##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended July 2, 2006

or



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to
.

Commission
file number 333-126019-09

MAGNACHIP SEMICONDUCTOR LLC

(Exact name of Registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 83-0406195                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                                                                                         |  |               
|-------------------------------------------------------------------------------------------------------- |  | --------------
|c/o MagnaChip Semiconductor S.A. 74, rue de Merl, B.P. 709, L-2017 Luxembourg, Grand Duchy of Luxembourg |  | Not Applicable
|(Address of principal executive offices)                                                                 |  | (Zip Code)    

Registrants telephone number, including area code: (352) 45-62-62

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non accelerated filer. See the definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated
filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ̈No  x

As of August 1, 2006, the registrant had 52,720,784.0470 of the registrants common units outstanding.



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##### Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

TABLE OF CONTENTS



|                             |  |                                                                                       |  |         
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | --------
|                             |  |                                                                                       |  | Page No.
|                             | 
|PART I
FINANCIAL INFORMATION |  | 3                                                                                    
|                             |  |                                                                                      
|Item 1.                      |  | Financial Statements (Unaudited)                                                      |  | 3       
|                             |  |                                                                                      
|                             |  | Condensed Consolidated Statements of Operations                                       |  | 3       
|                             |  |                                                                                      
|                             |  | Condensed Consolidated Balance Sheets                                                 |  | 4       
|                             |  |                                                                                      
|                             |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5       
|                             |  |                                                                                      
|                             |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6       
|                             |  |                                                                                      
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 24      
|                             |  |                                                                                      
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 32      
|                             |  |                                                                                      
|Item 4.                      |  | Controls and Procedures                                                               |  | 32      
|                             | 
|PART II
OTHER INFORMATION    |  | 33                                                                                   
|                             |  |                                                                                      
|Item 1A                      |  | Risk Factors                                                                          |  | 33      
|                             |  |                                                                                      
|Item 2                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 38      
|                             |  |                                                                                      
|Item 4                       |  | Submission of Matters to a Vote of Security Holders                                   |  | 38      
|                             |  |                                                                                      
|Item 6.                      |  | Exhibits                                                                              |  | 38      
|                             | 
|SIGNATURES                   |  | 39                                                                                   



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

MagnaChip Semiconductor LLC and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited; in thousands of US dollars, except unit data)



|                                             |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|-------------------------------------------- |  | ------------------ | ---------- | - | ---------------- | - | ---------- | ------------ |  | - | ------------ | - |  | - | ---------- | -
|                                             |  | Three months ended |            |   | Six months ended |  
|                                             |  | July 2, 2006       |            |   | July 3, 2005     |   |            | July 2, 2006 |  |   | July 3, 2005 |  
|Net sales                                    |  | $                  | 197,613    |   |                  | $ | 236,023    |              |  | $ | 410,756      |   |  | $ | 449,413    |  
|Cost of sales                                |  |                    | 177,342    |   |                  |   | 175,619    |              |  |   | 350,157      |   |  |   | 363,057    |  
|                                             |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|Gross profit                                 |  |                    | 20,271     |   |                  |   | 60,404     |              |  |   | 60,599       |   |  |   | 86,356     |  
|                                             |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|Selling, general and administrative expenses |  |                    | 22,025     |   |                  |   | 32,518     |              |  |   | 43,556       |   |  |   | 60,997     |  
|Research and development expenses            |  |                    | 33,934     |   |                  |   | 27,488     |              |  |   | 63,852       |   |  |   | 53,587     |  
|Restructuring and impairment charges         |  |                    | 93,684     |   |                  |   | 8,720      |              |  |   | 93,684       |   |  |   | 8,720      |  
|                                             |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|Operating loss                               |  |                    | (129,372   | ) |                  |   | (8,322     | )            |  |   | (140,493     | ) |  |   | (36,948    | )
|                                             |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|Other income (expenses)                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|Interest expense, net                        |  |                    | (14,352    | ) |                  |   | (13,991    | )            |  |   | (29,085      | ) |  |   | (27,892    | )
|Foreign currency gain (loss), net            |  |                    | 14,520     |   |                  |   | (12,795    | )            |  |   | 38,757       |   |  |   | 806        |  
|                                             |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|Loss before income taxes                     |  |                    | (129,204   | ) |                  |   | (35,108    | )            |  |   | (130,821     | ) |  |   | (64,034    | )
|                                             |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|Income tax expenses (benefits)               |  |                    | 2,859      |   |                  |   | (1,624     | )            |  |   | 5,133        |   |  |   | 728        |  
|                                             |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|Net loss                                     |  | $                  | (132,063   | ) |                  | $ | (33,484    | )            |  | $ | (135,954     | ) |  | $ | (64,762    | )
|                                             |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|Dividends accrued on preferred units         |  |                    | 2,706      |   |                  |   | 2,478      |              |  |   | 5,339        |   |  |   | 4,873      |  
|                                             |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|Net loss attributable to common units        |  | $                  | (134,769   | ) |                  | $ | (35,962    | )            |  | $ | (141,293     | ) |  | $ | (69,635    | )
|                                             |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|Net loss per common units                    |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|- Basic and diluted                          |  | $                  | (2.54      | ) |                  | $ | (0.68      | )            |  | $ | (2.66        | ) |  | $ | (1.32      | )
|                                             |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|Weighted average number of units             |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|- Basic and diluted                          |  |                    | 53,098,537 |   |                  |   | 52,981,901 |              |  |   | 53,101,546   |   |  |   | 52,755,012 |  

The accompanying notes are an integral part of these financial statements



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##### Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited; in thousands of US dollars, except unit data)



|                                                                                                                                                                   |  |              |          |   |                   |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ----------------- | - | --------- | -
|                                                                                                                                                                   |  | July 2, 2006 |          |   | December 31, 2005 |  
|Assets                                                                                                                                                             |  |              |          |   |                   |   |           |  
|Current assets                                                                                                                                                     |  |              |          |   |                   |   |           |  
|Cash and cash equivalents                                                                                                                                          |  | $            | 86,488   |   |                   | $ | 86,574    |  
|Restricted cash                                                                                                                                                    |  |              | 1,118    |   |                   |   | 2,837     |  
|Accounts receivable, net                                                                                                                                           |  |              | 95,990   |   |                   |   | 112,053   |  
|Inventories, net                                                                                                                                                   |  |              | 62,157   |   |                   |   | 88,677    |  
|Other receivables                                                                                                                                                  |  |              | 7,343    |   |                   |   | 9,501     |  
|Other current assets                                                                                                                                               |  |              | 12,141   |   |                   |   | 10,148    |  
|                                                                                                                                                                   |  |              |          |   |                   |   |           |  
|Total current assets                                                                                                                                               |  |              | 265,237  |   |                   |   | 309,790   |  
|                                                                                                                                                                   |  |              |          |   |                   |   |           |  
|Property, plant and equipment, net                                                                                                                                 |  |              | 382,865  |   |                   |   | 485,077   |  
|Intangible assets, net                                                                                                                                             |  |              | 153,367  |   |                   |   | 191,389   |  
|Other non-current assets                                                                                                                                           |  |              | 57,120   |   |                   |   | 54,391    |  
|                                                                                                                                                                   |  |              |          |   |                   |   |           |  
|Total assets                                                                                                                                                       |  | $            | 858,589  |   |                   | $ | 1,040,647 |  
|                                                                                                                                                                   |  |              |          |   |                   |   |           |  
|Liabilities and Unitholders Equity                                                                                                                                |  |              |          |   |                   |   |           |  
|Current liabilities                                                                                                                                                |  |              |          |   |                   |   |           |  
|Accounts payable                                                                                                                                                   |  | $            | 53,125   |   |                   | $ | 93,911    |  
|Other accounts payable                                                                                                                                             |  |              | 25,109   |   |                   |   | 35,368    |  
|Accrued expenses                                                                                                                                                   |  |              | 28,547   |   |                   |   | 28,968    |  
|Other current liabilities                                                                                                                                          |  |              | 4,719    |   |                   |   | 10,102    |  
|                                                                                                                                                                   |  |              |          |   |                   |   |           |  
|Total current liabilities                                                                                                                                          |  |              | 111,500  |   |                   |   | 168,349   |  
|                                                                                                                                                                   |  |              |          |   |                   |   |           |  
|Long-term borrowings                                                                                                                                               |  |              | 750,000  |   |                   |   | 750,000   |  
|Accrued severance benefits, net                                                                                                                                    |  |              | 58,958   |   |                   |   | 55,124    |  
|Other non-current liabilities                                                                                                                                      |  |              | 6,137    |   |                   |   | 7,196     |  
|                                                                                                                                                                   |  |              |          |   |                   |   |           |  
|Total liabilities                                                                                                                                                  |  |              | 926,595  |   |                   |   | 980,669   |  
|                                                                                                                                                                   |  |              |          |   |                   |   |           |  
|Commitments and contingencies                                                                                                                                      |  |              |          |   |                   |   |           |  
|Series A redeemable convertible preferred units; 60,000 units authorized, 50,091 units issued and 0 unit outstanding at July 2, 2006 and
December 31, 2005         |  |              |         |   |                   |   |          |  
|Series B redeemable convertible preferred units; 550,000 units authorized, 450,692 units issued and 93,997 units outstanding at July 2,
2006 and December 31, 2005 |  |              | 111,801  |   |                   |   | 106,462   |  
|                                                                                                                                                                   |  |              |          |   |                   |   |           |  
|Total redeemable convertible preferred units                                                                                                                       |  |              | 111,801  |   |                   |   | 106,462   |  
|                                                                                                                                                                   |  |              |          |   |                   |   |           |  
|Unitholders equity                                                                                                                                                |  |              |          |   |                   |   |           |  
|Common units; 65,000,000 units authorized; 52,720,784 units and 53,091,570 units issued and outstanding at July 2, 2006 and
December 31, 2005, respectively        |  |              | 52,721   |   |                   |   | 53,092    |  
|Additional paid-in capital                                                                                                                                         |  |              | 2,311    |   |                   |   | 2,169     |  
|Accumulated deficit                                                                                                                                                |  |              | (271,385 | ) |                   |   | (130,092  | )
|Accumulated other comprehensive income                                                                                                                             |  |              | 36,546   |   |                   |   | 28,347    |  
|                                                                                                                                                                   |  |              |          |   |                   |   |           |  
|Total unitholders equity                                                                                                                                          |  |              | (179,807 | ) |                   |   | (46,484   | )
|                                                                                                                                                                   |  |              |          |   |                   |   |           |  
|Total liabilities, redeemable convertible preferred units and unitholders equity                                                                                  |  | $            | 858,589  |   |                   | $ | 1,040,647 |  
|                                                                                                                                                                   |  |              |          |   |                   |   |           |  

The accompanying notes are an integral part of these financial statements



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MagnaChip Semiconductor LLC and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited; in thousands of US dollars)



|                                                                               |  |                  |          |   |              |   |         |  
|------------------------------------------------------------------------------ |  | ---------------- | -------- | - | ------------ | - | ------- | -
|                                                                               |  | Six months ended |         
|                                                                               |  | July 2, 2006     |          |   | July 3, 2005 |  
|Cash flows from operating activities                                           |  |                  |          |   |              |   |         |  
|Net loss                                                                       |  | $                | (135,954 | ) |              | $ | (64,762 | )
|Adjustments to reconcile net loss to net cash provided by operating activities |  |                  |          |   |              |   |         |  
|Depreciation and amortization                                                  |  |                  | 102,509  |   |              |   | 106,784 |  
|Provision for severance benefits                                               |  |                  | 5,357    |   |              |   | 8,126   |  
|Amortization of debt issuance costs                                            |  |                  | 1,833    |   |              |   | 1,695   |  
|Gain on foreign currency translation, net                                      |  |                  | (42,367  | ) |              |   | (1,345  | )
|Impairment of long-lived assets                                                |  |                  | 92,540   |   |              |   | 7,996   |  
|Other                                                                          |  |                  | 465      |   |              |   | (1,046  | )
|Changes in operating assets and liabilities                                    |  |                  |          |   |              |   |         |  
|Accounts receivable                                                            |  |                  | 25,007   |   |              |   | (17,502 | )
|Inventories                                                                    |  |                  | 31,539   |   |              |   | 9,371   |  
|Other receivables                                                              |  |                  | 3,114    |   |              |   | 67,000  |  
|Deferred tax assets                                                            |  |                  | 839      |   |              |   | (3,395  | )
|Accounts payable                                                               |  |                  | (47,177  | ) |              |   | 3,464   |  
|Other accounts payable                                                         |  |                  | (15,996  | ) |              |   | (75,382 | )
|Accrued expenses                                                               |  |                  | (2,088   | ) |              |   | (4,948  | )
|Other current assets                                                           |  |                  | (821     | ) |              |   | 1,515   |  
|Other current liabilities                                                      |  |                  | (5,570   | ) |              |   | (4,092  | )
|Long-term prepaid expenses                                                     |  |                  |         |   |              |   | (4,878  | )
|Payment of severance benefits                                                  |  |                  | (4,559   | ) |              |   | (6,864  | )
|Other                                                                          |  |                  | 1,798    |   |              |   | 543     |  
|                                                                               |  |                  |          |   |              |   |         |  
|Net cash provided by operating activities                                      |  |                  | 10,469   |   |              |   | 22,280  |  
|                                                                               |  |                  |          |   |              |   |         |  
|Cash flows from investing activities                                           |  |                  |          |   |              |   |         |  
|Purchase of plant, property and equipment                                      |  |                  | (19,332  | ) |              |   | (18,299 | )
|Purchase of intangible assets                                                  |  |                  | (1,178   | ) |              |   | (1,172  | )
|Acquisition of business, net of cash acquired of $4,620 thousand               |  |                  |         |   |              |   | (11,831 | )
|Proceeds from disposal of plant, property and equipment                        |  |                  | 2,202    |   |              |   | 113     |  
|Proceeds from disposal of intangible assets                                    |  |                  | 2,794    |   |              |   | 112     |  
|Decrease in restricted cash                                                    |  |                  | 1,876    |   |              |   | 7,065   |  
|Other                                                                          |  |                  | (927     | ) |              |   | 1,577   |  
|                                                                               |  |                  |          |   |              |   |         |  
|Net cash used in investing activities                                          |  |                  | (14,565  | ) |              |   | (22,435 | )
|                                                                               |  |                  |          |   |              |   |         |  
|Cash flows from financing activities                                           |  |                  |          |   |              |   |         |  
|Repayment of short-term borrowings                                             |  |                  |         |   |              |   | (13,369 | )
|Exercise of unit options                                                       |  |                  | 82       |   |              |   | 514     |  
|Repurchase of common units                                                     |  |                  | (414     | ) |              |   |        |  
|Other                                                                          |  |                  |         |   |              |   | (595    | )
|                                                                               |  |                  |          |   |              |   |         |  
|Net cash used in financing activities                                          |  |                  | (332     | ) |              |   | (13,450 | )
|Effect of exchange rates on cash and cash equivalents                          |  |                  | 4,342    |   |              |   | 30      |  
|                                                                               |  |                  |          |   |              |   |         |  
|Net decrease in cash and cash equivalents                                      |  |                  | (86      | ) |              |   | (13,575 | )
|                                                                               |  |                  |          |   |              |   |         |  
|Cash and cash equivalents                                                      |  |                  |          |   |              |   |         |  
|Beginning of the period                                                        |  |                  | 86,574   |   |              |   | 58,396  |  
|                                                                               |  |                  |          |   |              |   |         |  
|End of the period                                                              |  | $                | 86,488   |   |              | $ | 44,821  |  
|                                                                               |  |                  |          |   |              |   |         |  

The accompanying notes are an integral part of these financial statements



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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited; tabular dollars in thousands, except unit data)

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of MagnaChip Semiconductor LLC and its subsidiaries (the
Company) have been prepared in accordance with Accounting Principle Board (APB) Opinion No. 28, Interim Financial Reporting regarding interim financial information and, accordingly, do not include all of the
information and note disclosures required by generally accepted accounting principles in the United States of America for complete financial statements. In the opinion of the Companys management, the unaudited interim condensed consolidated
financial statements include all normal recurring adjustments necessary to fairly present the information required to be set forth therein. All inter-company accounts and transactions have been eliminated. These financial statements should be read
in conjunction with the audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2005, which was filed with the SEC on March 31, 2006. The
results of operations for the three-month and six-month periods ended July 2, 2006 are not necessarily indicative of the results to be expected for a full year or for any other periods.

Recent accounting pronouncements

In June
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of Statements of Financial Accounting Standards
(SFAS) No. 109. FIN 48 clarifies the accounting for uncertain income tax positions accounted for in accordance with SFAS No. 109. The Interpretation stipulates recognition and measurement criteria in addition to classification,
interim period accounting and significantly expanded disclosure provisions for uncertain tax positions that are expected to be taken in a companys tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The
Company does not expect that adoption of this Interpretation will have a material impact on its consolidated financial statements.

In
March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assetsan amendment of FASB Statement No. 140. This Statement addresses the accounting for recognized servicing assets and liabilities
related to certain transfers of the servicers financial assets and for acquisitions or assumptions of obligations to service financial assets that do not relate to the financial assets of the servicer and its related parties. SFAS 156 requires
that all recognized servicing assets and liabilities are initially measured at fair value, and subsequently measured at either fair value or by applying an amortization method for each class of recognized servicing assets and liabilities. SFAS 156
is effective in fiscal years beginning after September 15, 2006. The adoption of SFAS 156 is not expected to have a material impact on the Companys consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements
No. 133 and 140.This Statement amends SFAS No. 133 and SFAS No. 140, and improves the financial reporting of certain hybrid financial instruments by requiring more consistent accounting. Specifically, this Statement allows
fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. This Statement is effective for all financial instruments acquired or issued after the beginning of an
entitys first fiscal year that begins after September 15, 2006. The Company does not expect that adoption of this Statement will have a material impact on its consolidated financial statements.



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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements  (Continued)

(Unaudited; tabular dollars in thousands, except unit data)



2. Inventories

Inventories as of July 2, 2006 and December 31, 2005 consist of the following:



|                                         |  |              |         |   |                   |   |        |  
|---------------------------------------- |  | ------------ | ------- | - | ----------------- | - | ------ | -
|                                         |  | July 2, 2006 |         |   | December 31, 2005 |  
|Finished goods                           |  | $            | 23,135  |   |                   | $ | 28,414 |  
|Semi-finished goods and work-in-progress |  |              | 46,221  |   |                   |   | 60,095 |  
|Raw materials                            |  |              | 6,565   |   |                   |   | 5,814  |  
|Materials in-transit                     |  |              | 1,984   |   |                   |   | 1,966  |  
|Less: Valuation allowance                |  |              | (15,748 | ) |                   |   | (7,612 | )
|                                         |  |              |         |   |                   |   |        |  
|Inventories, net                         |  | $            | 62,157  |   |                   | $ | 88,677 |  
|                                         |  |              |         |   |                   |   |        |  

3. Property, plant and equipment

Property, plant and equipment as of July 2, 2006 and December 31, 2005 comprise the following:



|                                   |  |              |          |   |                   |   |          |  
|---------------------------------- |  | ------------ | -------- | - | ----------------- | - | -------- | -
|                                   |  | July 2, 2006 |          |   | December 31, 2005 |  
|Buildings and related structures   |  | $            | 159,191  |   |                   | $ | 149,236  |  
|Machinery and equipment            |  |              | 342,751  |   |                   |   | 472,388  |  
|Vehicles and others                |  |              | 37,435   |   |                   |   | 32,438   |  
|                                   |  |              |          |   |                   |   |          |  
|                                   |  |              | 539,377  |   |                   |   | 654,062  |  
|Less: Accumulated depreciation     |  |              | (169,376 | ) |                   |   | (181,806 | )
|Land                               |  |              | 12,238   |   |                   |   | 11,492   |  
|Construction in-progress           |  |              | 626      |   |                   |   | 1,329    |  
|                                   |  |              |          |   |                   |   |          |  
|Property, plant and equipment, net |  | $            | 382,865  |   |                   | $ | 485,077  |  
|                                   |  |              |          |   |                   |   |          |  

4. Intangible Assets

Intangible assets as of July 2, 2006 and December 31, 2005 are as follows:



|                               |  |              |         |   |                   |   |         |  
|------------------------------ |  | ------------ | ------- | - | ----------------- | - | ------- | -
|                               |  | July 2, 2006 |         |   | December 31, 2005 |  
|Technology                     |  | $            | 20,874  |   |                   | $ | 23,911  |  
|Customer relationships         |  |              | 167,821 |   |                   |   | 193,958 |  
|Goodwill                       |  |              | 15,095  |   |                   |   | 15,095  |  
|Intellectual property assets   |  |              | 8,774   |   |                   |   | 10,969  |  
|Less: Accumulated amortization |  |              | (59,197 | ) |                   |   | (52,544 | )
|                               |  |              |         |   |                   |   |         |  
|Intangible assets, net         |  | $            | 153,367 |   |                   | $ | 191,389 |  
|                               |  |              |         |   |                   |   |         |  



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##### Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements  (Continued)

(Unaudited; tabular dollars in thousands, except unit data)



5. Product Warranties

The Company records warranty liabilities for the estimated costs that may be incurred under its basic limited warranty in other current liabilities. This warranty covers defective products and related liabilities are
accrued when product revenues are recognized. Factors that affect the Companys warranty liability include historical and anticipated rates of warranty claims on those repairs and cost per claim to satisfy the Companys warranty
obligation. As these factors are impacted by actual experience and future expectations, the Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts when necessary.

Changes in accrued warranty liabilities are as follows:



|                                           |  |                    |       |   |                  |   |        |              |  |   |              |   |  |   |        |  
|------------------------------------------ |  | ------------------ | ----- | - | ---------------- | - | ------ | ------------ |  | - | ------------ | - |  | - | ------ | -
|                                           |  | Three months ended |       |   | Six months ended |  
|                                           |  | July 2, 2006       |       |   | July 3, 2005     |   |        | July 2, 2006 |  |   | July 3, 2005 |  
|Beginning balance                          |  | $                  | 1,027 |   |                  | $ | 2,470  |              |  | $ | 1,036        |   |  | $ | 1,448  |  
|Addition to (reversal of) warranty reserve |  |                    | (693  | ) |                  |   | 1,878  |              |  |   | (575         | ) |  |   | 3,018  |  
|Payments made                              |  |                    | (140  | ) |                  |   | (1,357 | )            |  |   | (308         | ) |  |   | (1,518 | )
|Translation adjustments                    |  |                    | 13    |   |                  |   | (66    | )            |  |   | 54           |   |  |   | (23    | )
|                                           |  |                    |       |   |                  |   |        |              |  |   |              |   |  |   |        |  
|Ending balance                             |  | $                  | 207   |   |                  | $ | 2,925  |              |  | $ | 207          |   |  | $ | 2,925  |  
|                                           |  |                    |       |   |                  |   |        |              |  |   |              |   |  |   |        |  

6. Long-term Borrowings

On December 23, 2004, two of the Companys subsidiaries, MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company issued $500 million aggregate principal amount of Second Priority Senior
Secured Notes consisting of $300 million aggregate principal amount of Floating Rate Second Priority Senior Secured Notes and $200 million aggregate principal amount of 67/8% Second Priority
Senior Secured Notes. At the same time, such subsidiaries issued $250 million aggregate principal amount of 8% Senior Subordinated Notes.

Concurrently with the issuance of the Second Priority Senior Secured Notes, the Company entered into a new senior credit agreement with a syndicate of banks, financial institutions and other entities providing for a $100 million senior
secured revolving credit facility. Interest is charged at current rates when drawn upon.

Details of long-term borrowings as of
July 2, 2006 and December 31, 2005 are presented as below:



|                                                   |  |          |  |                          |  |                    |        
|-------------------------------------------------- |  | -------- |  | ------------------------ |  | ------------------ | -------
|                                                   |  | Maturity |  | Annual interest rate (%) |  | Amount ofprincipal
|Floating Rate Second Priority Senior Secured Notes |  | 2011     |  | 3 month LIBOR + 3.250    |  | $                  | 300,000
|67/8% Second Priority Senior Secured Notes         |  | 2011     |  | 6.875                    |  |                    | 200,000
|8% Senior Subordinated Notes                       |  | 2014     |  | 8.000                    |  |                    | 250,000
|                                                   |  |          |  |                          |  |                    |        
|                                                   |  |          |  |                          |  | $                  | 750,000
|                                                   |  |          |  |                          |  |                    |        

The senior secured revolving credit facility and Second Priority Senior Secured Notes are
collateralized by substantially all of the assets of the Company. The notes will be paid in full upon maturity.

Each indenture governing
the notes contains covenants that limit the ability of the Company and its subsidiaries to (i) incur additional indebtedness, (ii) pay dividends or make other distributions on its capital stock or repurchase, repay or redeem its capital
stock, (iii) make certain investments, (iv) incur liens, (v) enter into certain types of transactions with affiliates, (vi) create restrictions on the payment of dividends or other amounts to the Company by its subsidiaries, and
(vii) sell all or substantially all of its assets or merge with or into other companies.



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##### Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements  (Continued)

(Unaudited; tabular dollars in thousands, except unit data)



Borrowings under the senior secured credit facility are subject to significant conditions, including
compliance with financial ratios and other covenants and obligations.

As of July 2, 2006, the Company and all of its subsidiaries
except for MagnaChip Semiconductor (Shanghai) Company Limited have jointly and severally guaranteed each series of the Second Priority Senior Secured Notes on a second priority senior secured basis. As of July 2, 2006, the Company and its
subsidiaries except for MagnaChip Semiconductor Ltd. (Korea) and MagnaChip Semiconductor (Shanghai) Company Limited have jointly and severally guaranteed the Senior Subordinated Notes on an unsecured, senior subordinated basis. In addition, the
Company and each of its current and future direct and indirect subsidiaries (subject to certain exceptions) will be guarantors of Second Priority Senior Secured Notes and Senior Subordinated Notes.

On July 26, 2006, the Company entered into the Fourth Amendment to Credit Agreement (as amended, the Credit Agreement), dated as of
July 26, 2006 (the Amendment), with MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, as borrowers, the Subsidiary Guarantors party thereto, the Lenders party thereto (the Lenders), UBS AG,
Stamford Branch, as administrative agent and collateral agent (the Agent), and U.S. Bank National Association (US Bank).

Under the Amendment, among other things, (i) the Company agreed to furnish to the Agent and the Lenders monthly financial statements along with an officers certificate with respect to the occurrence of any events of default under
the Credit Agreement, (ii) certain restrictions were imposed on the Companys ability to make acquisitions and capital expenditures, (iii) the financial covenants set forth in Section 6.10 of the Credit Agreement were revised,
(iv) the schedule of applicable margins under the Credit Agreement was revised, (v) the Lenders, the Agent and US Bank waived certain defaults and obligations, and (vi) the Agent consented to the Companys voting in favor of
increasing the share capital of one of the Companys subsidiaries.

Interest Rate Swap

Effective June 27, 2005, the Company entered into an interest rate swap agreement (the Swap) that converted the variable interest rate of
three-month London Inter-bank Offering Rate (LIBOR) plus 3.25% to a fixed interest rate of 7.34% on the Companys Floating Rate Second Priority Senior Secured Notes (the Notes). This Swap will be in effect until
15 June, 2008.

The Swap qualifies as a cash flow hedge under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. The Company is utilizing the hypothetical derivative method to measure the effectiveness by comparing the changes in value of the actual derivative versus the change in fair value of the hypothetical
derivative. Under this methodology, the actual swap was effective when compared to the hypothetical hedge.

For the six-month period
ended July 2, 2006, the Company recorded changes in the fair value of the Swap amounting to $3,310 thousand, under other comprehensive income in the accompanying condensed consolidated financial statements. In addition, during the same period,
the Company recognized interest income of $1,045 thousand, which represents the differences between fixed and variable rates.



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##### Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements  (Continued)

(Unaudited; tabular dollars in thousands, except unit data)



7. Accrued Severance Benefits

Almost all of the accrual for severance benefits is for employees in the Companys Korean subsidiary. Pursuant to the Labor Standard Act of Korea, employees and most executive officers with one or more years of
service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay. As of July 2, 2006, 95% of all employees of the Company were eligible for severance benefits.

Changes in the carrying value of accrued severance benefits are as follows:



|                                                            |  |                    |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|----------------------------------------------------------- |  | ------------------ | ------ | - | ---------------- | - | ------ | ------------ |  | - | ------------ | - |  | - | ------ | -
|                                                            |  | Three months ended |        |   | Six months ended |  
|                                                            |  | July 2, 2006       |        |   | July 3, 2005     |   |        | July 2, 2006 |  |   | July 3, 2005 |  
|Beginning balance                                           |  | $                  | 59,249 |   |                  | $ | 55,237 |              |  | $ | 56,967       |   |  | $ | 52,925 |  
|Provisions                                                  |  |                    | 2,320  |   |                  |   | 4,470  |              |  |   | 5,357        |   |  |   | 8,126  |  
|Transferred from acquired company                           |  |                    |       |   |                  |   |       |              |  |   |             |   |  |   | 196    |  
|Severance payments                                          |  |                    | (1,701 | ) |                  |   | (4,108 | )            |  |   | (4,559       | ) |  |   | (6,864 | )
|Effect of foreign currency translation and other            |  |                    | 925    |   |                  |   | (1,729 | )            |  |   | 3,028        |   |  |   | (513   | )
|                                                            |  |                    |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|Ending balance                                              |  |                    | 60,793 |   |                  |   | 53,870 |              |  |   | 60,793       |   |  |   | 53,870 |  
|                                                            |  |                    |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|Less: Cumulative contributions to the National Pension Fund |  |                    | (888   | ) |                  |   | (1,041 | )            |  |   | (888         | ) |  |   | (1,041 | )
|Group Severance insurance plan                              |  |                    | (947   | ) |                  |   | (940   | )            |  |   | (947         | ) |  |   | (940   | )
|                                                            |  |                    |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|                                                            |  | $                  | 58,958 |   |                  | $ | 51,889 |              |  | $ | 58,958       |   |  | $ | 51,889 |  
|                                                            |  |                    |        |   |                  |   |        |              |  |   |              |   |  |   |        |  

The severance benefits are funded approximately 3.02% and 3.68% as of July 2, 2006 and
July 3, 2005, respectively, through the Companys national pension fund and group severance insurance deposit plan which will be used exclusively for payment of severance benefits to eligible employees. These amounts have been deducted
from the accrued severance benefit balance.

In addition, the Company expects to pay the following future benefits to its employees upon
their normal retirement age:



|            |  |                   |      
|----------- |  | ----------------- | -----
|            |  | Severance benefit
|2006  2008 |  | $                 |     
|2009        |  |                   | 75   
|2010        |  |                   | 218  
|2011  2015 |  |                   | 1,765

The above amounts were determined based on the employees current salary rates and the number
of service years that will be accumulated upon their retirement dates. These amounts do not include amounts that might be paid to employees that will cease working with the Company before their normal retirement ages.



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##### Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements  (Continued)

(Unaudited; tabular dollars in thousands, except unit data)



8. Redeemable Convertible Preferred Unit

The Company issued 49,727 units as Series A redeemable convertible preferred unit (the Series A) and 447,420 units as Series B redeemable
convertible preferred unit (the Series B) on September 23, 2004 and additionally issued 364 units of Series A and 3,272 units of Series B on November 30, 2004, respectively. All of Series A were redeemed by cash on
December 27, 2004 and parts of Series B were redeemed by cash on December 15, 2004 and December 27, 2004.

Changes in Series
B for the three and six months ended July 2, 2006 are as follows:



|                               |  |                    |  |              |         |       |        |        |   |        
|------------------------------ |  | ------------------ |  | ------------ | ------- | ----- | ------ | ------ | - | -------
|                               |  | Three months ended
|                               |  | July 2, 2006       |  | July 3, 2005
|                               |  | Units              |  | Amount       |         | Units |        | Amount
|Beginning of period            |  | 93,997             |  | $            | 109,095 |       | 93,997 |        | $ | 98,929 
|Accrual of preferred dividends |  |                   |  |              | 2,706   |       |       |        |   | 2,478  
|                               |  |                    |  |              |         |       |        |        |   |        
|End of period                  |  | 93,997             |  | $            | 111,801 |       | 93,997 |        | $ | 101,407
|                               |  |                    |  |              |         |       |        |        |   |        



|                               |  |                  |  |              |         |       |        |        |   |        
|------------------------------ |  | ---------------- |  | ------------ | ------- | ----- | ------ | ------ | - | -------
|                               |  | Six months ended
|                               |  | July 2, 2006     |  | July 3, 2005
|                               |  | Units            |  | Amount       |         | Units |        | Amount
|Beginning of period            |  | 93,997           |  | $            | 106,462 |       | 93,997 |        | $ | 96,534 
|Accrual of preferred dividends |  |                 |  |              | 5,339   |       |       |        |   | 4,873  
|                               |  |                  |  |              |         |       |        |        |   |        
|End of period                  |  | 93,997           |  | $            | 111,801 |       | 93,997 |        | $ | 101,407
|                               |  |                  |  |              |         |       |        |        |   |        

The Series B were issued to the original purchasers of the Company in 2004. Holders of Series B
receive dividends which are cumulative, whether or not earned or declared by the board of directors. The cumulative cash dividends accrue at the rate of 10% per unit per annum on the Series B original issue price, compounded semi-annually. Such
dividends are payable in semi-annual installments in arrears commencing March 15, 2005.

9. Earnings per Unit

The following table illustrates the computation of basic and diluted loss per common unit for the three-month and six-month periods ended July 2,
2006 and July 3, 2005:



|                                          |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|----------------------------------------- |  | ------------------ | ---------- | - | ---------------- | - | ---------- | ------------ |  | - | ------------ | - |  | - | ---------- | -
|                                          |  | Three months ended |            |   | Six months ended |  
|                                          |  | July 2, 2006       |            |   | July 3, 2005     |   |            | July 2, 2006 |  |   | July 3, 2005 |  
|Net loss                                  |  | $                  | (132,063   | ) |                  | $ | (33,484    | )            |  | $ | (135,954     | ) |  | $ | (64,762    | )
|Dividends to preferred unitholders        |  |                    | 2,706      |   |                  |   | 2,478      |              |  |   | 5,339        |   |  |   | 4,873      |  
|                                          |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|Net loss attributable to common units     |  | $                  | (134,769   | ) |                  | $ | (35,962    | )            |  | $ | (141,293     | ) |  | $ | (69,635    | )
|                                          |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|Weighted-average common units outstanding |  |                    | 53,098,537 |   |                  |   | 52,981,901 |              |  |   | 53,101,546   |   |  |   | 52,755,012 |  
|                                          |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|Basic and diluted loss per unit           |  | $                  | (2.54      | ) |                  | $ | (0.68      | )            |  | $ | (2.66        | ) |  | $ | (1.32      | )
|                                          |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  

The following outstanding redeemable convertible preferred units issued, options granted and
warrants issued were excluded from the computation of diluted loss per unit as they would have an anti-dilutive effect on the calculation:



|                                       |  |              |  |             
|-------------------------------------- |  | ------------ |  | ------------
|                                       |  | July 2, 2006 |  | July 3, 2005
|Redeemable convertible preferred units |  | 93,997       |  | 93,997      
|Options                                |  | 5,107,886    |  | 3,589,580   
|Warrant                                |  | 5,079,254    |  | 5,079,254   

In connection with the acquisition of the Companys business from Hynix Semiconductor Inc. on
October 6, 2004, by Citigroup Venture Capital Equity Partners, L.P., or CVC, Francisco Partners L.P., or Francisco Partners, CVC Asia Pacific Limited, or CVC Asia Pacific (the Original Acquisition), the Company issued a warrant to
Hynix which enables Hynix to purchase 5,079,254 common units of the Company at an exercise price of $1.00 per unit. This warrant has not been exercised and expires on October 6, 2006.



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##### Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements  (Continued)

(Unaudited; tabular dollars in thousands, except unit data)



10. Equity Incentive Plans

The Company adopted two equity incentive plans effective October 6, 2004 and March 21, 2005, respectively, which are administered by the Compensation Committee designated by the board of directors.
Employees, consultants and non-employee directors are eligible for the grant of options to purchase the Companys common units or restricted common units subject to terms and conditions determined by the Committee. The term of options in no
event exceed ten years from the date of grant. As of July 2, 2006, an aggregate maximum of 7,890,864 common units were authorized and reserved for all future and outstanding grants of options.

Unit options are generally granted with exercise prices of no less than the fair market value of the Companys common units on the grant date.
Generally, options vest and become exercisable in periodic installments, with 25% of the options vesting on the first anniversary of the grant date and 6.25% of options vesting on the last day of each calendar quarter thereafter. In most cases, the
requisite service period, or the period during which a grantee is required to provide service in exchange for option grants, coincides with the vesting period.

Restricted units are issued upon the exercise of certain options to purchase restricted common units. Restricted units issued are subject to restrictions which generally lapse in installments over a four-year period.

The following summarizes unit option and restricted unit activities for the six months ended July 2, 2006:



|                               |  |                            |  |                   |  |                                                |  |                                            
|------------------------------ |  | -------------------------- |  | ----------------- |  | ---------------------------------------------- |  | -------------------------------------------
|                               |  | Number of restricted units |  | Number of options |  | Weighted average exercise price (in US
dollar) |  | Weighted average remaining contractual
life
|Outstanding at January 1, 2006 |  | 1,726,062                  |  | 3,780,643         |  | 1.6                                            |  |                                            
|Granted                        |  |                           |  | 570,500           |  | 1.4                                            |  |                                            
|Exercised                      |  |                           |  | 38,875            |  | 1.9                                            |  |                                            
|Forfeited / Repurchased        |  |                           |  | 175,688           |  | 2.1                                            |  |                                            
|Released from restriction      |  | 156,631                    |  |                  |  |                                                |  |                                            
|                               |  |                            |  |                   |  |                                                |  |                                            
|Outstanding at April 2, 2006   |  | 1,569,431                  |  | 4,136,580         |  | 1.5                                            |  |                                            
|                               |  |                            |  |                   |  |                                                |  |                                            
|Granted                        |  |                           |  | 1,238,000         |  | 1.4                                            |  |                                            
|Exercised                      |  |                           |  | 2,813             |  | 2.9                                            |  |                                            
|Forfeited / Repurchased        |  | 409,348                    |  | 263,881           |  | 1.3                                            |  |                                            
|Released from restriction      |  | 361,305                    |  |                  |  |                                                |  |                                            
|                               |  |                            |  |                   |  |                                                |  |                                            
|Outstanding at July 2, 2006    |  | 798,778                    |  | 5,107,886         |  | 1.5                                            |  | 9.0 years                                  
|                               |  |                            |  |                   |  |                                                |  |                                            
|Exercisable at July 2, 2006    |  | n/a                        |  | 1,297,216         |  | 1.6                                            |  | 8.3 years                                  
|                               |  |                            |  |                   |  |                                                |  |                                            

Effective January 1, 2006, the Company adopted SFAS 123(R), Share-Based Payment (revised
2004).As the Company elected to use the modified prospective application method, no restatement was made to the condensed consolidated statements of operations for prior interim periods or fiscal years. Under SFAS 123(R), the Company is
required to measure compensation cost for all unit-based awards at fair value on the date of grant and recognize compensation expense over the grantees requisite service period. As permitted under SFAS No. 123(R), the Company elected to
recognize compensation expense for all options with graded vesting based on the graded attribution method.



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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements  (Continued)

(Unaudited; tabular dollars in thousands, except unit data)



Total compensation expense for the three and six months ended July 2, 2006 were $28 thousand and
$102 thousand, respectively. As of July 2, 2006, total unrecognized compensation cost of $548 thousand is expected to be recognized over a weighted average future period of 1.7 years.

Prior to the first quarter of 2006, the Company accounted for its unit-based compensation using the intrinsic value method prescribed in APB Opinion
No. 25, Accounting for Stock Issued to Employees, and provided the required pro forma disclosures of SFAS No. 123, Accounting for Stock-Based Compensation. The following presents pro forma net loss and per unit data as if the
fair value based method had been applied to account for the unit-based compensation for three and six months ended July 3, 2005:



|                                                                                                                                                 |  |                                 |         |   |                               |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------- | ------- | - | ----------------------------- | - | ------- | -
|                                                                                                                                                 |  | Three months ended July 3, 2005 |         |   | Six months ended July 3, 2005 |  
|As reported net loss                                                                                                                             |  | $                               | (33,484 | ) |                               | $ | (64,762 | )
|Add: Amortization of non-cash deferred unit compensation expense determined under the intrinsic value method as reported in net loss, net of
tax |  |                                 |        |   |                               |   |        |  
|Deduct: Total unit-based compensation expense determined under the fair value method for all awards, net of tax                                  |  |                                 | (84     | ) |                               |   | (218    | )
|                                                                                                                                                 |  |                                 |         |   |                               |   |         |  
|Pro forma net loss                                                                                                                               |  | $                               | (33,568 | ) |                               | $ | (64,980 | )
|                                                                                                                                                 |  |                                 |         |   |                               |   |         |  
|Pro forma loss per unit                                                                                                                          |  | $                               | (0.68   | ) |                               | $ | (1.32   | )
|                                                                                                                                                 |  |                                 |         |   |                               |   |         |  

The Company utilizes the Black-Scholes option-pricing model to measure the fair value of each
option grant. The following summarizes the grant-date fair value of options granted during the specified periods and assumptions used in the Black-Scholes option-pricing model on a weighted average basis:



|                                                |  |                    |   |  |              |  
|----------------------------------------------- |  | ------------------ | - |  | ------------ | -
|                                                |  | Three months ended |  
|                                                |  | July 2, 2006       |   |  | July 3, 2005 |  
|Grant-date fair value of options (in US dollar) |  | 0.26               |   |  | 0.25         |  
|Expected term                                   |  | 2.2 Years          |   |  | 2.1 Years    |  
|Risk-free interest rate                         |  | 5.0                | % |  | 3.6          | %
|Expected volatility                             |  | 45.7               | % |  | 57.0         | %
|Expected dividends                              |  |                   |   |  |             |  



|                                                |  |                  |   |  |              |  
|----------------------------------------------- |  | ---------------- | - |  | ------------ | -
|                                                |  | Six months ended |  
|                                                |  | July 2, 2006     |   |  | July 3, 2005 |  
|Grant-date fair value of options (in US dollar) |  | 0.25             |   |  | 0.22         |  
|Expected term                                   |  | 2.3 Years        |   |  | 2.1 Years    |  
|Risk-free interest rate                         |  | 4.9              | % |  | 3.0          | %
|Expected volatility                             |  | 46.7             | % |  | 60.9         | %
|Expected dividends                              |  |                 |   |  |             |  

The expected term of each option grant was based on employees expected exercises and
post-vesting employment termination behavior and the risk free interest rate was based on the U.S. Treasury yield curve for the period corresponding to the expected term at the time of grant. The expected volatility was estimated using historical
volatility of share prices of similar public entities. No dividends were assumed for this calculation of option value.

The total cash
received from employees as a result of option exercises was $8 thousand and $82 thousand for the three and six months ended July 2, 2006, respectively. None of the options exercised during these periods had any intrinsic value.



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##### Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements  (Continued)

(Unaudited; tabular dollars in thousands, except unit data)



11. Restructuring and Impairment Charges

Assets impairment

During the three months ended July 2, 2006, the Company recorded
impairment charges of $92,540 thousand related to one of the Companys fabrication facilities (the Fab) and certain related technology and customer-based intangible assets (the asset group) in accordance with SFAS 144,
Accounting for the Impairment or Disposal of Long-lived assets.

SFAS 144 requires the Company to evaluate the recoverability of
certain long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. From the fourth quarter of 2005 through the end of March 2006, the capacity utilization of the Fab had been under the
level that the Company believes to be normal. This was primarily due to a transition in product mix coupled with a seasonal decrease in market demand, which the Company deemed to be temporary and recoverable. However, in the second quarter of 2006,
the Company determined, based on revised forecasting, that the projected demand for certain of its products was significantly less than previously forecasted and that this decline was not temporary or seasonal. Therefore, the Company assessed
whether there had been a material impairment on the asset group pursuant to SFAS 144 and recorded impairment charges based on such assessment. The net book value of the asset group before the impairment charges was approximately $185,985 thousand.

The impairment charge was measured as an excess of the carrying value of the asset group over its fair value. The fair value of the asset
group was estimated using a present value technique, where expected future cash flows from the use and eventual disposal of the asset group were discounted by an interest rate commensurate with the risk of the cash flows.

Restructuring

During the three months ended
July 2, 2006, the Company recorded restructuring charges of $1,144 thousand in accordance with SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. These charges were incurred in association with changes in certain
of the Companys management and related severance agreements.

Assets held-for-sale

In connection with the sale of the Companys application processor business, which was finalized in January 2006, the Company identified and
segregated related tangible assets as held-for-sale and ceased depreciating for such assets. As of July 2, 2006, the remaining amount of held-for-sale assets was $4,437 thousand in total.

12. Comprehensive Income

Comprehensive income is as
follows:



|                                    |  |                    |          |   |                  |   |         |              |  |   |              |   |  |   |         |  
|----------------------------------- |  | ------------------ | -------- | - | ---------------- | - | ------- | ------------ |  | - | ------------ | - |  | - | ------- | -
|                                    |  | Three months ended |          |   | Six months ended |  
|                                    |  | July 2, 2006       |          |   | July 3, 2005     |   |         | July 2, 2006 |  |   | July 3, 2005 |  
|Net loss                            |  | $                  | (132,063 | ) |                  | $ | (33,484 | )            |  | $ | (135,954     | ) |  | $ | (64,762 | )
|Change in fair value of derivatives |  |                    | 1,141    |   |                  |   |        |              |  |   | 3,310        |   |  |   |        |  
|Foreign currency translation effect |  |                    | 1,142    |   |                  |   | (2,232  | )            |  |   | 4,889        |   |  |   | 2,615   |  
|                                    |  |                    |          |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Comprehensive loss                  |  | $                  | (129,780 | ) |                  | $ | (35,716 | )            |  | $ | (127,755     | ) |  | $ | (62,147 | )
|                                    |  |                    |          |   |                  |   |         |              |  |   |              |   |  |   |         |  



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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements  (Continued)

(Unaudited; tabular dollars in thousands, except unit data)



13. Condensed Consolidating Financial Statements

The senior secured credit facility and Second Priority Senior Secured Notes are each fully and unconditionally guaranteed by the Company and all of its
subsidiaries, except for MagnaChip Semiconductor (Shanghai) Company Limited. The Senior Subordinated Notes are fully and unconditionally guaranteed by the Company and all of its subsidiaries, except for MagnaChip Semiconductor, Ltd. (Korea) and
MagnaChip Semiconductor (Shanghai) Company Limited. Below are condensed consolidating balance sheets as of July 2, 2006 and December 31, 2005, condensed consolidating statements of operations for the three and six months ended July 2,
2006 and July 3, 2005 and condensed consolidating statements of cash flows for the six months ended July 2, 2006 and July 3, 2005 of those entities that guarantee the Senior Subordinated Notes, those that do not, MagnaChip
Semiconductor LLC, and the co-issuers.



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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements  (Continued)

(Unaudited; tabular dollars in thousands, except unit data)



Condensed Consolidating Statement of Operations

For the three months ended July 2, 2006



|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |         |   |  |   |          |  
|------------------------------------------------------------------------------ |  | ------------------------------------ | -------- | - | ---------- | - | -------- | -------------- |  | - | ---------- | - |  | ------------ | -------- | - | ------------ | - | ------- | - |  | - | -------- | -
|                                                                               |  | MagnaChip Semiconductor LLC (Parent) |          |   | Co-Issuers |   |          | Non-Guarantors |  |   | Guarantors |   |  | Eliminations |          |   | Consolidated |  
|Net sales                                                                      |  | $                                    |         |   |            | $ |         |                |  | $ | 189,395    |   |  | $            | 101,591  |   |              | $ | (93,373 | ) |  | $ | 197,613  |  
|Cost of sales                                                                  |  |                                      |         |   |            |   |         |                |  |   | 174,434    |   |  |              | 93,489   |   |              |   | (90,581 | ) |  |   | 177,342  |  
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |         |   |  |   |          |  
|Gross profit                                                                   |  |                                      |         |   |            |   |         |                |  |   | 14,961     |   |  |              | 8,102    |   |              |   | (2,792  | ) |  |   | 20,271   |  
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |         |   |  |   |          |  
|Selling, general and administrative expenses                                   |  |                                      | 35       |   |            |   | 269      |                |  |   | 19,115     |   |  |              | 2,606    |   |              |   |        |   |  |   | 22,025   |  
|Research and development expenses                                              |  |                                      |         |   |            |   |         |                |  |   | 34,003     |   |  |              | 3,573    |   |              |   | (3,642  | ) |  |   | 33,934   |  
|Restructuring and Impairment charges                                           |  |                                      |         |   |            |   |         |                |  |   | 93,459     |   |  |              | 225      |   |              |   |        |   |  |   | 93,684   |  
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |         |   |  |   |          |  
|Operating income (loss)                                                        |  |                                      | (35      | ) |            |   | (269     | )              |  |   | (131,616   | ) |  |              | 1,698    |   |              |   | 850     |   |  |   | (129,372 | )
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |         |   |  |   |          |  
|Other income (expenses)                                                        |  |                                      |         |   |            |   | 6,106    |                |  |   | 2,058      |   |  |              | (7,996   | ) |              |   |        |   |  |   | 168      |  
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |         |   |  |   |          |  
|Income (loss) before income taxes, equity in loss of related equity investment |  |                                      | (35      | ) |            |   | 5,837    |                |  |   | (129,558   | ) |  |              | (6,298   | ) |              |   | 850     |   |  |   | (129,204 | )
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |         |   |  |   |          |  
|Income tax expenses                                                            |  |                                      |         |   |            |   | 41       |                |  |   |           |   |  |              | 2,818    |   |              |   |        |   |  |   | 2,859    |  
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |         |   |  |   |          |  
|Income (loss) before equity in loss of related Investment                      |  |                                      | (35      | ) |            |   | 5,796    |                |  |   | (129,558   | ) |  |              | (9,116   | ) |              |   | 850     |   |  |   | (132,063 | )
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |         |   |  |   |          |  
|Loss of related investment                                                     |  |                                      | (132,028 | ) |            |   | (138,126 | )              |  |   |           |   |  |              | (129,642 | ) |              |   | 399,796 |   |  |   |         |  
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |         |   |  |   |          |  
|Net loss                                                                       |  | $                                    | (132,063 | ) |            | $ | (132,330 | )              |  | $ | (129,558   | ) |  | $            | (138,758 | ) |              | $ | 400,646 |   |  | $ | (132,063 | )
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |         |   |  |   |          |  
|Dividends accrued on preferred units                                           |  |                                      | 2,706    |   |            |   |         |                |  |   |           |   |  |              |         |   |              |   |        |   |  |   | 2,706    |  
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |         |   |  |   |          |  
|Net loss attributable to common units                                          |  | $                                    | (134,769 | ) |            | $ | (132,330 | )              |  | $ | (129,558   | ) |  | $            | (138,758 | ) |              | $ | 400,646 |   |  | $ | (134,769 | )
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |         |   |  |   |          |  



16



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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements  (Continued)

(Unaudited; tabular dollars in thousands, except unit data)



Condensed Consolidating Statement of Operations

For the six months ended July 2, 2006



|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|------------------------------------------------------------------------------ |  | ------------------------------------ | -------- | - | ---------- | - | -------- | -------------- |  | - | ---------- | - |  | ------------ | -------- | - | ------------ | - | -------- | - |  | - | -------- | -
|                                                                               |  | MagnaChip Semiconductor LLC (Parent) |          |   | Co-Issuers |   |          | Non-Guarantors |  |   | Guarantors |   |  | Eliminations |          |   | Consolidated |  
|Net sales                                                                      |  | $                                    |         |   |            | $ |         |                |  | $ | 397,823    |   |  | $            | 200,385  |   |              | $ | (187,452 | ) |  | $ | 410,756  |  
|Cost of sales                                                                  |  |                                      |         |   |            |   |         |                |  |   | 346,877    |   |  |              | 185,853  |   |              |   | (182,573 | ) |  |   | 350,157  |  
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Gross profit                                                                   |  |                                      |         |   |            |   |         |                |  |   | 50,946     |   |  |              | 14,532   |   |              |   | (4,879   | ) |  |   | 60,599   |  
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Selling, general and administrative expenses                                   |  |                                      | 68       |   |            |   | 517      |                |  |   | 37,772     |   |  |              | 5,199    |   |              |   |         |   |  |   | 43,556   |  
|Research and development expenses                                              |  |                                      |         |   |            |   |         |                |  |   | 62,745     |   |  |              | 6,985    |   |              |   | (5,878   | ) |  |   | 63,852   |  
|Restructuring and Impairment charges                                           |  |                                      |         |   |            |   |         |                |  |   | 93,459     |   |  |              | 225      |   |              |   |         |   |  |   | 93,684   |  
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Operating income (loss)                                                        |  |                                      | (68      | ) |            |   | (517     | )              |  |   | (143,030   | ) |  |              | 2,123    |   |              |   | 999      |   |  |   | (140,493 | )
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Other income (expenses)                                                        |  |                                      |         |   |            |   | 10,421   |                |  |   | 13,268     |   |  |              | (14,017  | ) |              |   |         |   |  |   | 9,672    |  
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Income (loss) before income taxes, equity in loss of related equity investment |  |                                      | (68      | ) |            |   | 9,904    |                |  |   | (129,762   | ) |  |              | (11,894  | ) |              |   | 999      |   |  |   | (130,821 | )
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Income tax expenses                                                            |  |                                      |         |   |            |   | 82       |                |  |   |           |   |  |              | 5,051    |   |              |   |         |   |  |   | 5,133    |  
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Income (loss) before equity in loss of related Investment                      |  |                                      | (68      | ) |            |   | 9,822    |                |  |   | (129,762   | ) |  |              | (16,945  | ) |              |   | 999      |   |  |   | (135,954 | )
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Loss of related investment                                                     |  |                                      | (135,886 | ) |            |   | (144,867 | )              |  |   |           |   |  |              | (130,138 | ) |              |   | 410,891  |   |  |   |         |  
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Net loss                                                                       |  | $                                    | (135,954 | ) |            | $ | (135,045 | )              |  | $ | (129,762   | ) |  | $            | (147,083 | ) |              | $ | 411,890  |   |  | $ | (135,954 | )
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Dividends accrued on preferred units                                           |  |                                      | 5,339    |   |            |   |         |                |  |   |           |   |  |              |         |   |              |   |         |   |  |   | 5,339    |  
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Net loss attributable to common units                                          |  | $                                    | (141,293 | ) |            | $ | (135,045 | )              |  | $ | (129,762   | ) |  | $            | (147,083 | ) |              | $ | 411,890  |   |  | $ | (141,293 | )
|                                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  



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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements  (Continued)

(Unaudited; tabular dollars in thousands, except unit data)



Condensed Consolidating Statement of Operations

For the three months ended July 3, 2005



|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|------------------------------------------------------------------------------ |  | ------------------------------------ | ------- | - | ---------- | - | ------- | -------------- |  | - | ---------- | - |  | ------------ | ------- | - | ------------ | - | -------- | - |  | - | ------- | -
|                                                                               |  | MagnaChip Semiconductor LLC (Parent) |         |   | Co-Issuers |   |         | Non-Guarantors |  |   | Guarantors |   |  | Eliminations |         |   | Consolidated |  
|Net sales                                                                      |  | $                                    |        |   |            | $ |        |                |  | $ | 226,550    |   |  | $            | 109,527 |   |              | $ | (100,054 | ) |  | $ | 236,023 |  
|Cost of sales                                                                  |  |                                      |        |   |            |   |        |                |  |   | 171,005    |   |  |              | 104,776 |   |              |   | (100,162 | ) |  |   | 175,619 |  
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Gross profit                                                                   |  |                                      |        |   |            |   |        |                |  |   | 55,545     |   |  |              | 4,751   |   |              |   | 108      |   |  |   | 60,404  |  
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Selling, general and administrative expenses                                   |  |                                      | 112     |   |            |   | 366     |                |  |   | 25,413     |   |  |              | 5,823   |   |              |   | 804      |   |  |   | 32,518  |  
|Research and development expenses                                              |  |                                      |        |   |            |   |        |                |  |   | 25,174     |   |  |              | 3,118   |   |              |   | (804     | ) |  |   | 27,488  |  
|Restructuring and impairment charges                                           |  |                                      |        |   |            |   |        |                |  |   | 8,720      |   |  |              |        |   |              |   |         |   |  |   | 8,720   |  
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Operating loss                                                                 |  |                                      | (112    | ) |            |   | (366    | )              |  |   | (3,762     | ) |  |              | (4,190  | ) |              |   | 108      |   |  |   | (8,322  | )
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Other income (expenses)                                                        |  |                                      | 2       |   |            |   | (8,667  | )              |  |   | (25,344    | ) |  |              | 7,223   |   |              |   |         |   |  |   | (26,786 | )
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Income (loss) before income taxes, equity in loss of related equity investment |  |                                      | (110    | ) |            |   | (9,033  | )              |  |   | (29,106    | ) |  |              | 3,033   |   |              |   | 108      |   |  |   | (35,108 | )
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Income tax expenses (benefits)                                                 |  |                                      |        |   |            |   | 81      |                |  |   |           |   |  |              | (1,705  | ) |              |   |         |   |  |   | (1,624  | )
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Income (loss) before equity in loss of related Investment                      |  |                                      | (110    | ) |            |   | (9,114  | )              |  |   | (29,106    | ) |  |              | 4,738   |   |              |   | 108      |   |  |   | (33,484 | )
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Loss of related investment                                                     |  |                                      | (33,374 | ) |            |   | (20,131 | )              |  |   |           |   |  |              | (29,231 | ) |              |   | 82,736   |   |  |   |        |  
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Net loss                                                                       |  | $                                    | (33,484 | ) |            | $ | (29,245 | )              |  | $ | (29,106    | ) |  | $            | (24,493 | ) |              | $ | 82,844   |   |  | $ | (33,484 | )
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Dividends accrued on preferred units                                           |  |                                      | 2,478   |   |            |   |        |                |  |   |           |   |  |              |        |   |              |   |         |   |  |   | 2,478   |  
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Net loss attributable to common units                                          |  | $                                    | (35,962 | ) |            | $ | (29,245 | )              |  | $ | (29,106    | ) |  | $            | (24,493 | ) |              | $ | 82,844   |   |  | $ | (35,962 | )
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  



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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements  (Continued)

(Unaudited; tabular dollars in thousands, except unit data)



Condensed Consolidating Statement of Operations

For the six months ended July 3, 2005



|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|------------------------------------------------------------------------------ |  | ------------------------------------ | ------- | - | ---------- | - | ------- | -------------- |  | - | ---------- | - |  | ------------ | ------- | - | ------------ | - | -------- | - |  | - | ------- | -
|                                                                               |  | MagnaChip Semiconductor LLC (Parent) |         |   | Co-Issuers |   |         | Non-Guarantors |  |   | Guarantors |   |  | Eliminations |         |   | Consolidated |  
|Net sales                                                                      |  | $                                    |        |   |            | $ |        |                |  | $ | 434,515    |   |  | $            | 203,149 |   |              | $ | (188,251 | ) |  | $ | 449,413 |  
|Cost of sales                                                                  |  |                                      |        |   |            |   |        |                |  |   | 357,725    |   |  |              | 194,278 |   |              |   | (188,946 | ) |  |   | 363,057 |  
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Gross profit                                                                   |  |                                      |        |   |            |   |        |                |  |   | 76,790     |   |  |              | 8,871   |   |              |   | 695      |   |  |   | 86,356  |  
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Selling, general and administrative expenses                                   |  |                                      | 115     |   |            |   | 586     |                |  |   | 50,774     |   |  |              | 8,383   |   |              |   | 1,139    |   |  |   | 60,997  |  
|Research and development expenses                                              |  |                                      |        |   |            |   |        |                |  |   | 51,608     |   |  |              | 3,118   |   |              |   | (1,139   | ) |  |   | 53,587  |  
|Restructuring and impairment charges                                           |  |                                      |        |   |            |   |        |                |  |   | 8,720      |   |  |              |        |   |              |   |         |   |  |   | 8,720   |  
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Operating loss                                                                 |  |                                      | (115    | ) |            |   | (586    | )              |  |   | (34,312    | ) |  |              | (2,630  | ) |              |   | 695      |   |  |   | (36,948 | )
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Other income (expenses)                                                        |  |                                      | 5       |   |            |   | (16,829 | )              |  |   | (24,652    | ) |  |              | 14,390  |   |              |   |         |   |  |   | (27,086 | )
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Income (loss) before income taxes, equity in loss of related equity investment |  |                                      | (110    | ) |            |   | (17,415 | )              |  |   | (58,964    | ) |  |              | 11,760  |   |              |   | 695      |   |  |   | (64,034 | )
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Income tax expenses                                                            |  |                                      |        |   |            |   | 108     |                |  |   |           |   |  |              | 620     |   |              |   |         |   |  |   | 728     |  
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Income (loss) before equity in loss of related Investment                      |  |                                      | (110    | ) |            |   | (17,523 | )              |  |   | (58,964    | ) |  |              | 11,140  |   |              |   | 695      |   |  |   | (64,762 | )
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Loss of related investment                                                     |  |                                      | (64,652 | ) |            |   | (43,136 | )              |  |   |           |   |  |              | (60,164 | ) |              |   | 167,952  |   |  |   |        |  
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Net loss                                                                       |  | $                                    | (64,762 | ) |            | $ | (60,659 | )              |  | $ | (58,964    | ) |  | $            | (49,024 | ) |              | $ | 168,647  |   |  | $ | (64,762 | )
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Dividends accrued on preferred units                                           |  |                                      | 4,873   |   |            |   |        |                |  |   |           |   |  |              |        |   |              |   |         |   |  |   | 4,873   |  
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Net loss attributable to common units                                          |  | $                                    | (69,635 | ) |            | $ | (60,659 | )              |  | $ | (58,964    | ) |  | $            | (49,024 | ) |              | $ | 168,647  |   |  | $ | (69,635 | )
|                                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  



19



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##### Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements  (Continued)

(Unaudited; tabular dollars in thousands, except unit data)



Condensed Consolidating Balance Sheet

July 2, 2006



|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------------------ | -------- | - | ---------- | - | -------- | -------------- |  | - | ---------- | - |  | ------------ | -------- | - | ------------ | - | ---------- | - |  | - | -------- | -
|                                                                                  |  | MagnaChip Semiconductor LLC (Parent) |          |   | Co-Issuers |   |          | Non-Guarantors |  |   | Guarantors |   |  | Eliminations |          |   | Consolidated |  
|Assets                                                                            |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Current assets                                                                    |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Cash and cash equivalents                                                         |  | $                                    | 278      |   |            | $ | 441      |                |  | $ | 65,812     |   |  | $            | 19,957   |   |              | $ |           |   |  | $ | 86,488   |  
|Restricted cash                                                                   |  |                                      |         |   |            |   |         |                |  |   | 1,118      |   |  |              |         |   |              |   |           |   |  |   | 1,118    |  
|Accounts receivable, net                                                          |  |                                      |         |   |            |   |         |                |  |   | 125,269    |   |  |              | 50,820   |   |              |   | (80,099    | ) |  |   | 95,990   |  
|Inventories, net                                                                  |  |                                      |         |   |            |   |         |                |  |   | 56,996     |   |  |              | 5,513    |   |              |   | (352       | ) |  |   | 62,157   |  
|Other receivables                                                                 |  |                                      | 34,578   |   |            |   | 718      |                |  |   | 5,571      |   |  |              | 22,325   |   |              |   | (55,849    | ) |  |   | 7,343    |  
|Other current assets                                                              |  |                                      |         |   |            |   | 21,576   |                |  |   | 12,043     |   |  |              | 11,579   |   |              |   | (33,057    | ) |  |   | 12,141   |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Total current assets                                                              |  |                                      | 34,856   |   |            |   | 22,735   |                |  |   | 266,809    |   |  |              | 110,194  |   |              |   | (169,357   | ) |  |   | 265,237  |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Property, plant and equipment, net                                                |  |                                      |         |   |            |   |         |                |  |   | 381,532    |   |  |              | 1,333    |   |              |   |           |   |  |   | 382,865  |  
|Intangibles, net                                                                  |  |                                      |         |   |            |   |         |                |  |   | 129,137    |   |  |              | 24,230   |   |              |   |           |   |  |   | 153,367  |  
|Investments in subsidiaries                                                       |  |                                      | (101,827 | ) |            |   | (178,798 | )              |  |   |           |   |  |              | 19,178   |   |              |   | 261,447    |   |  |   |         |  
|Long-term inter-company loans                                                     |  |                                      |         |   |            |   | 786,265  |                |  |   |           |   |  |              | 621,311  |   |              |   | (1,407,576 | ) |  |   |         |  
|Other non-current assets                                                          |  |                                      |         |   |            |   | 26,265   |                |  |   | 44,627     |   |  |              | 10,876   |   |              |   | (24,648    | ) |  |   | 57,120   |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Total assets                                                                      |  | $                                    | (66,971  | ) |            | $ | 656,467  |                |  | $ | 822,105    |   |  | $            | 787,122  |   |              | $ | (1,340,134 | ) |  | $ | 858,589  |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Liabilities and Unitholders equity                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Current liabilities                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Accounts payable                                                                  |  | $                                    |         |   |            | $ |         |                |  | $ | 56,055     |   |  | $            | 77,169   |   |              | $ | (80,099    | ) |  | $ | 53,125   |  
|Other accounts payable                                                            |  |                                      | 1,035    |   |            |   | 5        |                |  |   | 59,474     |   |  |              | 20,444   |   |              |   | (55,849    | ) |  |   | 25,109   |  
|Accrued expenses                                                                  |  |                                      |         |   |            |   | 3,332    |                |  |   | 25,748     |   |  |              | 23,802   |   |              |   | (24,335    | ) |  |   | 28,547   |  
|Other current liabilities                                                         |  |                                      |         |   |            |   | 243      |                |  |   | 2,112      |   |  |              | 11,086   |   |              |   | (8,722     | ) |  |   | 4,719    |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Total current liabilities                                                         |  |                                      | 1,035    |   |            |   | 3,580    |                |  |   | 143,389    |   |  |              | 132,501  |   |              |   | (169,005   | ) |  |   | 111,500  |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Long-term borrowings                                                              |  |                                      |         |   |            |   | 750,000  |                |  |   | 621,311    |   |  |              | 786,265  |   |              |   | (1,407,576 | ) |  |   | 750,000  |  
|Accrued severance benefits, net                                                   |  |                                      |         |   |            |   |         |                |  |   | 58,637     |   |  |              | 321      |   |              |   |           |   |  |   | 58,958   |  
|Other non-current liabilities                                                     |  |                                      |         |   |            |   |         |                |  |   | 4,261      |   |  |              | 26,524   |   |              |   | (24,648    | ) |  |   | 6,137    |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Total liabilities                                                                 |  |                                      | 1,035    |   |            |   | 753,580  |                |  |   | 827,598    |   |  |              | 945,611  |   |              |   | (1,601,229 | ) |  |   | 926,595  |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Commitments and contingencies                                                     |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Series A redeemable convertible preferred units                                   |  |                                      |         |   |            |   |         |                |  |   |           |   |  |              |         |   |              |   |           |   |  |   |         |  
|Series B redeemable convertible preferred unites                                  |  |                                      | 111,801  |   |            |   |         |                |  |   |           |   |  |              |         |   |              |   |           |   |  |   | 111,801  |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Total redeemable convertible preferred units                                      |  |                                      | 111,801  |   |            |   |         |                |  |   |           |   |  |              |         |   |              |   |           |   |  |   | 111,801  |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Unitholders equity                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Common units                                                                      |  |                                      | 52,721   |   |            |   | 102,986  |                |  |   | 39,005     |   |  |              | 55,773   |   |              |   | (197,764   | ) |  |   | 52,721   |  
|Additional paid-in capital                                                        |  |                                      | 2,311    |   |            |   | 1,115    |                |  |   | 155,297    |   |  |              | 74,685   |   |              |   | (231,097   | ) |  |   | 2,311    |  
|Accumulated deficit                                                               |  |                                      | (271,385 | ) |            |   | (237,975 | )              |  |   | (229,428   | ) |  |              | (319,121 | ) |              |   | 786,524    |   |  |   | (271,385 | )
|Accumulated other comprehensive income                                            |  |                                      | 36,546   |   |            |   | 36,761   |                |  |   | 29,633     |   |  |              | 30,174   |   |              |   | (96,568    | ) |  |   | 36,546   |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Total unitholders equity                                                         |  |                                      | (179,807 | ) |            |   | (97,113  | )              |  |   | (5,493     | ) |  |              | (158,489 | ) |              |   | 261,095    |   |  |   | (179,807 | )
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  
|Total liabilities, redeemable convertible preferred units and unitholders equity |  | $                                    | (66,971  | ) |            | $ | 656,467  |                |  | $ | 822,105    |   |  | $            | 787,122  |   |              | $ | (1,340,134 | ) |  | $ | 858,589  |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |          |  



20



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##### Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements  (Continued)

(Unaudited; tabular dollars in thousands, except unit data)



Condensed Consolidating Balance Sheet

December 31, 2005



|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|--------------------------------------------------------------------------------- |  | ------------------------------------ | -------- | - | ---------- | - | -------- | -------------- |  | - | ---------- | - |  | ------------ | -------- | - | ------------ | - | ---------- | - |  | - | --------- | -
|                                                                                  |  | MagnaChip Semiconductor LLC (Parent) |          |   | Co-Issuers |   |          | Non-Guarantors |  |   | Guarantors |   |  | Eliminations |          |   | Consolidated |  
|Assets                                                                            |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Current assets                                                                    |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Cash and cash equivalents                                                         |  | $                                    | 209      |   |            | $ | 841      |                |  | $ | 63,435     |   |  | $            | 22,089   |   |              | $ |           |   |  | $ | 86,574    |  
|Restricted cash                                                                   |  |                                      |         |   |            |   |         |                |  |   | 2,837      |   |  |              |         |   |              |   |           |   |  |   | 2,837     |  
|Accounts receivable, net                                                          |  |                                      |         |   |            |   |         |                |  |   | 131,669    |   |  |              | 55,057   |   |              |   | (74,673    | ) |  |   | 112,053   |  
|Inventories, net                                                                  |  |                                      |         |   |            |   |         |                |  |   | 82,348     |   |  |              | 7,638    |   |              |   | (1,309     | ) |  |   | 88,677    |  
|Other receivables                                                                 |  |                                      | 35,013   |   |            |   | 718      |                |  |   | 7,792      |   |  |              | 20,097   |   |              |   | (54,119    | ) |  |   | 9,501     |  
|Other current assets                                                              |  |                                      |         |   |            |   | 22,382   |                |  |   | 9,987      |   |  |              | 6,063    |   |              |   | (28,284    | ) |  |   | 10,148    |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Total current assets                                                              |  |                                      | 35,222   |   |            |   | 23,941   |                |  |   | 298,068    |   |  |              | 110,944  |   |              |   | (158,385   | ) |  |   | 309,790   |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Property, plant and equipment, net                                                |  |                                      |         |   |            |   |         |                |  |   | 484,019    |   |  |              | 1,058    |   |              |   |           |   |  |   | 485,077   |  
|Intangibles, net                                                                  |  |                                      |         |   |            |   |         |                |  |   | 165,369    |   |  |              | 26,020   |   |              |   |           |   |  |   | 191,389   |  
|Investments in subsidiaries                                                       |  |                                      | 25,756   |   |            |   | (38,942  | )              |  |   |           |   |  |              | 144,131  |   |              |   | (130,945   | ) |  |   |          |  
|Long-term inter-company loans                                                     |  |                                      |         |   |            |   | 774,199  |                |  |   |           |   |  |              | 621,311  |   |              |   | (1,395,510 | ) |  |   |          |  
|Other non-current assets                                                          |  |                                      |         |   |            |   | 24,153   |                |  |   | 45,370     |   |  |              | 11,131   |   |              |   | (26,263    | ) |  |   | 54,391    |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Total assets                                                                      |  | $                                    | 60,978   |   |            | $ | 783,351  |                |  | $ | 992,826    |   |  | $            | 914,595  |   |              | $ | (1,711,103 | ) |  | $ | 1,040,647 |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Liabilities and Unitholders equity                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Current liabilities                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Accounts payable                                                                  |  | $                                    |         |   |            | $ |         |                |  | $ | 94,581     |   |  | $            | 74,003   |   |              | $ | (74,673    | ) |  | $ | 93,911    |  
|Other accounts payable                                                            |  |                                      | 1,000    |   |            |   | 440      |                |  |   | 68,703     |   |  |              | 19,344   |   |              |   | (54,119    | ) |  |   | 35,368    |  
|Accrued expenses                                                                  |  |                                      |         |   |            |   | 3,139    |                |  |   | 24,560     |   |  |              | 26,331   |   |              |   | (25,062    | ) |  |   | 28,968    |  
|Other current liabilities                                                         |  |                                      |         |   |            |   | 162      |                |  |   | 3,746      |   |  |              | 9,416    |   |              |   | (3,222     | ) |  |   | 10,102    |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Total current liabilities                                                         |  |                                      | 1,000    |   |            |   | 3,741    |                |  |   | 191,590    |   |  |              | 129,094  |   |              |   | (157,076   | ) |  |   | 168,349   |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Long-term borrowings                                                              |  |                                      |         |   |            |   | 750,000  |                |  |   | 621,311    |   |  |              | 774,199  |   |              |   | (1,395,510 | ) |  |   | 750,000   |  
|Accrued severance benefits, net                                                   |  |                                      |         |   |            |   |         |                |  |   | 54,854     |   |  |              | 270      |   |              |   |           |   |  |   | 55,124    |  
|Other non-current liabilities                                                     |  |                                      |         |   |            |   |         |                |  |   | 5,272      |   |  |              | 28,187   |   |              |   | (26,263    | ) |  |   | 7,196     |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Total liabilities                                                                 |  |                                      | 1,000    |   |            |   | 753,741  |                |  |   | 873,027    |   |  |              | 931,750  |   |              |   | (1,578,849 | ) |  |   | 980,669   |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Commitments and contingencies                                                     |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Series A redeemable convertible preferred units                                   |  |                                      |         |   |            |   |         |                |  |   |           |   |  |              |         |   |              |   |           |   |  |   |          |  
|Series B redeemable convertible preferred unites                                  |  |                                      | 106,462  |   |            |   |         |                |  |   |           |   |  |              |         |   |              |   |           |   |  |   | 106,462   |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Total redeemable convertible preferred units                                      |  |                                      | 106,462  |   |            |   |         |                |  |   |           |   |  |              |         |   |              |   |           |   |  |   | 106,462   |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Unitholders equity                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Common units                                                                      |  |                                      | 53,092   |   |            |   | 102,986  |                |  |   | 39,005     |   |  |              | 58,364   |   |              |   | (200,355   | ) |  |   | 53,092    |  
|Additional paid-in capital                                                        |  |                                      | 2,169    |   |            |   | 1,027    |                |  |   | 155,212    |   |  |              | 71,989   |   |              |   | (228,228   | ) |  |   | 2,169     |  
|Accumulated deficit                                                               |  |                                      | (130,092 | ) |            |   | (102,930 | )              |  |   | (99,666    | ) |  |              | (172,038 | ) |              |   | 374,634    |   |  |   | (130,092  | )
|Accumulated other comprehensive income                                            |  |                                      | 28,347   |   |            |   | 28,527   |                |  |   | 25,248     |   |  |              | 24,530   |   |              |   | (78,305    | ) |  |   | 28,347    |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Total unitholders equity                                                         |  |                                      | (46,484  | ) |            |   | 29,610   |                |  |   | 119,799    |   |  |              | (17,155  | ) |              |   | (132,254   | ) |  |   | (46,484   | )
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  
|Total liabilities, redeemable convertible preferred units and unitholders equity |  | $                                    | 60,978   |   |            | $ | 783,351  |                |  | $ | 992,826    |   |  | $            | 914,595  |   |              | $ | (1,711,103 | ) |  | $ | 1,040,647 |  
|                                                                                  |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |            |   |  |   |           |  



21



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##### Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements  (Continued)

(Unaudited; tabular dollars in thousands, except unit data)



Condensed Consolidating Statement of Cash Flows

For the six months ended July 2, 2006



|                                                                                         |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|---------------------------------------------------------------------------------------- |  | ------------------------------------ | -------- | - | ---------- | - | -------- | -------------- |  | - | ---------- | - |  | ------------ | -------- | - | ------------ | - | -------- | - |  | - | -------- | -
|                                                                                         |  | MagnaChip Semiconductor LLC (Parent) |          |   | Co-Issuers |   |          | Non-Guarantors |  |   | Guarantors |   |  | Eliminations |          |   | Consolidated |  
|Cash flow from operating activities:                                                     |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Net loss                                                                                 |  | $                                    | (135,954 | ) |            | $ | (135,045 | )              |  | $ | (129,762   | ) |  | $            | (147,083 | ) |              | $ | 411,890  |   |  | $ | (135,954 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Depreciation and amortization                                                            |  |                                      |         |   |            |   |         |                |  |   | 100,410    |   |  |              | 2,099    |   |              |   |         |   |  |   | 102,509  |  
|Provision for severance benefits                                                         |  |                                      |         |   |            |   |         |                |  |   | 5,315      |   |  |              | 42       |   |              |   |         |   |  |   | 5,357    |  
|Amortization of debt issuance costs                                                      |  |                                      |         |   |            |   | 1,384    |                |  |   | 449        |   |  |              |         |   |              |   |         |   |  |   | 1,833    |  
|Gain on foreign currency translation, net                                                |  |                                      |         |   |            |   | (12,067  | )              |  |   | (42,554    | ) |  |              | 12,254   |   |              |   |         |   |  |   | (42,367  | )
|Impairment of long-lived assets                                                          |  |                                      |         |   |            |   |         |                |  |   | 92,540     |   |  |              |         |   |              |   |         |   |  |   | 92,540   |  
|Loss of related investment                                                               |  |                                      | 135,886  |   |            |   | 144,867  |                |  |   |           |   |  |              | 130,138  |   |              |   | (410,891 | ) |  |   |         |  
|Other                                                                                    |  |                                      |         |   |            |   |         |                |  |   | 651        |   |  |              | (1,802   | ) |              |   | 1,616    |   |  |   | 465      |  
|Changes in operating assets and liabilities:                                             |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Accounts receivable                                                                      |  |                                      |         |   |            |   |         |                |  |   | 14,306     |   |  |              | 5,275    |   |              |   | 5,426    |   |  |   | 25,007   |  
|Inventories                                                                              |  |                                      |         |   |            |   |         |                |  |   | 30,250     |   |  |              | 2,247    |   |              |   | (958     | ) |  |   | 31,539   |  
|Other receivables                                                                        |  |                                      | 434      |   |            |   |         |                |  |   | 2,689      |   |  |              | (1,739   | ) |              |   | 1,730    |   |  |   | 3,114    |  
|Deferred tax assets                                                                      |  |                                      |         |   |            |   |         |                |  |   |           |   |  |              | 839      |   |              |   |         |   |  |   | 839      |  
|Accounts payable                                                                         |  |                                      |         |   |            |   |         |                |  |   | (43,676    | ) |  |              | 1,925    |   |              |   | (5,426   | ) |  |   | (47,177  | )
|Other accounts payable                                                                   |  |                                      | 35       |   |            |   | (435     | )              |  |   | (14,954    | ) |  |              | 1,088    |   |              |   | (1,730   | ) |  |   | (15,996  | )
|Accrued expenses                                                                         |  |                                      |         |   |            |   | 193      |                |  |   | (412       | ) |  |              | (2,596   | ) |              |   | 727      |   |  |   | (2,088   | )
|Other current assets                                                                     |  |                                      |         |   |            |   | 807      |                |  |   | (676       | ) |  |              | (225     | ) |              |   | (727     | ) |  |   | (821     | )
|Other current liabilities                                                                |  |                                      |         |   |            |   | 82       |                |  |   | (1,852     | ) |  |              | (3,800   | ) |              |   |         |   |  |   | (5,570   | )
|Payment of severance benefits                                                            |  |                                      |         |   |            |   |         |                |  |   | (4,559     | ) |  |              |         |   |              |   |         |   |  |   | (4,559   | )
|Other                                                                                    |  |                                      |         |   |            |   | (186     | )              |  |   | 5,462      |   |  |              | (1,862   | ) |              |   | (1,616   | ) |  |   | 1,798    |  
|                                                                                         |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Net cash provided by (used in) operating activities                                      |  |                                      | 401      |   |            |   | (400     | )              |  |   | 13,627     |   |  |              | (3,200   | ) |              |   | 41       |   |  |   | 10,469   |  
|                                                                                         |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Cash flows from investing activities:                                                    |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Purchase of plant, property and equipment                                                |  |                                      |         |   |            |   |         |                |  |   | (18,890    | ) |  |              | (442     | ) |              |   |         |   |  |   | (19,332  | )
|Purchase of intangible assets                                                            |  |                                      |         |   |            |   |         |                |  |   | (1,178     | ) |  |              |         |   |              |   |         |   |  |   | (1,178   | )
|Proceeds from disposal of plant, property and equipment                                  |  |                                      |         |   |            |   |         |                |  |   | 2,201      |   |  |              | 1        |   |              |   |         |   |  |   | 2,202    |  
|Proceeds from disposal of intangible assets                                              |  |                                      |         |   |            |   |         |                |  |   | 2,794      |   |  |              |         |   |              |   |         |   |  |   | 2,794    |  
|Decrease in restricted cash                                                              |  |                                      |         |   |            |   |         |                |  |   | 1,876      |   |  |              |         |   |              |   |         |   |  |   | 1,876    |  
|Increase in short-term inter-company loans                                               |  |                                      |         |   |            |   |         |                |  |   |           |   |  |              | (5,500   | ) |              |   | 5,500    |   |  |   |         |  
|Other                                                                                    |  |                                      |         |   |            |   |         |                |  |   | (946       | ) |  |              | 19       |   |              |   |         |   |  |   | (927     | )
|                                                                                         |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Net cash used in investing activities                                                    |  |                                      |         |   |            |   |         |                |  |   | (14,143    | ) |  |              | (5,922   | ) |              |   | 5,500    |   |  |   | (14,565  | )
|                                                                                         |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Cash flows from financing activities:                                                    |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Proceeds from short-term inter-company borrowings                                        |  |                                      |         |   |            |   |         |                |  |   |           |   |  |              | 5,500    |   |              |   | (5,500   | ) |  |   |         |  
|Exercise of unit options                                                                 |  |                                      | 82       |   |            |   |         |                |  |   |           |   |  |              |         |   |              |   |         |   |  |   | 82       |  
|Repurchase of common units                                                               |  |                                      | (414     | ) |            |   |         |                |  |   |           |   |  |              |         |   |              |   |         |   |  |   | (414     | )
|                                                                                         |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Net cash provided by (used in) financing activities                                      |  |                                      | (332     | ) |            |   |         |                |  |   |           |   |  |              | 5,500    |   |              |   | (5,500   | ) |  |   | (332     | )
|Effect of exchange rate on cash and cash equivalents                                     |  |                                      |         |   |            |   |         |                |  |   | 2,893      |   |  |              | 1,490    |   |              |   | (41      | ) |  |   | 4,342    |  
|                                                                                         |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                     |  |                                      | 69       |   |            |   | (400     | )              |  |   | 2,377      |   |  |              | (2,132   | ) |              |   |         |   |  |   | (86      | )
|                                                                                         |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Cash and cash equivalents:                                                               |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|Beginning of the period                                                                  |  |                                      | 209      |   |            |   | 841      |                |  |   | 63,435     |   |  |              | 22,089   |   |              |   |         |   |  |   | 86,574   |  
|                                                                                         |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  
|End of the period                                                                        |  | $                                    | 278      |   |            | $ | 441      |                |  | $ | 65,812     |   |  | $            | 19,957   |   |              | $ |         |   |  | $ | 86,488   |  
|                                                                                         |  |                                      |          |   |            |   |          |                |  |   |            |   |  |              |          |   |              |   |          |   |  |   |          |  



22



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##### Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements  (Continued)

(Unaudited; tabular dollars in thousands, except unit data)



Condensed Consolidating Statement of Cash Flows

For the six months ended July 3, 2005



|                                                                                         |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ---------- | - | ------- | -------------- |  | - | ---------- | - |  | ------------ | ------- | - | ------------ | - | -------- | - |  | - | ------- | -
|                                                                                         |  | MagnaChip Semiconductor LLC (Parent) |         |   | Co-Issuers |   |         | Non-Guarantors |  |   | Guarantors |   |  | Eliminations |         |   | Consolidated |  
|Cash flow from operating activities:                                                     |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Net loss                                                                                 |  | $                                    | (64,762 | ) |            | $ | (60,659 | )              |  | $ | (58,964    | ) |  | $            | (49,024 | ) |              | $ | 168,647  |   |  | $ | (64,762 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Depreciation and amortization                                                            |  |                                      |        |   |            |   |        |                |  |   | 102,760    |   |  |              | 4,024   |   |              |   |         |   |  |   | 106,784 |  
|Provision for severance benefits                                                         |  |                                      |        |   |            |   |        |                |  |   | 8,083      |   |  |              | 43      |   |              |   |         |   |  |   | 8,126   |  
|Amortization of debt issuance costs                                                      |  |                                      |        |   |            |   | 1,288   |                |  |   | 407        |   |  |              |        |   |              |   |         |   |  |   | 1,695   |  
|Loss (gain) on foreign currency translation, net                                         |  |                                      |        |   |            |   | 20,359  |                |  |   | (2,494     | ) |  |              | (19,210 | ) |              |   |         |   |  |   | (1,345  | )
|Impairment of long-lived assets                                                          |  |                                      |        |   |            |   |        |                |  |   | 7,996      |   |  |              |        |   |              |   |         |   |  |   | 7,996   |  
|Loss(earnings) of related investment                                                     |  |                                      | 64,652  |   |            |   | 43,136  |                |  |   |           |   |  |              | 60,164  |   |              |   | (167,952 | ) |  |   |        |  
|Other                                                                                    |  |                                      |        |   |            |   |        |                |  |   | (1,038     | ) |  |              | (8      | ) |              |   |         |   |  |   | (1,046  | )
|Changes in operating assets and liabilities:                                             |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Accounts receivable                                                                      |  |                                      |        |   |            |   |        |                |  |   | (8,877     | ) |  |              | (1,090  | ) |              |   | (7,535   | ) |  |   | (17,502 | )
|Inventories                                                                              |  |                                      |        |   |            |   |        |                |  |   | 4,785      |   |  |              | 5,286   |   |              |   | (700     | ) |  |   | 9,371   |  
|Other receivables                                                                        |  |                                      | (263    | ) |            |   | 825     |                |  |   | 66,448     |   |  |              | (1,807  | ) |              |   | 1,797    |   |  |   | 67,000  |  
|Deferred tax assets                                                                      |  |                                      |        |   |            |   |        |                |  |   |           |   |  |              | (3,395  | ) |              |   |         |   |  |   | (3,395  | )
|Accounts payable                                                                         |  |                                      |        |   |            |   |        |                |  |   | 6,403      |   |  |              | (10,474 | ) |              |   | 7,535    |   |  |   | 3,464   |  
|Other accounts payable                                                                   |  |                                      | (161    | ) |            |   | 205     |                |  |   | (73,517    | ) |  |              | (112    | ) |              |   | (1,797   | ) |  |   | (75,382 | )
|Accrued expenses                                                                         |  |                                      |        |   |            |   | 1,784   |                |  |   | (2,256     | ) |  |              | 6,389   |   |              |   | (10,865  | ) |  |   | (4,948  | )
|Other current assets                                                                     |  |                                      |        |   |            |   | (7,591  | )              |  |   | 895        |   |  |              | (2,654  | ) |              |   | 10,865   |   |  |   | 1,515   |  
|Other current liabilities                                                                |  |                                      |        |   |            |   | 108     |                |  |   | (4,819     | ) |  |              | 619     |   |              |   |         |   |  |   | (4,092  | )
|Long-term prepaid expense                                                                |  |                                      |         |   |            |   |         |                |  |   | 26,205     |   |  |              |        |   |              |   | (31,083  | ) |  |   | (4,878  | )
|Payment of severance benefits                                                            |  |                                      |        |   |            |   |        |                |  |   | (6,864     | ) |  |              |        |   |              |   |         |   |  |   | (6,864  | )
|Other                                                                                    |  |                                      |        |   |            |   |        |                |  |   | (58,564    | ) |  |              | 28,024  |   |              |   | 31,083   |   |  |   | 543     |  
|                                                                                         |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Net cash provided by (used in) operating activities                                      |  |                                      | (534    | ) |            |   | (545    | )              |  |   | 6,589      |   |  |              | 16,775  |   |              |   | (5       | ) |  |   | 22,280  |  
|                                                                                         |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Cash flows from investing activities:                                                    |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Purchase of plant, property and equipment                                                |  |                                      |        |   |            |   |        |                |  |   | (18,226    | ) |  |              | (474    | ) |              |   | 401      |   |  |   | (18,299 | )
|Purchase of intangible assets                                                            |  |                                      |        |   |            |   |        |                |  |   | (1,172     | ) |  |              |        |   |              |   |         |   |  |   | (1,172  | )
|Acquisition of business                                                                  |  |                                      | (1,870  | ) |            |   |        |                |  |   |           |   |  |              | (9,961  | ) |              |   |         |   |  |   | (11,831 | )
|Proceeds from disposal of plant, property and equipment                                  |  |                                      |        |   |            |   |        |                |  |   | 113        |   |  |              |        |   |              |   |         |   |  |   | 113     |  
|Proceeds from disposal of intangible assets                                              |  |                                      |        |   |            |   |        |                |  |   | 112        |   |  |              |        |   |              |   |         |   |  |   | 112     |  
|Increase in short-term inter-company loans                                               |  |                                      |        |   |            |   |        |                |  |   |           |   |  |              | (14,000 | ) |              |   | 14,000   |   |  |   |        |  
|Increase in long-term inter-company loans                                                |  |                                      |         |   |            |   | (1,009  | )              |  |   |            |   |  |              | (1,009  | ) |              |   | 2,018    |   |  |   |        |  
|Decrease in restricted cash                                                              |  |                                      |        |   |            |   |        |                |  |   | 7,065      |   |  |              |        |   |              |   |         |   |  |   | 7,065   |  
|Other                                                                                    |  |                                      |        |   |            |   |        |                |  |   | 1,462      |   |  |              | 516     |   |              |   | (401     | ) |  |   | 1,577   |  
|                                                                                         |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Net cash used in investing activities                                                    |  |                                      | (1,870  | ) |            |   | (1,009  | )              |  |   | (10,646    | ) |  |              | (24,928 | ) |              |   | 16,018   |   |  |   | (22,435 | )
|                                                                                         |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Cash flows from financing activities:                                                    |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Proceeds from short-term inter-company borrowings                                        |  |                                      |        |   |            |   |        |                |  |   |           |   |  |              | 14,000  |   |              |   | (14,000  | ) |  |   |        |  
|Proceeds from long-term inter-company borrowings                                         |  |                                      |        |   |            |   |        |                |  |   | 1,009      |   |  |              | 1,009   |   |              |   | (2,018   | ) |  |   |        |  
|Repayment of short-term borrowings                                                       |  |                                      |        |   |            |   |        |                |  |   | (764       | ) |  |              | (12,605 | ) |              |   |         |   |  |   | (13,369 | )
|Other                                                                                    |  |                                      | 514     |   |            |   | (378    | )              |  |   | (217       | ) |  |              |        |   |              |   |         |   |  |   | (81     | )
|                                                                                         |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Net cash provided by financing activities                                                |  |                                      | 514     |   |            |   | (378    | )              |  |   | 28         |   |  |              | 2,404   |   |              |   | (16,018  | ) |  |   | (13,450 | )
|Effect of exchange rate on cash and cash equivalents                                     |  |                                      |        |   |            |   |        |                |  |   | 832        |   |  |              | (807    | ) |              |   | 5        |   |  |   | 30      |  
|                                                                                         |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                     |  |                                      | (1,890  | ) |            |   | (1,932  | )              |  |   | (3,197     | ) |  |              | (6,556  | ) |              |   |         |   |  |   | (13,575 | )
|                                                                                         |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Cash and cash equivalents:                                                               |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|Beginning of the period                                                                  |  |                                      | 2,386   |   |            |   | 3,201   |                |  |   | 29,671     |   |  |              | 23,138  |   |              |   |         |   |  |   | 58,396  |  
|                                                                                         |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  
|End of the period                                                                        |  | $                                    | 496     |   |            | $ | 1,269   |                |  | $ | 26,474     |   |  | $            | 16,582  |   |              | $ |         |   |  | $ | 44,821  |  
|                                                                                         |  |                                      |         |   |            |   |         |                |  |   |            |   |  |              |         |   |              |   |          |   |  |   |         |  



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##### Table of Contents

PART I. Financial Information  (continued)



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following Managements Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the
meaning of the federal securities laws that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors set forth elsewhere in this Form 10-Q and
in prior Company public filings with the SEC. In addition, other factors have been or may be discussed from time to time in the Companys SEC filings. These forwardlooking statements are made based on managements expectations and
beliefs concerning future events impacting the Company and, therefore, involve a number of risks and uncertainties. The Companys management cautions that forwardlooking statements are not guarantees and that actual results could differ
materially from those expressed or implied in the forwardlooking statements. The following discussion should be read in conjunction with the unaudited condensed consolidated interim financial statements and related notes included elsewhere in
this Form 10-Q. While the Company periodically reassesses material trends and uncertainties affecting the Companys results of operations and financial condition in connection with the preparation of Managements Discussion and
Analysis of Financial Condition and Results of Operations and certain other sections contained in the Companys quarterly, annual or other reports filed with the SEC, the Company does not intend to review or revise any particular
forwardlooking statement in light of future events.

Overview

We are a leading designer, developer and manufacturer of mixed-signal and digital multimedia semiconductors addressing the convergence of consumer electronics and communication devices. We focus our core business on
CMOS image sensors and flat panel display drivers, which are complex, high-performance mixed-signal semiconductors that capture images and enable and enhance the features and capabilities of both small and large flat panel displays. We also provide
wafer foundry services whereby we leverage our specialized process technologies and low cost manufacturing facilities to produce semiconductors for third parties using their product designs. Our solutions are used in a wide variety of consumer and
commercial mass market applications, such as mobile handsets, including camera-equipped mobile handsets, flat panel monitors and televisions, consumer home and mobile displays, portable and desktop computer displays, handheld gaming devices, PDAs
and audio-visual equipment such as DVD players.

We derive our net sales from products and services in three principal areas: CMOS imaging
solutions, display solutions, and semiconductor manufacturing services.



| |  |  | CMOS imaging solutions: Our CMOS image sensor solutions are used in image-capture applications such as camera-equipped mobile handsets and personal computer cameras. Our
highly integrated image sensors are designed to be cost-effective and to provide brighter, sharper, more colorful, and thus enhanced, image quality.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Display solutions:Our flat panel display drivers are used in several major types of large and small flat panel displays, including TFT-LCD, Color-STN and OLED displays. Our
flat panel display solutions are used in applications such as mobile handsets, flat panel televisions, displays for portable and desktop computers, handheld gaming devices and PDAs.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Semiconductor manufacturing services:We use our process technology and manufacturing facilities to manufacture semiconductor wafers for third parties based on their designs.
Our five fabs have a combined capacity of over 116,000 eight-inch equivalent wafers per month and are located in Cheongju and Gumi, Korea. Our fabs provide us with large scale, cost-effective and flexible capacity enabling us to rapidly scale to
high volume to meet shifts in demand by our end customers.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our business was named MagnaChip Semiconductor when it was
acquired from Hynix Semiconductor Inc. on October 6, 2004, by CVC, Francisco Partners, CVC Asia Pacific, certain members of management and other investors, following discussions with Hynix that began in late 2001 and the execution of a
definitive agreement in June 2004. Previously, we were the System IC division within Hynix which, in 1999, had been formed from a merger between the Hyundai Electronics and LG Semiconductor System IC businesses and can trace its history back to the
late 1970s. Although we were previously part of Hynix, our business had a history of operating autonomously within Hynix and had a separate global sales force and management structure.



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##### Table of Contents

Results of Operations - Comparison of Three-Month Periods Ended July 2, 2006 and July 3, 2005



|                                             |  |                                 |        |   |                                |       |   |        |   |       |                |  |       |        |  |   |        |   |  |         |  
|-------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | ----- | - | ------ | - | ----- | -------------- |  | ----- | ------ |  | - | ------ | - |  | ------- | -
|                                             |  | Three months ended July 2, 2006 |        |   | Three months endedJuly 3, 2005 |       |   | Change |  
|                                             |  | Amount                          |        |   | % of net sales                 |       |   | Amount |   |       | % of net sales |  |       | Amount |  |   | %      |  
|                                             |  | (in millions of US dollars; %)  |       
|Net sales                                    |  | $                               | 197.6  |   |                                | 100.0 |   |        | $ | 236.0 |                |  | 100.0 |        |  | $ | (38.4  | ) |  | (16.3   | )
|Cost of sales                                |  |                                 | 177.3  |   |                                | 89.7  |   |        |   | 175.6 |                |  | 74.4  |        |  |   | 1.7    |   |  | 1.0     |  
|                                             |  |                                 |        |   |                                |       |   |        |   |       |                |  |       |        |  |   |        |   |  |         |  
|Gross profit                                 |  |                                 | 20.3   |   |                                | 10.3  |   |        |   | 60.4  |                |  | 25.6  |        |  |   | (40.1  | ) |  | (66.4   | )
|                                             |  |                                 |        |   |                                |       |   |        |   |       |                |  |       |        |  |   |        |   |  |         |  
|Selling, general and administrative expenses |  |                                 | 22.0   |   |                                | 11.1  |   |        |   | 32.5  |                |  | 13.8  |        |  |   | (10.5  | ) |  | (32.3   | )
|Research and development expenses            |  |                                 | 33.9   |   |                                | 17.2  |   |        |   | 27.5  |                |  | 11.7  |        |  |   | 6.4    |   |  | 23.3    |  
|Restructuring and impairment charges         |  |                                 | 93.7   |   |                                | 47.4  |   |        |   | 8.7   |                |  | 3.7   |        |  |   | 85.0   |   |  | 977.0   |  
|                                             |  |                                 |        |   |                                |       |   |        |   |       |                |  |       |        |  |   |        |   |  |         |  
|Operating loss                               |  |                                 | (129.3 | ) |                                | (65.4 | ) |        |   | (8.3  | )              |  | (3.6  | )      |  |   | (121.0 | ) |  | 1,457.8 |  
|Interest expense, net                        |  |                                 | (14.4  | ) |                                | (7.3  | ) |        |   | (14.0 | )              |  | (5.9  | )      |  |   | (0.4   | ) |  | 2.9     |  
|Foreign currency gain, net                   |  |                                 | 14.5   |   |                                | 7.3   |   |        |   | (12.8 | )              |  | (5.4  | )      |  |   | 27.3   |   |  | (213.3  | )
|                                             |  |                                 |        |   |                                |       |   |        |   |       |                |  |       |        |  |   |        |   |  |         |  
|Loss before income taxes                     |  |                                 | (129.2 | ) |                                | (65.4 | ) |        |   | (35.1 | )              |  | (14.9 | )      |  |   | (94.1  | ) |  | 268.1   |  
|Income tax expenses                          |  |                                 | 2.9    |   |                                | 1.5   |   |        |   | (1.6  | )              |  | (0.7  | )      |  |   | 4.5    |   |  | (281.3  | )
|                                             |  |                                 |        |   |                                |       |   |        |   |       |                |  |       |        |  |   |        |   |  |         |  
|Net loss                                     |  | $                               | (132.1 | ) |                                | (66.9 | ) |        | $ | (33.5 | )              |  | (14.2 | )      |  | $ | (98.6  | ) |  | 294.3   |  
|                                             |  |                                 |        |   |                                |       |   |        |   |       |                |  |       |        |  |   |        |   |  |         |  

Net Sales. Net sales for the three months ended July 2, 2006 were $197.6 million, a
$38.4 million or 16.3% decrease from $236 million for the three months ended July 3, 2005. The year-over-year decrease in net sales is mainly due to discontinuation of our application processor business and DRAM foundry service, coupled with
new product introduction delays in our core business. We completed the divesture of our application processor business in the first quarter of 2006 to focus on our core business.

Net sales from our core business for the three months ended July 2, 2006 was $179.8 million, a decrease of $25.4 million or 12.4% from $205.2
million for the three months ended July 3, 2005. This decrease was primarily attributable to a revenue reduction of $28.8 in our imaging solution business. Delays in the launch of new megapixel products and continued average selling price
pressure for VGA products resulted in the revenue decrease in this business.

Cost of Sales. Cost of sales was $177.3 million during
the current quarter, relatively consistent, on an absolute dollar basis, with cost of sales of $175.6 million in the prior year quarter. Marginal decrease in variable costs, which was driven by lower sales volume, was more than offset by inventory
charges under SFAS No. 151 and increased provisions for inventory valuation reserves. In accordance with SFAS No. 151, certain manufacturing overhead costs were expensed rather than being capitalized as inventory due to under-utilization
of certain fabrication facility. Inventory reserve provisions were increased mainly due to average selling price declines that resulted in lower of cost or market adjustments as well as excessive inventory in display driver products. Cost of sales
as a percentage of net sales was 89.7% in the current quarter compared to 74.4% in the prior year quarter.

Selling, General and
Administrative Expenses.Selling, general and administrative expenses were $22.0 million or 11.1% of net sales for the three months ended July 2, 2006 compared to $32.5 million or 13.8% for the three months ended July 3, 2005. The
decrease of $10.5 million or 32.3% from the prior year quarter was primarily due to lower amortization of intangible assets from the sale of our application processor business in the first quarter of 2006. In addition, a reduction in provisions for
customer claims and returns was reflected during the quarter as a result of improvement in quality control and lower actual experience rates and projected claims.

Research and Development Expenses.Research and development expenses for the current quarter were $33.9 million, an increase of $6.4 million or 23.3% from $27.5 million for the prior year quarter. This increase
in research and development expenses was mainly attributable to increased technology license fees and additional research and development staffing and activity from the acquisition of ISRON Corporation and IC Media Corporation. As a percentage of
net sales, research and development expense in the second quarter of 2006 increased to 17.2% from 11.7% of net sales in the second quarter of 2005.

Restructuring and Impairment Charges.During the three months ended July 2, 2006, we recorded restructuring and impairment charges totaling $93.7 million, which included $92.5 million of impairment under SFAS 144, Accounting
for the Impairment or Disposal of Long-lived assets and $1.2 million of restructuring under SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. The impairment charges were recorded against one of our fabrication
facilities



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##### Table of Contents

(the Fab) and certain related technology and customer-based intangible assets (the asset group) and the restructuring charges were
incurred in association with changes in certain of our management.

From the fourth quarter of 2005 through the end of the first quarter of
2006, the capacity utilization of the Fab was under the level that we believe to be normal. This was primarily due to a transition in product mix coupled with a seasonal decrease in market demand, which was deemed to be temporary and recoverable.
However, in the second quarter of 2006, our management determined, based on revised forecasting, that the projected demand for certain of its products was significantly less than previously forecasted and that this decline was not temporary or
seasonal. Therefore, we assessed whether there had been a material impairment on the asset group pursuant to SFAS 144 and, based on the assessment, recorded impairment charges. The net book value of the tangible and intangible assets before the
impairment charges was approximately $131,815 million and $54,170 thousand, respectively.

The restructuring and impairment charges of $8.7
million for the prior year quarter were taken in connection with an impairment of certain tangible assets and an early retirement program.

Operating Loss.Operating loss for the three-month period ended July 2, 2006 was $129.3 million compared to $8.3 million in the prior year quarter. The increase of $121 million in the operating loss was primarily attributable to
restructuring and impairment charges of $93.7 million taken in the second quarter of 2006 compounded by reduction in net sales. Operating loss as a percentage of net sales was 65.4% and 3.6% in the second quarter of 2006 and 2005, respectively.

Net Interest Expense.Net interest expense was $14.4 million during the three-month period ended July 2, 2006, which is
relatively consistent with $14.0 million for the three-month period ended July 3, 2005. Our interest expense is mostly to serve the long-term borrowings of $750.0 million, which include $300 million of Floating Rate Second Priority Senior
Secured Notes. As a result of an interest rate swap entered into in the second quarter of 2005, the variable interest rate of such Notes was effectively converted to a fixed rate and we are not exposed to changes in interest rates until the interest
rate swap is unwound on June 15, 2008. Refer to Note 6. Long-term Borrowings for details.

Income Tax Expenses.
Income tax expenses for the current quarter were $2.9 million compared to income tax benefits of $1.6 million for the same quarter of 2005. The income tax benefits in the second quarter of 2005 were primarily attributable to the initial recognition
of deferred tax assets for the temporary difference between taxable and accounting income at one of our subsidiaries. Excluding the impact from deferred tax accounting, our income tax expenses are mostly composed of withholding taxes on the interest
paid by one of our subsidiaries to its parent company. Due to the uncertainty of utilization for foreign tax credits, we treated this withholding tax as a current tax expense.



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##### Table of Contents

Results of Operations - Comparison of Six-Month Periods Ended July 2, 2006 and July 3, 2005



|                                             |  |                                |        |   |                               |       |   |        |   |       |                |  |       |        |  |   |        |   |  |         |  
|-------------------------------------------- |  | ------------------------------ | ------ | - | ----------------------------- | ----- | - | ------ | - | ----- | -------------- |  | ----- | ------ |  | - | ------ | - |  | ------- | -
|                                             |  | Six months ended July 2, 2006  |        |   | Six months ended July 3, 2005 |       |   | Change |  
|                                             |  | Amount                         |        |   | % of net sales                |       |   | Amount |   |       | % of net sales |  |       | Amount |  |   | %      |  
|                                             |  | (in millions of US dollars; %) |       
|Net sales                                    |  | $                              | 410.8  |   |                               | 100.0 |   |        | $ | 449.4 |                |  | 100.0 |        |  | $ | (38.6  | ) |  | (8.6    | )
|Cost of sales                                |  |                                | 350.2  |   |                               | 85.2  |   |        |   | 363.1 |                |  | 80.8  |        |  |   | (12.9  | ) |  | (3.6    | )
|                                             |  |                                |        |   |                               |       |   |        |   |       |                |  |       |        |  |   |        |   |  |         |  
|Gross profit                                 |  |                                | 60.6   |   |                               | 14.8  |   |        |   | 86.3  |                |  | 19.2  |        |  |   | (25.7  | ) |  | (29.8   | )
|                                             |  |                                |        |   |                               |       |   |        |   |       |                |  |       |        |  |   |        |   |  |         |  
|Selling, general and administrative expenses |  |                                | 43.6   |   |                               | 10.6  |   |        |   | 61.0  |                |  | 13.6  |        |  |   | (17.4  | ) |  | (28.5   | )
|Research and development expenses            |  |                                | 63.9   |   |                               | 15.6  |   |        |   | 53.6  |                |  | 11.9  |        |  |   | 10.3   |   |  | 19.2    |  
|Restructuring and impairment charges         |  |                                | 93.7   |   |                               | 22.8  |   |        |   | 8.7   |                |  | 1.9   |        |  |   | 85.0   |   |  | 977.0   |  
|                                             |  |                                |        |   |                               |       |   |        |   |       |                |  |       |        |  |   |        |   |  |         |  
|Operating loss                               |  |                                | (140.6 | ) |                               | (34.2 | ) |        |   | (37.0 | )              |  | (8.2  | )      |  |   | (103.6 | ) |  | 280.0   |  
|Interest expense, net                        |  |                                | (29.1  | ) |                               | (7.1  | ) |        |   | (27.9 | )              |  | (6.2  | )      |  |   | (1.2   | ) |  | 4.3     |  
|Foreign currency gain, net                   |  |                                | 38.8   |   |                               | 9.4   |   |        |   | 0.8   |                |  | 0.2   |        |  |   | 38.0   |   |  | 4,750.0 |  
|                                             |  |                                |        |   |                               |       |   |        |   |       |                |  |       |        |  |   |        |   |  |         |  
|Loss before income taxes                     |  |                                | (130.9 | ) |                               | (31.9 | ) |        |   | (64.1 | )              |  | (14.2 | )      |  |   | (66.8  | ) |  | 104.2   |  
|Income tax expenses                          |  |                                | 5.1    |   |                               | 1.2   |   |        |   | 0.7   |                |  | 0.2   |        |  |   | 4.4    |   |  | 628.6   |  
|                                             |  |                                |        |   |                               |       |   |        |   |       |                |  |       |        |  |   |        |   |  |         |  
|Net loss                                     |  | $                              | (136.0 | ) |                               | (33.1 | ) |        | $ | (64.8 | )              |  | (14.4 | )      |  | $ | (71.2  | ) |  | 109.9   |  
|                                             |  |                                |        |   |                               |       |   |        |   |       |                |  |       |        |  |   |        |   |  |         |  

Net Sales. Net sales for the six months ended July 2, 2006 were $410.8 million. This
represents a $38.6 million or 8.6% decrease from $449.4 million for the six months ended July 3, 2005. This decrease in net sales is primarily attributable to discontinuation of our application processor business and DRAM foundry service,
coupled with new product introduction delays in our core business which we had forecasted would substitute for the lost volume from the discontinued business.

Revenues from our core business for the six months ended July 2, 2006 was $375.3 million, a decrease of $7.9 million or 2.1% from $383.2 million for the six months ended July 3, 2005. Revenue increase driven
by both semiconductor manufacturing services and display solution business was more than offset by a decrease in revenue from imaging solution business. Lower revenues in imaging solution business were due to delays in new products and continued ASP
erosion.

Cost of Sales. Cost of sales was $350.2 million for the six months ended July 2, 2006, a decrease of $12.9 million or
3.6% from $363.1 million for the six months ended July 3, 2005. Cost of sales for the first half of 2005 included an inventory charge of $4.5 million related to fair value uplift from purchase accounting. Excluding this charge, the decrease of
$8.4 million in cost of sales was primarily due to reduction in variable costs driven by the decrease in sales volume. Cost of sales as a percentage of net sales was 85.2% in the current year period compared to 80.8% in the prior year period.

Selling, General and Administrative Expenses.Selling, general and administrative expenses were $43.6 million or 10.6% of net sales
for the six months ended July 2, 2006 compared to $61.0 million or 13.6% for the six months ended July 3, 2005. This decrease of $17.4 million or 28.5% from the prior year period was primarily attributable to lower amortization of
intangible assets from the sale of our application processor business in the first quarter of 2006, a decrease in professional service fees and reduced provisions for customer claims and returns. These expenses were reduced as a result of
operational efficiency and infrastructure improvements.

Research and Development Expenses.Research and development expenses for
the current quarter were $63.9 million, a $10.3 million or 19.2% increase from $53.6 million for the prior year period. This increase in research and development expenses represents increased technology license fees and additional research and
development staffing and activity from the acquisition of ISRON Corporation and IC Media Corporation. As a percentage of net sales, research and development expense increased by 370 basis points to 15.6% compared to 11.9% in the first half of 2005.

Restructuring and Impairment Charges.During the six months ended July 2, 2006, we recorded a one-time charge of $93.7 million
as restructuring and impairment charges. The amount included $92.5 million of impairment charges under SFAS 144, Accounting for the Impairment or Disposal of Long-lived assets and $1.2 million of restructuring charges under SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities. As mentioned in the foregoing, the impairment charges were recorded against one of our fabrication facilities and certain related technology and customer-based intangible
assets, and the restructuring charges were taken in association with changes in certain of our management. In the prior year period, $8.7 million of restructuring and impairment charges were recorded in connection with an impairment of certain
tangible assets and an early retirement program.



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##### Table of Contents

Operating Loss.Operating loss for the six-month period ended July 2, 2006 was $140.6
million, a $103.6 million increase from the operating loss of $37 million for the six-month period ended July 3, 2005. This increase in operating loss is primarily attributable to the one-time charge of restructuring and impairment charges
taken during the current period.

Net Interest Expense.Net interest expense was $29.1 million during the six-month period ended
July 2, 2006, an increase of $1.2 million from $27.9 million for the six-month period ended July 3, 2005. The increase in net interest expense was primarily due to an increase in the interest rate on our Floating Rate Second Priority
Senior Secured Notes of $300.0 million. This floating interest rate was effectively converted to a fixed interest rate through an interest rate swap entered into in the second quarter of 2005. As a result, we are not exposed to changes in interest
rates until the interest rate swap is unwound on June 15, 2008. Refer to Note 6. Long-term Borrowings for details.

Income Tax Expenses. Income tax expenses for the six months ended July 2, 2006 were $5.1 million while income tax expenses were $0.7 million for the prior year period. The lower income tax expenses in the prior year period were
primarily attributable to the initial recognition of deferred tax assets for temporary difference between taxable and accounting income. Excluding the impact from deferred tax accounting, our income tax expenses are mostly composed of withholding
taxes on the interest paid by one of our subsidiaries to its parent company. Due to the uncertainty of utilization for foreign tax credits, this withholding tax was treated as a current tax expense.

Liquidity and Capital Resources

Our principal
capital requirements are to fund working capital needs, meet required debt payments, including debt service payments on our notes and, if drawn upon, the senior credit facility, to invest in research and development and capital equipment
expenditures. We anticipate that operating cash flow, together with available borrowing capacity under our senior credit facility, will be sufficient to meet our working capital needs, and fund our research and development expenses, capital
expenditures and service requirements on our debt obligations for the foreseeable future. As of July 2, 2006, we had total long-term debt outstanding of $750.0 million.

During the six-month period ended July 2, 2006, we generated cash from operating activities of $10.5 million, an $11.8 million or 53.0% decrease
from operating cash inflow of $22.3 million during the first half of 2005. The operating cash inflows for the six-month periods reflected our net loss of $135.9 million adjusted by non-cash items of $160.3 million which consisted mostly of
impairment charges, depreciation costs, and amortization costs. This cash inflow on an adjusted basis was partially offset by cash outlays of $13.9 million, mainly due to an increase in working capital requirements during the six-month ended
July 2, 2006.

Our working capital balance was $153.7 million as of July 2, 2006 compared to $141.4 million as of
December 31, 2005. The increase of $12.3 million or 8.7% was driven by a reduction of $40.8 million in accounts payable, representing a decline in the days of accounts payable from 63 to 40. This increase of working capital balance was
partially offset by a decrease of $16.1 million in accounts receivable due to a decline in net sales during the six months ended July 2, 2006.

For investing activities, we used cash of approximately $14.6 million for the six months ended July 2, 2006. This cash outlay principally represented $20.5 million of capital expenditures on tangible and intangible assets, partially
offset by a cash inflow from the sale of our application processor business and other tangible assets. During the prior year quarter, the net cash outlay for investing activities was $22.4 million.

For the six months ended July 2, 2006, there were no significant financing activities. During the first six months of 2005, we used approximately
$13.4 million to repay short-term borrowings.

Capital Expenditures. For the six months ended July 2, 2006, capital
expenditures were flat at $20.5 million compared to $19.5 million for the six months ended July 3, 2005. We will continue to manage the timing of our capital expenditures to support the growth of business from new customers and to optimize
return on our investment.

Future Financing Activities.Our primary future capital requirements include funding of our working
capital needs, meeting our required debt payments, and funding of research and development as well as capital equipment expenditures. We plan to add design resources in low cost locations in Asia. We anticipate that our operating cash flows,
together with available borrowings under our senior credit facility, will be sufficient to meet these capital requirements for the foreseeable future.



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From time to time, we may need to incur additional debt or issue equity to make strategic acquisitions
and investments. However, we cannot assure you that such financing will be available to us on acceptable terms or that such financing will be available at all.

Contractual Obligations

Summarized in the table below are our obligations and commitments to make future payments under
debt obligations and minimum lease payment obligations as of July 2, 2006.



|                                        |  |                             |  |      |  |      |  |      |  |      |  |      |  |            |  |                  |  
|--------------------------------------- |  | --------------------------- |  | ---- |  | ---- |  | ---- |  | ---- |  | ---- |  | ---------- |  | ---------------- | -
|                                        |  | Payments Due by Period      | 
|                                        |  | Total                       |  | 2006 |  | 2007 |  | 2008 |  | 2009 |  | 2010 |  | Thereafter |  | Interest expense |  
|                                        |  | (in millions of US dollars) | 
|Revolving credit facility               |  |                            |  |     |  |     |  |     |  |     |  |     |  |           |  |                  |  
|Secured notes and subordinated notes(*) |  | 750.0                       |  |     |  |     |  |     |  |     |  |     |  | 750.0      |  |                  |  
|Operating lease                         |  | 63.3                        |  | 5.8  |  | 11.5 |  | 11.5 |  | 11.5 |  | 11.5 |  | 11.5       |  |                  |  
|Others                                  |  | 13.3                        |  | 6.7  |  | 6.3  |  | 0.7  |  |     |  |     |  | 0.1        |  | (0.5             | )

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|(*) | Excludes interest obligations on notes.
|--- | ---------------------------------------

The Floating
Rate Second Priority Senior Secured Notes of $300 million and Second Priority Senior Secured Notes of $200 million mature in 2011, while the Senior Subordinated Notes of $250 million mature in 2014. Interest rates are 3 month LIBOR +
3.25%, 67/8% and 8%, respectively. These notes will be paid in full upon maturity.

Each indenture governing the notes contains covenants that limit the ability of the Company and its subsidiaries to (i) incur additional
indebtedness, (ii) pay dividends or make other distributions on its capital stock or repurchase, repay or redeem its capital stock, (iii) make certain investments, (iv) incur liens, (v) enter into certain types of transactions
with affiliates, (vi) create restrictions on the payment of dividends or other amounts to the Company by its subsidiaries, and (vii) sell all or substantially all of its assets or merge with or into other companies.

On July 26, 2006, we entered into the Amendment with MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, as borrowers, the
Subsidiary Guarantors party thereto, the Lenders, the Agent and US Bank.

Under the Amendment, among other things, (i) we agreed to
furnish to the Agent and the Lenders monthly financial statements along with an officers certificate with respect to the occurrence of any events of default under the Credit Agreement, (ii) certain restrictions were imposed on our ability
to make acquisitions and capital expenditures, (iii) the financial covenants set forth in Section 6.10 of the Credit Agreement were revised, (iv) the schedule of applicable margins under the Credit Agreement was revised, (v) the
Lenders, the Agent and US Bank waived certain defaults and obligations, and (vi) the Agent consented to our voting in favor of increasing the share capital of one of our subsidiaries.

Off-Balance Sheet Arrangements

On December 23,
2004, two of our subsidiaries, MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company entered into a senior credit agreement with a syndicate of banks, financial institutions and other entities providing for a $100 million senior
secured revolving credit facility. The undrawn portion of such senior secured credit line as of July 2, 2006 and December 31, 2005 were $88.2 million and $83.0 million, respectively. The utilized portions of the credit line are related to
the issuance of letters of credit under the credit facility.

Other than the senior credit facility, there are no material off-balance
sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that is material to investors.

Recent accounting pronouncements

In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of SFAS No. 109. FIN 48 clarifies the accounting for uncertain income tax positions accounted
for in accordance with SFAS No. 109. The Interpretation stipulates recognition and measurement criteria in addition to classification, interim period accounting and significantly expanded disclosure provisions for uncertain tax positions that
are expected to be taken in a companys tax



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return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of this Interpretation is not expected to have a material
impact on our consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assetsan amendment of FASB Statement No. 140. This Statement addresses the accounting for recognized servicing assets and liabilities related to certain transfers of the servicers financial assets and for acquisitions
or assumptions of obligations to service financial assets that do not relate to the financial assets of the servicer and its related parties. SFAS 156 requires that all recognized servicing assets and liabilities are initially measured at fair
value, and subsequently measured at either fair value or by applying an amortization method for each class of recognized servicing assets and liabilities. SFAS 156 is effective in fiscal years beginning after September 15, 2006. The adoption of
SFAS 156 is not expected to have a material impact on our consolidated financial statements.

In February 2006, the FASB issued SFAS
No. 155, Accounting for Certain Hybrid Financial Instruments  an amendment of FASB Statements No. 133 and 140. This Statement amends SFAS No. 133 and SFAS No. 140, and improves the financial reporting of certain
hybrid financial instruments by requiring more consistent accounting. Specifically, this Statement allows fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation.
This Statement is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The adoption of this Statement is not expected to have a material
impact on our consolidated financial statements.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires our management to make significant judgments and
estimates that affect our financial position and results of operations.

Revenue Recognition

Our revenue is derived from the sale of semiconductor products we design and the manufacture of semiconductor wafers for third parties. We recognize
revenue when persuasive evidence of an arrangement exists, the product has been delivered and title and risk of loss have transferred, the price is fixed and determinable, and collection of resulting receivables is reasonably assured. For certain
distributors, standard products are sold to the distributors without rights to return products or stock rotation or price protection rights. Our policy is to recognize revenue upon shipment of products to customers, where shipment represents the
point when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable and collection of the resulting receivable is reasonably
assured. Specialty foundry services are performed pursuant to manufacturing agreements and purchase orders. Standard products are shipped and sold based upon purchase orders from customers. All amounts billed to a customer related to shipping and
handling are classified as sales, while all costs incurred by us for shipping and handling are classified as expenses.

We maintain
allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make payment. If the financial condition of our customers were to deteriorate, additional allowances may be required. The establishment of
reserves for sales discounts is based on judgment that requires significant estimates of a variety of factors, including forecasted demand, returns and industry pricing assumptions. We record warranty liabilities for the estimated costs that may be
incurred under our limited warranty. This warranty covers product defects based on compliance to our specifications and is normally applicable for twelve months from the date of purchase. These liabilities are recorded when related revenue is
recognized. Warranty costs include the costs to replace the defective product. Factors that affect our warranty liability include the historical and anticipated rate of warranty claims on those repairs and the cost per claim to satisfy our warranty
obligations. As these factors are impacted by actual experience and future expectations, we periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.

Inventory Valuation

Inventories are stated at
the lower of cost or market, using the average cost method, which approximates the first in, first out method. If net realizable value is less than cost at the balance sheet date, the carrying amount is reduced to the realizable value, and the
difference is recognized as a loss on valuation of inventories under cost of sales. We estimate the net realizable value for such finished goods and work-in-progress based on current invoice prices. Inventory reserves are established when conditions
indicate that the net realizable value is less than cost due to physical deterioration, obsolescence, changes in price levels, or other causes. Reserves are also established for excess inventory based on inventory levels in excess of six months of
projected demand, as judged by management, for each specific product.



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Useful Lives of Tangible and Intangible Assets

Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Buildings and related structures are depreciated over the 10 to 40 year periods. Machinery, equipment and other assets including vehicles are depreciated over the estimated useful lives ranging 5 to 10 years.

Our intellectual property assets represent rights under patents, trademarks and property use rights and are amortized over the periods of
benefit, ranging up to 10 years, on a straight-line basis.

Impairment of Long-Lived Assets

We review the carrying value of fixed assets for impairment when events and circumstances indicate that the carrying value of an asset or group of assets
may not be recoverable from the estimated future cash flows expected to result from its use and/or disposition. Factors which could trigger an impairment review include the following: (i) significant negative industry or economic trends,
(ii) exiting an activity in conjunction with a restructuring of operations, (iii) current, historical or projected losses that demonstrated continuing losses associated with an asset, and (iv) managements assessment of future
manufacturing capacity requirements. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment charge is recognized equal to the amount by which the carrying value exceeds the estimated fair value of the
assets. The estimation of future cash flows involves numerous assumptions, which require our judgment, including, but not limited to, future use of the assets for our operations versus sale or disposal of the assets, future-selling prices for our
products and future production and sales volumes. In addition, we must use our judgment in determining the groups of assets for which impairment tests are separately performed.

Income Taxes

We account for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes. SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in a companys financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences
are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax
assets and liabilities.

We established valuation allowances for deferred tax assets at most of our subsidiaries since, other than with
respect to one particular subsidiary, it is not probable that a majority of the deferred tax assets will be realizable. The valuation allowance at this particular subsidiary was not set up since it is expected that the deferred tax assets at this
subsidiary will be deemed realizable based on the current prospects for its future taxable income.

Unit-based Compensation

In 2006, we adopted SFAS No. 123(R) using the modified prospective application method and began to account for unit-based compensation based on a
fair value method. Under the provision of SFAS No. 123(R), unit-based compensation cost is estimated at the grant date based on the fair-value of the award and is recognized as expense over the requisite service period of the award. Consistent
with prior-period pro forma presentation under SFAS No. 123, we use the Black-Scholes option pricing model to value options. In developing assumptions for fair value calculation under SFAS No. 123(R), we use estimates based on historical
data and market information. A small change in the assumptions used in the estimate can cause a relatively significant change in the fair value calculation.

The valuation of our common unit is based on an independent appraisal from a third party and is updated reflecting the changes in our financial results and prospects. Determination of the fair value of our common
units involves complex and subjective judgments. If we make different judgments or adopt different assumptions, material differences could result in the timing and amount of the unit-based compensation expenses recorded because the estimated fair
value of the underlying units for the options granted would be different.

Contingencies and Litigation

We are subject to the possibility of losses from various contingencies. Considerable judgment is necessary to estimate the probability and amount of any
loss from such contingencies. An accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. In such case, we accrue a liability and charge operations for
the estimated costs of adjudication or settlement of the applicable asserted and unasserted claims existing as of the balance sheet date.



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|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Market risk is the risk that the value of a financial instrument will fluctuate due to changes in market conditions, including changes in interest rates and foreign exchange rates. In the normal course of our business, we are subject to
market risk associated with interest rate movements and currency movements on our assets and liabilities.

Foreign Currency Risk. We
have exposure to foreign currency exchange-rate fluctuations on net income from our subsidiaries denominated in currencies other than U.S. dollars, as our foreign subsidiaries in Korea, Taiwan, China, Japan and Hong Kong use local currency as their
functional currency. From time to time these subsidiaries have cash and financial instruments in local currency. The amounts held in Japan, Taiwan, Hong Kong and China are not material in regards to foreign currency movements. However, based on the
cash and financial instruments balance at July 2, 2006 for our Korean subsidiary, a 10% devaluation of the Korean Won against the U.S. dollar would have resulted in a decrease of $6.1 million in our U.S. dollar financial instruments balance and
cash balance.

Interest Rate Risk. The $200 million 67/8% Second Priority Senior Secured Notes due 2011 and the $250 million 8% Senior Subordinated Notes due 2014 are subject to changes in fair value due to
interest rate changes. If the market interest rate had decreased by 10% and all other variables were held constant from their levels at July 2, 2006, we estimate that we would have additional interest expense costs over the market rate of $1.4
million for the six months ended July 2, 2006. The fair value of these fixed rate notes would have decreased by $9.4 million or increased by $9.8 million with a 10% increase or decrease in the interest rate, respectively.

Cash Flow Interest Rate Risk. In 2005, we entered into an interest rate swap agreement to convert the variable interest rate on our Floating Rate
Second Priority Senior Secured Notes to a fixed interest rate for the periods to maturity date of June 2008. With this interest rate swap, cash flow interest rate risk was replaced with exposure to interest rate risk. For details, refer to
Note 6. Long-term Borrowings.



|Item 4. | Controls and Procedures
|------- | -----------------------

Disclosure Controls and Procedures

As required by the Securities Exchange Act of 1934, as amended (the Exchange Act), our management, including our Chief
Executive Officer (CEO) and our Chief Financial Officer (CFO), conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this
report. As defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, disclosure controls and procedures are controls and other procedures that we use that are designed to ensure that information required to be disclosed by us in the reports we
file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and our CFO, as appropriate, to allow timely decisions
regarding required disclosure.

Based upon that evaluation, our CEO and our CFO concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

On June 2, 2006, the Board of Directors constituted an Audit Committee to oversee the accounting and financial reporting processes of the Company and
audits of the financial statements of the Company and to assist the Board in oversight and monitoring of the integrity of the Companys financial statements, the Companys compliance with legal and regulatory requirements, the independent
auditors qualifications, independence and performance, and the Companys internal accounting and financial controls. The Company also established an internal audit function under the Audit Committee. The internal audit function is
currently comprised of two auditors and is charged with, among other tasks, establishing appropriate internal controls to meet the requirements under Section 404 of the Sarbanes-Oxley Act of 2002.



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PART II OTHER INFORMATION



|Item 1A. | Risk Factors
|-------- | ------------

The cyclical nature of the semiconductor industry
may limit our ability to maintain or increase net sales and profit levels during industry downturns.

The semiconductor industry is
highly cyclical and periodically experiences significant economic downturns characterized by diminished product demand, resulting in production overcapacity and excess inventory in the markets we serve, which can result in rapid erosion of average
selling prices. The industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles of both semiconductor companies and their customers products and the decline in general economic
conditions.

We have experienced these conditions in our business in the past and may experience renewed, and possibly more severe and
prolonged, downturns in the future as a result of such cyclical changes. This may reduce our profitability and the value of our business.

Customer
demand is difficult to accurately forecast.

We make significant decisions, including determining the levels of business that we will
seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimates of customer requirements. The short-term nature of commitments by many of our customers and the
possibility of rapid changes in demand for their products reduces our ability to accurately estimate future customer demand. On occasion, customers may require rapid increases in production, which can challenge our resources and reduce margins. We
may not have sufficient capacity at any given time to meet our customers increased demand for our product. Conversely, downturns in the semiconductor industry may cause and have caused our customers to significantly reduce the amount of
products ordered from us. Because many of our costs and operating expenses are relatively fixed, a reduction in customer demand may decrease our gross margins and operating income.

Our customers may cancel their orders, change production quantities or delay production.

We
generally do not obtain firm, long-term purchase commitments from our customers. Customers may cancel their orders, change production quantities or delay production for a number of reasons. Cancellations, reductions or delays by a significant
customer or by a group of customers, which we have experienced as a result of the recent downturn in the semiconductor industry, have adversely affected and may continue to adversely affect our results of operations. In addition, while we do not
obtain long-term purchase commitments, we generally agree to the pricing of a particular product for the entire lifecycle of the product, which can extend over a number of years. If we underestimate our costs when determining the pricing, our
margins and results of operations would be adversely affected.

A significant portion of our sales comes from a relatively limited number of customers.

If we were to lose key customers or if customers cease to place orders for our high volume devices, our financial results will be
adversely affected. While we served more than 214 customers in the six-month period ended July 2, 2006, net sales to our 10 largest customers represented approximately 60.1% of our net sales for the period. We had one individual customer and
one group of affiliated customers that each represented greater than 10% of our net sales during the six-month period ended July 2, 2006. Significant reductions in sales to any of these customers, the loss of major customers or the curtailment
of orders for our high-volume devices within a short period of time would adversely affect our business.

Our industry is highly competitive.

The semiconductor industry is highly competitive and includes hundreds of companies, a number of which have achieved substantial market
share. Current and prospective customers for our products evaluate our capabilities against the merits of our direct competitors. Some of our competitors are well-established as independent companies and have substantially greater market share and
manufacturing, financial, research and development and marketing resources than we do. We also compete with emerging companies that are attempting to sell their products in specialized markets, and with the internal capabilities of many of our
significant customers. We expect to experience continuing competitive pressures in our markets from existing competitors and new entrants. Any consolidation among our competitors could enhance their product offerings and financial resources, further
enhancing their competitive position. Our ability to compete successfully depends on a number of factors, including the following: our ability to offer cost effective products on a timely basis using our technologies; our ability to accurately
identify and respond to emerging technological trends and demand for product features and performance characteristics; product introductions by our competitors; our ability to adopt or adapt to emerging industry standards; and the number and nature
of our competitors in a given market. Many of these factors are outside of our control. In the future, our competitors may capture our existing or potential customers and our customers may satisfy more of their requirements internally. As a result,
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A decline in average selling prices could decrease our profits.

In the past, our industry has experienced a decline in average selling prices. A decline in average selling prices for our products, if not offset by
reductions in the costs of producing such products, would decrease our gross profits and could have a material adverse effect on our business, financial condition and results of operations.

Growth in the consumer electronics and other end markets for our products is an important component in our success.

Our continued success will depend in part on the growth of various consumer electronics markets and other end markets that use our semiconductors and on
general economic growth. To the extent that we cannot offset recessionary periods or periods of reduced growth that may occur in these markets through greater penetration of these markets, our sales may decline and our business, financial condition
and results of operations may suffer as a result.

We depend on successful technological advances for growth.

Our industry is subject to rapid technological change and product obsolescence as customers and competitors create new and innovative products and
technologies. Products or technologies developed by other companies may render our products or technologies obsolete or noncompetitive and we may not be able to access leading edge process technologies or to license or otherwise obtain essential
intellectual property required by our customers. Our inability to continue identifying new product opportunities, or manufacturing technologically advanced products on a cost-effective basis, may result in decreased revenues and a loss of market
share to our competitors.

We may not be able to attract or retain the technical or management employees necessary to remain competitive in our
industry.

We depend on our ability to attract and retain skilled technical and managerial personnel. We could lose the services of, or
fail to recruit, skilled personnel, which could hinder our research and product development programs or otherwise have a material adverse effect on our business.

If we encounter future labor problems, we may fail to deliver our products in a timely manner which could adversely affect our revenues and profitability.

As of August 1, 2006, approximately 62% of our employees were represented by the MagnaChip Semiconductor Labor Union, which is a member of the Federation of Korean Metal Workers Trade Unions. We cannot assure you
that issues with the labor union and other employees will be resolved favorably for us in the future, that we will not experience significant work stoppages in future years or that we will not record significant charges related to those work
stoppages.

We may incur costs to engage in future business combinations or strategic investments and the anticipated benefits of those transactions may
not be realized.

As part of our business strategy, we may seek to enter into business combinations, investments, joint ventures and
other strategic alliances with other companies in order to maintain and grow revenue and market presence as well as to provide us with access to technology, products and services. Those transactions would be accompanied by risks that may harm our
business, such as difficulties in assimilating the operations, personnel and products of an acquired business or in realizing the projected benefits; disruption of our ongoing business; potential increases in our indebtedness and contingent
liabilities; and charges if the acquired company or assets are later worth less than the amount paid for them in the Original Acquisition. In addition, our senior secured credit facility and the indentures governing our notes may prohibit us from
making acquisitions that we may otherwise wish to pursue.

We depend on high utilization of our manufacturing capacity.

As many of our costs are fixed, a reduction in capacity utilization, together with other factors such as yield and product mix, could reduce our profit
margins and adversely affect our operating results. A number of factors and circumstances may reduce utilization rates, including periods of industry overcapacity, low levels of customer orders, operating inefficiencies, mechanical failures and
disruption of operations due to expansion or relocation of operations, power interruptions, fire, flood or other natural disasters or calamities.

The
failure to achieve acceptable manufacturing yields could adversely affect our business.

The manufacture of semiconductors requires
precision, a highly-regulated and sterile environment and expensive equipment. We may have difficulty achieving acceptable yields in the manufacture of our products. Slight impurities or



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defects in the masks used to print circuits on a wafer or other factors can cause significant difficulties, particularly in connection with the production of
a new product, the adoption of a new manufacturing process or any expansion of our manufacturing capacity and related transitions.

We rely on certain
subcontractors.

The majority of our net sales are derived from semiconductor devices assembled in advanced packages. The packaging of
semiconductors is a complex process requiring, among other things, a high degree of technical skill and advanced equipment. We outsource our semiconductor packaging to subcontractors, most of which are located in Korea and Southeast Asia. We rely on
these subcontractors to package our devices with acceptable quality and yield levels. If our semiconductor packagers experience problems in packaging our semiconductor devices or experience prolonged quality or yield problems, our operating results
could be adversely affected.

We depend on successful parts and materials procurement for our manufacturing processes.

We use a wide range of parts and materials in the production of our semiconductors, including silicon, processing chemicals, processing gases, precious
metals and electronic and mechanical components. We procure materials and electronic and mechanical components from domestic and foreign sources and original equipment manufacturers. As a division of Hynix, we were able to take advantage of
Hynixs size and purchasing power in procuring parts and materials. As an independent company, we are smaller and less diversified than Hynix, and we may be unable to obtain parts and materials at prices and on terms as favorable as those
available to us prior to the separation from Hynix in October 2004. If we cannot obtain adequate materials in a timely manner or on favorable terms for the manufacture of our products, either or both of our revenues or profits will decline.

We face product liability risks and the risk of negative publicity if our products fail.

Our semiconductors are incorporated into a number of end products, and our business is exposed to product liability risk and the risk of negative
publicity if our products fail. Although we maintain insurance for product liability claims, the amount and scope of our insurance may not be adequate to cover a product liability claim that is asserted against us. In addition, product liability
insurance could become more expensive and difficult to maintain and, in the future, may not be available on commercially reasonable terms or at all.

In addition, we are exposed to the product liability risk and the risk of negative publicity affecting our customers and suppliers. Our sales may decline if any of our customers are sued on a product liability claim.
We may also suffer a decline in sales from the negative publicity associated with such a lawsuit or with adverse public perceptions in general regarding our customers products.

Our ability to compete successfully and achieve future growth will depend, in part, on our ability to protect our proprietary technology, as well as our ability to operate without infringing the proprietary rights
of others.

We seek to protect our proprietary technologies and know-how through the use of patents, trade secrets, confidentiality
agreements and other security measures. The process of seeking patent protection takes a long time and is expensive. We cannot assure you that patents will issue from pending or future applications or that, if patents issue, they will not be
challenged, invalidated or circumvented, or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage. Some of our technologies are not covered by any patent or patent application. The
confidentiality agreements on which we rely may be breached and may not be adequate to protect our proprietary technologies. We cannot assure you that other countries in which we market our services will protect our intellectual property rights to
the same extent as the United States.

Our ability to compete successfully depends on our ability to operate without infringing the
proprietary rights of others. We have no means of knowing what patent applications have been filed in the United States until they are published. In addition, the semiconductor industry is characterized by frequent litigation regarding patent and
other intellectual property rights. Litigation, which could result in substantial costs to us and diversion of our resources, may also be necessary to enforce our patents or other intellectual property rights or to defend against claimed
infringement of the rights of others. In the event of an adverse outcome in any such litigation, we may be required to pay substantial damages, indemnify customers or licensees for damages they may suffer if the products they purchase from us or the
technology they license from us violate the intellectual property rights of others; stop our manufacture, use, sale or importation of infringing products; expend significant resources to develop or acquire non-infringing technologies; discontinue
processes; or obtain licenses to the intellectual property we are found to have infringed. We cannot assure you that we would be successful in such development or acquisition or that such licenses would be available under reasonable terms, or at
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As a business segment of Hynix, we were the beneficiary of some of Hynixs intellectual property
arrangements, including cross-licensing arrangements with other leading semiconductor companies and licenses from third parties of technology incorporated in our products and used to operate our business. We are no longer a beneficiary under some of
these agreements and arrangements. There may be third parties who had refrained from asserting intellectual property infringement claims against our products or processes while we were a business segment of Hynix that elect to pursue such claims
against us now that we are an independent company. In addition, some of our technologies have been sublicensed from Hynix on a non-exclusive basis and Hynix may sublicense such technologies to others. We have cross-licensed most of our technologies
to Hynix. This cross-license is subject to the non-competition provision of the Hynix business transfer agreement. Our competitors may develop, patent or gain access to similar know-how and technology. Failure to protect our existing intellectual
property rights may result in the loss of valuable technologies or having to pay other companies for infringing on their intellectual property rights.

We are subject to many environmental laws and regulations that could affect our operations or result in significant expenses.

We are subject to requirements of environmental, health and safety laws and regulations in each of the jurisdictions in which we operate, governing, among other things, air emissions, wastewater discharges, the generation, use, handling,
storage and disposal of, and exposure to, hazardous substances (including asbestos) and wastes, soil and groundwater contamination and employee health and safety. These laws and regulations are complex, constantly changing and have tended to become
more stringent over time. We cannot assure you that we have been, or will be at all times, in complete compliance with all these laws and regulations or that we will not incur material costs or liabilities in connection with these laws and
regulations in the future. The adoption of new environmental, health and safety laws, the failure to comply with new or existing laws, or issues relating to hazardous substances could subject us to material liability (including substantial fines or
penalties), impose the need for additional capital equipment or other process requirements upon us, curtail our operations, or restrict our ability to expand operations.

We could suffer adverse tax and other financial consequences as a result of changes in, or differences in the interpretation of, applicable tax laws.

Our company organizational structure is based, in part, on assumptions about the various tax laws, including withholding tax, and other laws of applicable
non-U.S. jurisdictions. In addition, MagnaChip Korea was granted a limited tax-holiday under Korean law in October 2004, which provides for certain tax exemptions for corporate taxes, withholding taxes, acquisition taxes, property and land taxes and
other taxes for five years. Our interpretations and conclusions are not binding on any taxing authority, and, if our assumptions about tax and other laws are incorrect or if the authorities were to change or modify the relevant laws, we could suffer
adverse tax and other financial consequences or have the anticipated benefits of our company organizational structure materially impaired.

A limited
number of persons indirectly control us.

CVC, Francisco Partners, and CVC Asia Pacific own approximately 34%, 34% and 18%,
respectively, of the outstanding voting interests in MagnaChip. By virtue of their ownership of these voting interests, and the securityholders agreement among MagnaChip and its unitholders, these entities have significant influence over our
management and will be able to determine the outcome of all matters required to be submitted to the unitholders for approval, including the election of a majority of our directors and the approval of mergers, consolidations and the sale of all or
substantially all of our assets.

We may need additional capital in the future and it may not be available on acceptable terms or at all.

We may require more capital in the future to fund our operations, finance investments in equipment and infrastructure, and respond to
competitive pressures and potential strategic opportunities. Additional capital may not be available when needed or, if available, may not be available on satisfactory terms. If we are unable to obtain capital on favorable terms, or if we are unable
to obtain capital at all, we may have to reduce our operations or forego opportunities and it may have a material adverse effect on our business, financial condition and results of operations.

Our international operations are subject to various risks that may lead to decreases in financial results.

We face risks inherent in international operations, such as unexpected changes in regulatory requirements, tariffs and other market barriers, political,
social and economic instability, adverse tax consequences, war, civil disturbances and acts of terrorism, difficulties in accounts receivables collection, extended payment terms and differing labor standards, enforcement of contractual obligations
and protection of intellectual property. These risks may lead to increased costs or decreased revenue growth, or both.



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We are subject to risks associated with currency fluctuations.

Our revenues are denominated in various currencies, specifically, the Korean Won, Japanese Yen, Euro and U.S. dollar. As a result, changes in the exchange
rates of these currencies or any other applicable currencies to the U.S. dollar will affect the translated price of products and therefore operating margins and could result in exchange losses.

The majority of our costs are denominated in Korean Won and to a lesser extent in Japanese Yen, U.S. dollar and Euro. Therefore, changes in the exchange
rates of these currencies or any other applicable currencies to the U.S. dollar will affect cost of goods sold and operating margins and could result in exchange losses.

We cannot fully predict the impact of future exchange rate fluctuations on our profitability. From time to time, we may have engaged in, and may continue to engage in, exchange rate hedging activities in an effort to
mitigate the impact of exchange rate fluctuations. However, we cannot assure you that any hedging technique we implement will be effective. If it is not effective, we may experience reduced operating margins.

Our historical financial information may not be representative of our results as a separate company.

Prior to the Original Acquisition, we operated as a division of Hynix. Historical financial information for periods prior to September 30, 2004, was
derived from Hynixs consolidated financial statements, has been presented on a carve-out basis and does not necessarily reflect what our financial position, results of operations or cash flows would have been had we been a separate,
stand-alone company during the periods presented. As carve-out financial statements, the financial statements include allocations of the costs of shared activities and overhead of Hynix and of intangible assets and property, plant and equipment
shared with Hynix. These allocations are based upon various assumptions and estimates, some of which are subjective. Actual results of our operations had we operated on a stand-alone basis, may differ from those allocations and estimates. Also, as
part of the Original Acquisition we did not acquire certain assets that were included in the carve-out financial statements and we assumed certain additional costs and obligations that are not reflected in the carve-out financial statements.
Accordingly, the carve-out financial statements should not be relied upon as being representative of our financial position or operating results had we operated on a stand-alone basis, nor may they be representative of our financial position or
operating results following the Original Acquisition.

Our expenses could increase if Hynix were unwilling or unable to provide certain services related
to our shared facilities with Hynix.

Because we share certain facilities with Hynix, a few services that are essential to our business
are provided to us by or through Hynix. These services include electricity, bulk gasses and de-ionized water, campus facilities, wastewater and sewage management, and environmental safety. If any of our agreements with Hynix were terminated or if
Hynix were unwilling or unable to fulfill its obligations to us under the terms of these agreements, we would have to procure these services on our own and as a result may experience an increase in our expenses.

In addition, we lease building and warehouse space from Hynix in Cheongju, Korea, and lease to Hynix some of the space we own in Cheongju, Korea. If
Hynix were to become insolvent, we could lose our leases on some of our building and warehouse space.

Research and development investments may not
yield profitable and commercially viable products and thus will not necessarily result in increases in revenues for us.

We invest
significant resources in our research and development. However, research and development efforts may not yield commercially viable products. During each stage of research and development there is a substantial risk that we will have to abandon a
potential product which is no longer marketable and in which we have invested significant resources. In the event we are able to develop viable new products, a significant amount of time will have elapsed between our investment in the necessary
research and development effort and the receipt of any related revenues.

Investor confidence may be adversely impacted if we are unable to comply with
Section 404 of the Sarbanes-Oxley Act of 2002.

Beginning with our fiscal year ending December 31, 2007, we will be subject to
rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, which require us to include in our Annual Report on Form 10-K our managements report on, and assessment of the effectiveness of, our internal controls
over financial reporting. In addition, our independent auditors will be required to attest to and report on managements assessment of the effectiveness of our internal controls over financial reporting. If we fail to achieve and maintain the
adequacy of our internal controls, there is a risk that we will not comply with all of the requirements imposed by Section 404. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to
produce reliable financial reports and are important



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to helping prevent financial fraud. Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss of investor
confidence in the reliability of our financial statements, which ultimately could harm our business and could negatively impact the market price of our securities.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
|------- | ------------------------------------------------------------

During the three-month period ended July 2, 2006, certain of our subsidiarys employees and former employees exercised options to acquire an aggregate of 2,812.50 of our common units at an aggregate purchase
price of $8,050.32. Because the offering transactions took place outside the U.S. and none of the optionees were U.S. persons, these securities were exempt from registration under Regulation S of the Securities Act of 1933, as amended.



|Item 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------

Effective May 27, 2006, R. Douglas Norby and Sang Park were elected to the Board of Directors of the Company to serve at the discretion of the unitholders of the Company until their successors are duly elected and qualified, as
permitted under the Companys Third Amended and Restated Limited Liability Company Operating Agreement, by written consent of unitholders holding 41,840,446.51 common units of the Company constituting 78.8% of the then-outstanding common units
of the Company.

Effective May 27, 2006, a proposal by the Company to reserve an additional 400,000 common units of the Company, for
an aggregate of 7,890,864 common units of the Company, for issuance upon the exercise of Options or SARs granted or Restricted Unit awards offered under the MagnaChip Semiconductor LLC California Equity Incentive Plan and the MagnaChip Semiconductor
LLC Equity Incentive Plan was approved, as permitted under the Companys Third Amended and Restated Limited Liability Operating Company Agreement, by written consent of unitholders holding 41,840,446.51 common units of the Company constituting
78.75% of the then-outstanding common units of the Company.



|Item 6. | Exhibits.
|------- | ---------



|               |  |                                                                                                                                                                                                                                                                                                                                                                                   
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                                                       
|               | 
|10.3.d         |  | Fourth Amendment to Credit Agreement, dated as of July 26, 2006, by and among MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, as borrowers, MagnaChip
Semiconductor LLC, the Subsidiary Guarantors party thereto, the Lenders party thereto, UBS AG, Stamford Branch, as administrative agent and collateral agent, and U.S. Bank National Association.*
|               | 
|10.36          |  | Service Agreement, dated as of May 27, 2006, by and between MagnaChip Semiconductor, Ltd. (Korea) and Sang Park.#                                                                                                                                                                                                                                                                 
|               | 
|31.1           |  | Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive Officer.                                                                                                                                                                                                                                                 
|               | 
|31.2           |  | Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial Officer.                                                                                                                                                                                                                                                 
|               | 
|32.1           |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer.                                                                                                                                                                                                                           
|               | 
|32.2           |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer.                                                                                                                                                                                                                           



|* | Incorporated by reference to an identically numbered exhibit filed in response to Item 1.01, Entry into a Material Definitive Agreement, of the companys
Current Report on Form 8-K dated July 25, 2006 (File No. 333-126019-09).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|# | Incorporated by reference to an identically numbered exhibit filed in response to Item 1.01, Entry into a Material Definitive Agreement, of the companys
Current Report on Form 8-K dated May 27, 2006 (File No. 333-126019-09).
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURE

Pursuant to the requirements 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.



|                       |  |  |  |                             |  |                                       |  | 
|---------------------- |  |  |  | --------------------------- |  | ------------------------------------- |  | 
|                       |  |  |  | MAGNACHIP SEMICONDUCTOR LLC
|                       |  |  | 
|Dated: August 14, 2006 |  |  |  | By:                         |  | /s/ Sang Park                        
|                       |  |  |  |                             |  | Sang Park                            
|                       |  |  |  |                             |  | Chief Executive Officer and President



|                       |  |  |  |     |  |                                                                             |  | 
|---------------------- |  |  |  | --- |  | --------------------------------------------------------------------------- |  | 
|                       |  |  | 
|Dated: August 14, 2006 |  |  |  | By: |  | /s/ Robert J. Krakauer                                                     
|                       |  |  |  |     |  | Robert J. Krakauer                                                         
|                       |  |  |  |     |  | Executive Vice President, Corporate Operations, and Chief Financial Officer



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INDEX TO EXHIBITS



|               |  |                                                                                                                                                                                                                                                                                                                                                                                   
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                                                       
|               | 
|10.3.d         |  | Fourth Amendment to Credit Agreement, dated as of July 26, 2006, by and among MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, as borrowers, MagnaChip
Semiconductor LLC, the Subsidiary Guarantors party thereto, the Lenders party thereto, UBS AG, Stamford Branch, as administrative agent and collateral agent, and U.S. Bank National Association.*
|               | 
|10.36          |  | Service Agreement, dated as of May 27, 2006, by and between MagnaChip Semiconductor, Ltd. (Korea) and Sang Park.#                                                                                                                                                                                                                                                                 
|               | 
|31.1           |  | Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive Officer.                                                                                                                                                                                                                                                 
|               | 
|31.2           |  | Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial Officer.                                                                                                                                                                                                                                                 
|               | 
|32.1           |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer.                                                                                                                                                                                                                           
|               | 
|32.2           |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer.                                                                                                                                                                                                                           



|* | Incorporated by reference to an identically numbered exhibit filed in response to Item 1.01, Entry into a Material Definitive Agreement, of the companys
Current Report on Form 8-K dated July 25, 2006 (File No. 333-126019-09).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|# | Incorporated by reference to an identically numbered exhibit filed in response to Item 1.01, Entry into a Material Definitive Agreement, of the companys
Current Report on Form 8-K dated May 27, 2006 (File No. 333-126019-09).
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



40