INTEGRATED CIRCUIT SYSTEMS INC - 10-K Annual Report

Back to GetFilings.com

================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended June 29,1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-19299

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

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

2435 Boulevard of the Generals, Norristown, Pennsylvania 19403
(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [X]

Aggregate market value of the registrant's Common Stock held by non-
affiliates of the registrant as of September 6, 1996, based on the closing sales
price, was $113,096,775. Such calculation excludes the shares of Common Stock
beneficially held by directors and certain officers of the registrant but does
not reflect a determination that persons are affiliates for any other purpose.
The number of shares outstanding of the registrant's Common Stock as of
September 6, 1996: 11,392,050 shares

Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on November 25, 1996 are incorporated by reference
into Part III.

================================================================================

1

PART I

Item 1. BUSINESS
General
-------

Integrated Circuit Systems, Inc. (the "Company") was incorporated in
Pennsylvania in 1976, and began by designing and marketing custom application
specific integrated circuits ("ASICs") for various industrial customers. In
particular the Company was noted for its unique expertise in designing ASICs
which combined both analog and digital or "mixed-signal" technology. By 1988,
the Company had adopted a strategy of developing proprietary integrated circuits
("ICs") to capitalize on its complex mixed-signal design technology and
pioneered the market for frequency timing generators ("FTGs") which provide the
timing signals or "clocks" necessary to synchronize high performance electronic
systems. FTGs replaced the multiple crystal oscillators and other peripheral
circuitry previously used to generate and synchronize timing signals, thus
providing savings in board space, power consumption and cost. The Company's
initial FTG products were used in video graphics applications in personal
computers ("PCs"), but its FTG product line soon expanded to include ICs for the
main circuit boards of the PC (commonly referred to as the "motherboards") and
PC peripheral devices such as disk drives, audio cards and laser printers. More
recently the Company has further extended the use of its mixed-signal expertise
to develop and market products for multimedia and data communication
applications.

In the second quarter of fiscal 1993, the Company acquired Avasem Corporation
("Avasem"), a privately held company providing FTGs primarily for PC
motherboards, as well as other custom mixed signal IC components. In the first
quarter of fiscal 1994, the Company acquired Turtle Beach Systems, Inc., a
privately held company engaged in the design, development and marketing of sound
board and software products primarily for the PC multimedia market. These
acquisitions were structured as tax-free reorganizations and were accounted for
as pooling of interests. Accordingly, all financial information has been
restated to reflect the combined operations of these companies. In the third
quarter of fiscal 1995, the Company acquired a 51% interest in ARK Logic, Inc.,
a privately held company developing graphic accelerator engines. In the second
quarter of fiscal 1996, the Company's Turtle Beach subsidiary acquired the PC
multimedia and communications peripheral product lines of Value Media, Inc., a
privately held company that developed and marketed multimedia peripheral kits
for PCs. Through its Turtle Beach subsidiary the Company integrates its
multimedia ICs with additional hardware and software, and markets multimedia
peripheral kits for PCs. The latter two acquisitions were accounted for using
the purchase method, and accordingly such operations are now included in the
Company's consolidated financial statements from the respective dates of
acquisition. The company considers its various design, manufacture and marketing
activities to be a single industry segment.

The Company's initial public offering of Common Stock occurred in June 1991, at
which time the Company's Common Stock commenced trading on the Nasdaq National
Market under the symbol ICST.

Products and Product Applications
---------------------------------

Frequency Timing Generators
The Company's FTG customers are predominately PC original equipment
manufacturers ("OEMs"). As of fiscal 1996, these major OEM customers include:
Intel, Compaq, IBM, Hewlett-Packard and DEC.

Motherboard and Peripheral Applications. The Company supplies a broad line of
FTG products for use in motherboard and peripheral applications, which provide
the numerous frequency outputs required for both general and specific timing
functions required by the motherboards and the peripherals of computer systems.
These FTGs control multiple functions by providing and synchronizing the timing
of the computer system, including signals from the video screen, graphics
controller, memory, keyboard, microprocessor, disk drives

2

and communication ports. The Company has expanded its presence in this market
and the products designed for these applications currently contribute most of
the Company's FTG revenues.

During fiscal 1995 the Company experienced increased demand for its FTG
motherboard and peripheral products driven by industry growth in higher
performance desktop and portable computing, and a new generation of FTGs for the
Pentium, PowerPC, and NexGen microprocessor-based motherboards. Such demand
however slowed during fiscal 1996, reflecting an aging product line and a
general softness in the PC component industry.

New Applications. The Company intends to increase its presence in high
frequency/performance FTGs for timing and graphics applications, which
applications comprised less than 10% of its total FTG revenue in fiscal 1996.
Such applications will likely include new products for wireless communications
and other non-PC markets.

Multimedia Products
PC multimedia applications enable the user to input, create, manipulate and
combine different forms of data including audio and video (i.e., images, text,
graphics and animation). The Company's customers in the multimedia market are
predominately add-in board makers. including Jaton, Hercules, Aztech and
Diamond Multimedia.

Turtle Beach Systems. With the acquisition of Turtle Beach in July 1993, the
Company expanded its product offerings to include a family of high performance
PC sound board and software products used to record, edit and play back
digitally recorded sound on IBM compatible computers. Turtle Beach marketed
these products for professional audio and music applications through the PC
distribution channel and consumer mass merchandisers. The Company originally
intended to incorporate proprietary audio chipsets and software under
development in the Company into new Turtle Beach sound card products. However,
with the recent redirection of the Company's multimedia product strategy to
integrate audio into the video/graphic environment, the original intent is no
longer appropriate.

The Company is exploring alternatives which will enable Turtle Beach to be
separately measured in both financial and business terms, while maximizing the
return on the Company's investment in Turtle Beach for the Company's
shareholders. During the third quarter of fiscal 1995 the Company took a one-
time charge of $3.5 million as part of downsizing Turtle Beach, replaced certain
management personnel and discontinued Turtle Beach's non-SoundBlaster
compatible business. During the second quarter of fiscal 1996 the Company took
a one-time charge of $2.3 million in connection with the relocation of the
Turtle Beach business from York, PA to Fremont, CA, and a write-off of in-
process R&D in connection with its purchase of the peripheral product lines of
Value Media, Inc. While Turtle Beach continued to significantly increase its
revenue during fiscal 1996, the PC audio business remains a challenge for the
Company and there can be no assurance that break-even performance for Turtle
Beach can be reliably achieved or sustained.

ARK Logic. The Company acquired a majority interest in ARK Logic in the third
of quarter of fiscal 1995. ARK Logic offers a family of graphic user interface
controller chips with built-in high performance graphic accelerator engines. A
suite of software drivers supporting PC operating systems has also been
developed by ARK Logic. These devices utilize external RAMDAC and video clock
generators which are compatible with the Company's GENDAC (FTG integrated with a
RAMDAC/TM/) family of integrated generators.

During the later part of fiscal 1996 ARK Logic introduced a fully integrated
single chip controller incorporating the Company's GENDAC technology, full
motion video functionality and ARK Logic's graphics core logic. ARK Logic
expects to introduce its next generation video graphics controller in early
fiscal 1997. In addition, ARK Logic is continuing development of a full PC
multimedia solution in a single chip which includes 3-D rendering capabilities
as well as 2-D video graphics and audio, which is expected to be introduced in
late fiscal 1997.

3

Timing & Communications
The Company has developed and since late fiscal 1995 marketed transceiver
chipsets for data communications applications, including ATM and SONET. New
product introductions continued in fiscal 1996 to address these and other
rapidly growing communication opportunities in Fast Ethernet. During the fourth
quarter 1996 the Company introduced and sampled prototypes for a single chip,
CMOS, 10/100 megabyte PHYceiver product for Fast Ethernet applications. This
unique product has generated significant interest among OEMs supplying 100
megabyte solutions to the networking industry. The Company believes that
transition to Fast Ethernet in the LAN marketplace continues to offer
opportunities for the Company's communication products. In addition, the
Company continues to have a significant presence in high frequency performance
timing for workstation applications. New products were introduced last year for
laser engine and line locking applications, which have subsequently won
acceptance at major office product, telecommunications and imaging OEMs.

Custom ICs
The Company has developed and sold custom mixed-signal ICs to a broad range of
customers and market applications. Custom ICs are typically sold pursuant to
development and production contracts which generally provide for partial
reimbursement of development costs and a minimum production commitment to be
purchased by the customer after approval of a prototype. Unit prices for custom
IC products are negotiated based on factors which include complexity of the
design, minimum purchase requirements and the Company's production and testing
costs. Such products do not, however, contribute a significant portion of the
total Company revenue.

A few of the Company's custom IC products are sold into the medical market for
applications which include a blood glucose measurement instrument, hearing aids
and cardiac pacemakers. In certain cases, the Company has provided or received
indemnities with respect to possible third party claims arising from these
products. Although the Company believes that exposure to third party claims has
been minimized, there can be no assurance that the Company will not be subject
to third party claims in these or any other applications, or that any
indemnification or insurance available to the Company will be adequate to
protect it from liability.

Sales and Marketing
-------------------

The Company markets its IC component products worldwide through independent
sales representatives and a network of distributors managed by a direct sales
force. During fiscal 1996 the Company conducted its direct sales efforts
through its offices in Norristown, Pennsylvania, San Jose, California, Austin,
Texas, and Boston, Massachusetts. The Company has over 400 OEM customers,
including, ATI Technologies, Compaq, DEC, Diamond Computer, Epson, Hewlett
Packard, IBM, Intel, Silicon Graphics, Sun Microsystems, Tandy and Texas
Instruments. During fiscal 1996 shipments to Intel (including all Intel and
Intel subcontractor locations) accounted for ten or more percent of the
Company's consolidated revenue.

The Company's Turtle Beach products are sold to distributors and mass-
merchandisers. Sales efforts are conducted through its sales office located in
Fremont, CA and through third party sales representatives.

Foreign sales are conducted by sales representatives and distributors located in
the Pacific Rim and Europe. Foreign sales are generally denominated in U.S.
dollars and are subject to risks common to export activities, including
governmental regulation and trade barriers.

At June 29, 1996, the Company's backlog was approximately $23.0 million, as
compared to $35.4 million at June 30, 1995. The Company includes in its backlog
customer released orders with firm schedules for shipment within the next twelve
months. These orders may be canceled generally with 60 days advance notice
without significant penalty to the customers. The Company has experienced a
reduction in customer

4

order lead times for its IC products and its "turns" business (i.e., orders
placed by customers for immediate or relatively short term delivery) has grown
to a significant share of its quarterly revenue. Almost all of Turtle Beach's
orders are turns business and accordingly Turtle Beach operates with a
relatively small backlog. Furthermore, in accordance with industry practices
Turtle Beach periodically accepts from its customers returns of products which
such customers have not resold within a reasonable time period, in exchange for
orders for new products. For these reasons, the Company believes that its
backlog, at any time, should not be used as a measure of future revenues.

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

The Company generally warrants that its products will be free from defects in
workmanship and materials for a one-year period. Defective products returned to
the Company within the warranty period are replaced after a confirming
evaluation by the Company's quality control staff. The Company has not
experienced significant warranty returns to date.

Manufacturing
-------------

The Company has qualified and utilizes third party suppliers for the manufacture
of silicon wafers. Such suppliers are capable of providing CMOS processing
technologies ranging from 0.35 to 3 micron. All of the Company's wafers
currently are manufactured by outside suppliers, three of which supply the
substantial majority of the Company's wafers. The Company and the suppliers
typically agree on production schedules based on order backlog and demand
forecasts for the next three months.

Although most of the Company's relationships with its wafer suppliers do not
currently provide for the supplier to supply, or the Company to purchase,
substantial minimum wafer quantities, the Company has, on occasion, made
negotiated commitments to purchase specified minimum wafer quantities in
exchange for supply commitments and/or pricing concessions. During the past
fiscal year the Company entered into a wafer purchase contract with Chartered
Semiconductor Manufacturing PTE. Ltd. ("CSM") pursuant to which the Company
advanced to CSM a deposit of $2 million as part of a mutual commitment for CSM
to supply and the Company to purchase an agreed minimum quarterly quantity of
wafers over a five-year period from April, 1996 through December, 2000. In
addition CSM agreed to provide to the Company certain price concessions as part
of such commitment. Under its agreement with CSM the Company is required to
increase its deposit to up to $20 million during the five year term. Any
failure of either CSM and/or the Company to comply with its supply or purchase
commitment, as is applicable, will result in the assessment of specified
liquidated damages against the party failing to comply with its commitment. The
Company had previously entered into a similar agreement with one of its other
wafer suppliers, American Microsystems, Inc. but has subsequently amended such
agreement to remove any material purchase and supply commitment as well as any
associated penalties.

During fiscal 1995 the Company operated its own testing facilities at Valley
Forge, Pennsylvania, to ensure the quality of both purchased wafers and
assembled products. Such facilities included IC testing equipment and a staff
of product engineering, test and planning personnel. In addition, a significant
portion of final testing of certain finished products had been performed by
subcontractors in California and in the Philippines. During fiscal 1996 the
Company transferred the remaining testing activities it performed in-house to
offshore subcontractors. To ensure that the quality of the Company's product is
maintained, personnel have been put in place to closely supervise these offshore
facilities. Exit costs from relocating its in-house facilities were provided as
part of the one-time charge taken by the Company in the third quarter of fiscal
1995, with transition costs related to relocating equipment and operations
offshore being expensed as incurred. This transfer of test operations was
completed during the current fiscal year.

5

Turtle Beach generally uses contracted manufacturing and packaging services as
well as parts and components which are generally available from multiple vendors
as part of their standard product/service offerings. Certain components,
however, are available from sole or limited source suppliers. Turtle Beach
typically purchases these sole and limited source components pursuant to
purchase orders placed from time to time in the ordinary course of business and
has no guaranteed supply arrangements with such suppliers (including certain of
the Company's audio IC components.)

The Company believes that adequate capacity will be available to support its
manufacturing requirements. The Company's reliance, however, on multiple,
internationally located, outside subcontractors involves several risks,
including capacity constraints or delays in timely delivery and reduced control
over delivery schedules, quality assurance and costs. The Company is
continuously evaluating new sources of supply and is seeking to obtain
additional sources of supply and capacity for more advanced process
technologies, although, there can be no assurance that such additional sources
and capacity can be obtained. The occurrence of any supply or other problem
resulting from these risks could have a material adverse effect on the Company's
operating results.

Research and Development
------------------------

The Company believes that it must continually introduce new products to take
advantage of market opportunities and maintain its competitive position.
Research and development efforts concentrate on the design and development of
new leading edge products for the Company's markets and the continual
enhancement of the Company's design capabilities. Expenditures for research and
development were approximately $12.1 million, $11.4 million and $10.6 million in
fiscal 1996, 1995 and 1994, respectively, and include expenses related to the
development of the Company's recently introduced timing and communication
products as well its multimedia and custom ASIC products. Such expenses
typically include the addition of engineering personnel and increased
investments in design tools and support overheads related to new and existing
product development.

The Company expects to continue to increase its spending for research and
development in absolute dollar amounts in the foreseeable future. Because
design of the Company's products is extremely complex, the Company has
experienced delays from time to time in completing products on a timely basis.
The design of the Company's products is an extremely complex iterative process
involving the development of a prototype product through computer-aided circuit
design, the generation of photo masks for the manufacturing process and the
fabrication of wafers. Throughout this process, the Company's engineering staff
reviews preliminary performance data against the original product
specifications. Resulting variances, if any, may require redesign of previously
completed elements and result in the lengthening of the design, and thus the
production cycle.

Patents, Licenses and Trademarks
--------------------------------

The Company holds several patents as well as copyrights, mask works and
trademarks with respect to its various products and expects to continue to file
applications for the same in the future as a means of protecting its technology
and market position. In addition, the Company seeks to protect its proprietary
information and know-how through the use of trade secrets, confidentiality
agreements and other security measures. There can be no assurance, however,
that these measures and/or others will be adequate to safeguard the Company's
interests or preserve the Company's leading edge in certain of its technology
and products or protect it from allegations regarding potential patent
infringement. To augment product feature sets or accelerate development
schedules, the Company licenses certain technologies, however, no single license
is deemed to be material to the consolidated business of the Company. In
certain instances, the Company has performed design services pursuant to an
agreement by which it transferred certain of its

6

intellectual property rights in the final product to its customer. Such
transfer is also not deemed material to the consolidated business of the
Company.

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

Competition
-----------

In general, the semiconductor and PC component industries are intensely
competitive and characterized by rapid technological changes, price erosion,
cyclical shortages of materials, and variations in manufacturing yields and
efficiencies. The Company's ability to compete in this dynamic and
opportunistic environment depends on factors both within and outside its
control, including new product introduction, product quality, product
performance and price, cost-effective manufacturing, general economic
conditions, the performance of competition and the growth and evolution of the
industry in general. In the latter regard there are several substantial
entities, the Company not being one of them, in the industry who could and do
exert significant influence in determining the pace and key trends in the
development of PCs and PC components. Moreover, some of the Company's current
and potential competitors have significantly greater financial, technical,
manufacturing and marketing resources than the Company. Competitors also
include privately owned and emerging companies attempting to secure a share of
the market for the Company's products.

The Company has directed significant resources towards the objective of
establishing growth in PC video/graphics accelerator and networking
transceiver markets. In order to succeed the Company will potentially have to
displace larger and more established competitors in these markets. There can be
no assurance that the Company will be successful in its efforts or that even if
market penetration were to be achieved, competitive responses would not have a
material adverse impact on future profitability.

Cautionary Statement Concerning Forward Looking Statements
----------------------------------------------------------

This report contains certain forward-looking statements that are subject to
risks and uncertainties. Forward looking statements include, without
limitation, information under the captions "Products and Product Applications"
and elsewhere in this report, relating to planned product introductions and/or
statements preceded by, followed by or that include the words "believes","
expects", "anticipates", "intends" or similar expressions. For such statements
the Company claims the protection of the safe harbor for forward looking
statements contained in the Private Securities Litigation Reform Act of 1995.
The following important factors, in addition to those discussed elsewhere in the
report and in the documents incorporated herein by reference, could cause the
results to differ materially from those expressed in such forward looking
statements.

The Company's products are in various stages of their product life cycles. The
Company's success is highly dependent upon its ability to develop new products,
to introduce them to the marketplace ahead of the competition, and to have them
selected for design into products of leading systems manufacturers. These
factors have become increasingly important to the Company's results of
operations because the rate of change in the dynamic markets served by the
Company continues to accelerate. Since product life cycles are continually
becoming shorter, revenue may be affected quickly if new product introductions
are delayed. Since the gross margins of semiconductor products typically decline
as competitive products are introduced, both revenue and profitability are
impacted by the Company's success at introducing new products quickly. Also, the
Company must deliver product to customers according to customer schedules. If
delays occur, then revenue and gross margins for current and follow-on products
may be affected as customers may shift to

7

competitors to meet their requirements. There can be no assurance that the
Company will continue to compete successfully because of these factors.

A substantial portion of the sales of the Company's products depend largely on
sales of PCs and peripherals for PCs. Should the PC market decline or
experience slower growth, then a decline in the order rate for the Company's
products could occur during a period of inventory correction by the PC and
peripheral device manufacturers. This could result in a decline in revenue or a
slower rate of revenue growth during the inventory correction period. A
downturn in the PC market could also affect the financial health of some of the
Company's customers, which could affect the Company's ability to collect
outstanding accounts receivable from these customers. Furthermore, the intense
price competition in the PC industry is expected to continue to put pressure on
the price of all PC components.

The Company's reliance on subcontractors for wafer manufacture, assembly and
test involves several risks, including capacity constraints or delays in timely
delivery and reduced control over delivery schedules, quality assurance and
costs. The Company is continuously evaluating new sources of supply and is
seeking to obtain additional sources of supply and capacity for more advanced
process technologies, although there can be no assurance that such additional
sources and capacity can be obtained. The occurrence of any supply or other
problem resulting from these risks could have an adverse effect on the Company's
operating results.

The Company's operating results are subject to quarterly fluctuations as a
result of a number of factors, including competitive pressures on selling
prices, availability of wafer supply, fluctuation in yields, changes in the mix
of products sold, the timing and success of new product introductions and the
scheduling of orders by customers. The Company believes that its future
quarterly operating results may also fluctuate as a result of Company-specific
factors, including pricing pressures on its more mature FTG components,
continuing demand for its custom ASIC products, acceptance of the Company's
newly introduced products and market acceptance of its customers' products. Due
to the effect of these factors on future operations, past performance may be a
limited indicator in assessing potential future performance. In addition, if
revenue or earnings fail to meet expectations of the investment community, there
could be an immediate adverse effect on the trading price of the Company's
common stock.

Executive Officers of the Registrant
------------------------------------

The following sets forth certain information with regard to executive officers
of Integrated Circuit Systems, Inc.

Name Age Position
---- --- --------

Henry I. Boreen......... 69 Interim Chief Executive Officer, and Director

Hock E. Tan............. 44 Senior Vice President, Chief Operating Officer
and Chief Financial Officer

Ronald J. Wenger........ 53 Vice President of Sales

Mr. Boreen has been a director of the Company since December 1984 and chairman
of the board of directors since April 1995. In August 1996 Mr Boreen was
appointed to the additional position of interim chief executive officer pending
a search for a new chief executive officer for the Company. Since 1984 Mr.
Boreen has been a principal of HIB International. Since 1989 Mr. Boreen has
also served as chairman of AM Communications, Inc., a manufacturer of
telecommunications equipment. Mr. Boreen

8

has over 25 years of experience in the integrated circuits industry and was the
founder and chairman of Solid State Scientific, a semiconductor manufacturer.

Mr. Tan has served as Senior Vice President and Chief Financial Officer since
February 1995 after joining the Company in August 1994. In June 1996 Mr. Tan
was appointed to the additional post of Chief Operating Officer. Mr. Tan was
Vice President of Finance of Commodore International Ltd. from 1992 to 1994.
Mr. Tan has served as Managing Director of Pacven Investment Ltd. from 1988 to
1992 and was Managing Director of Hume Industries (M) Ltd. from 1983 to 1988.
His career also includes senior financial positions with PepsiCo, Inc. and
General Motors. Mr. Tan holds an MBA from Harvard Business School and an MS in
Mechanical Engineering from Massachusetts Institute of Technology.

Mr. Wenger joined the Company in April 1995 as Vice President of Sales. Mr.
Wenger has over 25 years experience in developing electronic component sales for
various companies in the semiconductor industry. Prior to joining the Company,
Mr. Wenger served as Vice President, Sales and Marketing of Intellisense Corp
and VP Sales-East for Fairchild Semiconductor. He had held various senior sales
positions with Catalyst Semiconductor, Fujitsu Microelectronics, and Signetics
Corp.

During calendar 1996 David W. Sear and Perry A. Denning resigned their positions
as CEO and President, and Vice President Operations, respectively. In addition
N. Werner Anderson retired. During the Company's search for a new CEO, Henry I.
Boreen, the Company's chairman, has been appointed interim CEO.

Employees
---------

As of June 29, 1996, the Company had 206 full-time employees, 75 of whom were
engaged in research and development, 51 in sales, marketing and technical
support, 37 in finance and administration, and 43 in operations. The Company's
employees are not represented by any collective bargaining agreements, and the
Company has never experienced a work stoppage.

Item 2. PROPERTIES

The Company's principal facilities consist of a 61,000 square-foot building in
Norristown, Pennsylvania, which serves as the corporate headquarters and is used
for product development, testing, sales, marketing and administration. This
facility was purchased in September 1992, and financed with a mortgage payable
in monthly installments over 15 years, in the amount of $1,830,000 (increased to
$2,268,000 in November, 1993 to cover building improvements.) During the third
quarter of fiscal 1996 the Company repaid the remaining balance of this
mortgage. Additionally, interim financing was provided by a second mortgage in
the amount of $1,647,000 which was due and repaid on July 30, 1993 by drawing on
the revolving line of credit. The line of credit was repaid on April 29, 1994
with the proceeds from a $2,000,000 loan that had been granted from Pennsylvania
Industrial Development Authority (PIDA). The PIDA loan is payable in monthly
installments over 15 years at an interest rate of 2%.

The Company also utilizes three West Coast facilities. The one located in San
Jose, California, consists of 26,686 square feet of office space leased pursuant
to an agreement which expires in August 1998. The space is used for product
development, testing, sales, marketing and administration. In addition ARK
Logic currently leases a facility of 5,772 square feet pursuant to an agreement
which expires in July 1998, which facility will be used by ARK Logic for the
development, sales and marketing of integrated circuits for multimedia
applications. Turtle Beach currently leases approximately 17,000 square feet of
office space in Fremont, California, under a lease which expires in December
2000. This facility is used by Turtle Beach for the development, sales and
marketing of multimedia kits for PCs. Turtle Beach also leases 12,720 square
feet of office space in York, Pennsylvania, under a lease which expires in
August 2001. This facility was previously used by Turtle Beach for the
development, sales and marketing of audio products for multimedia

9

and professional applications. The Company's Turtle Beach subsidiary is
currently making arrangements to sublease a significant portion of this facility
and has already negotiated an agreement with its landlord amending the subject
lease to exclude approximately 2800 square feet from the leased space. The
Company believes that its existing facilities are adequate to meet its current
requirements.

Item 3. LEGAL PROCEEDINGS

From time to time , various inquiries, potential claims and charges and
litigation (collectively "claims") are made, asserted or commenced by or against
the Company, principally arising from or related to contractual relations and
possible patent infringement. Such claims are reviewed and discussed with
counsel, and although the actual outcome of any claim cannot be predicted, the
Company does not believe separately and in the aggregate that any such claims
currently pending will have any material adverse effect on the Company's
consolidated financial position or the results of its operations. Further
information pertinent to the item is set forth on page 6 hereof, under the
heading "Patents, Licenses and Trademarks."

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

None.

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

The Company's common stock is traded in the over-the-counter market on the
NASDAQ National Market System under the symbol ICST. In addition, the Company
has been selected for listing on the Chicago Board Options Exchange with trading
in the option beginning on September 5, 1995. Below are the quarterly high and
low closing sale prices of the Company's common stock for the fiscal years ended
1996 and 1995, as reported by the "NASDAQ Stock Market."

Fiscal 1996 Fiscal 1995
----------------------------------------
High Low High Low
---- --- ---- ---

First quarter ended Sept 29 and Sept 30 $18.875 $13.625 $11.75 $ 9.75
Second quarter ended Dec 30 and Dec 31 15.875 10.750 10.75 7.13
Third quarter ended Mar 30 and Mar 31 12.250 6.500 12.56 7.63
Fourth quarter ended Jun 29 and Jun 30 14.750 9.625 15.00 10.00

At June 29, 1996, there were approximately 294 holders of record and in excess
of 4,000 beneficial holders of the Company's common stock. The Company has not
paid cash dividends on its common stock and intends to continue a policy of
retaining any earnings for reinvestment in its business.

10

Item 6. SELECTED FINANCIAL DATA

Five Year Summary
(In thousands, except for per share data)

Year ended
---------------------------------------------------
June 29 June 30
1996 1995 1994 1993 1992
---------------------------------------------------

Consolidated Statements of
Operations Data:
Revenues $100,485 $104,385 $93,824 $77,577 $36,536
Cost of sales 62,547 50,530 45,798 37,312 17,449
Research and development 12,073 11,350 10,647 9,156 6,767
Operating income 2,827 10,321 18,110 17,440 5,670
Net income 3,915 4,923 12,218 10,690 3,822
Earnings per common and
common equivalent share
(primary) $ 0.34 $ 0.45 $ 1.11 $1.06 $ .41
Earnings per common and
common equivalent share
(assuming full dilution) $ 0.34 $ 0.43 $ 1.10 $1.04 $ .40
Shares used in computing
earnings per common and
common equivalent share
(primary) 11,592 11,045 11,051 10,085 9,399
Shares used in computing
earnings per common and
common equivalent share
(assuming full dilution) 11,598 11,424 11,070 10,304 9,574

June 29 June 30
1996 1995 1994 1993 1992
---------------------------------------------------

Consolidated Balance Sheet Data:
Working capital $ 53,017 $ 51,931 $35,227 $32,246 $11,921
Total assets 90,967 82,182 73,452 55,034 24,299
Long-term debt, less current portion 1,631 3,480 3,775 3,780 1,863
Shareholders' equity 69,164 62,484 55,726 41,434 14,465

SEE ACCOMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

11

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

Annual Results of Operations

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

(Expressed as a percentage of total revenue)

Year ended

June 29 June 30
1996 1995 1994
---------------------------

Revenues 100.0% 100.0% 100.0%

Cost and expenses:
Cost of sales 62.2 48.4 48.9
Research and development expense 12.0 10.9 11.3
Selling, general and administrative expense 19.7 19.8 20.5
---------------------------
Operating income before one-time charges 6.1 20.9 19.3

One-time charges:
Change in business strategies - 3.7 -
Facility closing 1.7 - -
Discontinued product lines - 3.4 -
Write-off of in-process R&D 1.5 3.9 -
---------------------------
Operating Income 2.9 9.9 19.3
Interest and other income (1.5) (1.1) (0.9)
Interest expense 0.7 0.8 0.5
Minority interest 1.6 0.5 -
---------------------------
Income before income taxes 5.3 9.7 19.7
Income tax expense 1.4 5.0 6.7
---------------------------
Net income 3.9% 4.7% 13.0%
===========================

Revenue

The Company achieved revenue of $100.5 million in fiscal year 1996 as compared
to $104.4 million and $93.8 million in fiscal years 1995 and 1994,
respectively. This decrease in fiscal 1996 revenue was primarily attributable to
decreased volume shipments of FTG and custom ASIC components, partially offset
by increased shipments of Turtle Beach products.

Frequency Timing Generators

FTG components for motherboard and peripheral applications for PCs contributed a
declining percentage of the Company's total revenue over the last three years,
constituting approximately 42%, 48% and 60% of total revenue in fiscal years
1996, 1995 and 1994, respectively. This decline is largely attributable to a
declining market share, and more recently a general slowdown in the PC component
market. Although the market for FTG motherboard and PC peripheral applications
will likely remain an important source of revenue, the Company intends to
increase its presence in new and growing applications for FTG in wireless
communications and other non-PC applications, which applications comprised less
than 10% of its total FTG revenue in fiscal 1996.

Timing & Communications

Although currently representing less than ten percent of consolidated revenue,
the Company believes that transition to Fast Ethernet in the LAN marketplace
will continue to offer opportunities for the Company's communication products
during fiscal 1997. Timing and communications component revenue represented
approximately 7% of total revenue in fiscal years 1996 and 1995, and
approximately 5% in fiscal 1994.

12

Multimedia Products

ARK Logic. Multimedia component revenue (from the IC components for PC audio and
graphics, including the display adapter chips developed by ARK Logic) comprised
13%, 14% and 11% of total revenue for fiscal years 1996, 1995 and 1994,
respectively. The decrease from fiscal year 1995 largely reflects the delay in
the introduction of new video graphics motherboard solutions.

Turtle Beach. While Turtle Beach continued to significantly increase its revenue
during fiscal 1996, the PC audio upgrade business remains a challenge for the
Company, and there can be no assurance that break-even performance for Turtle
Beach can be reliably achieved or sustained. The Company continues to explore
alternatives which will enable Turtle Beach to be separately measured in both
financial and business terms, while maximizing the return on the Company's
investment in Turtle Beach for the Company's shareholders. Revenue from Turtle
Beach grew during fiscal years 1996, 1995 and 1994 on the strength of expanded
distribution outlets and new product introductions and represented approximately
21%, 12% and 7% of total revenue in fiscal years 1996, 1995 and 1994,
respectively.

Custom ICs

Revenue from custom ICs comprised 17%, 19%and 17% of total revenue in fiscal
years 1996, 1995 and 1994, respectively, and include design revenue representing
partial reimbursement of research and development expenditures.

Foreign Revenue Foreign revenue, which resulted primarily from sales to
offshore customers, largely in the Pacific Rim, were 48%, 56% and 41% of total
revenue in fiscal years 1996, 1995 and 1994, respectively. The decrease in
fiscal 1996 largely reflects a reduced market share in the Far East. The
Company's sales are denominated in U.S. dollars.

Backlog Backlog was $23.0 million at June 29, 1996, compared to $35.4 million
at June 29, 1995, and $22.2 million at June 30, 1994. The decrease in fiscal
1996 is primarily due to over capacity in the PC component market and delay in
the Company's introduction of new products.

Cost of Sales

Cost of sales consists of costs related to the purchase of processed wafers,
assembly and testing services provided by third-party suppliers, as well as
costs arising from in-house product testing, quality control and manufacturing
support operations and royalty expenses related to licensing and technology
agreements. Cost of sales as a percentage of total revenue was 62.2% in fiscal
1996 as compared to 48.4% in fiscal 1995 and 48.9% in fiscal 1994. The increase
in the cost of sales percentage in fiscal year 1996 was primarily attributable
to the declining sales prices in the PC component business.

Research & Development

Research and development expense expressed as a percentage of revenue was 12.0%
in fiscal 1996 as compared to 10.9% in fiscal year 1995, and 11.3% in fiscal
1994. In dollar terms, research and development spending increased 6.4% from
fiscal year 1995 to 1996, primarily as a result of the hiring of additional
engineering personnel, investment in new design tools, an increase in support
costs related to new product development and product enhancement programs for
existing standard products, including the Company's recently introduced timing
and communication products as well its multimedia products.

Operating Income

Expressed as a percentage of revenue, operating income was 2.9%, 9.9% and 19.3%
in fiscal years 1996, 1995 and 1994, respectively. In dollar terms, operating
income was $2.8 million in fiscal year 1996 compared to $10.3 million and $18.1
million in fiscal years 1995 and 1994, respectively. Fiscal 1996 includes one-
time charges of $3.3 million primarily as the result of Turtle Beach's
acquisition of certain assets of Value Media, which included a $1.5 million
write-off of in -process research and development, and the transfer of Turtle
Beach's York, PA operations to Fremont, CA, which resulted in a $1.8 million
charge for facility closing. Fiscal year 1995 includes one time charges of
$11.5 million primarily associated with a write-off of in-process R&D arising
from the acquisition of ARK Logic, as well as severance and other exit costs
associated with the redirection of the Company's multimedia strategy and the
transfer of its test operations to offshore subcontractors. Operating income
before one-time charges were $6.1 million, or 5.9% of revenue, in fiscal year
1996 as compared to 20.9% in fiscal 1995.

13

Income Taxes

After consideration of minority interest, the provision for income taxes was
37.8%, 48.7% and 33.9% for fiscal years 1996, 1995 and 1994, respectively. The
effective income tax rate for fiscal 1996 reflects a $1.1 million reversal due
to a change in estimate for state taxes. The effective tax rate for fiscal 1995
reflects a $4.1 million, non-deductible intangible write-offs related to the
acquisition of ARK Logic of $4.1 million.

Net Income

Net income was $3.9 million or 34 cents per share for fiscal 1996 as compared to
$4.9 million or 45 cents per share for fiscal 1995, and $12.2 million or $1.11
per share for fiscal 1994. Excluding one-time charges in fiscal 1996 and one-
time charges in 1995, net income for fiscal year 1996 was $5.9 million or $0.51
per share, compared to $13.8 million or $1.21 per share for fiscal year 1995,
and $12.2 million or $1.10 per share for fiscal 1994.

Liquidity, Capital Resources and Inflation

During fiscal year 1996, the Company generated $12.5 million in cash from its
operating activities as compared to $14.1 million during fiscal year 1995. The
decrease in fiscal year 1996 was primarily due to a decrease in operating
results offset by improved collections and inventory turns. The Company's days
sales outstanding was reduced from 75 days in fiscal 1995 to 64 days in fiscal
1996. The Company's inventory turns per year increased from 2.9 times in fiscal
1995 to 3.6 times in fiscal year 1996.

At June 29, 1996, the Company's principal sources of liquidity included
approximately $30.5 million in cash and investments as compared to $22.5 million
at June 30, 1995. The investments primarily consist of commercial paper,
government bonds and marketable securities with various maturities up to about
three months. During fiscal 1996, the Company renegotiated its revolving/term
loan credit facility with its commercial bank to extend the expiration date to
December 31, 1997. The facility is subject to certain covenants, including the
maintenance of certain financial ratios and minimum tangible net worth
requirements, as well as a prohibition against the payment of cash dividends
without prior bank approval. The Company was in compliance with all covenants
as of June 29, 1996. During fiscal year 1996, the Company made a draw down of
$2.3 million on its revolving line of credit. At June 29, 1996, there was a
$2.3 million balance outstanding under this facility. During fiscal 1996 the
Company also repaid the balance of a mortgage loan with respect to its
Norristown, PA facility, resulting in a cash outflow of approximately $1.6
million.

Expenditures for property and equipment were $4.7 million in fiscal year 1996 as
compared to $3.7 million in fiscal year 1995. Expenditures in all fiscal years
primarily included equipment used in product design and testing. The Company
intends to continue to invest in capital equipment to support continued growth.

During the past fiscal year the Company entered into a wafer purchase contract
with Chartered Semiconductor Manufacturing PTE. Ltd. ("CSM") pursuant to which
the Company advanced to CSM a deposit of $2.0 million as part of a mutual
commitment for CSM to supply and the Company to purchase an agreed minimum
quarterly quantity of wafers over a five-year period from April, 1996 through
December, 2000. In addition CSM agreed to provide to the Company certain price
concessions as part of such commitment. Under its agreement with CSM the
Company is required to increase its deposit to up to $20 million during the five
year term. Any failure of either CSM and/or the Company to comply with its
supply or purchase commitment, as is applicable, will result in the assessment
of specified liquidated damages against the party failing to comply with its
commitment. The Company had previously entered into a similar agreement with
one of its other wafer suppliers, American Microsystems, Inc. but has
subsequently amended such agreement to remove any material purchase and supply
commitment as well as any associated penalties.

During the second quarter of 1996, the Company's Turtle Beach subsidiary
acquired the PC multimedia and communications peripheral product lines of
ValueMedia, Inc. ("ValueMedia") for 1.0 million shares of Turtle Beach's common
stock (valued at $2.7 million) and cash of $0.4 million, aggregating to $3.1
million. In January 1996, Turtle Beach issued 500,000 shares of its common
stock, valued at $2.67 per share, to the Company as consideration of the
cancellation by the Company of indebtedness in the principal amount of
$1,325,000 owing to the Company by Turtle Beach. In February 1996, the Company
purchased from ValueMedia 183,700 shares of common stock of Turtle Beach for a
cash payment of $490,479. After these transactions, the Company owned 80.8% of
the common stock of Turtle Beach.

14

The Company acquired a 51% interest in ARK Logic during the third quarter of
fiscal 1995 Pursuant to the terms of such acquisition and under certain
circumstances as set forth therein, at any time between the eighteenth month and
the seventh year anniversary of the effective date of the acquisition, the
Company may acquire the remaining 49% of ARK Logic or certain members of the
prior management group of ARK Logic may require the Company to buy such minority
interest, each at a price based upon the fair market valuation determined at
such time.

The Company believes that the existing sources of liquidity and funds expected
to be generated from operations will adequately fund the Company's anticipated
working capital and other operating needs through at least fiscal year 1997. The
Company has acquired technology companies in the past, and may continue to make
strategic acquisitions in the future. Such potential transactions may require
substantial resources which, to the extent not provided by internally generated
sources, would require the Company to seek access to debt or equity markets.

The Company has not adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" ("SFAS 121"), which will become effective for the year ended
June 28, 1997. The Company believes that the adoption of this statement will not
have a material financial impact.

The Company has not adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which will become
effective for the year ended June 28, 1997. The Company believes that the
adoption of this statement will not have a material financial impact.

The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," effective
July 1, 1994. The adoption of this statement did not have a material financial
impact. The Company previously classified its investments as held-to-maturity.
However, effective cash management increasingly requires a flexible approach to
asset management that is inconsistent with this classification. Accordingly,
in fiscal 1995 the Company reclassified its investments as available-for-sale.

Inflation has not had a significant impact on the Company.

Update on Impact of One-Time Charges Taken in FY 1996 and FY 1995

The Company's Form 10-K for the fiscal year ending June 30, 1995 discussed a
one-time charge of $11.5 million taken during the third quarter of fiscal 1995.
The Company indicated in prior filings that the actions associated with this
charge would generate annual savings in excess of $5.0 million, primarily
through a reduction of salary and associated overhead and expenses as a result
of approximately 70 fewer employees and consultants at the Company's various
facilities. This reduction affected substantially all employee groups and
required the payment of approximately $2.1 million in severance over the twenty
seven month period ending June 28, 1997. The actions contemplated by this
charge have largely been accomplished and a substantial portion of the expected
savings has been realized. The full impact of such savings will not, however,
be realized until fiscal 1997. The Company does not currently expect these
savings will be materially offset by anticipated increased expenses or reduced
revenue associated with the activities leading to this charge. In addition, as
of the date of this filing, the Company has recovered approximately $250,000 by
disposing of certain of the assets which were written off. Of the total charge,
approximately $9.0 million was related to non-cash items. The charge is not
expected to affect future cash outflows other than for the severance payments of
approximately $210,000.

The Company's Form 10-Q for the second quarter of fiscal 1996, discussed a one-
time charge of $2.7 million, net of taxes, taken during the second quarter of
fiscal 1996. The subject charge included severance of $0.3 million paid over
the remainder of fiscal 1996, relating to the reduction of approximately 20
employees as a result of the closing of Turtle Beach's York, PA facility. In
addition, the charge included a reserve for terminating the lease for the York
facility and a write-off of fixed and other assets as a result of the closure of
the York facility. The Company has since negotiated with the landlord of this
facility to take back a portion of the leased space and is in negotiations to
sub-lease a significant portion of the remaining space. Accordingly such
reserve has subsequently been reduced. The Company expected to generate annual
savings of approximately $.6 million, primarily as a result of the reductions in
personnel and associated overhead. The full impact of such savings will not,
however, be realized until the first quarter of fiscal year 1997. The Company
does not currently expect these savings to be materially offset by anticipated
increased expenses or reduced revenue associated with the activities leading to
this charge. Of the total

15

charge, approximately $2.3 million, net of tax, was related to non-cash items.
The charge is not expected to affect future cash outflows of approximately
$100,000.

16

Independent Auditors Report

The Board of Directors and Shareholders
Integrated Circuit Systems, Inc.:

We have audited the accompanying consolidated balance sheets of Integrated
Circuit Systems, Inc. and subsidiaries as of June 29, 1996 and June 30, 1995,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended June 29, 1996.
In connection with our audits of the consolidated financial statements, we have
also audited the consolidated financial statement schedule, for each of the
years in the three-year period ended June 29, 1996, as listed in the
accompanying index. These consolidated financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Integrated Circuit
Systems, Inc. and subsidiaries as of June 29, 1996 and June 30, 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 29, 1996, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for marketable securities in 1995 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities."

/s/KPMG Peat Marwick LLP

Philadelphia, Pennsylvania
July 30, 1996

17

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Balance Sheets (In thousands)

June 29 June 30
Assets 1996 1995
---------------------

Current Assets:
Cash and cash equivalents $30,457 $9,960
Marketable securities - current $24 $12,525
Accounts receivable, net $15,405 $18,825
Inventory, net $17,059 $15,504
Deferred income taxes $2,475 $3,550
Other current assets $3,054 $3,483
--------------------
Total current assets $68,474 $63,847
--------------------
Property and equipment, net $14,628 $13,358
Deposits on purchase contracts $5,575 $4,240
Goodwill $1,813 $409
Other assets $477 $328
--------------------
Total assets $90,967 $82,182
====================

Liabilities and Shareholders' Equity
Current Liabilities:
Note payable to bank $2,315 -
Current portion of long-term obligations $117 $294
Accounts payable $10,221 $5,863
Accrued salaries and bonuses $449 $1,231
Accrued expenses and other current liabilities $2,355 $4,528

Total current liabilities $15,457 $11,916

Long-term debt, less current portion $1,631 $3,480

Deferred income taxes $788 $997
--------------------
Total liabilities $17,876 $16,393

Minority interest $3,927 $3,305
Shareholders' Equity:
Preferred stock, authorized 5,000 shares, none - -
issued
Common stock, no par value, authorized 50,000
shares; issued 11,389 and 11,110 shares at June
29, 1996 and June 30, 1995,
respectively $32,674 $29,449
Less treasury stock, at cost (1996 - 35 shares) ($460) -
Retained earnings $36,950 $33,035
--------------------
Total shareholders' equity $69,164 $62,484
--------------------
Total liabilities and shareholders' equity $90,967 $82,182
====================

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

18

Consolidated Statements of Operations
(In thousands, except for per share data)

Year ended
----------------------------------------
June 29 June 30
1996 1995 1994
----------------------------------------

Revenue $100,485 $104,385 $ 93,824
Cost and expenses:
Cost of sales 62,547 50,530 45,798
Research and development expense 12,073 11,350 10,647
Selling, general and
administrative expense 19,781 20,664 19,269
One-time charges:
Change in business strategies - 3,822 -
Discontinued product lines - 3,606 -
Facility closing 1,757 - -
Write-off of in-processresearch
and development costs 1,500 4,092 -
----------------------------------------
Operating income 2,827 10,321 18,110

Interest and other income (1,467) (1,175) (848)
Interest expense 657 831 483
Minority interest (1,654) 545 -
----------------------------------------
Income before income taxes 5,291 10,120 18,475

Income tax expense 1,376 5,197 6,257
----------------------------------------
Net income $ 3,915 $ 4,923 $ 12,218
========================================

Earnings per common and common
equivalent share:
Primary $ 0.34 $ 0.45 $ 1.11
========================================
Assuming full dilution $ 0.34 $ 0.43 $ 1.10
========================================
Shares used to compute earnings per
common and common equivalent share:
Primary 11,592 11,045 11,051
========================================
Assuming full dilution 11,598 11,424 11,070
========================================

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

19

Consolidated Statements of Shareholders' Equity
(In thousands)

Total Number of
Common Treasury Retained shareholders' shares
stock stock earnings equity outstanding
-------------------------------------------------------------------

Balances at June 30, 1993 $ 25,540 $ - $ 15,894 $ 41,434 10,422
Shares issued upon conversion of 475 - - 475 218
warrants
Shares issued upon exercise of stock 331 - - 331 188
options
Tax benefits related to stock options 1,268 - - 1,268 -
Net income - - 12,218 12,218 -
-------------------------------------------------------------------

Balances at June 30, 1994 27,614 - 28,112 55,726 10,828
Shares issued upon exercise of stock 1,440 - - 1,440 282
options
Tax benefits related to stock options 395 - - 395 -
Net income - - 4,923 4,923 -
-------------------------------------------------------------------

Balances at June 30, 1995 29,449 - 33,035 62,484 11,110
Shares issued upon exercise of stock 2,811 - - 2,811 279
options
Tax benefits related to stock options 506 - - 506 -
Acquisition of treasury stock - (460) - (460) (35)
Subsidiaries' equity transactions (92) - - (92) -
Net income - - 3,915 3,915 -
-------------------------------------------------------------------

Balances at June 29, 1996 $ 32,674 $ (460) $ 36,950 $ 69,164 11,354
===================================================================

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

20

Consolidated Statements of Cash Flows (In thousands)
Year ended
--------------------------------------
June 29 June 30
1996 1995 1994
--------------------------------------

Cash flows from operating activities:
Net income $ 3,915 $ 4,923 $ 12,218
Increase (decrease) in cash to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,321 3,148 2,056
Minority interest (1,654) 545 -
(Gain)loss on sale of assets 39 - -
Deferred income taxes 866 (217) (1,130)
Write-off of in-process R&D costs 1,500 4,092 -
Facility closing, non-cash portion 1,215
Change in business strategy charges, - 929 -
noncash portion
Write-down of discontinued product - 3,606 -
lines
Accounts receivable 3,420 670 (6,055)
Inventory (2,465) (4,530) (6,078)
Other assets, net 1,405 (233) (1,776)
Accounts payable, accrued expenses 1,387 1,318 2,192
and other liabilities
Income taxes (451) (113) (1,156)
-------------------------------------------
Net cash provided by operating activities 12,498 14,138 271
-------------------------------------------
Cash flows from investing activities:
Capital expenditures (4,681) (3,719) (4,640)
Proceeds from sale of fixed assets 144 745 60
Proceeds from sales of marketable securities - 2,004 -
Proceeds from maturities of 18,316 13,309 9,480
marketable securities
Purchases of marketable securities (5,940) (8,376) (17,177)
Deposits on purchase contracts (2,000) (5,500) -
Investment in subsidiary, net of
cash acquired (986) (2,060) -
-------------------------------------------
Net cash provided by (used in) investing activities 4,853 (3,597) (12,277)
-------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit
agreement 2,315 (867) 867
Payments on subordinated notes payable - - (600)
Proceeds from long-term debt - - 791
Repayments of long-term debt (2,026) (375) (667)
Increase (decrease) in bank overdrafts - (2,061) 2,061
Exercise of stock options 2,811 1,440 331
Tax benefit of stock option exercise 506 395 1,268
Issuance (repurchase) of common stock, net (460) - 475
-------------------------------------------
Net cash provided by (used in) financing activities 3,146 (1,468) 4,526
-------------------------------------------
Net increase (decrease) in cash 20,497 9,073 (7,480)
Cash and cash equivalents:
Beginning of year 9,960 887 8,367
-------------------------------------------
End of year $30,457 $ 9,960 $ 887
===========================================
Supplemental disclosures of cash flow information

21

Cash payments during the period for:
Interest $ 308 $ 372 $ 426
Income taxes $ 1,407 $ 6,120 $ 7,275
===========================================
For a description of certain non-cash investing
and financing transactions refer to footnote 2

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

22

Notes to Consolidated Financial Statements

The Company designs, manufactures and markets mixed signal integrated circuits
("ICs") primarily for timing, multimedia and networking solutions for the PC
industry. The Company also designs, manufactures and markets custom,
application specific ICs developed pursuant to product development projects with
selected customers. In addition, the Company's Turtle Beach subsidiary develops
and markets PC sound board/multmedia upgrade and related software products.

(1) Summary of Significant Accounting Policies
Consolidation Policy
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries (wholly and majority-owned), after elimination of
all significant intercompany accounts and transactions. Certain amounts have
been reclassified to conform with current year presentation. The effect of
adjustments to the Company's carrying values of subsidiaries resulting from
their underlying equity transactions is included in the Company's common stock.

Reporting Periods
In fiscal 1996 the Company changed its fiscal year to a 52/53 week operating
cycle that ends on the Saturday nearest June 30. All of the reporting periods
presented herein represents a 52-week operating cycle.

Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents at June 29, 1996 consist of cash, overnight retail repurchase
agreements (held in U.S. Treasury obligations), money market funds and
commercial paper.

Marketable Securities
Effective July 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115), which requires certain investments to be categorized as
either held-to-maturity, trading, or available-for-sale. The Company previously
classified its investments as held-to-maturity. However, effective management
of financial activities increasingly requires a flexible approach to asset and
liability management that is inconsistent with this classification.
Accordingly, at June 29, 1996 and June 30, 1995, marketable equity and debt
securities are classified as available-for-sale and are stated at fair value.
The transfer was accounted for at fair value and no gain or loss was recognized.
Marketable equity and debt securities available for current operations are
classified as current assets.

The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest expense. Realized gains and losses
are included in other income or expense.

In accordance with SFAS 115, prior years' financial statements have not been
restated to reflect the change in accounting method. There was no cumulative
effect as a result of adopting SFAS 115 in fiscal year 1995.

Inventory
Inventory is stated at the lower of standard cost which approximates actual
cost (FIFO basis), or market.

Property, Plant and Equipment
Property and equipment are stated at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets of generally
30 years for buildings and between 18 months and 10 years for all other
property, including equipment and building improvements. Leasehold improvements
are amortized over the shorter of the lease term or the estimated useful life.

Goodwill
The purchase price in excess of the fair value of net assets acquired is
amortized on a straight-line basis over periods of 5 to 7 years. Accumulated
amortization was $311,000 and $45,000 as of June 29, 1996 and June 30, 1995,
respectively.

23

Carrying value of long-term assets
The Company evaluates the carrying value of long-term assets, including
goodwill, based upon current and anticipated undiscounted cash flows, and
recognizes an impairment when it is probable that such estimated cash flows will
be less than the carrying value of the asset. Measurement of the amount of
impairment, if any, is based upon the difference between carrying value and fair
value. The Company has not adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the impairment of Long-Lived Assets and for Long-Lived
Assets Disposed of," (SFAS 121), which will become effective for the year ended
June 28, 1997. The Company believes that the adoption of this statement will
not have a material financial impact.

Revenue Recognition
Product sales are recognized as revenue upon shipment to the customer.
Estimated allowances are established to recognize the right of return from
selected customers. Custom IC revenue is generated pursuant to development and
production contracts and include design revenue representing partial
reimbursement of research and development expenditures. The research and
development costs funded by customers were $612,000, $698,000 and $1,221,000 for
fiscal years 1996, 1995 and 1994, respectively.

Concentration of Credit Risk
The Company sells its products primarily to original equipment manufacturers and
distributors in North America, Europe and the Pacific Rim. The Company performs
ongoing credit evaluations of its customers and maintains reserves for potential
credit losses. Concentrations of credit risk with respect to trade accounts
receivable are limited due to the large number of customers and their dispersion
across many geographic areas. See Note 18.

Income Taxes
Income taxes are computed in accordance with Statement of Financial Accounting
Standards No. 109. The Company files a consolidated federal tax return with its
80% or more owned subsidiaries and, accordingly, any dividends from included
companies are not taxable to the Company.

Earnings per Common Share
Primary earnings per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares consist of stock options to purchase common stock (using the
treasury stock method based on average price over the period). Fully diluted
earnings per share is based on the weighted average number of shares and
equivalent shares outstanding (using the treasury stock method based on ending
price, if higher), unless anti-dilutive.

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

Accounting for Stock-based Compensation
The Company has not adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123"), which will become
effective for the year ended June 28, 1997. The Company believes that the
adoption of this statement will not have a material financial impact.

Reclassification of Accounts
Certain reclassifications have been made to conform prior year's balances to the
current year presentation.

(2) Acquisitions
During the second quarter of 1996, the Company's Turtle Beach subsidiary
acquired the PC multimedia and communications peripheral product lines of
ValueMedia, Inc. ("ValueMedia") for 1.0 million shares of Turtle Beach's common
stock (valued at $2.7 million) and cash of $0.4 million, aggregating to $3.1
million. The issuance of 1.0 million shares represented 26.6% of Turtle Beach's
common stock. ValueMedia is a developer and marketer of peripheral kits for
personal computers. For financial reporting purposes, the transaction was
accounted for by the purchase method of accounting. Turtle Beach immediately
wrote off the portion of the acquisition premium related to in-process research
and development of $1.5 million. This write-off is separately disclosed in the
statement of operations as a non-recurring charge. The excess of the purchase
price over the fair value of the net assets acquired of $1.6 million will be
amortized

24

over seven years. In January 1996, Turtle Beach issued 500,000 shares of its
common stock, valued at $2.67 per share, to the Company as consideration of the
cancellation by the Company of indebtedness in the principal amount of
$1,325,000 owing to the Company by Turtle Beach. In February 1996, the Company
purchased from ValueMedia 183,700 shares of common stock of Turtle Beach for a
cash payment of $490,479. After these transactions, the Company owned 80.8% of
the common stock of Turtle Beach.

During the third quarter of 1995, the Company acquired a 51% interest in ARK
Logic, Inc. (ARK Logic) for approximately $7.3 million in cash. The Company
purchased a 37% stake in the form of newly issued common shares of ARK Logic for
$5.3 million and 14% from an existing investor group for $2.0 million.
Pursuant to the terms of such acquisition and under certain circumstances as set
forth therein, at any time between the eighteen month and the seventh year
anniversary of the effective date of the acquisition, the Company may acquire
the remaining 49% of ARK Logic or certain members of the prior management group
of ARK Logic may require the Company to buy such minority interest, each at a
price based upon the fair market valuation determined at such time. The
acquisition has been accounted for as a purchase and ARK Logic's operations have
been included in the accompanying consolidated financial statements from January
1, 1995. The excess of the purchase price over the estimated fair value of the
net tangible assets acquired has been recorded as goodwill and is amortized over
5 years. Intangibles of $4.1 million (representing the estimated fair market
value of in-process research and development projects) were written off in the
quarter ended March 31, 1995.

(3) Non-recurring Charges
The Company's Form 10-K for the fiscal year ending June 30, 1995 discussed a
one-time charge of $11.5 million taken during the third quarter of fiscal 1995.
This charge included a reduction of approximately 70 employees from
substantially all employee groups and requires the payment of approximately
$2.1 million in severance over the twenty seven month period ending June 28,
1997. The full impact of any savings will not, however, be realized until
fiscal 1997. The Company does not currently expect these savings will be
materially offset by anticipated increased expenses or reduced revenue
associated with the activities leading to this charge. In addition, as of the
date of this filing, the Company has recovered approximately $250,000 by
disposing of certain of the assets which were written off. Of the total charge,
approximately $9.0 million was related to non-cash items. The charge is not
expected to affect future cash outflows other than for the remaining severance
payments of approximately $210,000.

The Company's Form 10-Q for the second quarter of fiscal 1996, discussed a one-
time charge of $2.7 million, net of taxes, taken during the second quarter of
fiscal 1996. The subject charge included severance of $0.3 million paid over
the remainder of fiscal 1996, relating to the reduction of approximately 20
employees as a result of the closing of Turtle Beach's York, PA facility. In
addition, the charge included a reserve for terminating the lease for the York
facility and a write-off of fixed and other assets as a result of the closure of
the York facility. The Company has since negotiated with the landlord of this
facility to take back a portion of the leased space and is in negotiations to
sub-lease a significant portion of the remaining space. Accordingly such
reserve has subsequently been reduced. The full impact of any savings will
not, however, be realized until the first quarter of fiscal year 1997. The
Company does not currently expect these savings to be materially offset by
anticipated increased expenses or reduced revenue associated with the activities
leading to this charge. Of the total charge, approximately $2.3 million, net of
tax, was related to non-cash items. The charge is not expected to affect future
cash outflows other than for payments of approximately $100,000 associated with
the York facility.

(4) Purchase Commitments
Although most of the Company's relationships with its wafer suppliers do not
currently provide for the supplier to supply, or the Company to purchase,
substantial minimum wafer quantities, the Company has, on occasion, made
negotiated commitments to purchase specified minimum wafer quantities in
exchange for supply commitments and/or pricing concessions. During the past
fiscal year the Company entered into a wafer purchase contract with Chartered
Semiconductor Manufacturing PTE. Ltd. ("CSM") pursuant to which the Company
advanced to CSM a deposit of $2 million as part of a mutual commitment for CSM
to supply and the Company to purchase an agreed minimum quarterly quantity of
wafers over a five-year period from April, 1996 through December, 2000. In
addition CSM agreed to provide to the Company certain price concessions as part
of such commitment. Under its agreement with CSM the Company is required to
increase its deposit to up to $20 million during the five year term. Any
failure of either CSM and/or the Company to comply with its supply or purchase
commitment, as is applicable, will result in the assessment of specified
liquidated damages against the party failing to comply with its commitment.
This non-interest bearing deposit is recorded as a long term asset under the
caption, "Deposits on purchase contracts." The Company had previously
entered into a similar agreement with one of its other wafer suppliers, American
Microsystems, Inc. but has subsequently amended such agreement to remove any
material purchase and supply commitment ,as well as any resulting penalties. The
deposit made to secure these commitments was recorded as a long term asset
under the caption "Deposits on

25

purchase contracts". The Company records interest on such deposit on a
quarterly basis as interest income in the Company's statement of operations.

(5) Marketable Securities
The estimated fair value of each investment approximates the cost and therefore
there are no unrealized gains or losses as of June 29, 1996 and June 30, 1995.
Proceeds from the sale or maturity of the investments were $18.3 million and
$15.3 million in fiscal 1996 and 1995, respectively. Gross realized losses were
$3,000 and $31,000 in fiscal 1996 and 1995, respectively. The cost of
securities sold is based on the specific identification method. Marketable
securities classified as current assets at June 30, 1995, are due within one
year and include primarily municipal auction rate cumulative preferred stock and
municipal bonds.

(6) Accounts Receivable
The components of accounts receivable are as follows (in thousands):

June 29 June 30
1996 1995
------------------------------

Accounts receivable $ 17,512 $ 20,188
Less: reserves for allowances
and doubtful accounts (2,107) (1,363)
------------------------------
$ 15,405 $ 18,825
==============================

(7) Inventory
The components of inventories are as follows
(in thousands):
June 29 June 30
1996 1995
------------------------------
Work-in-process $ 4,430 $ 9,407
Finished parts 14,864 9,984
Less: obsolescence reserve (2,235) (3,887)
------------------------------
Inventory, net $ 17,059 $ 15,504
==============================

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

June 29 June 30
1996 1995
------------------------------
Land and building $ 5,358 $ 5,118
Machinery and equipment 16,252 13,340
Furniture and fixtures 1,440 1,547
Leasehold improvements 219 218
------------------------------
$ 23,269 $ 20,223
Less: accumulated depreciation and amortization 8,641 6,865
------------------------------
Property and equipment, net $ 14,628 $ 13,358
==============================

Depreciation and amortization expense related to property, plant and equipment
was $2,935,000 , $2,462,000 and $1,910,000 in 1996, 1995 and 1994, respectively.

(9) Debt
In February 1996, the Company renegotiated its revolving/term loan credit
facility with a commercial bank to extend the expiration to December 31, 1997.
The facility is subject to certain covenants, including the maintenance of
certain financial ratios, minimum tangible net worth requirements, and a
prohibition against the payment of cash dividends without prior bank approval.
The Company was in compliance with all covenants as of June 29, 1996. At June
29, 1996, the Company had $2,315,000 outstanding under this facility.

The line of credit available for future borrowings at June 29, 1996 was $14.7
million; $3 million was reserved for outstanding letters of credit. Advances
under the revolving portion of the facility bear interest pegged at either the
bank's prime rate or the LIBOR rate. Advances under the term portion of the
facility bear interest pegged at the bank's prime rate.

26

A summary of long-term debt is as follows (in thousands):

June 29 June 30
1996 1995
------------------------

Mortgage, payable in monthly installments through
September, 2007, interest at prime plus
1/8% ( 9.125% at June 30, 1995) $ - $ 1,883
PIDA second mortgage, payable in monthly
installments through April 2009, interest at 2% 1,746 1,865

Lease obligations and other 2 26
------------------------
$ 1,748 $ 3,774
Less current portion 117 294
------------------------
Long-term debt, less current portion $ 1,631 $ 3,480
========================

During the third quarter of fiscal 1996 the Company repaid the remaining balance
of a mortgage loan.

Aggregate annual maturities of long-term debt as of June 29, 1996 (in
thousands):

1997 $ 117
1998 123
1999 126
2000 128
2001 131
2002 and beyond 1,123
-----------
$1,748
===========

(10) Lease Obligations
The Company leases certain of its facilities under operating lease agreements,
some of which have renewal options.

Rental expense under operating lease agreements, net of sublease income, was
$638,000, $512,000 and $427,000 in 1996, 1995, and 1994, respectively.

Future minimum lease commitments under the Company's operating leases (in
thousands):

1997 $ 411
1998 337
1999 56
---------
$ 804
=========

(11) Fair Value of Financial Instruments

Estimated fair value of financial instruments is provided in accordance with the
requirements of SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments". The estimated fair value amounts have been determined by the
Company using available market information and appropriate methodologies.
However, considerable judgment is necessarily required in interpreting market
data to develop the estimates of fair value.

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents, accounts receivable and accounts payable - The
carrying amounts of these items approximate their fair values at June 29,
1996 due to the short term maturities of these instruments.

Long-term debt - Interest rates that are currently available to the
Company for issuance of debt with similar terms and remaining maturities
are used to estimate fair value for debt issues for which quoted market
prices are not available. The carrying value of this item approximates its
fair value at June 29, 1996.

27

(12) Income Taxes
The provision for income taxes consists of the following (in thousands):

Year ended
------------------------------
June 29 June 30
1996 1995 1994
------------------------------

Current tax expense:
Federal $1,324 $4,236 $ 5,862
State (814) 1,178 1,525
------------------------------
Total current $ 510 $5,414 $ 7,387
------------------------------
Deferred tax (benefit):
Federal $ 341 $ (227) $ (556)
State 525 10 (574)
------------------------------
Total deferred 866 (217) (1,130)
------------------------------
Total income tax expense $1,376 $5,197 $ 6,257
==============================

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

June 29 June 30
1996 1995 1994
----------------------------

Deferred tax assets:
Accounts receivable allowances $ 852 $ 563 $1,017
Inventory valuation 903 1,601 1,770
Change in business strategy reserves 102 626 -
Net operating loss carry forward 529 194 194
Intangible asset 584 - -
Accrued expenses and other 416 566 259
----------------------------
Gross Deferred tax assets $3,386 $3,550 $3,240
Less valuation allowance 911 - -
----------------------------
Net deferred tax asset 2,475 3,550 3,240
Deferred tax liabilities:
Depreciation $ 773 $ 836 $ 770
Other 15 161 134
----------------------------
Deferred tax liabilities $ 788 $ 997 $ 904
----------------------------
Net Deferred tax asset $1,687 $2,553 $2,336
----------------------------

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which temporary differences representing net future deductible amounts become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, potential limitations with respect
to the utilization of loss carryforwards, and tax planning strategies in making
this assessment. Based upon the projections for future taxable income over the
periods which deferred tax assets are deductible and the potential limitations
of loss and credit carryforwards, management believes it is more likely than not
the Company will realize a portion of these deductible differences, net of
existing valuation allowances at June 29, 1996. The Company will periodically
assess and re-evaluate the status of its recorded deferred tax asset.

28

(12) Income Taxes (Cont'd)

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

June 29 June 30
1996 1995 1994
------------------------------

Computed expected tax expense $ 1,273 $3,733 $6,466
Change in estimate of state taxes (1,065) - -
Change in valuation of allowance 911 - -
Research and development tax credits - - (841)
Foreign trade income exemption (91) (124) (104)
State taxes (net of federal income tax 188 772 618
benefit)
Utilization of net operating loss carry forward - (383) -
Tax-exempt interest and dividends (86) (237) (200)
Acquisition costs - - 81
In-process research and development write-off - 1,432 -
Other 246 4 237
------------------------------
$ 1,376 $5,197 $6,257
==============================

At June 29, 1996, one of the Company's subsidiaries had state net operating loss
carry-forwards of approximately $1,000,000, expiring through 1998. During the
fourth quarter of fiscal 1996, the Company changed its estimate of accrued state
taxes.

(13) Employee Benefit Plans

The Company has a bonus plan which covers substantially all employees with at
least six months of service. Bonuses under this plan are based on the Company
achieving specified revenue and profit objectives and on individuals meeting
specified performance objectives. Amounts charged to expense for the plan were
$1,082,000, $1,896,000 and $1,842,000 in fiscal years 1996, 1995 and 1994,
respectively.

The Company has a 401(k) employee savings plan which provides for contributions
to be held in trust by corporate fiduciaries. Employees are permitted to
contribute up to 12 percent of their annual compensation. Under the plan, the
Company makes matching contributions equal to 150% of the first 1% contributed,
125% of the second 1% contributed, 100% of the third 1% contributed, 75% of the
fourth 1% contributed and 50% of the next 2% up to a maximum of 6 percent of
annual compensation, subject to IRS limits. The amounts contributed by the
Company and charged to expense in fiscal years 1996, 1995 and 1994 were
$330,000, $285,000 and $226,000, respectively.

(14) Stock Option Plans

The Company has various stock option plans (the Plans) under which key employees
and non-employee directors and advisors may be granted incentive stock options
and non-qualified options through November 2002.

Incentive stock options are granted at prices not less than the fair market
value at the date of grant, as determined by the market price for the Company's
common stock, and become exercisable as determined by the Company's stock option
committee, generally over four or five years. Options can be granted for terms
of up to ten years. Non-qualified stock options have also previously been
granted from time to time to certain key employees and directors at prices at
fair market value with various vesting provisions.

29

Stock option transactions during fiscal years 1996, 1995 and 1994 are summarized
as follows (in thousands, except price per share):

Options Options outstanding under the Plan
available for --------------------------------------
grant under Number of Price Aggregate
the Plan shares per share Price
-------------------------------------------------------

Balance June 30, 1993 306 1,149 $0.85 - $15.83 $12,276
Additional shares reserved 1,000 - -
Granted (1,150) 1,150 2.17 - 15.75 13,740
Exercised - (188) 0.05 - 5.50 (331)
Terminated 281 (281) 1.15 - 15.83 (3,378)
Termination of Turtle
Beach Plans (50) - -
-------------------------------------------------------
Balance June 30, 1994 387 1,830 $0.85 - $15.83 $22,307
Additional shares reserved 500 - -
Granted (2,758) 2,758 7.75 - 12.25 28,523
Exercised - (282) 0.85 - 10.25 (1,440)
Terminated 1,972 (1,972) 2.17 - 15.83 (25,179)
--------------------------------------------------------
Balance June 30, 1995 101 2,334 $2.17 - $15.75 $24,211
Additional shares reserved 600 - -
Granted (906) 906 9.88 - 14.38 11,051
Exercised - (278) 2.17 - 11.38 (2,811)
Terminated 502 (502) 5.50 - 17.38 (5,951)
--------------------------------------------------------
Balance June 29, 1996 297 2,460 $2.17 - $15.75 $ 26,500

At June 29, 1996, options for 876,000 shares were exercisable at prices ranging
from $3.65 to $15.75 at an aggregate exercise price of $9,216,000. Income tax
benefits attributable to non-qualified stock options exercised and disqualifying
dispositions of incentive stock options are credited to common stock.

(15) Treasury Stock
In January, 1996, the Company's Board of Directors authorized the repurchase of
up to 1.0 million shares of the Company's common stock. As of June 29, 1996, the
Company has repurchased 35,000 shares valued at $460,000, using the cost method.

(16) Business Segment and Geographic Information
The Company operates primarily within one business segment, which is the design,
development and marketing of mixed-signal (analog/digital) integrated circuits
and related board level products. Foreign sales consist of shipments primarily
to the Pacific Rim, which were approximately 47.8%, 55.7% and 41.0% of revenue
in 1996, 1995 and 1994, respectively.

30

(17) Quarterly Data (unaudited)
The following is a summary of the unaudited quarterly results of operations for
the years ended June 29, 1996 and June 30, 1995 (in thousands, except per share
data):

Quarter Ended
---------------------------------------------------------------------------------
Sept.29, Dec. 30, Mar.30, June 29, Sept.30, Dec. 31, Mar. 31, June 30,
1995 1995 1996 1996 1994 1994 1995 1995
---- ---- ---- ---- ---- ---- ---- ----

Revenue $28,290 $33,123 $17,349 $21,723 $22,549 $25,883 $27,793 $28,160
Cost of sales 14,390 19,136 13,945 15,076 10,062 12,468 13,428 14,572
Research and 2,522 3,392 3,080 3,079 2,708 2,931 2,837 2,874
development
Operating income 6,569 2,245 (4,751) (1,236) 4,448 5,260 (5,487) 6,100
(loss)
Net income (loss) $ 4,161 $1,894 $(2,087) $ (53) $2,860 $ 3,335 $(5,177) $ 3,905
Earnings (loss)
per common and
common
equivalent share:
Primary and $0.35 $0.16 $(0.18) $0.00 $ 0.26 $ 0.30 $(0.47) $ 0.34
fully diluted 0.35 0.16 (0.18) 0.00 0.26 0.30 (0.47) 0.34
Shares used to
compute
earnings per
common and
common
equivalent share:
Primary 11,894 11,682 11,341 11,331 10,982 10,979 11,055 11,327
Assuming full 11,897 11,687 11,345 11,331 11,003 10,979 11,057 11,653
dilution

(18) Major Customers
During fiscal 1996 shipments to Intel (including all Intel and Intel
subcontractor locations) accounted for eleven percent of the Company's
consolidated revenue.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

None

31

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The information with respect to directors required by this Item is incorporated
by reference to the section entitled "Election of Directors" in the Company's
definitive Proxy Statement for its 1996 Annual Meeting of Shareholders.

Item 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein by reference to the
section entitled "Executive Compensation" in the Company's definitive Proxy
statement for its 1996 Annual Meeting of Shareholders. Those portions of the
Proxy Statement included in response to Item 402(k) and Item 402(l) of
Regulation S-K are not incorporated by reference into Part III.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT

The information required by this Item is incorporated herein by reference to the
section entitled "Beneficial Ownership of Common Stock" in the Company's
definitive Proxy Statement for its 1996 Annual Meeting of Shareholders.

Item 13. CERTAIN RELATIONSHIPS RELATED TRANSACTIONS

The information required by this Item is incorporated herein by reference to the
section entitled "Executive Compensation-Certain Transactions" in the Company's
definitive Proxy Statement for its 1996 Annual Meeting of Shareholders.

32

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.

(a) The following documents are filed as part of this report.

(1) Consolidated Financial Statements

The following consolidated financial statements of the Registrant
and Independent Auditor's Report of KPMG Peat Marwick LLP, are
included in Item 8 of this Report.

Independent Auditors' Report

Consolidated Balance Sheets as of June 29, 1996 and June 30,
1995

Consolidated Statements of Operations for the years ended

June 29, 1996 and June 30, 1995 and 1994

Consolidated Statements of Shareholders' Equity for the
years

ended June 29, 1996 and June 30, 1995 and 1994

Consolidated Statements of Cash Flows for the years ended

June 29, 1996 and June 30, 1995 and 1994

Notes to Consolidated Financial Statements

(2) Consolidated Financial Schedules

Schedule II - Valuation and Qualifying Accounts

All other schedules have been omitted because they are inapplicable or the
information is provided in the Consolidated Financial Statements including the
Notes thereto.

(b) Report on Form 8-K

No reports were made on Form 8-K during the last quarter of the fiscal
year.

(c) Exhibits

* 3.1 Articles of Incorporation of the Registrant, as amended. (Exhibit 3.1
to the registrant's registration statement, No. 33-39728, on Form S-1,
filed on May 6, 1991 [the "1991 Registration Statement"])

* 3.2 Articles of Amendment dated December 10, 1992 of the Registrant's
Articles of Incorporation. (Exhibit 28.5 to the registrant's statement,
No. 33-57418, on Form S-3, filed on January 25, 1993 [the "1993 S-3
Registration Statement"])

* 3.3 Amended and Restated Bylaws of the Registrant. (Exhibit 3.3 to the 1991
Registration Statement)

33

* 3.4 Amendment to Amended and Restated Bylaws of the Registrant. (Exhibit
3.4 to the registrant's 1993 Annual Report on Form 10-K [the "1993 Form
10-K"])

4 Except for Exhibit 10.16 hereof, there are no instruments, with respect
to long-term debt of the Registrant, that involve indebtedness for
securities authorized thereunder, exceeding 10% of the total assets of
the registrant and its subsidiaries on a consolidated basis. The
registrant agrees to file a copy, of any instrument or argument
defining the rights of holders of long-term debt of the registrant,
upon request of the Securities and Exchange Commission

+*10.1 1989 Incentive Stock Option Plan, as amended. (Exhibit 10.9 to the 1991
Registration Statement)

+*10.2 1991 Stock Option Plan. (Exhibit 10.10 to the 1991 Registration
Statement)

+*10.3 Amendment dated June 17, 1991 to the 1991 Stock Option Plan. (Exhibit
10.18 to the 1991 Registration Statement)

+*10.4 Amendment dated November 19, 1991 to the 1991 Stock Option Plan.
(Exhibit 10.21 to the registrant's 1992 Annual Report on Form 10-K [the
"1992 Form 10-K"])

+*10.5 Amendment dated January 24, 1992 to the 1991 Stock Option Plan.
(Exhibit 10.22 to the 1992 Form 10-K)

+*10.6 1992 Stock Option Plan. (Exhibit 4.1 to the registrant's registration
statement, No. 33-55902, on Form S-8, filed on December 17, 1992.

+*10.7 Key Employee Agreement between Registrant and Mark R. Guidry, effective
November 30, 1992. (Exhibit 28.2 to the 1993 S-3 Registration
Statement)

+*10.8 Amendment to the Registrant's 1992 Stock Option Plan, dated December
10, 1992. (Exhibit 28.4 to the 1993 S-3 Registration Statement)

*10.9 Lease Agreement dated June 13, 1988 between VLSI Design Associates and
Sobrato Group. (Exhibit 10.27 to the registrant's registration
statement, No. 33-54142, on Form S-4, filed on November 3, 1992

*10.10 Lease between Turtle Beach Systems, Inc. and Winship Land Associates
III dated May 28, 1993.(Exhibit 10.27 to the 1993 Form 10-K)

*10.11 First Amendment to lease, dated May 13, 1993 between the registrant and
The Sobrato Group. (Exhibit 10.28 to the 1993 Form 10-K)

+*10.12 1992 Stock Option Plan, as amended as of October 21, 1993. (Exhibit 4.1
to the registrant's registration statement, No. 33-73208, on Form S-8,
filed on December 21, 1993 [the "1993 S-8 Registration Statement"]

+*10.13 Amendment to the Registrant's 1992 Stock Option Plan, dated July
22, 1993. (Exhibit 4.2 to the 1993 S-8 Registration Statement)

+*10.14 Amendment to the Registrant's 1992 Stock Option Plan, dated November
22, 1994. (Exhibit 4.1 to the 1994 S-8 Registration Statement)

+ 10.15 $20,000,000 Revolving Credit Agreement between Mellon Bank, N.A. and
the registrant dated June 5, 1995.

+*10.16 Wafer purchase contract dated October 12, 1994 between the Company and
American Microsystems, Inc. (Exhibit 10 to the Registrant Form 10-Q for
the quarter ended September 30, 1994)

+*10.17 Agreement dated November 21, 1994 between the Company and Edward H.
Arnold (Exhibit 10.1 to the Registrant's Form 10-Q for the quarter
ended December 31, 1994)

* 10.18 Wafer purchase contract dated November 8, 1995 between the Company and
Chartered Semiconductor Manufacturing Pte. Ltd. (Exhibits 10(a) and
10(b) to the Registrant Form 10-Q for the quarter ended December 30,
1995)

* 10.19 Amendment to the Registrant's 1992 Stock Option Plan, dated November
21, 1995. (Exhibit 99.1 to the 1996 S-8 Registration Statement)

+ 10.20 Agreement dated August 2, 1996 between the Company and David W. Sear

34

+ 10.21 Agreement dated August 30, 1996 between the Company and Hock E. Tan

11 Statement re computation of per share income

*13 Portions of the 1996 Annual Report to Shareholders for fiscal year
ended June 29, 1996

*22 Subsidiaries of the Registrant (Exhibit 22 to the 1993 Form 10-K)

23.1 Consent of KPMG Peat Marwick LLP

27 Financial Data Schedules

* Incorporated by reference

+ Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of this report.

35

SCHEDULE II

INTEGRATED CIRCUIT SYSTEMS, INC.

VALUATION AND QUALIFYING ACCOUNTS

Years ended June 29, 1996, June 30, 1995 and 1994

(in thousands)

Balance at Additions Balance at
beginning of charged to end of
period costs and Deductions period
expenses
Description ---------------------------------------------------

Year ended June 29, 1996:

Valuation reserves:

Accounts receivable $1,363 $6,020/1/ $5,276/1/ $2,107

Inventory $3,887 $ 994 $2,646 $2,235

Year ended June 30, 1995:

Valuation reserves:

Accounts receivable $2,461 $ 499 $1,597 $1,363

Inventory $4,297 $5,142 $5,552 $3,887

Year ended June 30, 1994:

Valuation reserves:

Accounts receivable $ 972 $1,489 $ - $2,461

Inventory $2,107 $2,190 $ - $4,297

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

/1/ Reflects an increase in the valuation account for accounts receivable
primarily as a result of the slow down in the PC component market and
negotiated product return from a small number of significant Turtle Beach
customers.

36

SIGNATURES

Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

INTEGRATED CIRCUIT SYSTEMS, INC.

Date: September 13, 1996 By: /s/ HENRY BOREEN
----------------------------
Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

INTEGRATED CIRCUIT SYSTEMS, INC.

Date: September 13, 1996 By: /s/ HOCK E. TAN
-----------------------------
Senior Vice President and Chief Financial
Officer, and Secretary

Date: September 13, 1996 By: /s/ HENRY I. BOREEN
-----------------------------
Henry I. Boreen, Chairman of the Board

Date: September 13, 1996 By: /s/ EDWARD H. ARNOLD
-----------------------------
Edward H. Arnold, Director

Date: September 13, 1996 By: /s/ RUDOLF GASSNER
-----------------------------
Rudolf Gassner, Director

Date: September 13, 1996 By: /s/ HOWARD L. MORGAN
-----------------------------
Howard L. Morgan, Director

Date: September 13, 1996 By: /s/ JOHN L. PICKITT
-----------------------------
John L. Pickitt, Director

Date: September 13, 1996 By: /s/ STAVRO PRODROMOU
-----------------------------
Stavro Prodromou

37