whether or not they are in
Year 2000 compliance. With respect to the Company's products, Year 2000,
product's performance and functionality are unaffected by processing of dates
provided that all other technologies and products used in combination with the
ISS products are in Year 2000 compliance.

The table below indicates the phases of the Year 2000 Project related to the
Company's critical and priority

<PAGE> 21

internal systems and the expected time frames.

Phases Of The Project Start Date End Date
--------------------- ---------- --------
<S> <C> <C>
Internal Operating Systems............... Q4 FY98 Q2 FY00
Manufacturing In Line Test Software
and Embedded Controllers............... Q4 FY99 Q3 FY00
TMT Test Systems......................... Q3 FY99 Q3 FY00

</TABLE>

The Company does not believe it is legally responsible for costs incurred
by customers related to ensuring such customers' or end-users' Year 2000
capability. The Company has contacted many of its major customers to determine
whether their products into which the Company's products have been and will be
integrated are Year 2000 compliant. The Company has received assurances of Year
2000 compliance from a number of those customers. The Company anticipates that
substantial litigation may be brought against vendors, including the Company,
of all component products of systems that are unable to properly manage data
related to the Year 2000. The Company's agreements with customers typically
contain provisions designed to limit the Company's liability for such claims.
It is possible, however, that these measures will not provide protection from
liability claims, as a result of existing or future federal, state or local
laws or ordinances or unfavorable judicial decisions. Any such claims, with or
without merit, could result in a material adverse affect on the Company's
business, financial condition and results of operations, including increased
warranty costs, customer satisfaction issues and potential lawsuits. The
Company has also initiated formal communications with its critical suppliers
and financial institutions to determine the extent to which the Company is
vulnerable to those third parties' failure to remedy their own Year 2000 issue.
To date the Company has received assurances of Year 2000 compliance from a
number of those contacted. Most of the suppliers under existing contracts with
the Company are under no contractual obligation to provide such information to
the Company. The Company is taking steps with respect to new supplier
agreements to ensure that the suppliers' products and internal systems are Year
2000 compliant.

In fiscal 1999, a high level assessment was performed on the Company's
internal systems. This high level assessment identified all critical and non-
critical internal systems and the resources required to ensure these systems
are Year 2000 compliant. With this assessment, the Company has developed and
initiated a comprehensive program to address both Year 2000 readiness in its
internal systems and with its customers and suppliers. The Company's program
has been designed to address its most critical internal systems first and to
gather information regarding the Year 2000 compliance of products supplied to
it and into which the Company's products are integrated. The Company has formed
internal teams to address Year 2000 readiness at each of its manufacturing
locations. Detailed assessment and remediation, deployment, and integration
testing of the Company's internal systems are proceeding simultaneously, and
the Company intends to have its critical internal systems Year 2000 compliant
by October 1, 1999, the first day of the Company's 3rd Quarter of fiscal year
2000. These activities are intended to encompass all major categories of
systems in use by the Company, including manufacturing, engineering, sales,
finance and human resources and will involve both the use of internal resources
and outside consultants. Certain of the Company's manufacturing, engineering,
facilities, finance and human resource systems are deemed to be Year 2000
compliant as of March 31, 1999.

The costs incurred by the Company during the fiscal year ended March 31,
1999, related to its Year 2000 readiness program were less than $10,000 and
cumulatively to date have been less than $25,000. The Company currently expects
that the total cost of its Year 2000 readiness programs, excluding redeployed
resources, will not exceed $100,000 over the current fiscal year. The total
cost estimate does not include potential costs related to any customer, vendor,
or other claims or the costs of internal software or hardware replaced in the
normal course of business. The total cost estimate is based on the current
assessment of the Company's Year 2000 readiness needs, as defined by the high
level assessment performed in fiscal 1999, and is subject to change as the
projects proceed. The Company is identifying Year 2000 dependencies in its
equipment, processes and systems and is implementing changes to or replacements
of affected equipment, processes and systems to make them Year 2000 compliant.
There can be no assurance that the Company will have identified all such
dependencies (including those on its vendors, customers, or financial
institutions) or that it will implement its changes in an efficient and timely
manner or that any new systems will be adequate to support the Company's
operations. Problems with installation or initial operation of the changed
systems or replacements could cause substantial management difficulties in
operations planning, financial reporting and management and thus could have a
material adverse effect on the Company's business, financial condition and
results of operations. The cost of bringing the Company's systems into Year
2000 compliance is not expected to have a material effect on the Company's

<PAGE> 22

financial condition or results of operations.

While the Company currently expects that the Year 2000 issue will not pose
significant operational problems, delays in the implementation of changes in or
replacements of information systems or a failure to fully identify all Year
2000 dependencies in the Company's systems and in the systems of its suppliers,
customers and financial institutions could have material adverse effect in the
Company's business, financial condition and results of operations. Therefore,
the Company is developing contingency plans for continuing operations in the
event such problems arise.

Liquidity and Capital Resources

Since inception, the Company has financed its operations principally
through sales of equity securities, product revenues and contract revenues. The
Company completed its initial public offering on March 13, 1998, in which it
raised approximately $20,391,000, including the underwriter's exercise of their
over-allotment option on April 8, 1998, after deducting costs associated with
the initial public offering. At March 31, 1999, the Company had cash and cash
equivalents of $5.1 million and working capital of $12.2 million. The Company
also has a $3.5 million bank line of credit agreement secured by the assets of
the Company that permits borrowings of the lesser of $3.5 million or 80% 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 0.50%. At March 31,
1999, the Company also had a $1.5 million term loan facility for capital
equipment that bears interest at the bank's prime rate plus 1.50%. The bank
line of credit agreement and term loan facility will expire August 21, 1999. At
March 31, 1999, the Company had outstanding borrowings of $400,000 under the
line of credit agreement and $324,000 under various capital equipment lease
financing arrangements. At March 31, 1999, the Company was not in compliance
with its profitability covenant and received a waiver through that date. See
Notes 4 and 5 of Notes to Consolidated Financial Statements.

Net cash used in operating activities was $5.0 million, $0.7 million and
$2.7 million in fiscal 1999, 1998 and 1997, respectively. For fiscal 1999, cash
used in operating activities was primarily attributable to increases in
inventories, accounts receivable and net loss adjusted for non-cash items
partially offset by an increase in accounts payable. Inventory levels increased
by $4.0 million for the year ended March 31, 1999 in order to meet higher
expected customer demands. The increase in accounts payable of $2.4 million
for the year ended March 31, 1999 was primarily due to higher inventory
purchases. The increase in accounts receivable at March 31, 1999 of $1.3
million was due, primarily, to an increase in product shipments. For fiscal
1998, cash used in operating activities was primarily attributable to increases
in accounts receivable, inventories and net loss adjusted for non-cash items
partially offset by an increase in accounts payable. The increase in accounts
receivable at March 31, 1998 was due, primarily, to an increase in product
shipments. Inventory levels increased at March 31, 1998 in order to meet
expected customer demands.

Net cash used in investing activities was $9.8 million, $1.0 million and
$1.1 million in fiscal 1999, 1998 and 1997, respectively. Cash used in
investing activities was primarily for the purchase of equipment. In the year
ended March 31, 1999 the company purchased two new manufacturing lines for
approximately $5.0 million.

Net cash provided by financing activities was $2.2 million, $17.2 million
and $5.4 million in fiscal 1999, 1998 and 1997, respectively. In fiscal 1999,
the Company raised approximately $2.9 million through the sale of common
stock including $2.7 million upon the exercise of the over allotment option
held by the underwriters of the Company's initial public offering. The Company
also repaid $500,000 under its line of credit and $143,000 of its capital lease
obligations. In fiscal 1998, the Company raised cash from financing activities
of approximately $17.7 million, primarily through the issuance of stock in
connection with the Company's initial public offering, which was partially
offset by payments on notes payable and capital lease obligations.

As of March 31, 1999 the Company had outstanding noncancelable purchase
orders of approximately $14,050,000, primarily relating to inventory and fixed
asset purchases.

<PAGE> 23

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.

The Company plans to finance its working capital and other capital
resource needs with its current cash and cash equivalents and cash generated
from future operations, if any. The Company believes that these resources will
be sufficient to satisfy its working capital and other capital needs through at
least March 31, 2000.

<PAGE> 24

Risk Factors

The Company operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The following section lists some,
but not all, of those risks and uncertainties that may have a material adverse
effect on the Company's business, financial condition or results of operations.
This section should be read in conjunction with the audited Consolidated
Financial Statements and Notes thereto included in Part IV - Item 14 of this
Annual Report on Form 10-KSB.

Risks Relating to Transaction with TI. ISS believes that an important
--------------------------------------
benefit to be realized from the acquisition on the Company by TI will be the
integration of the Company's management, strategies, operations and product
lines with those of TI. This integration process may cause an interruption of,
or a loss of momentum in, the activities of the Company if the transaction is
significantly delayed or is not consummated. Additionally, the Company has
incurred significant expenses and made resource commitments in connection with
the sale to TI that would materially adversely affect the Company's business
and financial condition if the transaction were not consummated. Although the
Company is not aware of any circumstance which would interfere with the
consummation of the sale to TI, the Company cannot assure stockholders that the
transaction will be completed, and a cancellation or significant delay in
completion of the transaction could materially adversely affect the Company's
business, financial condition and results of operations.

History of Operating Losses. The Company was founded in 1989 and
----------------------------
commenced shipments of its initial product in 1990. The Company has never
achieved profitability on an annual basis. The Company sustained net losses of,
$2.6 million in the fiscal year ended March 31, 1997, $1.3 million in the
fiscal year ended March 31, 1998 and $3.9 million in the fiscal year ended
March 31, 1999. There can be no assurance that the Company will be profitable
in the future on a quarterly or annual basis. As of March 31, 1999, the Company
had an accumulated deficit of approximately $13.3 million.

Implementation of New Automated Manufacturing Line. The Company is
---------------------------------------------------
currently developing a new automated manufacturing line at its German facility
for the manufacture of Vehicle Stability Control System ISDs which will involve
existing technologies currently employed by the Company's Common Rail Diesel
Injection ISD manufacturing line at the same facility. There can be no
assurance that the transition of Vehicle Stability Control System ISDs
processing to the new line will be achieved on schedule without encountering
any delays in the process implementation. Nor can there be any assurance that
the Company will achieve acceptable manufacturing yields or that the operating
income margins on such products will be comparable to those realized in
connection with the Company's current manufacturing line. Failure to achieve
acceptable yields or margins could adversely affect the Company's financial
condition and results of operations. In developing the new line, there can be
no assurance that the Company will be able to meet customer demands or there
can be no assurance while implementing the new line there will be no line shut
downs at the Company's end, which in turn may cause shut downs at the customers
and/or end user such as a vehicle manufacturer. The cost of such a shut down
may have a material adverse effects on the Companys financial condition,
results of operations and business. There can be no assurance that the Company
can manage the cost of or handle such a shut down without materially adversely
affecting the Company's financial condition, results of operations or business.

Dependence on Customer Specific Products; Lengthy Sales and Development
-----------------------------------------------------------------------
Cycle. A substantial portion of the Company's products is 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.

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

<PAGE> 25

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, fluctuations in yields, the relatively long sales and development cycle
for the Company's 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, 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,
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, 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.

Significant portions 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
customers' requirements and manufacturing availability. 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.

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. For instance, the Company
experienced yield problems associated with the production ramp of it HVP media-
compatible ISDs which materially adversely affected the product gross margin
and operating results during the quarter ended March 31, 1998. 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.

Significant Customer Concentration. Historically, a relatively small
-----------------------------------
number of customers have accounted for a significant percentage of the
Company's total revenues, and the Company expects that this trend will
continue. In each of fiscal 1997, 1998 and 1999, the Company has had two or
more customers, which each accounted for more than 10% of total revenues. In
fiscal 1997, four customers accounted for 75% of total revenues; in fiscal
1998, three customers accounted for 68% of total revenues; and in fiscal year
1999, three customers accounted for 80% 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.

<PAGE> 26

Dependence on Automotive Industry; Need to Penetrate New Markets. In
-----------------------------------------------------------------
fiscal 1999, the Company derived approximately 90% 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 were 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 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. 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 sufficiently 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.

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.

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.

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

<PAGE> 27

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, 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.

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 needs, resulting in increased responsibilities
for the Company's existing personnel and the need to hire additional personnel.
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.

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.

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 may 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
requalification process 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 over the
price, timely delivery, performance, 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

<PAGE> 28

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.

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.

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. Although the Company has initiated
efforts to qualify second sources for certain of its key components, none of
the Company's ASICs is currently fabricated by more than one foundry. Although
processed 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, wafer processing 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 Alcatel Microelectronics ("Alcatel")
and is in the process of qualifying products manufactured by Alcatel. The
Company has also began qualification of Chartered Semiconductor ("Chartered")
as another foundry. There can be no assurance that the Company will be able to
complete qualification of products fabricated by Alcatel, Chartered
Semiconductor or any other new wafer supplier, 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 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

<PAGE> 29

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 as part of the Company's product cost
reduction strategy, 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.

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. For instance, the
Company encountered a substantial yield problem with certain of its ISD
products during the quarter ended March 31, 1998 due to a limitation of an ASIC
design with respect to a particular variation in the foundry wafer process.
These yield losses had a material adverse effect on the Company's operating
results. 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.

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 six patents and
has filed four additional patent applications in the United States and three
foreign patent applications. 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 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 76.7%, 56.8%, and
46.0% of the Company's total revenues in fiscal 1999, 1998, and 1997,
respectively. The Company's sales to customers outside the United States are
subject to a variety of risks, including

<PAGE> 30

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
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 canceled, 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 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.

Need for QS-9000 Certification. The Company currently does not have QS-
-------------------------------
9000 certification, which increasingly is being required by motor vehicle
manufacturers. The Company has invested significant financial and other
resources to obtain such certification, but there can be no assurance that the
Company will be successful in obtaining such certification in a timely manner,
or at all. Although the Company has not lost any sales to date as a result of
its lack of 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.

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.

<PAGE> 31

ITEM 8. FINANCIAL STATEMENTS

Attached to this Form 10-KSB are the Company's financial statements for
the year ended March 31, 1999, which include the following items:

Title Page
----- ----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 42
Consolidated Balance Sheets 43
Consolidated Statement of Operations 44
Consolidated Statements of Stockholder's Equity 45
Consolidated Statement of Cash Flows 47
Notes to Consolidated Financial Statements 48

</TABLE>

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

Not applicable.

<PAGE> 32

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The following table sets forth the executive officers and directors of the
Company as of March 31, 1999:

Name Age Position
---- --- --------
<S> <C> <S>
Manher D. Naik 56 President, Chief Executive Officer and
Chairman of the Board of Directors
Donald E. Paulus 42 Chief Operating Officer
Ramesh Sirsi, Ph.D. 54 Executive Vice President, Marketing and
Business Development
David Satterfield 46 Vice President, Finance and Administration
Vinod K. Sood(1) 62 Director
Shigeru Miyashita 63 Director
Stuart D. Boyd(2) 43 Director
Gerald F. Taylor(1)(2) 58 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 Business Development 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.

<PAGE> 33

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.

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.

Gerald "Jerry" Taylor has served as a director of the Company since June
---------------------
1998. Most recently, Mr. Taylor was with Applied Material as Senior Vice
President and Chief Financial Officer, and is currently acting as senior
advisor to Jim Morgan, Applied Material's Chief Executive Officer and to his
executive staff. He joined Applied Materials in 1984 as CFO. Prior to working
at Applied Materials, Mr. Taylor spent 20 years in a broad range of
international and domestic controllership positions at Schlumberger, Fairchild
Semiconductor and Instrument Corporation and Honeywell.

DIRECTOR COMPENSATION

The directors generally do not receive cash compensation for their
services as directors. However, Vinod K. Sood has historically received
compensation of $150 per Board meeting. In March 1999, the Board increased the
compensation of Mr. Sood for attendance at meetings of the Board of Directors
and the Compensation Committee from $150 per meeting to $500 per meeting.
Gerald Taylor receives $500 for each Board meeting he attends and $500 for each
Audit Committee meeting he attends. In connection with Mr. Taylor's appointment
to the Board, he was granted an option to purchase 15,000 shares of Common
Stock. In addition, in consideration for his services on the Board, Mr. Taylor
received $5,000 in 1998 and is due to receive $10,000 in 1999. Both Mr. Sood
and Mr. Taylor are reimbursed for all expenses incurred in order to attend the
meetings. In addition, the Company's directors are eligible to receive option
grants under the Company's 1997 Stock Plan.

ITEM 11. EXECUTIVE COMPENSATION

The following summary compensation table sets forth information concerning
the compensation during the fiscal years ended March 31, 1999, 1998 and 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

Long Term
Annual Compensation
Compensation Awards Securities
Name And Principal Position Year Salary(1) Underlying Options
- --------------------------- ---- -------- ------------------
<S> <C> <C> <C>
Manher D. Naik ................ 1999 $464,447 85,000
President and Chief Executive 1998 155,000 40,000
Officer 1997 136,667 40,000

Donald E. Paulus .............. 1999 145,331 16,000
Chief Operating Officer 1998 133,400 -
1997 116,400 14,000

Ramesh M. Sirsi................ 1999 120,000 17,000
Executive Vice President, Marketing 1998 120,000 -
and Business Development 1997 104,850 32,000
_____________________

</TABLE>

<PAGE> 34

(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, 1999 to the Named Executive Officers:

OPTION GRANTS IN FISCAL YEAR 1999

Percentage of Total
Number of Security Options Granted To
Underlying Options Employees during
Name Granted Fiscal Year 1999 Exercise Price Expiration
---- ------- ------------------ -------------- ----------
<S> <C> <C> <C> <C>
Manher D. Naik 50,000 9.73% $3.125 3/23/04
25,000 4.87% 5.250 8/13/03
10,000 1.95% 8.313 5/21/03
------ -----
Total 85,000 16.55%
====== =====
Donald E. Paulus 9,000 1.75% 3.125 3/23/04
7,000 1.36% 8.313 5/21/03
------ -----
Total 16,000 3.11%
====== =====

Ramesh M. Sirsi 10,000 1.95% 3.125 3/23/04
7,000 1.36% 8.313 5/21/03
------ -----
Total 17,000 3.31%
====== =====
</TABLE>
__________________

(1) Options granted in fiscal 1999 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 513,750 shares of Common Stock
during fiscal 1999.

(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.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of March 31, 1999 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.

<PAGE> 35

Number Shares Beneficially
Beneficial Owner(1) Owned Percent Shares
------------------ ----- --------------
<S> <C> <C>
Wellington Management(2) 745,000 9.40%
75 State Street
Boston, Massachusetts 02109

Breed Technologies, Inc.(3) 530,038 6.69
Stuart A Boyd
5300 Old Tampa Highway
P.O. Box 33050
Lakewood, FL 33807-3050

WK Technology Fund (4) 483,043 6.09
10th Floor, 115, Sec. 3
Ming Sheng E. Road
Taipei, Taiwan, R.O.C.

TDK Semiconductor Corporation 445,524 5.62
14351 Myford Road
Tustin, CA 92780-7068

Nagano Keiki Co., Ltd.(4) 291,007 3.67
Shigeru Miyashita
1-30-4 Higashimagome
Ohta-ku
Tokyo 162
JAPAN

Vinod K. Sood(5) 181,869 2.29

Manher D. Naik(6) 282,004 3.56

Donald E. Paulus(7) 156,823 1.98

Ramesh Sirsi(8) 86,283 1.09

David Satterfield (9) 38,604 0.49

Gerald F. Taylor (10) 6,000 0.08

All directors, executive officers
and beneficial owners as a group
(11 persons)(11) 3,246,195 40.94%

</TABLE>
______________________

(1) Percent ownership is based on 7,672,210 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 March 31, 1999.

(2) Based solely upon information supplied by the named stockholder on Schedule
13D.

(3) 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

<PAGE> 34

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 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.

(5) Includes 178,703 shares held by the Sood Family Trust and 3,166 shares
subject to options which are exercisable within 60 days of March 31, 1999.

(6) Includes 193,360 shares held by the Manher & Gita M. Naik Family Trust and
88,644 shares subject to options which are exercisable within 60 days of March
31, 1999.

(7) Includes 15,478 shares subject to options which are exercisable within 60
days of March 31, 1999.

(8) Includes 60,394 shares subject to options which are exercisable within 60
days of March 31, 1999.

(9) Includes 38,604 shares subject to options which are exercisable within 60
days of March 31, 1999.

(10) Includes 6,000 shares subject to options which are exercisable within 60
days of March 31, 1999.

(11) Includes 212,286 shares subject to options which are exercisable within 60
days of March 31, 1999.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Since April 1, 1997, 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
12,111shares 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. All outstanding and issuable
shares of Preferred Stock converted into shares of Common Stock in connection
with the closing of the Company's initial public offering. 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:

Warrants To Purchase
Executive Officers, Directors --------------------
- ----------------------------- Series E Series F Series F
And 5%Stockholders(1) Preferred Stock Preferred Stock Preferred Stock
--------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Nagano Keiki Co., Ltd.(2)....... 131,007(3)
TDK Semiconductor Corporation(2) 17,978(4)
WK Technology Fund(2)........... 49,978(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.

<PAGE> 37

(3) Represents shares issued in exchange for the cancellation of indebtedness.

(4) Represents shares 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 year 1998 and 1999, the Company purchased goods and services
from TDK Semiconductor Corporation resulting in payments of $375,000 and
$180,000, respectively. The accounts payable balance amounting to approximately
$138,000 and none at March 31, 1998 and 1999 payable to TDK Semiconductor
Corporation. Included in the notes payable balance at March 31, 1997, was
approximately $679,000 payable to TDK. 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 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 were paid in full in June
1998.

During fiscal 1998 and 1999, the Company performed development services
for and sold ASICs to Nagano resulting in approximately $1.8 million and $2.9
million of revenues in those periods, of which approximately $802,000 and
$971,000 are included in the accounts receivable balance at March 31, 1998 and
1999, respectively. Included in the accounts payable balance at March 31 1998,
and 1999 are approximately $988,000 and $2.4 million, respectively, payable to
Nagano for purchases of sensing elements of $2.1 million and $5.8 million
during fiscal 1998 and 1999, respectively. In addition, included in the notes
payable balance at March 31, 1997 is approximately $437,000 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.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers and directors and
persons who own more than ten percent of a registered class of the Company's
equity securities to file reports of ownership on Form 3 and changes in
ownership on Form 4 or Form 5 with the Securities and Exchange Commission (the
"SEC"). Such officers, directors and ten percent stockholders are also required
by SEC rules to furnish the Company with copies of all Section 16(a) reports
they file.

Based solely on its review of the copies of such forms received by it, the
Company believes that, during the year ended March 31, 1999, all reporting
persons complied with Section 16(a) filing requirements applicable to them.

<PAGE> 38

ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K

Sequentially
Exhibit No. Description Numbered Page
----------- ----------- -------------
<S> <C>
2.1^ Agreement and Plan of Merger, dated as of May 3,
1999, among Parent, the Purchaser and the Company.

3.1* Certificate of Incorporation of Registrant.

3.2** Bylaws of Registrant.

4.1* Restated Registration Rights Agreement.

10.1* 1989 Stock Option Plan and form of option agreement thereunder.

10.2* 1997 Stock Option Plan and form of option agreement thereunder.

10.3 1997 Employee Stock Purchase Plan and form of subscription
agreement thereunder.

10.4** Form of Indemnity Agreement for Officers and Directors.

10.5*** Development Agreement between ISS-GmbH and Robert Bosch GmbH
dated May 25, 1995.

10.6*** Development Agreement among ISS-Nagano GmbH, Integrated Sensor
Solutions, Inc. and Robert Bosch GmbH dated May 17, 1996.

10.7*** Supply Agreement between Integrated Sensor Solutions, Inc. ISS-
Nagano GmbH and Robert Bosch GmbH dated November 18, 1996.

10.8** Lease between Montague Oaks Associates Phase III and Integrated
Sensor Solutions, Inc. dated June 2, 1994, as amended.

10.9** Continuous Sales and Purchase Agreement by and between Nagano
Keiki Seisakusho, Ltd. and Integrated Sensor Solutions, Inc.
dated December 1, 1996.

10.10** Continuous Sales and Purchase Agreement by and between Nagano
Keiki Seisakusho, Ltd. and Integrated Sensor Solutions, Inc.
dated June 1, 1997.

10.11** Security Agreement by and between Integrated Sensor Solutions,
Inc. and Silicon Systems, Inc. dated December 1, 1995.

10.12** Credit Agreement between Integrated Sensor Solutions, Inc. and
Silicon Systems, Inc. dated December 1, 1995.

10.13** Loan and Security Agreement by and between Silicon Valley Bank
and Integrated Sensor Solutions, Inc. dated July 10, 1996, as
amended.

10.14** Lease Agreement between Geschaftsraum-Mietvertrag and ISS-
Integrated Sensor Solutions GmbH dated September 12, 1994.

10.15* Agreement relating to change in equity ownership of ISS-Nagano
GmbH dated July 30, 1997.

10.16 Second Amendment to Lease between Montague Oaks Associates Phase
III and Integrated Sensor Solutions, Inc. dated March 31, 1999.

10.17 Lease Agreement between Geschaftsraum-Mietvertrag and ISS-
Integrated Sensor Solutions GmbH dated ___________, 1999.

21.1** List of Subsidiaries of the Registrant.

23.1 Consent of Ernst & Young LLP, Independent Auditors

24.1** Power of Attorney (see page 39).

27.1 Financial Data Schedule.

</TABLE>
___________

^ Incorporated by reference to exhibit 99(c)(1) to the Registrant's
Information Statement on Schedule 14D-9 filed May 7, 1999.
* Filed as an exhibit to Amendment No. 1 to Registration Statement on
Form SB-2 (File No. 333-41351) on February 5, 1998.
** Filed as an exhibit to Registration Statement on Form SB-2 (File No.
333- 41351) on December 2, 1997.
*** Certain information in this exhibit has been omitted and filed
separately with the Securities and Exchange Commission pursuant to
orders for confidential treatment under 17 C.F.R. Sections
200.80(b)(4), 200.83 and 230.46.

<PAGE> 39

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

INTEGRATED SENSOR SOLUTIONS, INC.

By: /s/ MANHER NAIK
----------------------------
Manher Naik
Chairman, President and Chief Executive Officer
(Principal Executive Officer)

Date: July 15, 1999

POWER OF ATTORNEY

Know all persons by these presents, that each person whose signature
appears below constitutes and appoints Manher Naik and David Satterfield his
attorneys-in-fact and agents, each with the power of substitution and
resubstitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-KSB, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary, to be done in connection therewith, as fully as
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or either of them,
or their or his substitute may do or cause to be done by virtue hereof.

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

Name Title Date
---- ----- ----
<S> <C> <C>
/s/ MANHER NAIK Chairman, President and Chief July 15, 1999
- -------------------------- Executive Officer
Manher Naik

/s/ David Satterfield Vice President Finance & July 15, 1999
- -------------------------- Administration (Principal Financial
David Satterfield and Accounting Officer)

/s/ Shigeru Miyashita Director July 15, 1999
- --------------------------
Shigeru Miyashita

/s/ Gerald F. Taylor Director July 15, 1999
- --------------------------
Gerald F. Taylor

/s/ Vinod K. Sood Director July 15, 1999
- --------------------------
Vinod K. Sood

Director July __, 1999
- --------------------------
Stuart D. Boyd

</TABLE>

<PAGE> 40

INDEX TO EXHIBITS

3.1* Certificate of Incorporation of Registrant.

3.2** Bylaws of Registrant.

4.1* Restated Registration Rights Agreement.

10.1* 1989 Stock Option Plan and form of option agreement
thereunder.

10.2* 1997 Stock Option Plan and form of option agreement
thereunder.

10.3 1997 Employee Stock Purchase Plan and form of subscription
agreement thereunder.
10.4** Form of Indemnity Agreement for Officers and Directors.

10.5*** Development Agreement between ISS-GmbH and Robert
Bosch GmbH dated May 25, 1995.

10.6*** Development Agreement among ISS-Nagano GmbH, Integrated
Sensor Solutions, Inc. and Robert Bosch GmbH dated May 17, 1996.