Integrated Circuit Systems Inc – ‘10-K’ for 6/28/97

As of:  Thursday, 9/18/97   ·   For:  6/28/97   ·   Accession #:  1036050-97-761   ·   File #:  0-19299

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Annual Report   —   Form 10-K
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Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         49    233K 
 2: EX-11       Computation of Per Share Income                        2±     7K 
 3: EX-23.1     Consent of Independent Auditors                        1      7K 
 4: EX-27       Financial Data Schedule                                2      6K 

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

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 28, 1997                   
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 registration 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 August 29, 1997, based on the closing sales  
price, was $428,074,896.  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 August  
29, 1997:  12,407,968 shares                                                    

Portions of the registrant's definitive Proxy Statement for the Annual  
Meeting of Shareholders to be held on October 23, 1997 are incorporated by      
reference into Part III.                                                        

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

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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 FTG 
products were initially used in video graphics applications in personal         
computers ("PCs"), but subsequently expanded to include 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 products for data communication applications. The Company currently  
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.                                                   

ACQUISITIONS/DIVESTITURES                                                       

Over the past several years, the Company has pursued strategic acquisitions.    
More recently, however, in an effort to focus limited engineering resources on  
higher return product lines, the Company has selectively pruned its product     
portfolio.                                                                      

In the second quarter of fiscal 1993, the Company acquired Avasem Corporation   
("Avasem"), a privately held company producing 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.,        
("Turtle Beach") 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 solely  
in exchange of common stock of the Company, and were accounted for as pooling of
interests.  Accordingly, all financial information for periods prior to the     
acquisition has been restated to reflect the combined operations of these       
companies prior to the acquisition.  In the third quarter of fiscal 1995, the   
Company acquired a 51% interest in ARK Logic, Inc., ("ARK Logic") 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 upgrade product lines of Value Media, Inc.,  ("Value Media") 
a privately held company that developed and marketed multimedia peripheral kits 
for PCs.  These two acquisitions were accounted for using the purchase method of
accounting.  In the third quarter of fiscal 1997, the Company acquired          
MicroClock, Inc., a leading producer of clock synthesizer integrated circuits   
for multimedia applications including PC, audio, digital set-top boxes, DVD, PC 
networking disk drives and modems.  This acquisition was accounted for using the
purchase method, and accordingly that                                           

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operation is now included in the Company's consolidated financial statements    
from the date of the acquisition.                                               

In the first quarter of fiscal 1997, the Company sold Galaxy Power, Inc.,       
containing its battery charge controller product line, to Edward H. Arnold,     
former chairman and CEO of the Company in a tax-free transaction in which a gain
was recorded.  In the second quarter of fiscal 1997, Turtle Beach merged with   
Voyetra Technologies, Inc., ("Voyetra") a supplier of music and audio software  
and the Company thereby exchanged its approximately 87% interest in Turtle Beach
for an approximately 35% interest in the combined entity.  There was no gain or 
loss recorded on this transaction and the Company has since accounted for its   
investment in Voyetra using the equity method.  During the fourth quarter of    
fiscal 1997, the Company determined that significant events and changes in      
circumstances had occurred that indicated it was probable that its investment in
Voyetra would not be reasonable and accordingly recorded an impairment loss on  
this investment. In the fourth quarter of fiscal 1997, the Company sold for cash
approximately 80 percent of its equity position in ARK Logic, Inc., which was   
previously recorded as discontinued operations in the third quarter of fiscal   
1997, to Vision 2000 Ventures, Ltd., a privately held Cayman Islands investment 
holding company.  The Company now owns approximately 11 percent.                

PRODUCTS AND PRODUCT APPLICATIONS 
--------------------------------- 

FREQUENCY TIMING GENERATORS                                                     

MOTHERBOARD AND PERIPHERAL APPLICATIONS.  The Company supplies a broad line of  
FTG products for use in PC motherboard and peripheral applications, which       
provide the numerous frequency outputs required for various timing functions    
required by personal 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 and communication ports.  The Company has continued to expand its   
presence in this market, and products designed for these applications           
contributed over 90% of the Company's FTG revenues in fiscal 1997.              

Major OEM customers in fiscal 1997 include:  Intel, Compaq, IBM, Hewlett-Packard
and Seagate.                                                                    

COMMUNICATIONS APPLICATIONS.  The Company also supplies high frequency (900 MHz 
and higher) FTGs for communication applications.  To date, communications       
applications of this nature have not been significant, and high-frequency FTGs  
for this application comprised less than 10% of its total FTG revenue in fiscal 
1997.  The Company's goal is to increase its penetration of the market by, among
other things, introducing new products for wireless communications and hardware 
to support new standards for USB and IEEE 1394 ("firewire").                    

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DATA COMMUNICATIONS                                                             

The Company has also 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 applications and
the Fast Ethernet market.  During the fourth quarter 1996, the Company          
introduced a single chip, CMOS, 10/100 megabit per second  PHYceiver/TM/ product
for Fast Ethernet applications.  In fiscal 1997, the Company sold over 1 million
of these chips to customers such as Compaq, Hitachi, Hewlett Packard, Lexmark,  
Racore and Silicon Graphics. The Company believes that transition to Fast       
Ethernet in the LAN marketplace continues to offer opportunities for the        
Company's communication products.                                               

ADVANCED TECHNOLOGIES                                                           

The Company has developed and sold leading edge mixed-signal ICs customized to  
specific needs of 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.                                         

Certain of the Company's custom IC products are sold into the medical market for
applications which include a blood glucose measurement instrument and hearing   
aids.  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.                                                                      

TURTLE BEACH SYSTEMS.  On November 29, 1996, Turtle Beach and Voyetra entered   
into an Agreement and Plan of Merger, (the "Merger Agreement") pursuant to which
the Company's 87% interest in Turtle Beach was in exchange for an approximately 
35% equity interest in the combined business.  Effective November 29, 1996, the 
Company accounted for its investment in Voyetra under the equity method of      
accounting, and recorded an impairment loss on this investment in the fourth    
quarter of fiscal 1997 (see Management's Discussion & Analysis, pg. 17 for      
additional details).                                                            

ARK LOGIC.  ARK Logic supplies 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.  During the third quarter of fiscal 1997, the Company made a strategic   
decision to dispose of its majority interest in ARK Logic.  Accordingly, the    
Company presented ARK Logic as a discontinued operation and all prior periods   
have been restated to reflect this presentation.  Revenues from ARK Logic for   
fiscal 1997, 1996 and 1995 were $1.8 million, $10.2 million and $6.6 million,   
respectively.  Subsequently, on June 17, 1997, the Company sold most of its     
interest in ARK Logic.  The Company continues to hold an 11% equity interest in 
ARK Logic.                                                                      

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SALES AND MARKETING 
------------------- 

The Company markets its IC component products worldwide through a network of    
independent sales representatives and distributors managed by a direct sales    
force of employees.  During fiscal 1997, the Company conducted its direct sales 
efforts through its offices in Norristown, PA, San Jose, CA and Taipei, Taiwan. 
The Company has over 400 OEM customers, including Compaq, DEC, Fujitsu Devices, 
Hewlett Packard, IBM, Intel, SCI, Silicon Graphics, Solectron, and Sun          
Microsystems.   No customer represented 10% or more of the Company's revenues in
fiscal 1997.                                                                    

Foreign sales are directly conducted by sales representatives and distributors  
located in the Pacific Rim and Europe, and managed through a Taiwan sales office
and San Jose facility.  Foreign sales are denominated in U.S. dollars and are   
subject to risks common to export activities, including governmental regulation 
and trade barriers.                                                             

At June 28, 1997, the Company's backlog was approximately $35.5 million, as     
compared to $21.7 million at June 29, 1996.  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 within 60 days advance notice   
without significant penalty to the customers.  The Company has experienced a    
reduction in customer 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.       

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 0.5 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.  The Company has an 
outstanding wafer supply contract with Chartered Semiconductor Manufacturing PTE
Ltd.  ("CSM") pursuant to which the Company is required to place a deposit of   
$10.0 million in exchange for a commitment by CSM to supply an agreed minimum   
quarterly quantity of wafers over a five-year period from April 1996 through    
December 2000.  The Company has also outstanding a similar agreement with one of
its other wafer suppliers, American Microsystems, Inc.                          

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During the fourth quarter of fiscal 1997, the Company initiated plans to set up 
a test and drop-ship facility in Singapore's Kolam Ayer Industrial PARK to      
achieve faster delivery of its products to customers throughout the Pacific Rim.
The Singapore facility will handle wafer probe and final testing for various    
integrated circuits used in personal computers, data storage devices and other  
peripheral applications. As contemplated, the facility will begin operation in  
the first quarter of fiscal 1998, and will eventually be capitalized to test and
ship in excess of 40 million devices annually.                                  

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 $13.5  million, $10.5 million and $11.0 million  
in fiscal 1997, 1996 and 1995, respectively, and include expenses related to the
development of the Company's recently introduced data communication products as 
well its FTG and custom ASIC products.  Such expenses typically include costs   
for engineering personnel, prototype and wafer mask costs, and investment 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.                                                               

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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.  No single license,       
however,  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  intellectual property rights  
in the final product to its customer.  Such transfers are 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 networking transceiver markets.  In order to succeed, the
Company may occasionally 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                                    

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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, there is a risk of product obsolescence, and revenue may be   
adversely affected 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 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    
testing 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                            

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investment community, there could be an immediate adverse effect on the trading 
price of the Company's common stock.                                            

The Company has been active in mergers and acquisitions.  Risk exists that one  
or more failed acquisitions, including inefficient integration of the acquired  
business, could have a material adverse effect.                                 

EXECUTIVE OFFICERS OF THE REGISTRANT  
------------------------------------  

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

                                                        [Enlarge/Download Table]

         Name             Age                            Position                       
 --------------------  ---------   -----------------------------------------------------
                                                                                        
Henry I. Boreen           70      Chairman of the Board                                 
Stavro E. Prodromou       53      President and Chief Executive Officer                 
Hock E. Tan               45      Senior Vice President, Chief Operating Officer and    
                                  Chief Financial Officer                               
Martin Goldberg           50      Vice President of Sales                               
K. Venkateswaren          53      Vice President, Data Communications Group             
Greg Richmond             37      Vice President, Frequency Timing Generator Group      

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 has over 35 years of experience in the 
integrated circuits industry, and was the founder and chairman of Solid State   
Scientific, a semiconductor manufacturer.                                       

Dr. Prodromou served as President and Chief Executive Officer since April 1997. 
Dr. Prodromou became a director of the Company in October 1993.  Dr. Prodromou  
has been Chairman, President and Chief Executive Officer of Palo Alto Digital   
Systems, Inc. from 1991 to 1997.  In addition, Dr. Prodromou has been President 
of Underscore Technologies since early 1996.  From 1987 to 1991, Dr. Prodromou  
served as President and Chief Executive Officer of Poqet Computer Corporation.  
Dr. Prodromou has served as Executive Vice President of Fairchild Semiconductor 
Corporation, and in executive and technical management positions with General   
Electric Company, Mattel Electronics and Texas Instruments.  Dr. Prodromou holds
an MS and Ph.D. from the Polytechnic Institute of New York.                     

Mr. Tan has served as Senior Vice President and Chief Financial Officer since   
February 1995 after joining the Company in August 1994.  In April 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.              

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Mr. Goldberg was appointed Vice President of Sales in November 1996.  Prior to  
this, since 1995, he was President and Chief Executive Officer of Turtle Beach  
Systems.  He joined the Company as the Director of Far East Sales in 1993.  From
1990 to 1993, Mr. Goldberg served as Vice President, Business Development, for  
Harris Adacom Corporation, and prior to that was Vice President and Chief       
Operating Officer for Datapoint Corporation.  His career also includes senior   
level sales and marketing positions with Alpha Micro Systems, SEEQ Technology,  
and United Technologies.  Mr. Goldberg graduated from Long Island University    
with a BS in Physics.                                                           

Dr. Venkateswaren has served as Vice President, Data Communications Group since 
December 1996. He was one of the founders of Avasem Corporation and, since 1982,
had been Vice President of Engineering of Avasem (and the Company after its     
acquisition of Avasem).  Dr. Venkateswaren has also served in senior design     
engineering positions with Fairchild Semiconductor and Rockwell International.  
Dr. Venkateswaren holds a M.Tech. in Electrical Engineering from the Indian     
Institute of Technology, Bombay, India, and a Ph.D. in Electrical Engineering   
from the University of Waterloo, Canada.  He did Post-Doctoral Fellowships at   
the University of Waterloo, Canada and the University of California.            

Mr. Richmond has been Vice President, Frequency Timing Generator Group, since   
February 1996.  He joined the Company in 1993 as the Director of Engineering,   
Frequency Timing Generators Group.  He held senior engineering positions at EXAR
Corporation from 1986 to 1993, and at International Microcircuits Inc. from 1982
to 1986.  Mr. Richmond holds a B.S.E.E. from Walla Walla College and an M.S.E.E.
from Stanford University.                                                       

EMPLOYEES 
--------- 

As of June 28, 1997, the Company had 177 full-time employees, 67 of whom were   
engaged in research and development, 48 in sales, marketing and technical       
support, 25 in finance and administration, and 37 in manufacturing support and  
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 a sales office located in Taipei, Taiwan, which       
consists of 1,300 square feet of office space leased pursuant to an agreement   
which expires in October 1997.                                                  

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The Company also utilizes a test and drop-ship facility located in Singapore,   
which consists of 16,000 square feet of space leased pursuant to an agreement   
which expires in February 2001.  The space is used for testing, sales and       
administration.                                                                 

The Company also utilizes a West Coast facility located in San Jose, California,
which 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.  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 have not been adequately reserved or 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".            

In connection with the merger of Turtle Beach and Voyetra, the Company and      
Voyetra have asserted various claims against each other.  However, the Company's
management is of the belief that resolution of such claims would not be likely  
to have a material adverse effect on the Company's consolidated financial       
position.                                                                       

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

None.                                                                           

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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, options on   
the Company's common stock are traded on the Chicago Board Options Exchange.    
Below are the quarterly high and low closing sale prices of the Company's common
stock for the fiscal years ended 1997 and 1996, as reported by the "NASDAQ Stock
Market".                                                                        

                                                                [Download Table]

                                            Fiscal 1997       Fiscal 1996    
                                           High      Low     High      Low   
                                        -------------------------------------
                                                                             
                                        -------------------------------------
First quarter ended Sept 28 and Sept 29   $12.625  $ 6.875  $18.875  $13.625 
Second quarter ended  Dec 28 and Dec 30    14.125   10.250   15.875   10.750 
Third quarter ended Mar 29 and Mar 30      17.500   13.000   12.250    6.500 
Fourth quarter ended Jun 28 and Jun 29     22.725   12.625   14.750    9.625 

On June 28, 1997, there were approximately 218 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.                        

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ITEM 6.   SELECTED FINANCIAL DATA                                               

FIVE YEAR SUMMARY 

(In thousands, except for per share data) 

                                                        [Enlarge/Download Table]

                                                                             Year Ended                    
                                                         ------------------------------------------------- 
                                                            June 28   June 29            June 30           
                                                                             ----------------------------- 
                                                             1997       1996      1995     1994     1993   
                                                         ------------------------------------------------- 
                                                                                                           
Consolidated Statements of Operations Data:                                                                
Revenues                                                   $104,359   $91,330   $97,745   $93,824  $77,577 
Cost of sales                                                59,137    54,848    45,649    45,798   37,312 
Research and development                                     13,521    10,547    10,995    10,647    9,156 
In process research and development costs                    11,196     1,500        --        --       -- 
Operating income                                              5,387     4,200    13,223    18,110   17,440 
Income (loss) from continuing operations                     (7,510)    4,636     8,483    12,218   10,690 
Loss from discontinued operations                              (909)     (721)   (3,560)       --       -- 
Net income (loss)                                            (8,419)    3,915     4,923    12,218   10,690 
Primary earnings (loss) per common and common                                                              
equivalent share (continuing operations)                   $  (0.65)  $  0.40   $  0.77   $  1.11  $  1.06 
Primary earnings (loss) per common and common                                                              
equivalent shares (discontinued operations)                   (0.08)    (0.06)    (0.32)       --       -- 
                                                         ------------------------------------------------- 
Primary earnings (loss) per common and common                                                              
equivalent shares                                          $  (0.73)  $  0.34   $  0.45   $  1.11  $  1.06 
                                                         ================================================= 
Primary shares used in computing earnings (loss)                                                           
per common and common equivalent share                       11,474    11,592    11,045    11,051   10,085 
                                                         ================================================= 
Fully diluted earnings (loss) per common and                                                               
common equivalent shares (continuing operations)           $  (0.65)  $  0.40   $  0.74   $  1.10  $  1.04 
Fully diluted earnings (loss) per common and                                                               
common equivalent shares (discontinued operations)            (0.08)    (0.06)    (0.31)       --       -- 
                                                         ------------------------------------------------- 
Fully diluted earnings (loss) per common and                                                               
common equivalent shares                                   $  (0.73)  $  0.34   $  0.43   $  1.10  $  1.04 
                                                         ================================================= 
Fully diluted shares used in computing                                                                     
earnings (loss) per common and common equivalent shares      11,474    11,598    11,424    11,070   10,304 
                                                         ================================================= 

                                                           June 28    June 29            June 30           
                                                                             ----------------------------- 
                                                             1997      1996      1995      1994     1993   
                                                          -------------------------------------------------
Consolidated Balance Sheet Data:                                                                           
Working capital                                            $ 48,260   $48,023   $45,470   $35,227  $32,246 
Total assets                                                 90,622    87,570    77,691    73,452   55,034 
Long-term debt, less current portion                          1,503     1,631     3,480     3,775    3,780 
Shareholders' equity                                         70,147    69,164    62,484    55,726   41,434 

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                 

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

SIGNIFICANT FISCAL YEAR 1997 TRANSACTIONS                                       

On November 29, 1996 the Company signed an Agreement and Plan of Merger (the    
"Merger Agreement") to sell its approximately 87% interest in Turtle Beach      
Systems to Voyetra Technologies Inc. ("Voyetra") in exchange for an             
approximately 35% equity interest in Voyetra.  Commencing with the date of the  
Merger Agreement, the Company accounts for its investment in Voyetra under the  
equity method of accounting.  In the fourth quarter of fiscal 1997, the Company 
recognized an impairment of the asset of approximately $7.1 million, as further 
discussed below.                                                                

On February 28, 1997 the Company acquired all the capital stock of MicroClock,  
Inc. ("MicroClock"), a producer of clock synthesizer integrated circuits for    
multimedia applications.  The acquisition was accounted for under the purchase  
method of accounting and resulted in a special charge of $11.2 million related  
to the write-off of in process research and development costs and the recording 
of goodwill of $1.7 million, which will be amortized over the next 7 years.  The
operating results of MicroClock have been recorded in the Company's statements  
since the date of acquisition.                                                  

During the quarter ended March 29, 1997, the Company announced its decision to  
dispose of its majority interest in ARK Logic within a 12-month period.         
Accordingly, the Company has since presented ARK Logic as a discontinued        
operation, and all prior periods have been restated to reflect this             
presentation.  Following this, on June 17, 1997, the Company completed the sale 
of approximately 80% of its holding in ARK Logic to Vision 2000 Ventures, Ltd., 
an investment holding company.  Revenues from ARK Logic were $1.8 million, $10.2
million and $6.6 million for fiscal years 1997, 1996 and 1995, respectively.    
The Company maintains an 11% interest in ARK Logic.                             

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.                        

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(Expressed as a percentage of total revenue)  

                                                        [Enlarge/Download Table]

                                                                      Year Ended          
                                                           ------------------------------ 
                                                              June 28   June 29   June 30 
                                                               1997       1996      1995  
                                                           ------------------------------ 
                                                                                          
Revenues                                                       100.0%     100.0%    100.0%
Cost and expenses:                                                                        
   Cost of sales                                                56.7       60.1      46.7 
   Research and development expense                             13.0       11.5      11.3 
   Selling, general and administrative                                                    
    expense                                                     14.5       20.2      20.9 

Special charges:                                                                          
   Change in business strategies                                  --         --       3.9 
   Discontinued product lines                                     --         --       3.7 
   Facility closing                                               --        1.9        -- 
   Write-off of in-process research and development costs       10.6        1.7        -- 
                                                           ------------------------------ 
Operating income                                                 5.2        4.6      13.5 
Interest and other income                                       (1.7)      (1.5)     (1.2)
Interest expense                                                 0.6        0.6       0.7 
Impairment in equity investment                                  6.8         --        -- 
Minority interest                                               (0.1)      (1.1)       -- 
Equity loss of investee                                          0.8         --        -- 
                                                           ------------------------------ 

Income (loss) before income taxes and discontinued                                        
operations                                                      (1.2)       6.6      14.0 

Income tax expense                                               6.0        1.5       5.3 
                                                           ------------------------------ 
   Income (loss) from continuing operations                     (7.2)       5.1       8.7 
   Income (loss) from discontinued operations                   (0.9)      (0.8)     (3.7)
                                                           ------------------------------ 
   Net income (loss)                                            (8.1%)      4.3%      5.0%
                                                           ============================== 

REVENUE                                                                         

The Company achieved revenue of $104.4 million in fiscal year 1997, as compared 
to $91.3 million and $97.7 million in fiscal years 1996 and 1995, respectively. 
This increase in fiscal 1997 revenue was primarily attributable to increased    
volume shipments of FTG products and the introduction of Data Communication     
transceiver products, partially offset by the deconsolidation of Turtle Beach,  
effective in the second quarter of fiscal 1997.                                 

FREQUENCY TIMING GENERATORS                                                     

FTG components for motherboard and peripheral applications for PCs contributed  
approximately 53.7%, 45.6% and 51.5% of total revenue in fiscal years 1997, 1996
and 1995, respectively.  This increase over fiscal 1996 is largely attributable 
to market share gains, which includes 3.6% growth as a result of the acquisition
of MicroClock.  Although the market for FTG motherboard and PC peripheral       
applications will continue to be a major source of revenue, the Company intends 
to increase its presence in the applications of wireless communications and     
consumer electronics, which comprised less than 10% of total FTG revenue in     
fiscal 1997.                                                                    

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DATA COMMUNICATIONS                                                             

Data Communication component revenue represented approximately 15.4% of total   
revenue in fiscal year 1997, with very little corresponding revenue in the prior
year, reflecting introduction of the new 1890 transceiver at the end of fiscal  
1996.                                                                           

ADVANCED TECHNOLOGIES                                                           

Revenue from Advanced Technologies comprised 24.4%, 30.8% and 36.0% of total    
revenue in fiscal years 1997, 1996 and 1995, respectively, and includes         
engineering and design revenue representing reimbursement of research and       
development expenditures.  The declining trend in advanced technology products, 
as a percentage of revenue, reflects overall increases in revenue from FTG and  
Data Communication components.                                                  

TURTLE BEACH                                                                    

As a result of the merger of Turtle Beach and Voyetra, the revenues of Turtle   
Beach were de-consolidated from November 30, 1996.  The Company's 35% share of  
net losses at Voyetra was recorded under the equity method of accounting.       
Accordingly, revenues were 6.5% of total revenues in fiscal 1997, as compared to
23.3% in fiscal 1996 and 12.5% in fiscal 1995.                                  

During the fourth quarter of fiscal 1997, the Company determined that           
significant events and changes in circumstances had occurred that indicated it  
was probable that its investment in Voyetra would not be recoverable.           
Accordingly, the Company recorded an impairment loss of approximately $7.1      
million on its investment in Voyetra in the fourth quarter of 1997.             

FOREIGN REVENUE                                                                 

Foreign revenue, which resulted primarily from sales to offshore customers was  
60.3%, 46.8% and 55.1% of total revenue in fiscal years 1997, 1996 and 1995,    
respectively.  The increase in fiscal 1997 reflects significant growth in Far   
East markets.  The Company's sales are denominated in U.S. dollars.             

BACKLOG                                                                         

Backlog was $35.5 million at June 28, 1997, compared to $21.7 million at June   
29, 1996, and $32.7 million at June 30, 1995.  The Company has experienced a    
reduction in customer order lead times for its IC products and its "turns"      
business (i.e., orders placed by customers for immediate or short-term delivery)
has grown to a significant share of its quarterly revenue.  The increase in     
fiscal 1997 is primarily due to the Company's introduction of the 1890          
transceiver 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, shipping, quality control and      
manufacturing support operations.  Cost of sales as a percentage of total       
revenue was 56.7% in fiscal 1997, as compared to 60.1% in fiscal 1996 and 46.7% 
in fiscal 1995.  The decrease in the cost of sales in fiscal year 1997 reflects 
reduced costs and favorable product mix.                                        

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RESEARCH & DEVELOPMENT                                                          

Research and development expense expressed as a percentage of revenue was 13.0% 
in fiscal 1997, as compared to 11.5% in fiscal year 1996, and 11.3% in fiscal   
1995.  In dollar terms, research and development spending increased 28.2% from  
fiscal year 1996 to 1997, primarily as a result of the hiring of additional     
engineering personnel, investment in new design tools, and increased activity   
related to new product development and enhancement programs for existing        
standard products.                                                              

SELLING, GENERAL AND ADMINISTRATION                                             

Selling, general and administration expense represents 14.5%, 20.2% and 20.9% of
total revenues in fiscal years 1997, 1996 and 1995, respectively.  In monetary  
terms, expenses have decreased 9.6% from fiscal 1995 to fiscal 1996, and        
decreased 18.2% from fiscal 1996 to fiscal 1997.  The primary reason for the    
decrease in fiscal 1997 is the deconsolidation of Turtle Beach and in addition, 
the Company has implemented tight fiscal controls which have decreased spending.

OPERATING INCOME                                                                

Expressed as a percentage of revenue, operating income was 5.2%, 4.6% and 13.5% 
in fiscal years 1997, 1996 and 1995, respectively.  In dollar terms, operating  
income was $5.4 million in fiscal year 1997 compared to $4.2 million and $13.2  
million in fiscal years 1996 and 1995, respectively.  Fiscal 1997 includes a    
special charge of $11.2 million as a result of the write-off of in-process      
research and development costs arising from the acquisition of MicroClock.      
Fiscal 1996 includes special  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 special charges 
of $7.4 million primarily associated with 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.  Accordingly,       
operating income before special charges was 15.8% of revenue in fiscal year     
1997, as compared to 8.2% and 21.1% in fiscal 1996 and 1995, respectively.      

EQUITY INVESTMENT AND MINORITY INTEREST                                         

On November 29, 1996, the Company signed a Merger Agreement to merge Turtle     
Beach Systems with Voyetra  in exchange for an approximately 35% equity interest
in the combined business.  In connection with the merger, the Company also      
entered into a Revolving Credit Agreement and Note ("Revolving Credit           
Agreement") with Voyetra, pursuant to which the Company has agreed to make loans
to Voyetra up to an aggregate of $3.5 million, subject to certain covenants. The
Company accounts for its investment in Voyetra under the equity method of       
accounting, and recorded an impairment loss on this investment in the fourth    
quarter of fiscal 1997.  The minority interest represents the ownership interest
in Turtle Beach Systems that the Company did not own prior to the merger.       

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During the fourth quarter of fiscal 1997 the Company determined that significant
events and changes in circumstances had occurred subsequent to the merger that  
indicated it was probable that its investment in Voyetra would not be           
recoverable.  In the opinion of the Company's management, Voyetra was           
experiencing an adverse shift in the fundamentals of its business which resulted
in deteriorating gross profit margins and a substantial increase in operating   
losses.  In addition, during the fourth quarter of fiscal 1997 the Company      
notified Voyetra that they had violated certain covenants and were in default   
under the Revolving Credit Agreement (see Related Party footnote 19).  As such, 
the Company is under no obligation to provide financing under the Revolving     
Credit Agreement. Management of the Company believes that other alternatives for
third party financing for Voyetra are limited.  As a result of these significant
events in the fourth quarter, management of the Company estimated that the      
undiscounted cash flows anticipated for Voyetra would not be sufficient to      
recover the carrying value of the Company's investment and a write-down to fair 
value was required.  Consequently, in the fourth quarter of fiscal 1997, the    
Company recorded an impairment loss of $7.1 million on its investment in Voyetra
which is included in the Statement of Operations as Impairment in equity        
investment.                                                                     

The Company and Voyetra have asserted various claims against each other.        
However, the Company's management is of the belief that resolution of such      
claims would not be likely to have a material adverse effect on the Company's   
consolidated financial condition.                                               

INCOME TAXES                                                                    

After adjusting for minority interest and equity investment, the Company's      
effective tax rate related to income from continuing operations was 95.8%, 27.8%
and 37.8% for fiscal years 1997, 1996 and 1995, respectively.  The increased    
effective tax rate for fiscal 1997 includes a $11.2 million non-deductible      
intangible write-off related to the acquisition of MicroClock, Inc. and a $7.1  
million capital loss for the impairment of the Voyetra investment. The reduced  
effective income tax rate for fiscal 1996 reflects a favorable $1.1 million     
reversal in estimate for state taxes.                                           

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NET INCOME (LOSS)                                                               

Fiscal 1997 reflects a net loss of $8.4 million or $0.73 per share for fiscal   
1997, as compared to net income of $3.9 million or $0.34 per share for fiscal   
1996, and $4.9 million or $0.45 per share for fiscal 1995.  Excluding special   
charges, equity investment and minority interest, however, net income for fiscal
year 1997 was $10.6 million or $0.92 per share, compared to $6.0 million or     
$0.52 per share for fiscal year 1996, and $12.4 million or $1.12 per share for  
fiscal 1995.                                                                    

DISCONTINUED OPERATIONS                                                         

During the third quarter of fiscal 1997, the Company implemented a plan, with   
approval by the Board of Directors, to dispose of its majority interest in their
subsidiary, ARK Logic, within a 12-month period.  Unlike the Company's core     
business of developing mixed signal components, ARK Logic uses different design 
tools and technology to engineer complex digital circuits.  Accordingly, the    
Company has presented ARK Logic as discontinued operations and all prior periods
have been restated to reflect this presentation.  The Company recorded a charge 
of $1.5 million in the third quarter, including severance and facility          
termination costs.  Subsequently, on June 17, 1997,  the Company sold           
approximately 80% of its holdings in ARK Logic to Vision 2000 Ventures, Ltd for 
which a gain of $2.4 million,  including the reversal of severance and facility 
termination accruals, was recorded.   The Company maintains an 11% interest in  
ARK Logic.                                                                      

LIQUIDITY, CAPITAL RESOURCES AND INFLATION                                      

On June 28, 1997, the Company's principal sources of liquidity included         
approximately $26.4 million in cash and investments, as compared to $27.4       
million at June 29, 1996.  The investments primarily consist of commercial      
paper, government bonds and marketable securities with various maturities up to 
about one year.  During fiscal year 1997, the Company generated $10.3 million in
cash from its operating activities, as compared to $11.5 million during fiscal  
year 1996.  The decrease in fiscal year 1997 was primarily due to increases in  
accounts receivable as a result of revenue increases partially offset by        
increased accounts payable.  Notwithstanding, the Company's days sales          
outstanding was reduced from 63 days in fiscal 1996 to 51 days in fiscal 1997,  
while inventory turns increased from 3.7 times in fiscal 1996 to 4.2 times in   
fiscal year 1997.                                                               

Expenditures for property and equipment were $3.4 million in fiscal year 1997 as
compared to $4.4 million in fiscal year 1996.  The Company intends to continue  
to invest in capital equipment to support continued growth.                     

During fiscal year 1997, the Company engaged in certain transactions which had  
material impact on its cash flows.  During fiscal 1997, under its existing wafer
supply contract with Chartered Semiconductor Manufacturing PTE, Ltd. ("CSM"),   
the Company advanced to CSM deposits totaling $6.0 million as part of a         
commitment for CSM to supply an agreed minimum quantity of wafers over a five-  
year period from April 1996 through December 2000.  In addition, CSM agreed to  
provide to the Company favored pricing as part of such commitment.  Under its   
agreement with CSM, the Company will be required to increase its deposit to up  
to $10.0 million during the five-year term.  The contract requires CSM to refund
the Company's deposit by progressive installments based upon the volume of      
purchases made by the Company.  The Company had previously entered into a       
similar agreement with one of its other wafer suppliers, American Microsystems, 
Inc., by which deposits totaling $5.5 million were placed and $2.0 million      
repaid during fiscal 1997.                                                      

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On February 28, 1997 the Company acquired all the capital stock of MicroClock, a
producer of clock synthesizer integrated circuits for multimedia applications,  
for approximately $16.4 million satisfied in the form of approximately $6.4     
million in cash and 608,504 shares of ICS common stock.  The Company's shares   
exchanged in the transaction are restricted for one year, therefore, the shares 
were valued at a discount from the closing price on the date of issuance based  
on an independent valuation.  The acquisition was accounted for under the       
purchase method of accounting and resulted in a charge of $11.2 million related 
to the write-off of in process research and development costs and the recording 
of goodwill of $1.7 million, which will be amortized over the next 7 years.     
Revenues and results of operations of MicroClock were not significant to the    
Company's consolidated statement of operations for the year ended June 29, 1997.

On November 29, 1996, the Company signed a Merger Agreement to sell its         
approximately 87% interest in Turtle Beach to Voyetra in exchange for an        
approximately 35% equity interest in Voyetra. Voyetra is a supplier of music and
audio software.  The Company deconsolidated Turtle Beach and accounted for its  
investment using the equity method.  In connection with the merger, the Company 
also entered into a Revolving Credit Agreement with Voyetra, pursuant to which  
the Company has agreed to make loans to Voyetra up to an aggregate of $3.5      
million, subject to certain restrictions and covenants.  As of June 28, 1997,   
Voyetra was not in compliance with certain covenants.  As such, the Company has 
decided to cease funding under the Revolving Credit Agreement.                  

Reflecting an adverse shift in the fundamentals of the business of Voyetra, as  
well as the PC audio upgrade industry during the fourth quarter of 1997, the    
Company recorded an impairment loss of $7.1 million on its investment in        
Voyetra.  This impairment loss was based on the decline in the financial results
of Voyetra, and a determination that the undiscounted cash flows from the       
business would not be sufficient to recover the carrying value of the Company's 
investment.  The Company and Voyetra have asserted various claims against each  
other.  However, the Company's management is of the belief that resolution of   
such claims would not likely have a material adverse effect on the Company's    
consolidated financial position.                                                

On June 17, 1997, the Company sold approximately 80% of its share holdings in   
ARK Logic to Vision 2000 Ventures, Ltd. for cash of approximately $2.4 million, 
of which 20% is held in escrow.  As part of such divestiture, a shareholders'   
agreement, which was put in place pursuant to terms of the acquisition of a 51% 
interest in ARK Logic in fiscal 1995 and which could require the Company to buy 
the remaining 49% minority interest in ARK Logic at a future period, was        
terminated.                                                                     

During fiscal 1997, stock repurchased, net of proceeds from stock options       
exercised, was $0.3 million, versus $2.4 million in the prior year.             

During fiscal 1996, the Company renegotiated its $20 million 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 28, 1997.  On June 28, 1997, there was no balance outstanding under  
this facility, reflecting repayment of $2.3 million drawn down on the credit    
line in the prior year.                                                         

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                                       

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through the next fiscal year. 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.                                               

Inflation has not had a significant impact on the Company.                      

NEW ACCOUNTING PRONOUNCEMENTS                                                   

The Company has not adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", which will become effective in the second quarter of      
fiscal 1998.  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. 130,
"Reporting Comprehensive Income", which will become effective for fiscal year   
1999.  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. 131,
"Disclosures About Segments of an Enterprise and Related Information", which    
will become effective for fiscal year 1999.  The Company believes that the      
adoption of this statement will not have a material financial impact.           

UPDATE ON IMPACT OF SPECIAL CHARGES TAKEN IN FY 1996 AND FY 1995                

The Company's Form 10-K for the fiscal year ending June 30, 1995 discussed a    
special charge of $11.5 million (which includes $4.1 million related to         
discontinued operations) taken during the third quarter of fiscal 1995.  The    
actions contemplated by this charge have largely been accomplished and the      
expected saving has been realized. The charge will not affect future cash       
outflows, as all obligations have been met.                                     

The Company's Form 10-Q for the second quarter of fiscal 1996 discussed a       
special charge of $2.7 million, net of taxes, taken during the second quarter of
fiscal 1996.  The Company generated annual savings of approximately $0.6        
million, primarily as a result of the reductions in personnel and associated    
overhead.  Of the total charge, approximately $2.3 million, net of tax, was     
related to non-cash items.  The charge will not affect future cash outflows, as 
all obligations have been met.                                                  

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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 28, 1997 and June 29, 1996,   
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended June 28, 1997.  
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 28, 1997. 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 28, 1997 and June 29, 1996, and the   
results of their operations and their cash flows for each of the years in the   
three-year period ended June 28, 1997, 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                                                      
August 4, 1997                                                                  

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ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                      
CONSOLIDATED BALANCE SHEETS 
(In thousands)

                                                                [Download Table]

                                                          June 28   June 29  
Assets                                                      1997      1996   
                                                         ------------------- 
                                                                             
Current Assets:                                                              
  Cash and cash equivalents                               $18,425   $27,376  
  Marketable securities - current                           7,981        24  
  Accounts receivable, net                                 20,690    13,705  
  Inventory, net                                           13,542    16,237  
  Deferred income taxes                                     1,139     2,475  
  Other current assets                                      4,435     2,976  
                                                         ------------------- 
      Total current assets                                 66,212    62,793  

Property and equipment, net                                14,104    14,135  
Net assets of discontinued operations                          --     3,294  
Deposits on purchase contracts                              8,000     5,575  
Goodwill, net                                               1,600     1,495  
Other assets                                                  706       278  
                                                         ------------------- 
      Total assets                                        $90,622   $87,570  
                                                         ====================

Liabilities and Shareholders' Equity                                         
Current Liabilities:                                                         
  Note payable to bank                                    $    --   $ 2,315  
  Current portion of long-term obligations                    206       117  
  Accounts payable                                         12,565     9,648  
  Accrued salaries and bonuses                                935       460  
  Accrued expenses and other current liabilities            1,900     2,230  
  Income taxes payable                                      2,346        --  
                                                         ------------------- 
      Total current liabilities                            17,952    14,770  

Long-term debt, less current portion                        1,503     1,631  
Deferred income taxes and other liabilities                 1,020       788  
                                                         ------------------- 

      Total liabilities                                    20,475    17,189  
                                                         ------------------- 

Minority interest                                              --     1,217  
Commitments (notes 5 and 11)                                   --        --  

Shareholders' Equity:                                                        
  Preferred stock, authorized 5,000 shares, none                             
  issued                                                       --        --  
  Common stock, no par value, authorized 50,000                              
  shares; issued 12,445 and 11,389 shares at               45,366    32,674  
  June 28, 1997 and June 29, 1996, respectively                              
  Less treasury stock, at cost (286 and 35 shares at                         
  June 28, 1997 and June 29, 1996, respectively)           (3,749)     (460) 
  Currency translation adjustment                              (1)       --  
  Retained earnings                                        28,531    36,950  
                                                         ------------------- 

      Total shareholders' equity                           70,147    69,164  
                                                         ------------------- 
           Total liabilities and shareholders' equity     $90,622   $87,570  
                                                         =================== 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.                    

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CONSOLIDATED STATEMENTS OF OPERATIONS 
(In thousands, except for per share data) 

                                                        [Enlarge/Download Table]

                                                                          Year Ended           
                                                                 ------------------------------
                                                                   June 28   June 29   June 30 
                                                                    1997       1996      1995  
                                                                 ------------------------------
                                                                                               
Revenue                                                          $104,359   $91,330   $97,745  
Cost and expenses:                                                                             
   Cost of sales                                                   59,137    54,848    45,649  
   Research and development expense                                13,521    10,547    10,995  
   Selling, general and administrative expense                     15,118    18,478    20,450  
   Special charges:                                                                            
      Change in business strategies                                    --        --     3,822  
      Discontinued product lines                                       --        --     3,606  
      Facility closing                                                 --     1,757        --  
      Write-off of in-process research and development costs       11,196     1,500        --  
                                                                 ------------------------------
      Operating income                                              5,387     4,200    13,223  

Interest and other income                                          (1,800)   (1,332)   (1,126) 
Interest expense                                                      599       578       715  
Impairment in equity investment                                     7,072        --        --  
Minority interest                                                    (154)   (1,058)       --  
Equity loss of investee                                               866        --        --  
                                                                 ------------------------------
   Income (loss) before income taxes from continuing operations    (1,196)    6,012    13,634  

Income tax expense                                                  6,314     1,376     5,151  
                                                                 ------------------------------
   Income (loss) from continuing operations                        (7,510)    4,636     8,483  

Discontinued operations                                                                        
   Loss from operations                                            (1,773)     (721)   (3,560) 
   Gain on disposal                                                   864        --        --  
                                                                 ------------------------------
   Loss from discontinued operations                                 (909)     (721)   (3,560) 
                                                                 ------------------------------
   Net income (loss)                                             $ (8,419)  $ 3,915   $ 4,923  
                                                                 ==============================

Primary earnings (loss) per common and common equivalent                                       
share:                                                                                         
   Income (loss) from continuing operations                      $  (0.65)   $ 0.40   $  0.77  
   Loss from discontinued operations                                (0.15)    (0.06)    (0.32) 
   Gain on disposal                                                  0.07        --        --  
                                                                 ------------------------------
                                                                 $  (0.73)   $ 0.34   $  0.45  
                                                                 ==============================

Fully diluted earnings (loss) per common and common                                            
equivalent share:                                                                              
   Income (loss) from continuing operations                      $  (0.65)   $ 0.40   $  0.74  
   Loss from discontinued operations                                (0.15)    (0.06)    (0.31) 
   Gain on disposal                                                  0.07        --        --  
                                                                 ------------------------------
                                                                 $  (0.73)   $ 0.34   $  0.43  
                                                                 ==============================

Shares used to compute earnings (loss)  per common                                             
and common equivalent share:                                                                   
   Primary                                                         11,474    11,592    11,045  
                                                                 ==============================
   Fully diluted                                                   11,474    11,598    11,424  
                                                                 ==============================

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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.                    

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 
(in thousands)  

                                                        [Enlarge/Download Table]


                                                                                                Total        Number of  
                                                  Common   Treasury   Retained              Shareholders'      Shares   
                                                  Stock      Stock    Earnings   Currency       Equity      Outstanding 
                                                 ---------------------------------------------------------------------- 
                                                                                                                        
Balances at June 30, 1994                        $27,614   $     --    $28,112        $--        $ 55,726        10,828 
   Shares issued upon exercise of stock options    1,440         --         --         --           1,440           282 
   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 options    2,811         --         --         --           2,811           279 
   Tax benefits related to stock options             506         --         --         --             506            -- 
   Purchase of common stock                           --       (460)        --         --            (460)          (35)
   Subsidiaries equity transaction                   (92)        --         --         --             (92)           -- 
   Net income                                         --         --      3,915         --           3,915            -- 
                                                 ---------------------------------------------------------------------- 

Balances at June 29, 1996                         32,674       (460)    36,950         --          69,164        11,354 
   Shares issued upon exercise of stock options   10,807         --         --         --          10,807         1,056 
   Tax benefits related to stock options           2,039         --         --         --           2,039            -- 
   Purchase of common stock                           --    (10,466)        --         --         (10,466)         (792)
   Acquisition of MicroClock, Inc.                    34      7,966         --         --           8,000           609 
   Sale of Galaxy Power                               --       (789)        --         --            (789)          (68)
   Subsidiaries equity transactions                 (188)        --         --         --            (188)           -- 
   Currency translation adjustment                    --         --         --         (1)             (1)           -- 
   Net loss                                           --         --     (8,419)        --          (8,419)           -- 
                                                 ---------------------------------------------------------------------- 
Balances at June 28, 1997                        $45,366   $ (3,749)   $28,531        $(1)       $ 70,147        12,159 
                                                 ====================================================================== 
                                                                              

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.                    

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CONSOLIDATED STATEMENTS OF CASH FLOWS 
(In thousands)  

                                                        [Enlarge/Download Table]

                                                                             Year Ended          
                                                                  ------------------------------ 
                                                                     June 28   June 29   June 30 
                                                                      1997       1996      1995  
                                                                  ------------------------------ 
                                                                                                 
Cash flows from operating activities:                                                            
   Net income (loss)                                                $ (8,419)  $ 3,915   $ 4,923 
   Increase (decrease) in cash to reconcile net income (loss) to                                 
   net cash provided by operating activities:                                                    
      Depreciation and amortization                                    3,659     3,129     3,039 
      Minority interest and equity investment                          7,492    (1,058)       -- 
      (Gain) loss on sale of assets                                     (356)       42        63 
      Loss from discontinued operations                                  909       721     3,560 
      Deferred income taxes                                            1,541       866      (217)
      Write-off of in-process research & development costs            11,196     1,500        -- 
      Facility closing, non-cash portion                                  --     1,215        -- 
      Change in business strategy charges, noncash portion                --        --       929 
      Write-down of discontinued product lines                            --        --     3,606 
      Accounts receivable                                             (8,808)    1,850     3,418 
      Inventory                                                            2    (2,754)   (3,256)
      Other assets, net                                                 (687)      560       704 
      Accounts payable, accrued expenses and other liabilities         3,480     1,895      (592)
      Income taxes                                                       292      (405)     (158)
                                                                  ------------------------------ 
   Net cash provided by operating activities                          10,301    11,476    16,019 
                                                                  ------------------------------ 

Cash flows from investing activities:                                                            
   Capital expenditures                                               (3,358)   (4,390)   (3,508)
   Proceeds from sale of fixed assets                                    107       129       745 
   Proceeds from sales of marketable securities                          845        --     2,004 
   Proceeds from sale of discontinued operations                       1,925        --        -- 
   Proceeds from maturities of marketable securities                  10,499    18,316    13,309 
   Purchases of marketable securities                                (19,205)   (5,940)   (8,376)
   Deposits on purchase contracts, net                                (4,002)   (1,020)   (5,500)
   Investment in discontinued operations                                  --        --    (7,466)
   Investment in subsidiary, net of cash acquired                     (6,074)     (986)       -- 
                                                                  ------------------------------ 
   Net cash provided by (used in) investing activities               (19,263)    6,109    (8,792)
                                                                  ------------------------------ 

Cash flows from financing activities:                                                            
   Net borrowings (repayments) under line of credit agreement         (2,315)    2,315      (867)
   Repayments of long-term debt                                         (138)   (2,027)     (375)
   Decrease in bank overdrafts                                            --        --    (2,061)
   Exercise of stock options                                          10,807     2,811     1,440 
   Tax benefit of stock option exercise                                2,039       506       395 
   Purchase of common stock                                          (10,466)     (460)       -- 
   Other                                                                  84        --        -- 
                                                                  ------------------------------ 
   Net cash provided by (used in) financing activities                    11     3,145    (1,468)
                                                                  ------------------------------ 
Net increase (decrease) in cash                                       (8,951)   20,730     5,759 
Cash and cash equivalents:                                                                       
   Beginning of year                                                  27,376     6,646       887 
                                                                  ------------------------------ 
   End of year                                                      $ 18,425   $27,376   $ 6,646 
                                                                  ============================== 

Supplemental disclosures of cash information:                                                    
   Cash payments during the period for:                                                          
      Interest                                                      $     58   $   308   $   304 
                                                                  ============================== 
      Income taxes                                                  $  2,336   $ 1,407   $ 6,120 
                                                                  ============================== 

For a description of certain non-cash investing and financing transactions,     
refer to footnotes 2 and 19.                                                    

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.                    

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                      

The Company designs, manufactures and markets mixed signal integrated circuits  
("ICs") primarily for timing and networking solutions for the PC industry and   
also markets custom, application-specific ICs developed pursuant to product     
development projects with selected customers.                                   

(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. The effect of           
adjustments to the Company's carrying values of subsidiaries resulting from     
their underlying equity transactions is included in the Company's stockholders' 
equity.                                                                         

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 28, 1997 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 28, 1997 and June 29, 1996, 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 income. Realized gains and losses are 
included in other income or expense.                                            

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.                                                         

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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 7 years. Accumulated amortization was   
$4.4 million and $0.2 million as of June 28, 1997 and June 29, 1996,            
respectively. During the fourth quarter of 1997, the Company recorded an        
impairment loss of $7.1 million, of which $3.9 million is related to goodwill.  
This decision to record an impairment was based on the decline in the financial 
results of Voyetra and a determination that the cash flows from the business    
would not be sufficient to recover the carrying value of the Company's          
investment. See footnote 3 for further details.                                 

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 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) in fiscal year ending June 28, 1997. See footnote
3 for a discussion of an impairment charge in the Voyetra investment, which was 
recorded in the fourth quarter of fiscal 1997.                                  

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. Design revenue is recognized pursuant to development and production  
contracts for custom ICs representing partial reimbursement of research and     
development expenditures.                                                       

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 from specific customers is limited due to the large number of        
customers and their dispersion across many geographic areas, however, there is a
substantial concentration in the personal computer industry. See footnote 18 for
geographic information.                                                         

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, which included Turtle Beach for the first five  
months of the fiscal year 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).                  

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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 average or ending price, if higher, over the period), unless anti-dilutive.  
No common stock equivalents were included in the fiscal 1997 calculation since  
the effect would have been 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 adopted Statement of Financial Accounting Standards No. 123,    
"Accounting for Stock-Based Compensation" ("SFAS 123"), which became effective  
for the year ended June 28, 1997. The Company continues to apply APB25 and      
related interpretation in accounting for its stock options to employees and     
directors. See footnote 15 for pro forma disclosures.                           

Reclassification of Accounts                                                    

Certain reclassifications have been made to conform prior year's balances to the
current year presentation. During the third quarter of fiscal 1997, the Company 
classified ARK Logic as discontinued operations, and all prior periods have been
restated to reflect this presentation.                                          

New Accounting Pronouncements                                                   

The Company has not adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", which will become effective in the second quarter of      
fiscal 1998. 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. 130,
"Reporting Comprehensive Income", which will become effective for fiscal year   
1999. 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. 131,
"Disclosures About Segments of an Enterprise and Related Information", which    
will become effective for fiscal year 1999. The Company believes that the       
adoption of this statement will not have a material financial impact.           

(2)  ACQUISITIONS/MERGERS                                                       

On November 29, 1996 the Company signed an Agreement and Plan of Merger, (the   
"Merger Agreement") to sell its approximately 87% interest in Turtle Beach      
Systems, Inc. ("Turtle Beach") to Voyetra Technologies Inc. ("Voyetra"), in     
exchange for an approximately 35% equity interest in Voyetra. Voyetra is a      
supplier of music and audio software. No gain or loss was initially recorded on 
this transaction in accordance with APB 29 "Accounting for Nonmonetary          
Transactions", which states that the exchange of similar productive assets      
(i.e., investments accounted for by the equity method) not held for sale in the 
ordinary course of business does not result in the culmination of the earnings  
process. The Company's proportionate share of underlying equity in Voyetra was  
approximately $3.5 million. The excess of the Company's carrying value over     
their proportionate share of underlying                                         

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equity was approximately $4.3 million. The Company accounts for its investment  
in Voyetra under the equity method of accounting. In connection with the merger,
the Company also entered into a Revolving Credit Agreement and Note (the "      
Revolving Credit Agreement") with Voyetra, pursuant to which the Company has    
agreed to make loans to Voyetra up to an aggregate of $3.5 million, subject to  
certain covenants. (See Related Party footnote 19). The Company recorded an     
impairment loss on this investment in the fourth quarter of fiscal 1997. (See   
Disposition/Impairment footnote 3).                                             

On February 28, 1997 the Company acquired all the capital stock of MicroClock,  
Inc. ("MicroClock"), a producer of clock synthesizer integrated circuits for    
multimedia applications, for approximately $16.4 million satisfied in the form  
of approximately $6.4 million in cash and 608,504 shares of ICS common stock.   
The Company's shares exchanged in the transaction are restricted from sale for  
one year, therefore, the shares were valued at a discount from the closing price
on the date of issuance based on an independent valuation. The acquisition was  
accounted for under the purchase method of accounting and resulted in a charge  
of $11.2 million related to the write-off of in-process research and development
costs and the recording of goodwill of $1.7 million, which will be amortized    
over the next 7 years. Revenues and results of operations of MicroClock were not
significant to the Company's consolidated statement of operations for the year  
ended June 29, 1997.                                                            

(3)  DISPOSITIONS/IMPAIRMENT                                                    

In the first quarter of fiscal 1997, the Company sold its Galaxy Power, Inc.    
subsidiary, which owned the assets related to the battery charge controller     
product line, for $0.8 million to Edward H. Arnold, former Chairman and CEO of  
the Company. The purchase consideration was satisfied by transfer of 68,387     
shares of the Company's stock and was based on a valuation made by an           
independent appraiser. See Related Party footnote (19).                         

During the third quarter of fiscal 1997, the Company implemented a plan, with   
approval by the Board of Directors, to dispose of its majority interest in their
subsidiary, ARK Logic, within a 12-month period. Accordingly, the Company had   
presented ARK Logic as discontinued operations and all prior periods have been  
restated to reflect this presentation. The Company recorded a charge of $1.5    
million in the third quarter, including severance and facility termination      
costs. Subsequently, the Company sold approximately 80% of its holdings in ARK  
Logic to Vision 2000 Ventures, Ltd. ("Vision 2000") for which a gain of $2.4    
million, including the reversal of severance and facility termination accruals, 
was recorded. The sale and purchase agreement required 20% of the sales price to
be held in escrow for two years. The amounts from discontinued operations are   
not tax effected, as ARK Logic was not consolidated for tax purposes and ARK    
Logic has net operating loss carryforwards. Revenues from ARK Logic for fiscal  
1997, 1996 and 1995 were $1.8 million, $10.2 million and $6.6 million,          
respectively.                                                                   

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During the fourth quarter of fiscal 1997 the Company determined that significant
events and changes in circumstances had occurred subsequent to the merger that  
indicated it was probable that its investment in Voyetra would not be           
recoverable. In the opinion of the Company's management, Voyetra was            
experiencing an adverse shift in the fundamentals of its business which resulted
in deteriorating gross profit margins and a substantial increase in operating   
losses. In addition, during the fourth quarter of fiscal 1997 the Company       
notified Voyetra that they had violated certain covenants and were in default   
under the Revolving Credit Agreement (see Related Party footnote 19). As such,  
the Company believes that it is under no obligation to provide financing under  
the Revolving Credit Agreement. Management of the Company believes that other   
alternatives for third party financing for Voyetra are limited. As a result of  
these significant events in the fourth quarter, management of the Company       
estimated that the undiscounted cash flows anticipated for Voyetra would not be 
sufficient to recover the carrying value of the Company's investment and a      
write-down to fair value was required. Consequently, in the fourth quarter of   
fiscal 1997, the Company recorded an impairment loss of $7.1 million on its     
investment in Voyetra which is included in the Statement of Operations as       
Impairment in equity investment.                                                

The Company and Voyetra have asserted various claims against each other.        
However, the Company's management is of the belief that resolution of such      
claims would not likely have a material adverse effect on the Company's         
consolidated financial position.                                                

(4)  SPECIAL CHARGES                                                            

The Company's Form 10-Q for the third quarter of fiscal 1997, discussed a $11.2 
million charge for write-off of in-process research and development cost as a   
result of the MicroClock acquisition. The charge will not affect future cash    
outflows.                                                                       

The Company's Form 10-Q for the second quarter of fiscal 1996, discussed a      
special charge of $2.7 million, net of taxes, taken during the second quarter of
fiscal 1996. Of the total charge, approximately $2.3 million, net of tax, was   
related to non-cash items. The charge will not affect future cash outflows, as  
such obligations have been met.                                                 

The Company's Form 10-K for the fiscal year ending June 30, 1995 discussed a    
special charge of $11.5 (which includes $4.1 million related to discontinued    
operations) million taken during the third quarter of fiscal 1995. Of the total 
charge, approximately $9.0 million was related to non-cash items. The charge    
will not affect future cash outflows, as such obligations have been met.        

(5)  PURCHASE COMMITMENTS                                                       

During fiscal 1997, under an existing wafer supply contract with Chartered      
Semiconductor Manufacturing PTE Ltd. ("CSM") the Company advanced to CSM a      
deposit of $6.0 million as part of a commitment for CSM to supply 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        
favorable price concessions as part of such commitment. Under its agreement with
CSM the Company is required to increase its deposit to up to $10.0 million      
during the five-year term. As of June 28, 1997, the remaining commitment under  
this agreement of $2.0 million is due by September 1, 1997. This non-interest   
bearing deposit is recorded as a long term asset under the caption "Deposits on 
purchase contract" and will be progressively repaid from January 1, 1998, as    
wafers are purchased. The Company had previously entered into a similar         
agreement with American Microsystems, Inc., by which it placed a $5.5 million   
deposit which has been progressively repaid as wafer purchases were made.       

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As of June 28, 1997, approximately $2.6 million of deposit was outstanding which
the Company expects to receive within the next twelve months. The deposit made  
to secure these commitments was recorded as a current asset under the caption   
"Other current assets".                                                         

(6)  MARKETABLE SECURITIES                                                      

The estimated fair value of each investment approximates the cost and,          
therefore, there are no unrealized gains or losses as of June 28, 1997 and June 
29, 1996. Proceeds from the sale or maturity of the investments were $11.3      
million and $18.3 million in fiscal 1997 and 1996, respectively. The cost of    
securities sold is based on the specific identification method. Marketable      
securities and commercial paper classified as current assets at June 28, 1997   
are due within one year.                                                        

(7)  ACCOUNTS RECEIVABLE                                                        

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

                                                                [Download Table]

                                                      June 28   June 29 
                                                        1997      1996  
                                                     -------------------
                                                                        
Accounts receivable                                   $21,133   $15,784 
Less: reserves for allowances and doubtful accounts      (443)   (2,079)
                                                     -------------------
                                                      $20,690   $13,705 
                                                     ===================

(8)  INVENTORY                                                                  

The components of inventories are as follows (in thousands):                    

                                                                [Download Table]

                                         June 28    June 29  
                                           1997       1996   
                                        ---------------------
                                                             
Work-in-process                           $ 9,362   $ 6,876  
Finished parts                              6,553    11,362  
Less: obsolescence reserve                 (2,373)   (2,001) 
                                        ---------------------
Inventory, net                            $13,542   $16,237  
                                        =====================

(9)  PROPERTY AND EQUIPMENT                                                     

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

                                                                [Download Table]

                                                         June 28    June 29  
                                                           1997       1996   
                                                        ---------------------
                                                                             
    Land and building                                     $ 5,394   $ 5,359  
    Machinery and equipment                                18,601    15,624  
    Furniture and fixtures                                  1,240     1,383  
    Leasehold improvements                                    258       208  
                                                         --------------------
                                                          $25,493   $22,574  
    Less: accumulated depreciation and amortization        11,389     8,439  
                                                         --------------------
    Property and equipment, net                           $14,104   $14,135  
                                                         ====================
                                                                               
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Depreciation and amortization expense related to property, plant and equipment  
was $3.6 million, $2.8 million and $2.4 million in 1997, 1996 and 1995,         
respectively.                                                                   

(10) 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 28, 1997. On June   
28, 1997, the Company had no outstanding borrowings under this facility.        

The line of credit available for future borrowings at June 28, 1997 was $17.0   
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.                                            

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

                                                                [Download Table]

                                          June 28  June 29 
                                            1997     1996  
                                         ------------------
                                                           
PIDA second mortgage, payable in monthly                   
installments through April 2009,                           
 interest at 2%                            $1,636   $1,746 
Lease obligations and other                    73        2 
                                         ------------------
                                           $1,709   $1,748 
Less current portion                          206      117 
                                         ------------------
Long-term debt, less current portion       $1,503   $1,631 
                                         ==================

Aggregate annual maturities of long-term debt as of June 28, 1997 (in           
thousands):                                                                     

                                                                [Download Table]
                             
1998                   $  206

1999                      126

2000                      128

2001                      131

2002                      133

2003 and beyond           985
                       ------
                       $1,709
                       ======

(11) LEASE OBLIGATIONS                                                          

The Company leases certain of its facilities under operating lease agreements,  
some of which have renewal options.                                             

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Rental expense under operating lease agreements, net of sublease income, was    
$0.3 million, $0.5 million and $0.5 million in 1997, 1996 and 1995,             
respectively.                                                                   

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

                                                                [Download Table]
                                   

              1998           $  612

              1999              300

              2000              244

              2001              152
                             ------
                             $1,308
                             ======
                                                                               
In connection with merger of Turtle Beach and Voyetra, the Company has          
guaranteed lease payments relating to the Fremont facility which total $379,000.

(12) 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 28,
1997 due to the short-term maturities of these instruments.           

Marketable securities - The estimated fair value of each investment   
    approximates the amortized cost and as such no unrealized gain or loss has
been recorded.                                                        

     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 on June 28,
1997.                                                                 

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(13)    INCOME TAXES                                                            

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

                                                                [Download Table]

                                           Year Ended         
                                 ---------------------------- 
                                   June 28  June 29   June 30 
                                    1997      1996      1995  
                                 ---------------------------- 
                                                              
Current tax expense:                                          
     Federal                        $4,248   $1,324    $4,190 
     State                             525     (814)    1,178 
                                 ---------------------------- 
     Total current                  $4,773   $  510    $5,368 
                                 ---------------------------- 

Deferred tax expense (benefit):                               
     Federal                        $1,299   $  341    $ (227)
     State                             242      525        10 
                                 ---------------------------- 
     Total deferred                  1,541      866      (217)
                                 ---------------------------- 
     Total income tax expense       $6,314   $1,376    $5,151 
                                 ============================ 

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):                                                                     

                                                                [Download Table]

                                                 Year Ended        
                                        ---------------------------
                                          June 28  June 29  June 30
                                           1997     1996     1995  
                                        ---------------------------
                                                                   
Deferred tax assets:                                               
    Accounts receivable allowances         $  171   $  852   $  563
    Inventory valuation                       744      903    1,601
    Change in business strategy reserves       --      102      626
    Net operating loss carry forward          195      529      194
    Capital loss carry forward              2,136       --       --
    Intangible asset                           --      584       --
    Basis in investee                         692       --       --
    Accrued expenses and other                291      416      566
                                        ---------------------------
        Gross deferred tax assets           4,229    3,386    3,550
         Less valuation allowance           3,090      911       --
                                        ---------------------------

   Deferred tax asset                       1,139    2,475    3,550

Deferred tax liabilities:                                          
   Depreciation                               899      773      836
   Other                                       94       15      161
                                        ---------------------------
        Deferred tax liabilities              993      788      997
                                        ---------------------------

Net deferred tax asset                     $  146   $1,687   $2,553
                                        ===========================

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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 carry forwards, and tax planning strategies in making this  
assessment.  Based upon the projections for future taxable income over the      
periods which deferred tax assets are deductible and the potential limitations  
of loss and credit carry forwards, management believes it is more likely than   
not the Company will realize a portion of these deductible differences, net of  
existing valuation allowances at June 28, 1997.  The Company will periodically  
assess and re-evaluate the status of its recorded deferred tax assets.          

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):                  

                                                                [Download Table]

                                                   Year Ended        
                                        -----------------------------
                                          June 28   June 29   June 30
                                            1997      1996      1995 
                                        -----------------------------
                                                                     
Computed expected tax expense (benefit)  $ (736)  $ 1,481    $3,526  
Change in estimate of state taxes            --    (1,065)       --  
Loss in equity investments                2,778      (371)       --  
Loss from discontinued operations           318       252     1,246  
Gain from sale of Galaxy Power             (174)       --        --  
Change in valuation allowance                --       911        --  
Foreign trade income exemption               --       (91)     (124) 
State taxes (net of federal income tax      228       188       772  
 benefit)                                                            
Utilization of net operating loss carry      --        --      (383) 
 forward                                                             
Tax-exempt interest and dividends           (29)      (86)     (237) 
In-process research and development       3,904        --        --  
 write-off                                                           
Other                                        25       157       351  
                                        -----------------------------
                                         $6,314   $ 1,376    $5,151  
                                        =============================

As of June 28, 1997, the Company has state operating loss carry forwards of     
approximately $3.0 million expiring through 2000.  The Company also has a       
capital loss carry forward of approximately $5.2 million expiring in 2012.      
During the fourth quarter of fiscal 1996, the Company changed its estimate of   
accrued state taxes.                                                            

(14) 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                   

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for the plan were $1.9 million, $1.1 million and $1.9 million in fiscal years   
1997, 1996 and 1995, 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 were $0.3 million in each of the three fiscal    
years.                                                                          

(15) STOCK OPTION PLANS                                                         

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

The Company's 1997 Equity Compensation Plan ("the 1997 Plan") was approved by   
the Board of Directors and will be presented as a proposal to approve and ratify
the adoption by shareholders at the Shareholders' Meeting on October 23, 1997.  

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 various employees and directors at prices at fair  
market value with various vesting provisions.  Stock option transactions during 
fiscal years 1997, 1996 and 1995 are summarized as follows (in thousands, except
price per share):                                                               

                                                        [Enlarge/Download Table]

                                 Options Available                                      
                                  For Grant Under                       Weighted Average
                                     The Plans       Number of Shares    Exercise Price 
                               ---------------------------------------------------------
                                                                                        
Balance June 30, 1994                          398              1,837             $12.14
   Additional shares reserved                  500                 --                 --
   Granted                                  (2,765)             2,765              10.32
   Exercised                                    --               (282)              5.09
   Terminated                                1,969             (1,969)             12.77
                               ---------------------------------------------------------
Balance June 30, 1995                          102              2,350             $10.31
   Additional shares reserved                  600                 --                 --
   Granted                                    (934)               934              11.96
   Exercised                                    --               (279)             10.09
   Terminated                                  548               (548)             11.81
                               ---------------------------------------------------------
Balance June 29, 1996                          316              2,457             $10.63
   Additional shares reserved                  300                 --                 --
   Granted                                    (951)               951              12.22
   Exercised                                    --             (1,055)             10.23
   Terminated                                  366               (366)             11.08
                               ---------------------------------------------------------
Balance June 28, 1997                           31              1,987             $11.52
                               =========================================================

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As of June 28, 1997, options for 0.5 million shares were exercisable at prices  
ranging from $0.08 to $15.75 at an aggregate exercise price of $7.6 million.    
Income tax benefits attributable to non-qualified stock options exercised and   
disqualifying dispositions of incentive stock options are credited to common    
stock.                                                                          
During fiscal 1997, 0.4 million stock options have been granted to employees    
under the Plans, at an exercise price of $13.25, the fair market value at grant 
date, for terms of five years.  The Company is currently in the process of      
converting such grants to non-qualified stock options not subject to the Plans. 
Such options are not included in the above table but are considered in the SFAS 
123 pro forma disclosure that follows.                                          

                                                        [Enlarge/Download Table]

                        Options Outstanding                                 Options Exercisable     
-------------------------------------------------------------------  -------------------------------
                                Weighted Average                                                    
                                    Remaining                                                       
       Range of      Number     Contractual Life   Weighted Average      Number     Weighted Average
    Exercise Price Outstanding     (in years)       Exercise Price     Exercisable   Exercise Price 
-------------------------------------------------------------------  -------------------------------
                                                                                                    
    $0.08 - $ 4.89          40            2.71              $ 1.42              16          $ 1.35  
    $6.86 - $10.25         515            3.03               10.02             200           10.15  
   $10.38 - $13.25        1133            3.89               11.81             228           10.81  
   $13.50 - $15.44         298            3.80               14.24              76           14.69  
-------------------------------------------------------------------  -------------------------------
    $0.08 - $15.44       1,987            3.63              $11.52             520          $10.84  

The Company applies APB 25 and related interpretations in accounting for stock  
option plans.  Had compensation cost been recognized consistent with SFAS 123,  
the Company's consolidated net earnings (loss) and earnings (loss) per share    
would have been as follows:                                                     

                                                                [Download Table]

                                             1997    1996   
                                           -----------------
                                                            
Net income (loss)            As reported  $ (8,419)  $3,915 
(000 omitted)                Pro forma     (10,405)   3,330 

Earnings (loss) per share                                   
   Primary                   As reported  $  (0.73)  $ 0.34 
                             Pro forma       (0.91)    0.29 

   Fully diluted             As reported  $  (0.73)  $ 0.34 
                             Pro forma       (0.91)    0.29 

The per share weighted-average fair value of stock options issued by the Company
during 1997 and 1996 was $6.57 and $6.69, respectively.                         

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

                                                                [Download Table]
                                               
Dividend yield                               0%
Expected volatility                      60-65%
Average expected option life            4 years
Risk-free interest rate          5.34% to 6.71%

Pro forma net income (loss) reflects only options granted in fiscal 1997 and    
1996.  Therefore, the full impact of calculating compensation cost for stock    
options under SFAS 123 is not reflected in the pro                              

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forma net income (loss) amounts presented above because compensation cost is    
reflected over an option's vesting period, and compensation cost for options    
granted prior to July 1, 1995 is not considered.                                

(16) EARNINGS PER SHARE                                                         

The Company has not adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", which will become effective in the second quarter of      
fiscal 1998.  The following represents a pro forma earnings (loss) per share to 
disclose the effects of this statement on the Company's reported amounts:       

                                                        [Enlarge/Download Table]

                                                 Fiscal 1997   Fiscal 1996   Fiscal 1995 
                                               ----------------------------------------- 
                                                                                         
Income (loss) from continuing operations             $(7,510)      $ 4,636       $ 8,483 
Income (loss) from discontinued operations              (909)         (721)       (3,560)
                                               ----------------------------------------- 
Net income (loss)                                    $(8,419)      $ 3,915       $ 4,923 
                                               ========================================= 

Basic EPS:                                                                               
   Income (loss) from continuing operations          $ (0.65)      $  0.41       $  0.78 
   Income (loss) from discontinued operations          (0.08)        (0.06)        (0.33)
                                               ----------------------------------------- 
   Basic EPS                                         $ (0.73)      $  0.35       $  0.45 
                                               ========================================= 

   Weighted-average shares outstanding                11,474        11,278        10,936 
                                               ========================================= 

Diluted EPS:                                                                             
   Income (loss) from continuing operations          $ (0.65)      $  0.40       $  0.77 
   Income (loss) from discontinued operations          (0.08)        (0.06)        (0.32)
                                               ----------------------------------------- 
   Diluted EPS                                       $ (0.73)      $  0.34       $  0.45 
                                               ========================================= 

   Weighted-average shares outstanding                11,474        11,278        10,936 
   Assume exercise of options                             --           314           109 
                                               ----------------------------------------- 
   Weighted-average shares outstanding                                                   
    and dilutive potential common shares              11,474        11,592        11,045 
                                               ========================================= 

(17) TREASURY STOCK                                                             

In January 1996, the Company's Board of Directors authorized a program to       
repurchase up to 1.0 million shares of the Company's common stock.  As of June  
28, 1997, the Company has repurchased 0.8 million shares valued at $10.9 million
using the cost method.  In connection with the sale of its battery charge       
controller product line, the Company received 68,387 shares of the Company's    
common stock valued at $11.537 per share, which is included in treasury stock   
(see Related Party footnote 19).  In connection with the Company's acquisition  
of MicroClock, the Company issued 0.6 million shares which were taken from      
treasury stock (see Acquisition/Merger footnote 2).  As of June 28, 1997, the   

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Company had 0.3 million shares in treasury stock valued at $3.7 million, held at
an average cost of $13.09.                                                      

(18) BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION                                

The Company operates primarily within one business segment, which is the design,
development and marketing of integrated circuits and related board level        
products.  Foreign sales consist of shipments primarily to the Pacific Rim and  
Europe and which were approximately 60.3%, 46.8% and 55.1% of revenue in 1997,  
1996 and 1995, respectively.                                                    

(19) RELATED PARTY                                                              

On September 25, 1996, the Company sold its battery charge controller product   
line to Edward H. Arnold, a former director and former Chief Executive Officer  
of the Company. Although the Company had been involved in this product line     
since 1991, it was not considered part of the Company's core business and the   
associated products did not materially contribute to the Company's revenue. In  
making this sale the Company determined that further investment in such a       
product line was not consistent with the strategic direction of the Company.    
Under the terms of such tax-free sale, Mr. Arnold acquired all outstanding      
shares of the Company's wholly-owned subsidiary which owned the intellectual    
property rights and working capital assets of this product in exchange for      
68,387 shares of the Company's common stock valued at $11.537 per share (the    
average closing price for the 10 days prior to the sale). The sale price of $0.8
million was based upon a valuation made by an independent appraiser and involved
a premium over such valuation. In addition, the Company will receive a royalty  
of 2% for all sales during the three-year period after September 25, 1996 as    
consideration for a trademark license associated with this product line. The    
Company has recorded the gain in the statement of operations as follows: the    
battery charge controller inventory sold was recorded as revenue ($0.6 million) 
with its corresponding costs in cost of sales ($0.3 million), and the gain on   
the remaining assets is recorded as other income ($0.2 million).                

In the first quarter of fiscal 1997, the Company and David Sear, the former     
President and Chief Executive Officer, entered into a severance agreement. Dr.  
Sear received $0.3 million in the form of cash, accelerated stock options, and  
health benefits at the time of his departure.                                   

In the first quarter of fiscal 1997, the Company and Henry I. Boreen, Chairman  
of the Board, entered into an employment agreement as Interim Chief Executive   
Officer.  For his services in this capacity, Mr. Boreen received a grant of     
75,000 stock options at an exercise price of $10.38 per share which was equal to
the closing price on the date of grant, and which option has a term of ten years
and becomes exercisable in monthly installments over the six month period       
following the date of grant.                                                    

In the second quarter of fiscal 1997, the Company entered into a Revolving      
Credit Agreement with Voyetra under which the Company extends a line of credit  
up to $3.5 million, subject to certain limitations and certain financial        
covenants.  As of June 28, 1997, the Company believes that Voyetra was not in   
compliance with respect to these financial covenants.  See footnote 3 for       
further information.                                                            

(20) MAJOR CUSTOMERS                                                            

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During fiscal 1997 and 1995, no customer represented 10% or more of the         
Company's revenues. During fiscal 1996 shipments to Intel (including all Intel  
subcontractors) accounted for 11% of the Company's consolidated revenue.        

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(21) QUARTERLY DATA (UNAUDITED)                                                 

The following is a summary of the unaudited quarterly results of operations for 
the years ended June 28, 1997 and June 29, 1996 (in thousands, except per share 
data):                                                                          

                                                        [Enlarge/Download Table]

                                                                          Quarter Ended                                          
                               ------------------------------------------------------------------------------------------------- 
                                 September 28   December 28   March 29   June 28   September 29  December 30  March 30   June 29 
                                     1996           1996        1997       1997        1995         1995        1996       1996  
                               ------------------------------------------------------------------------------------------------- 
                                                                                                                                 
Revenue                               $21,381       $27,445   $ 25,121   $30,412        $25,185      $29,753   $15,382   $21,010 
Cost of sales                          13,677        16,278     13,504    15,678         11,888       16,664    11,891    14,405 
Research and development                2,851         3,215      3,512     3,943          2,307        3,022     2,495     2,723 
In process R&D costs                       --            --     11,196        --             --        1,500        --        -- 
Operating income (loss)                   822         3,847     (6,222)    6,940          6,418        2,106    (3,748)     (576)
Income (loss) from continuing                                                                                                    
operations                                996         2,739     (7,980)   (3,265)         4,094        1,838    (1,726)      430,
Income (loss) from                                                                                                               
discontinued operations                  (367)         (493)    (2,845)    2,796             67           55      (360)     (483)
                               ------------------------------------------------------------------------------------------------- 
Net income (loss)                     $   629       $ 2,246   $(10,825)  $  (469)       $ 4,161      $ 1,893   $(2,086)  $   (53)
                               ================================================================================================= 

Income (loss) from continuing                                                                                                    
operations                            $  0.09       $  0.24   $  (0.68)  $ (0.27)       $  0.34      $  0.16   $ (0.15)  $  0.04 
Income (loss) from                                                                                                               
discontinued operations                 (0.03)        (0.04)     (0.24)     0.23           0.01         0.00     (0.03)    (0.04)
                               ------------------------------------------------------------------------------------------------- 
Net income (loss)                     $  0.06       $  0.20   $  (0.92)  $ (0.04)       $  0.35      $  0.16   $ (0.18)     0.00 
                               ================================================================================================= 

Shares used to compute                                                                                                           
earnings per common and                                                                                                          
common equivalent share:                                                                                                         

Weighted shares outstanding            11,346        11,379     11,771    11,939         11,894       11,682    11,317    11,331 
                               ================================================================================================= 

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

None                                                                            

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 1997 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 1997 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 1997 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 1997 Annual Meeting of Shareholders.         

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.                                      

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Independent Auditors' Report                      

               Consolidated Balance Sheets as of June 28, 1997 and June 29, 1996

            Consolidated Statements of Operations for years ended June 28,
1997, June 29, 1996 and June 30, 1995             

           Consolidated Statements of Shareholders' Equity for the years
  ended June 28, 1997, June 29, 1996 and June 30, 1995

            Consolidated Statements of Cash Flows for the years ended June
28, 1997, June 29, 1996 and June 30, 1995         

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)                                

* 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)                                                  

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 +*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)                                    

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* 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  

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

+ 10.22   Agreement dated September 3, 1997 between the Company and Henry I.    
Boreen                                                      

+ 10.23   Agreement dated April 2, 1997 between the Company and Stavro E.       
Prodromou                                                   

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.                          

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SCHEDULE II 

INTEGRATED CIRCUIT SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS 

Years ended June 28, 1997, June 29, 1996 and June 30, 1995
(in thousands)

                                                        [Enlarge/Download Table]

                                Balance at     Additions Charged                              
                               Beginning of      to Costs and                    Balance at   
Description                       Period           Expenses       Deductions    End of Period 
----------------------------------------------------------------------------------------------
                                                                                              
Year ended June 28, 1997:                                                                     
   Valuation reserves:                                                                        
      Accounts receivable          $2,079       $     172           $   1,808/1/   $  443     
      Inventory                     2,001             372                  --       2,373     

Year ended June 29, 1996:                                                                     
   Valuation reserves:                                                                        
      Accounts receivable          $1,363       $   5,992/2/        $   5,276/2/   $2,079     
      Inventory                     3,887             760               2,646       2,001     

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     

___________________________                                                     
/1/ Reflects the de-consolidation of Turtle Beach.                              

/2/ 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.       

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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 8, 1997  By:     /S/ STAVRO PRODROMOU                          
           -----------------------
                        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 17, 1997  By:  /S/ HOCK E. TAN                               
                 -----------------------------
                                  Senior Vice President, Chief Financial Officer
 and Secretary

Date:    September 17, 1997  By:  /S/ HENRY I. BOREEN                           
                 -----------------------------
                          Henry I. Boreen, Chairman of the Board

Date:    September 17, 1997  By:  /S/ EDWARD M. ESBER JR.                       
                 -----------------------------
             Edward M. Esber, Director

Date:    September 17, 1997  By:  /S/ RUDOLF GASSNER                            
                 -----------------------------
            Rudolf Gassner, Director

Date:    September 17, 1997  By:  /S/ JOHN L. PICKITT                           
                 -----------------------------
             John L. Pickitt, Director

Date:    September 17, 1997  By:  /S/ STAVRO E. PRODROMOU                       
                 -----------------------------
                 Stavro E. Prodromou, Director

49

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10-K’ Filing		Date		First		Last			Other Filings
		1/1/98		32
		12/31/97		20		34
		10/23/97		1		38
Filed on:		9/18/97
		9/17/97		49
		9/8/97		49
		9/3/97		47
		9/1/97		32
		8/29/97		1
		8/4/97		22
		6/29/97		20		31
For Period End:		6/28/97		1		48
		6/17/97		4		20
		4/2/97		47
		3/29/97		14					10-Q
		2/28/97		14		31
		11/30/96		16
		11/29/96		4		30			8-K
		9/25/96		41
		8/30/96		47
		8/2/96		47
		6/29/96		5		48			10-K
		12/30/95		47
		11/21/95		47
		11/8/95		47
		7/1/95		40
		6/30/95		16		48
		6/5/95		46
		12/31/94		46
		11/22/94		46
		11/21/94		46
		10/12/94		46
		9/30/94		46
		7/1/94		28
		6/30/94		26
		4/29/94		10
		12/21/93		46
		10/21/93		46
		7/30/93		10
		7/22/93		46
		5/28/93		46
		5/13/93		46
		1/25/93		45
		12/17/92		46
		12/10/92		45		46
		11/30/92		46
		11/3/92		46
		1/24/92		46
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