##### Table of Contents





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 June 30, 2010

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 000-23084





Integrated Silicon Solution, Inc.

(Exact name of registrant as specified in its charter)







|                                |  |                    
|------------------------------- |  | -------------------
|Delaware                        |  | 77-0199971         
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|1940 Zanker Road, San Jose, California   |  | 95112     
|(Address of principal executive offices) |  | (Zip Code)

(408)
969-6600

(Registrants telephone number, including area code)





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 has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  | x |  | Smaller reporting company |  |  ̈

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

The number of outstanding shares of the registrants Common Stock as of July 31, 2010 was 26,148,463.









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TABLE OF CONTENTS



|                             |  |                                                                                                               |  |   
|---------------------------- |  | ------------------------------------------------------------------------------------------------------------- |  | --
|PART I Financial Information |  |                                                                                                              
|                             |  |                                                                                                              
|Item 1.                      |  | Financial Statements                                                                                          |  |   
|                             |  |                                                                                                              
|                             |  | Condensed Consolidated Statements of OperationsThree and nine months ended June 30, 2010 and 2009 (Unaudited) |  | 1 
|                             |  |                                                                                                              
|                             |  | Condensed Consolidated Balance SheetsJune 30, 2010 (Unaudited) and September 30,
2009                         |  | 2 
|                             |  |                                                                                                              
|                             |  | Condensed Consolidated Statements of Cash FlowsNine months ended June 30, 2010 and 2009
(Unaudited)           |  | 3 
|                             |  |                                                                                                              
|                             |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                              |  | 4 
|                             |  |                                                                                                              
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                         |  | 17
|                             |  |                                                                                                              
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                                    |  | 25
|                             |  |                                                                                                              
|Item 4.                      |  | Controls and Procedures                                                                                       |  | 26
|                             | 
|PART II Other Information    |  |                                                                                                              
|                             |  |                                                                                                              
|Item 1.                      |  | Legal Proceedings                                                                                             |  | 27
|                             |  |                                                                                                              
|Item 1A.                     |  | Risk Factors                                                                                                  |  | 27
|                             |  |                                                                                                              
|Item 6.                      |  | Exhibits                                                                                                      |  | 36
|                             |  |                                                                                                              
|Signatures                   |  |                                                                                                               |  | 37

References in this
Quarterly Report on Form 10-Q to we, us, our and ISSI mean Integrated Silicon Solution, Inc. and all entities controlled by Integrated Silicon Solution, Inc.



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##### Table of Contents

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

Integrated Silicon Solution, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)



|                                                                 |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                 |  | Three Months EndedJune 30, |        |   | Nine Months EndedJune 30, |  
|                                                                 |  | 2010                       |        |   | 2009                      |   |        | 2010 |  |   | 2009    |  
|Net sales                                                        |  | $                          | 71,228 |   |                           | $ | 38,901 |      |  | $ | 178,826 |   |  | $ | 107,819 |  
|Cost of sales                                                    |  |                            | 43,904 |   |                           |   | 29,152 |      |  |   | 110,165 |   |  |   | 83,870  |  
|                                                                 |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Gross profit                                                     |  |                            | 27,324 |   |                           |   | 9,749  |      |  |   | 68,661  |   |  |   | 23,949  |  
|                                                                 |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Operating expenses:                                              |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Research and development                                         |  |                            | 5,900  |   |                           |   | 4,980  |      |  |   | 16,788  |   |  |   | 14,374  |  
|Selling, general and administrative                              |  |                            | 8,121  |   |                           |   | 5,958  |      |  |   | 24,297  |   |  |   | 19,667  |  
|Acquired in-process technology charge                            |  |                            |       |   |                           |   | 710    |      |  |   |        |   |  |   | 710     |  
|                                                                 |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                         |  |                            | 14,021 |   |                           |   | 11,648 |      |  |   | 41,085  |   |  |   | 34,751  |  
|                                                                 |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Operating income (loss)                                          |  |                            | 13,303 |   |                           |   | (1,899 | )    |  |   | 27,576  |   |  |   | (10,802 | )
|Interest and other income (expense), net                         |  |                            | 585    |   |                           |   | (68    | )    |  |   | 1,156   |   |  |   | 796     |  
|Gain on sale of investments                                      |  |                            | 2,561  |   |                           |   |       |      |  |   | 2,761   |   |  |   |        |  
|                                                                 |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Income (loss) before income taxes                                |  |                            | 16,449 |   |                           |   | (1,967 | )    |  |   | 31,493  |   |  |   | (10,006 | )
|Provision (benefit) for income taxes                             |  |                            | 272    |   |                           |   | 50     |      |  |   | 963     |   |  |   | (52     | )
|                                                                 |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Consolidated net income (loss)                                   |  |                            | 16,177 |   |                           |   | (2,017 | )    |  |   | 30,530  |   |  |   | (9,954  | )
|                                                                 |  |                            |        |  
|Less: Net (income) loss attributable to noncontrolling interests |  |                            | (136   | ) |                           |   | 91     |      |  |   | (139    | ) |  |   | 132     |  
|                                                                 |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Net income (loss)                                                |  | $                          | 16,041 |   |                           | $ | (1,926 | )    |  | $ | 30,391  |   |  | $ | (9,822  | )
|                                                                 |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Basic net income (loss) per share                                |  | $                          | 0.62   |   |                           | $ | (0.08  | )    |  | $ | 1.20    |   |  | $ | (0.39   | )
|                                                                 |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Shares used in basic per share calculation                       |  |                            | 25,965 |   |                           |   | 25,410 |      |  |   | 25,429  |   |  |   | 25,507  |  
|                                                                 |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Diluted net income (loss) per share                              |  | $                          | 0.57   |   |                           | $ | (0.08  | )    |  | $ | 1.13    |   |  | $ | (0.39   | )
|                                                                 |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Shares used in diluted per share calculation                     |  |                            | 28,026 |   |                           |   | 25,410 |      |  |   | 26,807  |   |  |   | 25,507  |  
|                                                                 |  |                            |        |   |                           |   |        |      |  |   |         |   |  |   |         |  

See accompanying notes to condensed consolidated financial statements.



1



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Integrated Silicon Solution, Inc.

Condensed Consolidated Balance Sheets

(In thousands)



|                                                    |  |              |          |   |                   |   |          |  
|--------------------------------------------------- |  | ------------ | -------- | - | ----------------- | - | -------- | -
|                                                    |  | June 30,2010 |          |   | September 30,2009 |  
|                                                    |  | (unaudited)  |          |   | (1)               |  
|ASSETS                                              | 
|Current assets:                                     |  |              |          |   |                   |   |          |  
|Cash and cash equivalents                           |  | $            | 69,525   |   |                   | $ | 54,944   |  
|Restricted cash                                     |  |              | 4,957    |   |                   |   |         |  
|Short-term investments                              |  |              | 15,521   |   |                   |   | 28,542   |  
|Accounts receivable, net                            |  |              | 39,874   |   |                   |   | 26,501   |  
|Inventories                                         |  |              | 45,378   |   |                   |   | 19,275   |  
|Other current assets                                |  |              | 4,450    |   |                   |   | 2,922    |  
|                                                    |  |              |          |   |                   |   |          |  
|Total current assets                                |  |              | 179,705  |   |                   |   | 132,184  |  
|Property, equipment and leasehold improvements, net |  |              | 25,381   |   |                   |   | 23,218   |  
|Long-term investments                               |  |              |         |   |                   |   | 1,408    |  
|Purchased intangible assets, net                    |  |              | 1,530    |   |                   |   | 2,313    |  
|Goodwill                                            |  |              | 1,251    |   |                   |   | 1,251    |  
|Other assets                                        |  |              | 11,337   |   |                   |   | 1,556    |  
|                                                    |  |              |          |   |                   |   |          |  
|Total assets                                        |  | $            | 219,204  |   |                   | $ | 161,930  |  
|                                                    |  |              |          |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                | 
|Current liabilities:                                |  |              |          |   |                   |   |          |  
|Accounts payable                                    |  | $            | 43,151   |   |                   | $ | 26,825   |  
|Accrued compensation and benefits                   |  |              | 6,286    |   |                   |   | 4,364    |  
|Accrued expenses                                    |  |              | 5,606    |   |                   |   | 5,368    |  
|                                                    |  |              |          |   |                   |   |          |  
|Total current liabilities                           |  |              | 55,043   |   |                   |   | 36,557   |  
|Other long-term liabilities                         |  |              | 814      |   |                   |   | 797      |  
|                                                    |  |              |          |   |                   |   |          |  
|Total liabilities                                   |  |              | 55,857   |   |                   |   | 37,354   |  
|Commitments and contingencies (See Note 12)         |  |              |          |   |                   |   |          |  
|                                                    |  |             
|Stockholders equity:                               |  |              |          |   |                   |   |          |  
|Common stock                                        |  |              | 3        |   |                   |   | 2        |  
|Additional paid-in capital                          |  |              | 315,899  |   |                   |   | 309,649  |  
|Accumulated deficit                                 |  |              | (155,090 | ) |                   |   | (185,481 | )
|Accumulated comprehensive income (loss)             |  |              | (2,598   | ) |                   |   | (1,344   | )
|                                                    |  |              |          |   |                   |   |          |  
|Total parent stockholders equity                   |  |              | 158,214  |   |                   |   | 122,826  |  
|                                                    |  |             
|Noncontrolling interest                             |  |              | 5,133    |   |                   |   | 1,750    |  
|                                                    |  |              |          |   |                   |   |          |  
|Total stockholders equity                          |  |              | 163,347  |   |                   |   | 124,576  |  
|                                                    |  |              |          |   |                   |   |          |  
|Total liabilities and stockholders equity          |  | $            | 219,204  |   |                   | $ | 161,930  |  
|                                                    |  |              |          |   |                   |   |          |  



|(1) | Derived from audited financial statements.
|--- | ------------------------------------------

See accompanying notes to condensed consolidated financial statements.



2



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Integrated Silicon Solution, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)



|                                                                                         |  |                           |         |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                         |  | Nine Months EndedJune 30, |        
|                                                                                         |  | 2010                      |         |   | 2009 |  
|Cash flows from operating activities                                                     |  |                           |         |   |      |   |         |  
|Consolidated net income (loss)                                                           |  | $                         | 30,530  |   |      | $ | (9,954  | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                           |         |   |      |   |         |  
|Depreciation and amortization                                                            |  |                           | 2,497   |   |      |   | 2,989   |  
|Stock-based compensation                                                                 |  |                           | 1,680   |   |      |   | 2,572   |  
|Amortization of intangibles                                                              |  |                           | 783     |   |      |   | 713     |  
|Gain on sale of investments                                                              |  |                           | (2,761  | ) |      |   |        |  
|Acquired in-process technology charge                                                    |  |                           |        |   |      |   | 710     |  
|Net foreign currency transaction (gains) losses                                          |  |                           | (356    | ) |      |   | 220     |  
|Other non-cash items                                                                     |  |                           | 207     |   |      |   | (119    | )
|Prepayments for foundry capacity                                                         |  |                           | (10,000 | ) |      |   |        |  
|Net effect of changes in current and other assets and current liabilities                |  |                           | (22,251 | ) |      |   | 12,328  |  
|                                                                                         |  |                           |         |   |      |   |         |  
|Net cash provided by operating activities                                                |  |                           | 329     |   |      |   | 9,459   |  
|                                                                                         |  |                          
|Cash flows from investing activities                                                     |  |                           |         |   |      |   |         |  
|Acquisition of property, equipment and leasehold improvements                            |  |                           | (4,874  | ) |      |   | (2,312  | )
|Proceeds from sale of assets                                                             |  |                           |        |   |      |   | 3       |  
|Proceeds from sale of investments                                                        |  |                           | 3,216   |   |      |   |        |  
|Proceeds from noncontrolling interest                                                    |  |                           | 3,785   |   |      |   | 831     |  
|Investment in Enable Semiconductor Corp. (Enable), net of cash                           |  |                           |        |   |      |   | (2,682  | )
|Increase in restricted cash                                                              |  |                           | (4,957  | ) |      |   |        |  
|Proceeds from sales of trading securities                                                |  |                           | 9,450   |   |      |   |        |  
|Purchases of available-for-sale securities                                               |  |                           | (911    | ) |      |   | (11,900 | )
|Proceeds from sales of available-for-sale securities                                     |  |                           | 4,752   |   |      |   | 9,002   |  
|                                                                                         |  |                           |         |   |      |   |         |  
|Cash provided by (used in) investing activities                                          |  |                           | 10,461  |   |      |   | (7,058  | )
|                                                                                         |  |                          
|Cash flows from financing activities                                                     |  |                           |         |   |      |   |         |  
|Repurchases and retirement of common stock                                               |  |                           | (1,108  | ) |      |   | (3,730  | )
|Proceeds from issuance of common stock                                                   |  |                           | 4,915   |   |      |   | 407     |  
|Proceeds from borrowings under short-term lines of credit                                |  |                           |        |   |      |   | 12,216  |  
|Principal payments of short-term lines of credit                                         |  |                           |        |   |      |   | (12,216 | )
|                                                                                         |  |                           |         |   |      |   |         |  
|Cash provided by (used in) financing activities                                          |  |                           | 3,807   |   |      |   | (3,323  | )
|                                                                                         |  |                          
|Effect of exchange rate changes on cash and cash equivalents                             |  |                           | (16     | ) |      |   | (341    | )
|                                                                                         |  |                           |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                     |  |                           | 14,581  |   |      |   | (1,263  | )
|Cash and cash equivalents at beginning of period                                         |  |                           | 54,944  |   |      |   | 42,175  |  
|                                                                                         |  |                           |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                               |  | $                         | 69,525  |   |      | $ | 40,912  |  
|                                                                                         |  |                           |         |   |      |   |         |  
|Supplemental disclosures of cash flow information:                                       |  |                           |         |   |      |   |         |  
|Cash paid for income taxes                                                               |  | $                         | 654     |   |      | $ |        |  

See accompanying notes
to condensed consolidated financial statements.



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis
of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Integrated
Silicon Solution, Inc. (the Company) and its consolidated wholly and majority owned subsidiaries, after elimination of all significant intercompany accounts and transactions. These financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (which are of a normal, recurring nature) considered necessary for fair presentation have been included.

The Companys operating results for the three and nine months ended June 30, 2010 are not necessarily indicative of the results
that may be expected for the fiscal year ending September 30, 2010 or for any other period. The financial statements included herein should be read in conjunction with the Companys Annual Report on Form 10-K for the fiscal year ended
September 30, 2009.

2. Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during
the reporting period. Such estimates relate to the useful lives and fair value of fixed assets, the fair value of investments, allowances for doubtful accounts and customer returns, inventory write-downs, potential reserves relating to litigation
matters, accrued liabilities, and other reserves. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions and its beliefs of what could occur in the future, given available information. Actual
results may differ from those estimates, and such difference, may be material to the financial statements.

3. Impact of Recently
Issued Accounting Standards

Recently Adopted Accounting Pronouncements

During the first nine months of fiscal 2010, the Company adopted the following accounting standards, none of which had a material effect
on its consolidated results of operations during such period or financial condition at the end of such period:

Business
Combinations

In December 2007, the Financial Accounting Standards Board (FASB) issued guidance that establishes principles
and requirements for determining how a company recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including noncontrolling interests, contingent consideration, and certain acquired
contingencies. The guidance on business combinations also requires acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized.

Noncontrolling Interest (Minority Interest)

In December 2007 and January 2010, the FASB issued guidance on the accounting and reporting for a noncontrolling interest in a subsidiary.
The Company is required to report its noncontrolling interests as a separate component of stockholders equity. The Company is also required to present net income attributable to the noncontrolling interests and net income attributable to the
stockholders of the Company separately in its consolidated statements of operations.



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



Fair Value Disclosure

In January 2010, the FASB amended the disclosure requirements for the fair value measurements for recurring and nonrecurring non-financial
assets and liabilities. These disclosure requirements are effective in two phases. In the second quarter of fiscal year 2010, the Company adopted the requirements for disclosures about inputs and valuation techniques used to measure fair value as
well as disclosures about significant transfers. Beginning in the first quarter of fiscal year 2012, these amended accounting standards will require presentation of disaggregated activity within the reconciliation for fair value measurements
using significant unobservable inputs relating to Level 3 measurements. The Company does not anticipate that the additional disclosure requirements will have a material impact on its consolidated financial statements.

Subsequent Events

In February 2010, the FASB issued amended guidance on subsequent events. Under this amended guidance, Securities and Exchange
Commission (SEC) filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements.

4. Fair Value Measurements

Under FASB guidance, fair value is defined as the price expected to be received from the sale of an asset or paid to transfer a liability
in a transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. The FASB guidance also establishes a hierarchy
for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that the market
participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect a companys judgment concerning the assumptions that market participants
would use in pricing the asset or liability developed based on the best information available at that time. The fair value hierarchy is broken down into the following three levels based on the reliability of inputs:



| |  |  | Level 1  Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are
based on quoted prices which are readily and regularly available in an active market, valuation of these products can be done without a significant degree of judgment.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2  Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active
for identical or similar instruments and model-derived valuations in which all significant inputs and significant value drives are observable in active markets.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Valuations based on inputs that are unobservable and significant to the overall fair value measurement. These values are generally
determined using pricing models for which the assumptions utilize managements estimates of market participant assumptions.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of June 30, 2010, the Companys financial assets utilizing Level 1 inputs included short-term investment securities traded
on active securities exchanges. The Company did not have any financial assets utilizing Level 2 inputs. Financial assets utilizing Level 3 inputs included short-term investments in auction rate securities consisting of securities collateralized by
student loans, and a related put option.

At June 30, 2010, the Companys investment portfolio included $10.5
million par value ($9.5 million fair value) of AAA rated investments in auction rate securities (ARS), for which all of the underlying assets are student loans backed by the federal government under the Federal Family Education Loan Program. The
Company continued to earn interest on all of its auction rate securities as of June 30, 2010. Due to adverse events in the credit markets, the ARS held by the Company have experienced failed auctions since February 2008. As such, quoted prices
in active markets are not readily available. The Company used a discounted cash flow model to estimate the fair value of its ARS as of June 30, 2010. The assumptions used in preparing the discounted cash flow model include estimates for
interest rate, liquidity risk premium, credit quality, and timing of cash flows. The Company concluded that the pricing model, given the lack of available market pricing, provided a reasonable basis for determining fair value of the ARS as of
June 30, 2010.



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



In November 2008, the Company entered into an agreement (the Agreement) with
UBS AG (UBS), the investment firm that sold the ARS to the Company. The Agreement covers all of the Companys ARS as of March 31, 2010. By entering into the Agreement, the Company (1) received the right (Put Option) to
sell these ARS back to UBS at par, at its sole discretion, anytime during the period from June 30, 2010 through July 2, 2012, and (2) gave UBS the right to purchase these ARS securities or sell them on the Companys behalf at par
anytime after the execution of the Agreement through July 2, 2012. The Company elected to measure the Put Option at fair value with gains and losses recognized as a component of net income. At the same time, the Company transferred these
ARS from available-for-sale to trading investment securities. The Company valued the Put Option using the Black-Scholes model. The Put Option will continue to be measured at fair value utilizing Level 3 inputs until the earlier of its maturity or
exercise date. In July 2010, the Company sold $7.3 million of ARS at par value.

The following table represents the
Companys fair value hierarchy for financial assets measured at fair value on a recurring basis as of June 30, 2010 and September 30, 2009:



|                                                |  |                                                            |        |                                         |   |        |  |   |       
|----------------------------------------------- |  | ---------------------------------------------------------- | ------ | --------------------------------------- | - | ------ |  | - | ------
|                                                |  | June 30, 2010                                             
|                                                |  | Quoted Pricesin ActiveMarkets
forIdentical Assets(Level 1) |        | SignificantUnobservableInputs(Level
 3) |   | Total 
|                                                |  | (In thousands)                                            
|Money market instruments (1)                    |  | $                                                          | 41,705 |                                         | $ |       |  | $ | 41,705
|Auction rate securities (3)(5)                  |  |                                                            |       |                                         |   | 9,504  |  |   | 9,504 
|Auction rate securities Put Option (3)(5)       |  |                                                            |       |                                         |   | 996    |  |   | 996   
|Certificates of deposit (1)(2)(3)               |  |                                                            | 9,077  |                                         |   |       |  |   | 9,077 
|Semiconductor Manufacturing International Corp. |  |                                                            |        |                                         |   |        |  |   |       
|(SMIC) common stock (3)                         |  |                                                            | 2,418  |                                         |   |       |  |   | 2,418 
|                                                |  |                                                            |        |                                         |   |        |  |   |       
|Total                                           |  | $                                                          | 53,200 |                                         | $ | 10,500 |  | $ | 63,700
|                                                |  |                                                            |        |                                         |   |        |  |   |       
|                                                | 
|                                                |  | September 30, 2009                                        
|                                                |  | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) |        | SignificantUnobservableInputs(Level
 3) |   | Total 
|                                                |  | (In thousands)                                            
|Money market instruments (1)                    |  | $                                                          | 16,041 |                                         | $ |       |  | $ | 16,041
|Auction rate securities (3)(5)                  |  |                                                            |       |                                         |   | 18,042 |  |   | 18,042
|Auction rate securities Put Option (3)(5)       |  |                                                            |       |                                         |   | 1,908  |  |   | 1,908 
|Certificates of deposit (1)(3)                  |  |                                                            | 9,938  |                                         |   |       |  |   | 9,938 
|Mutual funds (3)                                |  |                                                            | 2,797  |                                         |   |       |  |   | 2,797 
|Ralink common stock (3)                         |  |                                                            | 2,130  |                                         |   |       |  |   | 2,130 
|Semiconductor Manufacturing International Corp. |  |                                                            |        |                                         |   |        |  |   |       
|(SMIC) common stock (4)                         |  |                                                            | 1,408  |                                         |   |       |  |   | 1,408 
|                                                |  |                                                            |        |                                         |   |        |  |   |       
|Total                                           |  | $                                                          | 32,314 |                                         | $ | 19,950 |  | $ | 52,264
|                                                |  |                                                            |        |                                         |   |        |  |   |       



|(1) | Included in cash and cash equivalents
|--- | -------------------------------------

|(2) | Included in restricted cash
|--- | ---------------------------

|(3) | Included in short-term investments
|--- | ----------------------------------

|(4) | Included in long-term investments
|--- | ---------------------------------

|(5) | Classified as trading securities
|--- | --------------------------------



6



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



The following table presents the valuation of the Companys financial assets that
are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in the FASB guidance for the for the three and nine months ended June 30, 2010:



|                                                  |                                 |                                           |        |                                |  |   |        |  
|------------------------------------------------- | ------------------------------- | ----------------------------------------- | ------ | ------------------------------ |  | - | ------ | -
|                                                  |                                 | Significant Unobservable Inputs (Level 3) |       
|                                                  | Three Months EndedJune 30, 2010 |                                           |        | Nine Months EndedJune 30, 2010 | 
|                                                  | (In thousands)                  |                                          
|Balance at beginning of period                    |                                 | $                                         | 19,950 |                                |  | $ | 19,950 |  
|Total gains or losses (realized and unrealized):  |                                 |                                           |        |                                |  |   |        |  
|Included in earnings                              |                                 |                                           |       |                                |  |   |       |  
|Included in other comprehensive income (loss)     |                                 |                                           |       |                                |  |   |       |  
|Purchases, sales, issuances, and settlements, net |                                 |                                           | (9,450 | )                              |  |   | (9,450 | )
|                                                  |                                 |                                           |        |                                |  |   |        |  
|Balance at end of period                          |                                 | $                                         | 10,500 |                                |  | $ | 10,500 |  
|                                                  |                                 |                                           |        |                                |  |   |        |  

As of June 30, 2010 and September 30, 2009, the Company did not have any liabilities or
non-financial assets that are measured on a fair value basis on a recurring basis.

Available-for-sale marketable securities
consisted of the following:



|                                                    |  |               |         |                |                             |   |                              |  |   |           |   |  |   |         |  
|--------------------------------------------------- |  | ------------- | ------- | -------------- | --------------------------- | - | ---------------------------- |  | - | --------- | - |  | - | ------- | -
|June 30, 2010                                       |  | AmortizedCost |         |                | GrossUnrealizedHoldingGains |   | GrossUnrealizedHoldingLosses |  |   | FairValue |  
|                                                    |  |               |         | (In thousands) |                             |   |                              | 
|Money market instruments                            |  | $             | 41,705  |                |                             | $ |                             |  | $ |          |   |  | $ | 41,705  |  
|Certificates of deposit                             |  |               | 4,120   |                |                             |   |                             |  |   |          |   |  |   | 4,120   |  
|SMIC common stock                                   |  |               | 3,426   |                |                             |   |                             |  |   | (1,008    | ) |  |   | 2,418   |  
|                                                    |  |               |         |                |                             |   |                              |  |   |           |   |  |   |         |  
|Total                                               |  |               | 49,251  |                |                             |   |                             |  |   | (1,008    | ) |  |   | 48,243  |  
|Less: Amounts included in cash and cash equivalents |  |               | (43,223 | )              |                             |   |                             |  |   |          |   |  |   | (43,223 | )
|                                                    |  |               |         |                |                             |   |                              |  |   |           |   |  |   |         |  
|                                                    |  | $             | 6,028   |                |                             | $ |                             |  | $ | (1,008    | ) |  | $ | 5,020   |  
|                                                    |  |               |         |                |                             |   |                              |  |   |           |   |  |   |         |  



|                                                    |  |               |         |                |                             |   |                              |  |   |           |   |  |   |         |  
|--------------------------------------------------- |  | ------------- | ------- | -------------- | --------------------------- | - | ---------------------------- |  | - | --------- | - |  | - | ------- | -
|September 30, 2009                                  |  | AmortizedCost |         |                | GrossUnrealizedHoldingGains |   | GrossUnrealizedHoldingLosses |  |   | FairValue |  
|                                                    |  |               |         | (In thousands) |                             |   |                              | 
|Money market instruments                            |  | $             | 16,041  |                |                             | $ |                             |  | $ |          |   |  | $ | 16,041  |  
|Certificates of deposit                             |  |               | 9,938   |                |                             |   |                             |  |   |          |   |  |   | 9,938   |  
|Mutual funds                                        |  |               | 2,795   |                |                             |   | 2                            |  |   |          |   |  |   | 2,797   |  
|SMIC common stock                                   |  |               | 3,426   |                |                             |   |                             |  |   | (2,018    | ) |  |   | 1,408   |  
|Ralink common stock                                 |  |               | 457     |                |                             |   | 1,673                        |  |   |          |   |  |   | 2,130   |  
|                                                    |  |               |         |                |                             |   |                              |  |   |           |   |  |   |         |  
|Total                                               |  |               | 32,657  |                |                             |   | 1,675                        |  |   | (2,018    | ) |  |   | 32,314  |  
|Less: Amounts included in cash and cash equivalents |  |               | (22,314 | )              |                             |   |                             |  |   |          |   |  |   | (22,314 | )
|                                                    |  |               |         |                |                             |   |                              |  |   |           |   |  |   |         |  
|                                                    |  | $             | 10,343  |                |                             | $ | 1,675                        |  | $ | (2,018    | ) |  | $ | 10,000  |  
|                                                    |  |               |         |                |                             |   |                              |  |   |           |   |  |   |         |  



7



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



5. Stock-based Compensation

Stock-Based Benefit Plans

The Company grants stock-based compensation awards under its 2007 Incentive Compensation Plan (the 2007 Plan) which permits
the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units (RSUs), performance shares and performance units. The Company has outstanding grants under prior plans, though no further grants can
be made under these prior plans. At June 30, 2010, 2,154,000 shares were available for future grant under the 2007 Plan. Options generally vest ratably over a four-year period with a 6-month or 1-year cliff vest and then vesting ratably over
the remaining period. Options granted prior to October 1, 2005 expire ten years after the date of grant; options granted after October 1, 2005 expire seven years after the date of the grant. RSUs generally vest annually over a three-year
period based upon continued employment with the Company.

In addition, the Company has an Employee Stock Purchase Plan (ESPP)
that permits eligible employees to purchase the Companys common stock through payroll deductions at 85% of the fair market value of the common stock at the end of each six-month offering period. As approved by the Board of Directors, effective
August 1, 2010, shares under the ESPP will be purchased at a price equal to 85% of the lesser of the fair market value of the Companys common stock as of the first day or the last day of each six-month purchase period. The offering
periods under the ESPP commence on approximately February 1 and August 1 of each year. At June 30, 2010, 1,215,000 shares were available for future issuance under the ESPP.

Stock-Based Compensation

The following table outlines the effects of total stock-based compensation.



|                                       |  |                            |     |                           |   |      |  |      |       |  |   |      
|-------------------------------------- |  | -------------------------- | --- | ------------------------- | - | ---- |  | ---- | ----- |  | - | -----
|                                       |  | Three Months EndedJune 30, |     | Nine Months EndedJune 30,
|                                       |  | 2010                       |     | 2009                      |   | 2010 |  | 2009
|                                       |  | (In thousands)            
|Stock-based compensation               |  |                            |     |                           |   |      |  |      |       |  |   |      
|Cost of sales                          |  | $                          | 41  |                           | $ | 40   |  | $    | 98    |  | $ | 152  
|Research and development               |  |                            | 206 |                           |   | 284  |  |      | 567   |  |   | 1,066
|Selling, general and administrative    |  |                            | 354 |                           |   | 406  |  |      | 1,015 |  |   | 1,354
|                                       |  |                            |     |                           |   |      |  |      |       |  |   |      
|Total stock-based compensation         |  | $                          | 601 |                           | $ | 730  |  | $    | 1,680 |  | $ | 2,572
|Tax effect on stock-based compensation |  |                            |    |                           |   |     |  |      |      |  |   |     
|                                       |  |                            |     |                           |   |      |  |      |       |  |   |      
|Net effect on net income (loss)        |  | $                          | 601 |                           | $ | 730  |  | $    | 1,680 |  | $ | 2,572
|                                       |  |                            |     |                           |   |      |  |      |       |  |   |      

As of June 30, 2010, there was approximately $3.4
million of total unrecognized stock-based compensation expense under the Companys stock option plans that will be recognized over a weighted-average period of approximately 2.57 years. Future stock option grants will add to this total whereas
quarterly amortization and the vesting of the existing stock option grants will reduce this total. The Company also records compensation expense for its ESPP for the difference between the purchase price and the fair market value on the date of
purchase.



8



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



The Company uses the Black-Scholes option pricing model to estimate the fair value of
the options granted. The weighted average estimated fair values of stock option grants, as well as the weighted average assumptions used in calculating these values during the three and nine months ended June 30, 2010 and 2009, were based on
estimates at the date of grant as follows:



|                                       |  |                            |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|-------------------------------------- |  | -------------------------- | ---- | - | ------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                       |  | Three Months EndedJune 30, |      |   | Nine Months EndedJune 30, |  
|                                       |  | 2010                       |      |   | 2009                      |   |      | 2010 |  |   | 2009 |  
|Weighted-average grant date fair value |  | $                          | 4.48 |   |                           | $ | 0.97 |      |  | $ | 1.92 |   |  | $ | 0.77 |  
|Expected term in years                 |  |                            | 4.54 |   |                           |   | 4.54 |      |  |   | 4.54 |   |  |   | 4.54 |  
|Estimated volatility                   |  |                            | 52   | % |                           |   | 44   | %    |  |   | 48   | % |  |   | 42   | %
|Risk-free interest rate                |  |                            | 2.18 | % |                           |   | 2.13 | %    |  |   | 2.24 | % |  |   | 2.26 | %
|Dividend yield                         |  |                            | 0.00 | % |                           |   | 0.00 | %    |  |   | 0.00 | % |  |   | 0.00 | %

A summary of the
Companys stock option activity and related information for the nine months ended June 30, 2010 follows (stock option amounts and aggregate intrinsic value are presented in thousands):



|                                             |  |                 |   |  |                                |      |                                           |      |                          |   |       
|-------------------------------------------- |  | --------------- | - |  | ------------------------------ | ---- | ----------------------------------------- | ---- | ------------------------ | - | ------
|                                             |  | Number ofShares |   |  | Weighted-AverageExercise Price |      | Weighted-AverageRemainingContractual Term |      | AggregateIntrinsic Value
|Outstanding at September 30, 2009            |  | 4,801           |   |  | $                              | 4.97 |                                           |      |                          |   |       
|Granted                                      |  | 1,021           |   |  | $                              | 4.54 |                                           |      |                          |   |       
|Exercised                                    |  | (1,054          | ) |  | $                              | 4.35 |                                           |      |                          | $ | 4,488 
|Cancelled/Expired                            |  | (338            | ) |  | $                              | 8.31 |                                           |      |                          |   |       
|                                             |  |                 |   |  |                                |      |                                           |      |                          |   |       
|Outstanding at June 30, 2010                 |  | 4,430           |   |  | $                              | 4.76 |                                           | 4.81 |                          | $ | 13,131
|                                             |  |                 |   |  |                                |      |                                           |      |                          |   |       
|Exercisable at June 30, 2010                 |  | 2,308           |   |  | $                              | 5.66 |                                           | 3.99 |                          | $ | 5,133 
|                                             |  |                 |   | 
|Vested and expected to vest at June 30, 2010 |  | 4,246           |   |  | $                              | 4.80 |                                           | 4.75 |                          | $ | 12,445

A summary of the
Companys RSU activity and related information for the nine months ended June 30, 2010 under the 2007 Plan follows (RSU amounts and aggregate intrinsic value are presented in thousands):



|                                  |  |                 |   |  |                                      |      |                           |   |    
|--------------------------------- |  | --------------- | - |  | ------------------------------------ | ---- | ------------------------- | - | ---
|                                  |  | Number ofShares |   |  | Weighted-AverageGrant DateFair Value |      | AggregateIntrinsic 
Value
|Outstanding at September 30, 2009 |  | 66              |   |  | $                                    | 5.60 |                           |   |    
|                                  |  |                 |  
|Granted                           |  | 1               |   |  | $                                    | 9.99 |                           |   |    
|Vested                            |  | (29             | ) |  | $                                    |     |                           | $ | 207
|Forfeited                         |  | (8              | ) |  | $                                    | 5.60 |                           |   |    
|                                  |  |                 |   |  |                                      |      |                           |   |    
|Outstanding at June 30, 2010      |  | 30              |   |  | $                                    | 5.78 |                           | $ | 225
|                                  |  |                 |   |  |                                      |      |                           |   |    

During the nine months ended June 30, 2010, employees purchased a total of 67,000 shares for
$0.3 million under the Companys ESPP. During the nine months ended June 30, 2009, employees purchased a total of 270,000 shares for $0.4 million under the Companys ESPP.



9



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



6. Concentrations

In the three and nine months ended June 30, 2010, revenue from the Companys largest distributor accounted for 18% and 15% of
net sales, respectively. In the three and nine months ended June 30, 2010, revenue from the Companys second largest distributor accounted for 11% and 10% of net sales, respectively. In the three and nine months ended June 30, 2009,
revenue recognized for the Companys largest distributor, accounted for 15% and 13% of net sales, respectively.

7. Inventories

The following is a summary of inventories by major category:



|                     |  |                |        |                   |   |       
|-------------------- |  | -------------- | ------ | ----------------- | - | ------
|                     |  | June 30,2010   |        | September 30,2009
|                     |  | (In thousands)
|Purchased components |  | $              | 11,085 |                   | $ | 5,667 
|Work-in-process      |  |                | 14,031 |                   |   | 1,106 
|Finished goods       |  |                | 20,262 |                   |   | 12,502
|                     |  |                |        |                   |   |       
|                     |  | $              | 45,378 |                   | $ | 19,275
|                     |  |                |        |                   |   |       

During the three and nine months ended June 30,
2010, the Company recorded inventory write-downs of $0.5 million and $1.9 million, respectively. During the three and nine months ended June 30, 2009, the Company recorded inventory write-downs of $2.0 million and $9.4 million, respectively.
The inventory write-downs were predominately for excess and obsolescence issues and lower of cost or market adjustments on certain of the Companys products.

8. Stockholders Equity

The changes in the components of Stockholders Equity since the beginning of fiscal 2010 are as follows:



|                                                               |  |                |   |                          |   |         |                    |  |   |                                       |   |  |                         |        |   |  |   |      
|-------------------------------------------------------------- |  | -------------- | - | ------------------------ | - | ------- | ------------------ |  | - | ------------------------------------- | - |  | ----------------------- | ------ | - |  | - | -----
|                                                               |  | CommonStock    |   | AdditionalPaid-InCapital |   |         | AccumulatedDeficit |  |   | AccumulatedComprehensiveIncome (Loss) |   |  | Non-ControllingInterest
|                                                               |  | (In thousands)
|Balance at September 30, 2009                                  |  | $              | 2 |                          | $ | 309,649 |                    |  | $ | (185,481                              | ) |  | $                       | (1,344 | ) |  | $ | 1,750
|Components of comprehensive loss:                              |  |                |   |                          |   |         |                    |  |   |                                       |   |  |                         |        |   |  |   |      
|Net income                                                     |  |                |  |                          |   |        |                    |  |   | 30,391                                |   |  |                         |       |   |  |   | 139  
|Change in cumulative translation adjustment, net of tax        |  |                |  |                          |   |        |                    |  |   |                                      |   |  |                         | (302   | ) |  |   |     
|Change in unrealized gain on investments, net of tax           |  |                |  |                          |   |        |                    |  |   |                                      |   |  |                         | (665   | ) |  |   |     
|Change in retirement plan obligations, net of tax              |  |                |  |                          |   |        |                    |  |   |                                      |   |  |                         | (287   | ) |  |   |     
|                                                               |  |                |   |                          |  
|Stock options exercised and shares issued upon vesting of RSUs |  |                | 1 |                          |   | 4,584   |                    |  |   |                                      |   |  |                         |       |   |  |   |     
|Shares issued under stock purchase plan                        |  |                |  |                          |   | 331     |                    |  |   |                                      |   |  |                         |       |   |  |   |     
|Stock-based compensation                                       |  |                |  |                          |   | 1,680   |                    |  |   |                                      |   |  |                         |       |   |  |   |     
|Shares repurchased and retired                                 |  |                |  |                          |   | (1,108  | )                  |  |   |                                      |   |  |                         |       |   |  |   |     
|Noncontrolling interest in Giantec                             |  |                |  |                          |   | 740     |                    |  |   |                                      |   |  |                         |       |   |  |   | 3,045
|Change in noncontrolling interest in Wintram                   |  |                |  |                          |   | 23      |                    |  |   |                                      |   |  |                         |       |   |  |   | 199  
|                                                               |  |                |   |                          |   |         |                    |  |   |                                       |   |  |                         |        |   |  |   |      
|Balance at June 30, 2010                                       |  | $              | 3 |                          | $ | 315,899 |                    |  | $ | (155,090                              | ) |  | $                       | (2,598 | ) |  | $ | 5,133
|                                                               |  |                |   |                          |   |         |                    |  |   |                                       |   |  |                         |        |   |  |   |      



10



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



Comprehensive income (loss) includes net income (loss) as well as other comprehensive
income (loss). The Companys other comprehensive income (loss) consists of changes in cumulative translation adjustment, unrealized gains and losses on investments and retirement plan transition and actuarial gains and losses.

Comprehensive income (loss), net of taxes (which were immaterial for all other comprehensive income items for the periods presented), was
as follows:



|                                                                    |      |                            |        |      |                           |   |        |   |  |      |        |   |  |   |        |  
|------------------------------------------------------------------- | ---- | -------------------------- | ------ | ---- | ------------------------- | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                    |      | Three Months EndedJune 30, |        |      | Nine Months EndedJune 30, |  
|                                                                    | 2010 |                            |        | 2009 |                           |   | 2010   |   |  | 2009 |       
|                                                                    |      |                            |        |      | (In thousands)            |   |        |   | 
|Consolidated net income (loss)                                      |      | $                          | 16,177 |      |                           | $ | (2,017 | ) |  | $    | 30,530 |   |  | $ | (9,954 | )
|Other comprehensive income (loss), net of tax:                      |      |                            |        |      |                           |   |        |   |  |      |        |   |  |   |        |  
|Change in cumulative translation adjustment                         |      |                            | (994   | )    |                           |   | 1,675  |   |  |      | (302   | ) |  |   | (1,278 | )
|Change in unrealized gains (losses) on investments                  |      |                            | (3,717 | )    |                           |   | 574    |   |  |      | (665   | ) |  |   | 2,013  |  
|Change in retirement plan transition obligation                     |      |                            | (18    | )    |                           |   | 5      |   |  |      | (287   | ) |  |   | (76    | )
|                                                                    |      |                            |        |      |                           |   |        |   |  |      |        |   |  |   |        |  
|Comprehensive income (loss)                                         |      | $                          | 11,448 |      |                           | $ | 237    |   |  | $    | 29,276 |   |  | $ | (9,295 | )
|Comprehensive income (loss) attributable to noncontrolling interest |      |                            | (136   | )    |                           |   | 91     |   |  |      | (139   | ) |  |   | 132    |  
|                                                                    |      |                            |        |      |                           |   |        |   |  |      |        |   |  |   |        |  
|Comprehensive income (loss) attributable to ISSI                    |      | $                          | 11,312 |      |                           | $ | 328    |   |  | $    | 29,137 |   |  | $ | (9,163 | )
|                                                                    |      |                            |        |      |                           |   |        |   |  |      |        |   |  |   |        |  

The components of accumulated other comprehensive income (loss), net of tax, were as follows:



|                                                                        |  |                |        |   |                   |   |        |  
|----------------------------------------------------------------------- |  | -------------- | ------ | - | ----------------- | - | ------ | -
|                                                                        |  | June 30,2010   |        |   | September 30,2009 |  
|                                                                        |  | (In thousands) |       
|Accumulated foreign currency translation adjustments                    |  | $              | (1,875 | ) |                   | $ | (1,573 | )
|Accumulated net unrealized gain on Ralink                               |  |                |       |   |                   |   | 1,673  |  
|Accumulated net unrealized gain (loss) on SMIC                          |  |                | (1,008 | ) |                   |   | (2,018 | )
|Accumulated net unrealized gain on other available-for-sale investments |  |                |       |   |                   |   | 2      |  
|Accumulated net retirement plan transition obligation                   |  |                | 121    |   |                   |   | 408    |  
|Accumulated net retirement plan actuarial losses                        |  |                | 164    |   |                   |   | 164    |  
|                                                                        |  |                |        |   |                   |   |        |  
|Total accumulated other comprehensive income (loss)                     |  | $              | (2,598 | ) |                   | $ | (1,344 | )
|                                                                        |  |                |        |   |                   |   |        |  



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



9. Income Taxes

As of June 30, 2010, the Company had no unrecognized tax positions that would impact its effective tax rate. In the three and nine
months ended June 30, 2010, the Company reversed $140,000 of unrecognized tax benefit due to the expiration of a statute of limitation.

The Company recorded income tax expense of $272,000 and $963,000 for the three and nine months ended June 30, 2010,
respectively. The income tax expense is comprised of foreign taxes on certain income earned by the Companys foreign entities and state minimum taxes reduced by a refund of previously paid Federal alternative minimum taxes and a reversal
of previously recorded unrecognized tax benefits. On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 was signed into law. One of the provisions in the Act allows a taxpayer, at the taxpayers election,
to carryback either its 2008, 2009 or 2010 net operating losses 3, 4, or 5 years whereas, generally, net operating losses can only be carried back up to 2 years. These net operating loss carryback provisions allow for the recovery of previously paid
federal alternative minimum taxes.

For the three and nine months ended June 30, 2009, the Company recorded an income tax
provision of $50,000 and an income tax benefit of $52,000, respectively. The income tax provision recorded for the three month period ended June 30, 2009 represents a discrete adjustment to the amount of previously recorded tax provision,
state minimum taxes and foreign taxes. The income tax benefit recorded for the nine month period ended June 30, 2009 is primarily a result of the Housing and Economic Recovery Act of 2008 and the American Recovery and Reinvestment Act of
2009. Under these Acts, corporations otherwise eligible to claim first year bonus depreciation for assets placed in service between April 1, 2008 and December 31, 2009 could elect to claim a refund of their previously generated tax
credits in lieu of claiming the bonus depreciation. The benefit recorded represents this refund claim partially offset by state minimum taxes.

10. Per Share Data

The
following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):



|                                                             |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|------------------------------------------------------------ |  | -------------------------- | ------ | ---- | ------------------------- | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                                             |  | Three Months EndedJune 30, |        |      | Nine Months EndedJune 30, |       
|                                                             |  | 2010                       |        | 2009 |                           |        | 2010 |  | 2009 |       
|Numerator for basic and diluted net income (loss) Per share: |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|Net income (loss)                                            |  | $                          | 16,041 |      | $                         | (1,926 | )    |  | $    | 30,391 |  | $ | (9,822 | )
|                                                             |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|Denominator for basic net income (loss) per share:           |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|Weighted average common shares outstanding                   |  |                            | 25,965 |      |                           | 25,410 |      |  |      | 25,429 |  |   | 25,507 |  
|Dilutive stock options and awards                            |  |                            | 2,061  |      |                           |       |      |  |      | 1,378  |  |   |       |  
|                                                             |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|Denominator for diluted net income (loss) per share          |  |                            | 28,026 |      |                           | 25,410 |      |  |      | 26,807 |  |   | 25,507 |  
|                                                             |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|Basic net income (loss) per share                            |  | $                          | 0.62   |      | $                         | (0.08  | )    |  | $    | 1.20   |  | $ | (0.39  | )
|                                                             |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  
|Diluted net income (loss) per share                          |  | $                          | 0.57   |      | $                         | (0.08  | )    |  | $    | 1.13   |  | $ | (0.39  | )
|                                                             |  |                            |        |      |                           |        |      |  |      |        |  |   |        |  

For the three and nine months ended June 30, 2010, options to purchase 139,000 and 927,000 shares were
excluded from diluted earnings per share by the application of the treasury stock method. For the three and nine months ended June 30, 2009, options and RSUs for 4,584,000 and 5,920,000 shares were excluded from diluted earnings per share by
the application of the treasury stock method. The diluted earnings per share calculations for the three and nine months ended June 30, 2009 do not include approximately 36,000 and 3,000 potential common shares from outstanding stock options
because their inclusion would be anti-dilutive.



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



11. Common Stock Repurchase Program

In the three months ended June 30, 2010, the Company did not repurchase any shares of its common stock. The Company paid
approximately $0.6 million in connection with the repurchase of 231,874 shares of its common stock during the three months ended June 30, 2009. The Company paid approximately $1.1 million and $3.7 million in connection with the repurchase of
244,941 shares and 1,721,356 shares of its common stock during the nine months ended June 30, 2010 and June 30, 2009, respectively. As of June 30, 2010, the Company had repurchased and retired an aggregate of 13,679,711 shares of
common stock at a cost of approximately $84.5 million since September 2007. As of June 30, 2010, $3.8 million remained available under the existing share repurchase authorization.

The Company issues RSUs as part of its equity incentive plans. For a small portion of RSUs granted, the number of shares issued on the
date the RSUs vest is net of the statutory withholding requirements that the Company pays on behalf of its employees. During the nine months ended June 30, 2010, the Company withheld 1,529 shares to satisfy approximately $11,000 of
employees tax obligations. Although the shares withheld are not issued, they are treated as common stock repurchases for accounting purposes, as they reduce the number of shares that would have been issued upon vesting.

12. Commitments and Contingencies

Patents and Licenses

In the semiconductor industry, it is not unusual for companies to receive notices alleging infringement of patents or other intellectual
property rights of others. The Company has been, and from time-to-time expects to be, notified of claims that it may be infringing patents, maskwork rights or copyrights owned by third parties. If it appears necessary or desirable, the Company may
seek licenses under patents that it is alleged to be infringing. Although patent holders commonly offer such licenses, licenses may not be offered and the terms of any offered licenses may not be acceptable to the Company. The failure to obtain a
license under a key patent or intellectual property right from a third party for technology used by the Company could cause it to incur substantial liabilities and to suspend the manufacture of the products utilizing the invention or to attempt to
develop non-infringing products, any of which could materially and adversely affect the Companys business and operating results. Furthermore, there can be no assurance that the Company will not become involved in protracted litigation
regarding its alleged infringement of third party intellectual property rights or litigation to assert and protect its patents or other intellectual property rights. Any litigation relating to patent infringement or other intellectual property
matters could result in substantial cost and diversion of the Companys resources that could materially and adversely affect the Companys business and operating results.

Legal Proceedings

SRAM Antitrust Litigation

Thirty-three purported class action lawsuits were filed by U.S. Direct-Purchaser and U.S. Indirect-Purchaser Plaintiffs against the
Company and other SRAM suppliers in various U.S. federal courts alleging violations of the Sherman Act, violations of state unfair competition laws, and unjust enrichment relating to the sale and pricing of SRAM products. The U.S. lawsuits seek
treble damages for the alleged damages sustained by purported class members, in addition to restitution, costs and attorneys fees, as well as an injunction against the allegedly unlawful conduct. As of August 30, 2007, the Company was
voluntarily dismissed from all lawsuits brought by the U.S. Indirect-Purchaser Plaintiffs pursuant to a Tolling Agreement between the Company and the U.S. Indirect-Purchaser Plaintiffs. The U.S. Indirect-Purchaser Plaintiffs agreed not to name the
Company as a defendant unless the Tolling Agreement is terminated according to terms specified in that agreement. On January 9, 2008, the Company was voluntarily dismissed without prejudice from one of the lawsuits brought by the U.S.
Direct-Purchaser Plaintiffs. The Company remained a defendant in three lawsuits brought by the U.S. Direct-Purchaser Plaintiffs. On October 5, 2009, the Company entered into a settlement agreement with the U.S. Direct-Purchaser Plaintiffs. On
July 2, 2010, the court issued an order granting approval of the settlement. As part of the agreement, the Company received a release for all Direct-Purchaser SRAM claims and did not admit any wrongdoing or liability.



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



DRAM Technologies LLC v. Integrated Silicon Solution, Inc., et al.

On or about February 23, 2010, the Company was purportedly served with a patent infringement suit against the Company and several
other semiconductor companies in the United States District Court for the Eastern District of Texas by DRAM Technologies LLC (DRAM Technologies), for the alleged infringement of various patents related to certain technology allegedly
applicable to DRAM devices (Case No. 2:10-CV-45) (the Complaint). The Complaint also alleges willful infringement of the patents by the Company and seeks a permanent injunction of the alleged infringing acts by it, as well as
up to the trebling of unspecified damages. The litigation is still in its early stages and the Company has not yet answered the Complaint. The Company will file an answer to the Complaint as prescribed by the Federal Rules of Civil
Procedure.

Other Legal Proceedings

In the ordinary course of its business, as is common in the semiconductor industry, the Company has been involved in a limited number
of other legal actions, both as plaintiff and defendant, and could incur uninsured liability in any one or more of them. Although the outcome of these actions is not presently determinable, the Company believes that the ultimate resolution of
these matters will not have a material adverse effect on its financial position, cash flows or results of operations. However, no assurances can be given with respect to the extent or outcome of any such litigation in the future.

Commitments to Wafer Fabrication Facilities and Contract Manufacturers

The Company issues purchase orders for wafers to various foundries. These purchase orders are generally considered to be cancelable.
However, to the degree that the wafers have entered into work-in-process at the foundry, as a matter of practice, it becomes increasingly difficult to cancel the purchase order. As of June 30, 2010, the Company had approximately $29.4 million
of purchase orders for which the related wafers had been entered into wafer work-in-process (i.e., manufacturing had begun).



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



13. Geographic and Segment Information

The Company has one operating segment, which is to design, develop, and market high performance SRAM, DRAM, and other memory and
non-memory semiconductor products. The following table summarizes the Companys operations in different geographic areas:



|                             |  |                            |        |                           |   |        |  |      |         |  |   |        
|---------------------------- |  | -------------------------- | ------ | ------------------------- | - | ------ |  | ---- | ------- |  | - | -------
|                             |  | Three Months EndedJune 30, |        | Nine Months EndedJune 30,
|                             |  | 2010                       |        | 2009                      |   | 2010   |  | 2009
|                             |  | (In thousands)            
|Net sales                    |  |                            |        |                           |   |        |  |      |         |  |   |        
|United States                |  | $                          | 10,719 |                           | $ | 4,203  |  | $    | 27,295  |  | $ | 16,533 
|China                        |  |                            | 3,521  |                           |   | 2,506  |  |      | 9,980   |  |   | 5,681  
|Hong Kong                    |  |                            | 20,408 |                           |   | 12,145 |  |      | 49,097  |  |   | 31,938 
|Japan                        |  |                            | 3,835  |                           |   | 1,724  |  |      | 9,780   |  |   | 5,236  
|Korea                        |  |                            | 4,595  |                           |   | 3,942  |  |      | 13,998  |  |   | 7,686  
|Taiwan                       |  |                            | 9,682  |                           |   | 7,029  |  |      | 24,345  |  |   | 16,666 
|Other Asia Pacific countries |  |                            | 4,140  |                           |   | 2,582  |  |      | 10,840  |  |   | 6,684  
|Europe                       |  |                            | 14,009 |                           |   | 4,479  |  |      | 32,554  |  |   | 16,489 
|Other                        |  |                            | 319    |                           |   | 291    |  |      | 937     |  |   | 906    
|                             |  |                            |        |                           |   |        |  |      |         |  |   |        
|Total net sales              |  | $                          | 71,228 |                           | $ | 38,901 |  | $    | 178,826 |  | $ | 107,819
|                             |  |                            |        |                           |   |        |  |      |         |  |   |        



|                  |  |                |        |                   |   |       
|----------------- |  | -------------- | ------ | ----------------- | - | ------
|                  |  | June 30,2010   |        | September 30,2009
|                  |  | (In thousands)
|Long-lived assets |  |                |        |                   |   |       
|United States     |  | $              | 1,949  |                   | $ | 2,857 
|Hong Kong         |  |                | 20     |                   |   | 30    
|China             |  |                | 1,662  |                   |   | 865   
|Taiwan            |  |                | 21,750 |                   |   | 19,466
|                  |  |                |        |                   |   |       
|                  |  | $              | 25,381 |                   | $ | 23,218
|                  |  |                |        |                   |   |       



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made forward-looking statements in this report that are subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future results of our operations. Also, when we use words such as believes, expects, anticipates or similar expressions, we are making forward-looking statements. You
should note that an investment in our securities involves certain risks and uncertainties that could affect our future financial results. Our actual results could differ materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in Risk Factors and elsewhere in this report.

We believe it
is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risks described in Risk Factors included in this
report, as well as any other cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before
you invest in our common stock, you should be aware that the occurrence of the events described in Risk Factors and elsewhere in this report could harm our business and adversely affect our results.

All forward-looking statements made by us or persons acting on our behalf are expressly qualified in their entirety by the Risk Factors
and other cautionary statements set forth in this report. Except as required by federal securities laws, we are under no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.



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

Overview

We are a fabless semiconductor company that designs and markets high performance integrated circuits for the following key markets:
(i) digital consumer electronics, (ii) networking and telecommunications, (iii) mobile communications, (iv) automotive electronics and (v) industrial applications. Our primary products are high speed and low power SRAM and
low and medium density DRAM in both package and Known Good Die (KGD) form. In the nine months ended June 30, 2010 and in fiscal 2009, approximately 90% and 86%, respectively, of our revenue was derived from our SRAM and DRAM products. We were
founded in October 1988 and initially focused on high performance, low cost SRAM for PC cache memory applications. In 1997, we introduced our first low and medium density DRAM products. Prior to fiscal 2003, our SRAM product family generated a
majority of our revenue. However, sales of our low and medium density DRAM products have represented a majority of our net sales in each year since fiscal 2003.

In January 2010, we formed a separate business unit, Giantec Semiconductor, Inc. (Giantec). As part of this formation, Shanghai Zhang
Jiang Science & Technology Investment Corporation invested approximately $3.8 million in Giantec. We still own more than 50% of Giantec and, as such, continue to consolidate the financial results of Giantec. Through our Giantec business
unit, we design and market application specific standard products (ASSP) primarily EEPROMs and SmartCards focused on our key markets.

In order to control our operating expenses, in recent years we limited our headcount in the U.S. and transferred various functions to
Taiwan and China. We believe this strategy has enabled us to limit our operating expenses while simultaneously locating these functions closer to our manufacturing partners and our customers. As a result of these efforts, we currently have
significantly more employees in Asia than we do in the U.S. We intend to continue these strategies going forward.

As a
fabless semiconductor company, our business model is less capital intensive because we rely on third parties to manufacture, assemble and test our products. Because of our dependence on third-party wafer foundries, our ability to increase our unit
sales volumes depends on our ability to increase our wafer capacity allocation from current foundries, add additional foundries and improve yields of good die per wafer.



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The average selling prices of our SRAM and DRAM products are sensitive to supply and demand
conditions in our target markets and have generally declined over time. We experienced declines in the average selling prices for many of our products in the first nine months of fiscal 2010 and in fiscal 2009. However, the average selling prices
for certain DRAM products have increased since the latter part of our September 2009 quarter and these average selling price increases have continued through the June 2010 quarter. We expect average selling prices for our products to decline in the
future, principally due to market demand, market competition and the supply of competitive products in the market. Any future decreases in our average selling prices could have an adverse impact on our revenue growth rate, gross margins and
operating margins. Our ability to maintain or increase revenues will be highly dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products in quantities sufficient to compensate for the
anticipated declines in average selling prices of existing products. Declining average selling prices will adversely affect our gross margins unless we are able to offset such declines with commensurate reductions in per unit costs or changes in
product mix in favor of higher margin products.

Revenue from product sales to our direct customers is recognized upon
shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed or determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements and there
are no remaining significant obligations. A portion of our sales is made to distributors under agreements that provide for the possibility of certain sales price rebates and limited product return privileges. Given the uncertainties associated with
credits that will be issued to these distributors, we defer recognition of such sales until our products are sold by the distributors to their end customers. Revenue from sales to distributors who do not have sales price rebates or product return
privileges is recognized at the time our products are sold by us to the distributors.

We market and sell our products in
Asia, the U.S., Europe and other locations through our direct sales force, distributors and sales representatives. The percentage of our sales shipped outside the U.S. was approximately 85% in each of the first nine months of fiscal 2010, the first
nine months of fiscal 2009, and in fiscal 2009 and 84% in fiscal 2008. We measure sales location by the shipping destination. We anticipate that sales to international customers will continue to represent a significant percentage of our net sales.
The percentages of our net sales by region are set forth in the following table:



|       |  |                           |   |  |                                 |   |  |      |   |  |      |  
|------ |  | ------------------------- | - |  | ------------------------------- | - |  | ---- | - |  | ---- | -
|       |  | Nine Months EndedJune 30, |   |  | Fiscal Years EndedSeptember 30, |  
|       |  | 2010                      |   |  | 2009                            |   |  | 2009 |   |  | 2008 |  
|Asia   |  | 66                        | % |  | 69                              | % |  | 70   | % |  | 66   | %
|Europe |  | 18                        |   |  | 15                              |   |  | 14   |   |  | 17   |  
|U.S.   |  | 15                        |   |  | 15                              |   |  | 15   |   |  | 16   |  
|Other  |  | 1                         |   |  | 1                               |   |  | 1    |   |  | 1    |  
|       |  |                           |   |  |                                 |   |  |      |   |  |      |  
|Total  |  | 100                       | % |  | 100                             | % |  | 100  | % |  | 100  | %
|       |  |                           |   |  |                                 |   |  |      |   |  |      |  

Our sales are generally made by purchase orders. Because industry practice allows customers to reschedule or
cancel orders on relatively short notice, backlog may not be a good indicator of our future sales. Cancellations of customer orders or changes in product specifications could result in the loss of anticipated sales without allowing us sufficient
time to reduce our inventory and operating expenses.

Since a significant portion of our revenue is from the digital consumer
electronics market, our business may be subject to seasonality, with increased revenues in the third and fourth calendar quarters of each year, when customers place orders to meet year-end holiday demand. However, due to the complex nature of the
markets we serve and the broad fluctuations in economic conditions in the U.S. and other countries, it is difficult for us to assess the impact of seasonal factors on our business.

We are subject to the risks of conducting business internationally, including economic conditions in Asia, particularly Taiwan and China,
changes in trade policy and regulatory requirements, duties, tariffs and other trade barriers and restrictions, the burdens of complying with foreign laws and, possibly, political instability. All of our foundries and assembly and test
subcontractors are located in Asia. Although our international sales are largely denominated in U.S. dollars, we do have sales transactions in New Taiwan dollars, in Hong Kong dollars and in Chinese renminbi. In addition, we have foreign operations
where expenses are generally denominated in the local currency. Such transactions expose us to the risk of exchange rate fluctuations. We monitor our exposure to foreign currency fluctuations, but have not adopted any hedging strategies to date.
There can be no assurance that exchange rate fluctuations will not harm our business and operating results in the future.



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Due to the continued uncertain economic conditions, our current or potential customers may
delay or reduce purchases of our products, which would adversely affect our revenues and harm our business and financial results. In addition, the continued uncertainty in the financial markets may have an adverse effect on the
U.S. and world economies, which may negatively impact the spending patterns of businesses including our current and potential customers. We expect our business to be adversely impacted by any future downturn in the U.S. or
global economies. In the past, industry downturns have resulted in reduced demand and declining average selling prices for our products which adversely affected our business. We expect to continue to experience these adverse business
conditions in the event of further downturns.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to
make difficult and subjective estimates, judgments and assumptions. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenue and expenses during the reporting period. The estimates and judgments that we use in applying our accounting policies have a significant impact on the results we report in our financial
statements. We base our estimates and judgments on our historical experience combined with knowledge of current conditions and our beliefs of what could occur in the future, considering the information available at the time. Actual results could
differ from those estimates and such differences may be material to our financial statements. We reevaluate our estimates and judgments on an ongoing basis.

Our critical accounting policies which are impacted by our estimates are: (i) the valuation of our inventory, which impacts cost of
goods sold and gross profit; (ii) the valuation of our allowance for sales returns and allowances, which impacts net sales; (iii) the valuation of our allowance for doubtful accounts, which impacts general and administrative expense;
(iv) accounting for acquisitions and goodwill, which impacts operating expense when we record impairments and (v) accounting for stock-based compensation which impacts costs of goods sold, research and development expense and selling,
general and administrative expense. Each of these policies is described in more detail below. We also have other key accounting policies that may not require us to make estimates and judgments that are as subjective or difficult. For instance, our
policies with regard to revenue recognition, including the deferral of revenues on sales to distributors with sales price rebates and product return privileges. These policies are described in the notes to our financial statements contained in our
Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

Valuation of inventory. Our
inventories are stated at the lower of cost or market value. Determining the market value of inventories on hand and at distributors as of the balance sheet date involves numerous judgments, including projecting average selling prices and sales
volumes for future periods and costs to complete products in work in process inventories. When market values are below our costs, we record a charge to cost of goods sold to write down our inventories to their estimated market value in advance of
when the inventories are actually sold. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required that may adversely affect our operating results. If actual market conditions
are more favorable, we may have higher gross margins when products are sold. In addition to lower of cost or market write-downs, we also analyze inventory to determine whether any of it is excess, obsolete or defective. We write down to zero dollars
(which is a charge to cost of goods sold) the carrying value of inventory on hand that has aged over one year to cover estimated excess and obsolete exposures, unless adjustments are made based on managements judgments for newer products, end
of life products, planned inventory increases or strategic customer supply. In making such judgments to write down inventory, we take into account the product life cycles which can range from six to 30 months, the stage in the life cycle of the
product, and the impact of competitors announcements and product introductions on our products. Once established, these write-downs are considered permanent.

Valuation of allowance for sales returns and allowances. Net sales consist principally of total product sales less estimated
sales returns and allowances. To estimate sales returns and allowances, we analyze potential customer specific product application issues, potential quality and reliability issues and historical returns. We evaluate quarterly the adequacy of the
allowance for sales returns and allowances. This allowance is reflected as a reduction to accounts receivable in our consolidated balance sheets. Increases to the allowance are recorded as a reduction to net sales. Because the allowance for sales
returns and allowances is based on our judgments and estimates, particularly as to product application, quality and reliability issues, our allowances may not be adequate to cover actual sales returns and other allowances. If our allowances are not
adequate, our net sales could be adversely affected.



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Valuation of allowance for doubtful accounts. We maintain an allowance for
doubtful accounts for losses that we estimate will arise from our customers inability to make required payments for goods and services purchased from us. We make our estimates of the uncollectibility of our accounts receivable by analyzing
historical bad debts, specific customer creditworthiness and current economic trends. Once an account is deemed unlikely to be fully collected, we write down the carrying value of the receivable to the estimated recoverable value, which results in a
charge to general and administrative expense, which decreases our profitability.

Accounting for acquisitions and
goodwill. We account for acquisitions using the purchase accounting method in accordance with Financial Accounting Standards Board (FASB) guidance in place at the time of the acquisition. Under this method, the total consideration paid is
allocated over the fair value of the net assets acquired, including in-process research and development, with any excess allocated to goodwill. Goodwill is defined as the excess of the purchase price over the fair value allocated to the net assets.
Our judgments as to fair value of the assets will, therefore, affect the amount of goodwill that we record. Management is responsible for the valuation of tangible and intangible assets. For tangible assets acquired in any acquisition, such as plant
and equipment, the useful lives are estimated by considering comparable lives of similar assets, past history, the intended use of the assets and their condition. In estimating the useful life of the acquired intangible assets with definite lives,
we consider the industry environment and unique factors relating to each product relative to our business strategy and the likelihood of technological obsolescence. Acquired intangible assets primarily include core and current technology, customer
relationships and customer contracts. We are currently amortizing our acquired intangible assets with definite lives over periods generally ranging from six months to six years.

We perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances where indicators of impairment
may exist. For instance, in response to changes in industry and market conditions, we could be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an
impairment of tangible and intangible assets, including goodwill.

Accounting for stock-based compensation. We
account for stock-based compensation arrangements in accordance with the FASB issued guidance. Under the guidance, stock option fair value is calculated on the date of grant using the Black-Scholes valuation model. The compensation cost is then
recognized on a straight-line basis over the requisite service period of the option, which is generally the option vesting term of four years. We use the Black-Scholes valuation model to determine the fair value of our stock options at the date of
grant. The Black-Scholes valuation model requires us to estimate key assumptions such as expected term, volatility, dividend yield and risk free interest rates that determine the stock option fair value. In addition, we estimate forfeitures at the
time of grant. In subsequent periods, if actual forfeitures differ from the estimate, the forfeiture rate may be revised. We estimate our expected forfeitures rate based on our historical activity and judgment regarding trends. We utilized the
simplified calculation of expected life under the provisions of the Securities and Exchange Commissions (SEC) Staff Accounting Bulletin 107 through December 2007. For option grants subsequent to December 2007, the expected term is based upon
historical exercise data. If we determined that another method used to estimate expected life was more reasonable than our current method, or if another method for calculating these inputs assumptions was prescribed by authoritative guidance, the
fair value calculated could change materially.

Accounting Changes and Recent Accounting Pronouncements

For a description of accounting changes and recent accounting pronouncements, including the expected dates of adoption
see Note 3: Impact of Recently Issued Accounting Standards in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q. None of the recently adopted accounting pronouncements have had a material effect on our condensed
consolidated financial statements.



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Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

Net Sales. Net sales consist principally of total product sales less estimated sales returns. Net sales increased
by 83% to $71.2 million in the three months ended June 30, 2010 from $38.9 million in the three months ended June 30, 2009. The increase in net sales of $32.3 million was principally due to a significant increase in unit shipments and an
increase in average selling prices for certain of our DRAM products in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. In addition, unit shipments of both our SRAM products and our application
specific standard products (ASSP) which include our EEPROM, Smart Card and logic products increased in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. We anticipate that the average selling prices of
our existing products will generally decline over time, although the rate of decline may fluctuate for certain products. There can be no assurance that any future price declines will be offset by higher volumes or by higher prices on newer products.

In the three months ended June 30, 2010, revenue from our largest distributor accounted for 18% of net sales and revenue
from our second largest distributor accounted for 11% of our net sales. In the three months ended June 30, 2009, revenue from our largest distributor accounted for 15% of net sales.

Gross profit. Cost of sales includes die cost from the wafers acquired from foundries, subcontracted package, assembly and test
costs, costs associated with in-house product testing, quality assurance and import duties. Gross profit increased by $17.6 million to $27.3 million in the three months ended June 30, 2010 from $9.7 million in the three months ended
June 30, 2009. Our gross margin was 38.4% in the three months ended June 30, 2010 compared to 25.1% in the three months ended June 30, 2009. The increase in gross margin in the three months ended June 30, 2010 compared to the
three months ended June 30, 2009 can be attributed to an improvement in product mix, the effect of better pricing for our products in certain target markets, cost reductions for certain products and a decrease in inventory write-downs. Our
gross margin for the three months ended June 30, 2010 included inventory write-downs of $0.5 million while our gross margin for the three months ended June 30, 2009 included inventory write-downs of $2.0 million. The inventory write-downs
were for excess and obsolescence issues and lower of cost or market accounting on certain of our products. Our gross margin for the three months ended June 30, 2010 and June 30, 2009 benefited from the sale of $0.9 million and $1.4
million, respectively, of products previously written down to zero carrying value. The increase in our gross profit in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 was primarily a result of an
increase in unit shipments across all our products but more significantly for our DRAM products. We believe that the average selling prices of our products will decline over time and, unless we are able to reduce our cost per unit or improve our
product mix to higher gross margin products to the extent necessary to offset such declines, the decline in average selling prices will result in a material decline in our gross margin. In addition, our product costs could increase if our suppliers
raise prices, which could result in a material decline in our gross margin. In the past, foundries have raised wafer prices when demand for end products increased. Although we have product cost reduction programs in place that involve efforts to
reduce internal costs and supplier costs, there can be no assurance that product costs will be reduced or that such reductions will be sufficient to offset the expected declines in average selling prices. We do not believe that such cost reduction
efforts are likely to have a material adverse impact on the quality of our products or the level of service provided by us.

Research and Development. Research and development expenses increased by 18% to $5.9 million in the three months ended
June 30, 2010 compared to $5.0 million in the three months ended June 30, 2009. As a percentage of net sales, research and development expenses decreased to 8.3% in the three months ended June 30, 2010 from 12.8% in the three months
ended June 30, 2009. The increase in research and development expenses of $0.9 million can be attributed to an increase in payroll related expenses and product development costs. We implemented an employee profit sharing program during the
March 2010 quarter which was retroactive to the beginning of our fiscal year. Our June 2010 quarter reflects the profit sharing expense for June quarter whereas the June 2009 quarter reflected salary reductions for all employees as a result of cost
reduction programs implemented in response to adverse global economic conditions existing at that time. We expect the dollar amount of our research and development expenses to increase in the September 2010 quarter due to an increase in mask
expenditures.



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Selling, General and Administrative. Selling, general and administrative expenses
increased by 36% to $8.1 million in the three months ended June 30, 2010 from $6.0 million in the three months ended June 30, 2009. As a percentage of net sales, selling, general and administrative expenses decreased to 11.4% in the three
months ended June 30, 2010 from 15.3% in the three months ended June 30, 2009. The increase in selling, general and administrative expenses of $2.2 million can be attributed to an increase in sales commissions in the June 2010 quarter as a
result of our higher revenue and an increase in payroll related expenses. We implemented an employee profit sharing program during the March 2010 quarter which was retroactive to the beginning of our fiscal year. Our June 2010 quarter reflects this
profit sharing expense whereas the June 2009 quarter reflected salary reductions for all employees as a result of cost reduction programs implemented in response to adverse global economic conditions. We expect the dollar amount of our selling,
general and administrative expenses to remain relatively flat in the September 2010 quarter.

Acquired in-process
technology charge. In April 2009, we acquired Enable, a private Taiwan and Korea based company. The Enable acquisition provides us with both ultra low power Single Data Rate (SDR) and Double Data Rate (DDR) SDRAMs, and ultra low power Pseudo
SRAMs in KGD and package format targeted at the portable consumer products market. The total purchase price was $2.7 million with the potential for additional contingent payments based on future operating results. The allocation of the purchase
price of Enable included both tangible assets and acquired intangibles including both developed technology as well as acquired in-process technology (IPR&D). In the three months ended June 30, 2009, we incurred a $0.7 million IPR&D
charge in connection with our acquisition of Enable. In accordance with SFAS 141, the $0.7 million allocated to IPR&D was expensed in the three months ending June 30, 2009 as it was deemed to have no future alternative use.

Interest and other income (expense), net. Interest and other income (expense), net was income of $0.6 million in the three months
ended June 30, 2010 compared to expense of $0.1 million in the three months ended June 30, 2009. The $0.6 million of interest and other income in the three months ended June 30, 2010 is comprised of $0.3 million in rental income from
the lease of excess space in our Taiwan facility, foreign exchange gains of approximately $0.3 million and net interest income of $0.1 million offset in part by other items. The $0.1 million of interest and other income (expense) in the three months
ended June 30, 2009 is comprised of $0.2 million in foreign exchange losses and $0.2 million in various other expense items offset in part by $0.2 million in rental income from the lease of excess space in our Taiwan facility and net interest
income of $0.1 million.

Gain on sale of investments.The gain on the sale of investments was $2.6 million in the three
months ended June 30, 2010 as we sold our remaining shares of Ralink for approximately $3.0 million and recorded a pre-tax gain of approximately $2.6 million. In the three months ended June 30, 2009, there were no gains on the sale of
investments.

Provision for income taxes.We recorded an income tax expense of $272,000 for the three months ended
June 30, 2010. The income tax expense is principally comprised of state income tax and foreign taxes reduced by the reversal of previously recorded unrecognized tax benefits. We recorded an income tax expense of $50,000 for the three
months ended June 30, 2009 which is primarily a result of the American Recovery and Reinvestment Act of 2009. Under this Act, corporations otherwise eligible to claim first year bonus depreciation for assets placed in service during 2009
could elect to claim a refund of their previously generated tax credits in lieu of claiming the bonus depreciation. The benefit recorded for the period represents this refund claim offset by state minimum taxes.

Net (income) loss attributable to noncontrolling interests.The net (income) loss attributable to noncontrolling interests was
income of $136,000 in the three months ended June 30, 2010 compared to a loss of $91,000 in the three months ended June 30, 2009.

Nine Months Ended June 30, 2010 Compared to Nine Months Ended June 30, 2009

Net Sales. Net sales increased by 66% to $178.8 million in the nine months ended June 30, 2010 from $107.8 million in the nine
months ended June 30, 2009. The increase in net sales of $71.0 million was principally due to a significant increase in unit shipments and an increase in average selling prices for certain of our DRAM products in the nine months ended
June 30, 2010 compared to the nine months ended June 30, 2009. In addition, unit shipments of both our SRAM products and our ASSP products increased in the nine months ended June 30, 2010 compared to the nine months ended
June 30, 2009.

In the nine months ended June 30, 2010, revenue from our largest distributor accounted for 15% of
net sales and revenue from our second largest distributor accounted for 10% of our net sales. In the nine months ended June 30, 2009, revenue from our largest distributor accounted for 13% of net sales.



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Gross profit. Gross profit increased by $44.7 million to $68.7 million in the nine
months ended June 30, 2010 from $23.9 million in the nine months ended June 30, 2009. Our gross margin was 38.4% in the nine months ended June 30, 2010 compared to 22.2% in the nine months ended June 30, 2009. The increase in
gross margin in the nine months ended June 30, 2010 compared to the nine months ended June 30, 2009 can be attributed to the favorable impact in the current period from the sales of items previously written down to lower of cost or market
combined with a decrease in inventory write-downs, an improvement in product mix, the effect of better pricing in certain target markets and cost reductions for certain products. Our gross margin for the nine months ended June 30, 2010 included
inventory write-downs of $1.9 million while our gross margin for the nine months ended June 30, 2009 included inventory write-downs of $9.4 million. The inventory write-downs were for excess and obsolescence issues and lower of cost or market
accounting on certain of our products. Our gross margin for the nine months ended June 30, 2010 and June 30, 2009 benefited from the sale of $2.9 million and $2.1 million, respectively, of products previously written down to zero carrying
value. The increase in our gross profit in the nine months ended June 30, 2010 compared to the nine months ended June 30, 2009 was primarily a result of an increase in unit shipments across all our products but more significantly for our
DRAM products.

Research and development. Research and development expenses increased by 17% to $16.8 million in the
nine months ended June 30, 2010 from $14.4 million in the nine months ended June 30, 2009. As a percentage of net sales, research and development expenses decreased to 9.4% in the nine months ended June 30, 2010 from 13.3% in the nine
months ended June 30, 2009. The increase in research and development expenses of $2.4 million can be attributed to an increase in expenditures for masks, other product development costs and an increase in headcount related expenses associated
with our acquisition of Enable. In addition, the nine months ended June 30, 2010 reflects expense for our employee profit sharing program which was implemented in the March quarter retroactive to the beginning of our current fiscal year.

Selling, general and administrative. Selling, general and administrative expenses increased by 24% to $24.3 million in
the nine months ended June 30, 2010 from $19.7 million in the nine months ended June 30, 2009. As a percentage of net sales, selling, general and administrative expenses decreased to 13.6% in the nine months ended June 30, 2010 from
18.2% in the nine months ended June 30, 2009. The increase in selling, general and administrative expenses of $4.6 million can be attributed to an increase in sales commissions in the nine months ended June 30, 2010 as a result of our
higher revenue and an increase in payroll related expenses. In addition, the nine months ended June 30, 2010 reflects expense for our employee profit sharing program which was implemented in the March quarter retroactive to the beginning of our
current fiscal year.

Acquired in-process technology charge. In the nine months ended June 30, 2009, we incurred a
$0.7 million IPR&D charge in connection with our acquisition of Enable. The $0.7 million allocated to IPR&D was expensed in the nine months ending June 30, 2009 as it was deemed to have no future alternative use.

Interest and other income, net. Interest and other income, net was $1.2 million in the nine months ended June 30, 2010
compared to $0.8 million in the nine months ended June 30, 2009. The $1.2 million of interest and other income in the nine months ended June 30, 2010 was comprised of $0.8 million in rental income from the lease of excess space in our
Taiwan facility, foreign exchange gains of approximately $0.4 million and net interest income of $0.3 million offset in part by other items. The $0.8 million of interest and other income in the nine months ended June 30, 2009 was comprised of
net interest income of $0.5 million and $1.0 million in rental income from the lease of excess space in our Taiwan facility offset in part by other items including foreign exchange losses of $0.2 million.

Gain on sale of investments.The gain on the sale of investments was $2.8 million in the nine months ended June 30, 2010 as
we sold all of our shares of Ralink for approximately $3.2 million and recorded a pre-tax gain of approximately $2.8 million. In the nine months ended June 30, 2009, there were no gains on the sale of investments.

Provision (benefit) for income taxes.We recorded an income tax expense of $963,000 for the nine months ended June 30, 2010.
The income tax expense of $963,000 is principally comprised of foreign taxes on certain income earned by our foreign entities, state income taxes reduced by a refund of previously paid Federal alternative minimum taxes and a reversal of previously
recorded unrecognized tax benefits. On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 was signed into law. One of the provisions in such Act allows a taxpayer, at the taxpayers election, to carryback
either its 2008, 2009 or 2010 net operating losses 3, 4, or 5 years whereas, generally, net operating losses can only be carried back up to 2 years. These net operating loss carryback provisions allow for the recovery of previously paid federal
alternative minimum taxes.



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For the nine months ended June 30, 2009, we recorded an income tax benefit of $52,000
which is primarily a result of the Housing and Economic Recovery Act of 2008 and the American Recovery and Reinvestment Act of 2009. Under these Acts, corporations otherwise eligible to claim first year bonus depreciation for assets placed in
service between April 1, 2008 and December 31, 2009 may elect to claim a refund of their previously generated tax credits in lieu of claiming the bonus depreciation. The benefit recorded for the period represents this refund claim
partially offset by state minimum taxes.

Net (income) loss attributable to noncontrolling interests.The net (income)
loss attributable to noncontrolling interests was income of $139,000 in the nine months ended June 30, 2010 compared to a loss of $132,000 in the nine months ended June 30, 2009.

Liquidity and Capital Resources

As of June 30, 2010, our principal sources of liquidity included cash, cash equivalents, restricted cash and short-term investments
of approximately $90.0 million. During the nine months ended June 30, 2010, operating activities provided cash of approximately $0.3 million compared to $9.5 million of cash provided in the nine months ended June 30, 2009. The cash
provided by operations in the nine months ended June 30, 2010 was primarily due to our net income of $30.5 million adjusted for non-cash items of $2.0 million, increases in accounts payable of $16.4 million and increases in accrued liabilities
of $2.2 million. This was offset by increases in inventory of $25.8 million, increases in accounts receivable of $13.4 million, $10.0 million for long-term deposits to secure foundry capacity and increases in other assets of $1.6 million. The cash
provided by operations in the nine months ended June 30, 2009 was primarily due to decreases in inventories of $22.0 million, decreases in accounts receivable of $10.9 million, and decreases in other assets of $2.8 million. These items were
offset by decreases in accounts payable of $20.3 million, decreases in accrued liabilities of $3.1 million and our net loss of $10.0 million adjusted for non-cash items of $7.1 million.

In the nine months ended June 30, 2010, we generated $10.5 million from investing activities compared to $7.1 million used for
investing activities in the nine months ended June 30, 2009. In the nine months ended June 30, 2010, we generated $9.5 million from the sale of trading securities, $3.8 million from the net sales of available-for-sale securities and
generated approximately $3.2 million from the sale of shares of Ralink. We also received approximately $3.8 million from the third-party investors in our consolidated subsidiary Giantec. In the nine months ended June 30, 2010, we used $5.0
million to collateralize accounts payable to a supplier. In the nine months ended June 30, 2009, we used $2.9 million for net purchases of available-for-sale securities and approximately $2.7 million for our acquisition of Enable which is
comprised of cash used for the purchase of Enable shares less cash acquired as a result of our consolidation of Enable. We also received proceeds of approximately $0.8 million from the third-party investors in our consolidated subsidiary Wintram
Inc.

In the nine months ended June 30, 2010, we made capital expenditures of approximately $4.9 million compared to $2.3
million in the nine months ended June 30, 2009. The expenditures in the nine months ended June 30, 2010 were primarily for test equipment, engineering tools and computer hardware. We expect to spend approximately $3.0 million to $5.0
million to purchase capital equipment during the next twelve months, principally for the purchase of additional test equipment, design and engineering tools, and computer software and hardware. We expect to fund our capital expenditures from our
existing cash and cash equivalent balances.

We generated $3.8 million from financing activities during the nine months ended
June 30, 2010 compared to $3.3 million used during the nine months ended June 30, 2009. Our source of financing for the nine months ended June 30, 2010 was proceeds from the issuance of common stock of $4.9 million from stock option
exercises and sales under our employee stock purchase plan. In the nine months ended June 30, 2010, we used $1.1 million for the repurchase and retirement of our common stock. In the nine months ended June 30, 2009, we used $3.7 million
for the repurchase and retirement of our common stock and $12.2 million for the repayment of short-term borrowings. Our sources of financing for the nine months ended June 30, 2009 were borrowings of $12.2 million under lines of credit in
Taiwan and proceeds from the issuance of common stock of $0.4 million from sales under our employee stock purchase plan and from stock option exercises.

We have $13.7 million available through a number of short-term lines of credit with various financial institutions in Taiwan. These lines
of credit expire at various times through April 2011. As of June 30, 2010, we had no outstanding borrowings under these short-term lines of credit.



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At June 30, 2010, our investment portfolio included $10.5 million par value ($9.5
million fair value) of AAA rated investments in auction rate securities, for which all of the underlying assets are student loans, which are backed by the federal government under the Federal Family Education Loan Program. In November 2008, we
entered into an agreement (the Agreement) with UBS AG (UBS) the investment firm that sold us our auction rate securities. The Agreement covers all of our auction rate securities as of June 30, 2010. By entering into the Agreement,
we (1) received the right to sell these auction rate securities back to UBS at par, at our sole discretion, anytime during the period from June 30, 2010 through July 2, 2012, and (2) gave UBS the right to purchase these auction
rate securities or sell them on our behalf at par anytime after the execution of the Agreement through July 2, 2012. However, if the rights are not exercised before July 2, 2012 they will expire and UBS will have no further rights
or obligation to buy our auction rate securities. So long as we hold our auction rate securities, they will continue to accrue interest as determined by the auction process or the term of the auction rate securities if the auction process
fails.

In November 2006, we entered into a lease for approximately 30,000 square feet of office space in San Jose and
relocated our headquarters there in February 2007. The lease on this building expires in June 2013. Outside of the U.S., we have operations in leased sites in China and Hong Kong. In addition to these sites, we lease sales offices in the U.S.,
Europe and Asia. These leases expire at various dates through 2012. In Taiwan, we own and occupy our building. The land upon which our building is situated is leased under an operating lease that expires in March 2016. Our outstanding commitments
under these leases were approximately $3.5 million at June 30, 2010.

We generally warrant our products against defects
in materials and workmanship for a period of 12 months. Liability for a stated warranty period is usually limited to the replacement of defective items or return of amounts paid. Warranty expense has historically been immaterial to our financial
statements.

At June 30, 2010, we had outstanding authorization from our Board to purchase up to $3.8 million of our
common stock from time to time.

We believe our existing funds will satisfy our anticipated working capital and other cash
requirements through at least the next 12 months. We may from time to time take actions to further increase our cash position through equity or debt financings, sales of shares of investments, bank borrowings, or the disposition of certain assets.
From time to time, we may also commit to acquisitions or equity investments, including strategic investments in or prepayments to wafer fabrication foundries or assembly and test subcontractors. To the extent we enter into such transactions, any
such transaction could require us to seek additional equity or debt financing to fund such activities. There can be no assurance that any such additional financing could be obtained on terms acceptable to us, if at all.

Off-Balance Sheet Arrangements

As of June 30, 2010, we did not have any off-balance sheet arrangements as defined in Item 303 (a)(4)(ii) of
SEC Regulation S-K.



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

Our financial market risk includes foreign currency transactions, exposure to changes in interest rates on our investments and our
investments in marketable equity securities.

We anticipate that international sales will continue to account for a
significant portion of our consolidated revenue. Our international sales are largely denominated in U.S. dollars and therefore are not subject to material foreign currency exchange risk. However, we have operations in China, Europe, Taiwan, Hong
Kong, India, Japan, Korea and Singapore where our expenses are denominated in each countrys local currency and are subject to foreign currency exchange risk. In the three and nine months ended June 30, 2010, we recorded exchange gains of
approximately $0.3 million and approximately $0.4 million, respectively. We could be negatively impacted by exchange rate fluctuations in the future. We do not currently engage in any hedging activities.



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We had cash, cash equivalents, restricted cash and short-term investments of $90.0 million
at June 30, 2010. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without incurring significant risk. We invest primarily in high-quality, short-term debt instruments and
instruments issued by high quality financial institutions and companies, including money market instruments. A decrease in interest rates would have an immaterial impact on our interest income as current interest rates are near historic lows.
Included within our investment portfolio are $10.5 million par value ($9.5 million fair value) of AAA rated investments in auction rate securities. The underlying assets of these auction rate securities are student loans which are backed by the
federal government under the Federal Family Education Loan Program.

We own ordinary shares in SMIC which has been a publicly
traded company since March 2004. SMICs ordinary shares are traded on the Hong Kong Stock Exchange and SMIC American Depository Receipts (ADR) are traded on the New York Stock Exchange. Each SMIC ADR represents fifty
(50) ordinary shares. We use the weighted-average cost method to determine our cost basis of shares of SMIC. We account for our shares in SMIC under the provisions of FASB ASC 320 and mark the shares to market value with the offset recorded in
accumulated other comprehensive income. The cost basis of our shares in SMIC is approximately $3.4 million and the market value at June 30, 2010 was approximately $2.4 million and is included in short-term investments. The market value of our
shares in SMIC at July 31, 2010 was approximately $2.1 million. The market value of SMIC shares is subject to fluctuations and our carrying value will be subject to adjustments to reflect changes in SMICs market value in future periods.
In the event the decline in the market value of our SMIC shares below our cost basis is determined to be other-than-temporary, we may be required to recognize a loss on our investment through operating results.



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

Our Chief Executive Officer and our Chief Financial Officer, based on the evaluation of our disclosure controls and procedures (as defined
in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that, as of June 30, 2010, our disclosure controls and procedures were effective
to ensure that the information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Remediation of Material Weakness in Internal Control over Financial Reporting

We have addressed the material weakness in our internal control over financial reporting related to adequate management oversight or
supervision over non-routine accounting functions and the judgments used in developing financial estimates for inventory reserves and the ineffectiveness of our disclosure controls and procedures that we reported in our report on Form 10-K for the
year ended September 30, 2009. To remediate the material weakness, we have implemented additional control procedures, management reviews and employee training. We have also improved the documentation of our policies and procedures. These
remediation actions were completed in the three months ended March 31, 2010.

Changes in Internal Control over
Financial Reporting

During the three months ended June 30, 2010, there were no changes in our internal control
over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.



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Part II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

SRAM Antitrust Litigation

Thirty-three purported class action lawsuits were filed by U.S. Direct-Purchaser and U.S. Indirect-Purchaser Plaintiffs against us and
other SRAM suppliers in various U.S. federal courts alleging violations of the Sherman Act, violations of state unfair competition laws, and unjust enrichment relating to the sale and pricing of SRAM products. The U.S. lawsuits seek treble damages
for the alleged damages sustained by purported class members, in addition to restitution, costs and attorneys fees, as well as an injunction against the allegedly unlawful conduct. As of August 30, 2007, we were voluntarily dismissed from
all lawsuits brought by the U.S. Indirect-Purchaser Plaintiffs pursuant to a Tolling Agreement between us and the U.S. Indirect-Purchaser Plaintiffs. The U.S. Indirect-Purchaser Plaintiffs agreed not to name us as a defendant unless the Tolling
Agreement is terminated according to terms specified in that agreement. On January 9, 2008, we were voluntarily dismissed without prejudice from one of the lawsuits brought by the U.S. Direct-Purchaser Plaintiffs. We remained a defendant in
three lawsuits brought by the U.S. Direct-Purchaser Plaintiffs. On October 5, 2009, we entered into a settlement agreement with the U.S. Direct-Purchaser Plaintiffs. On July 2, 2010, the court issued an order granting approval of the
settlement. As part of the agreement, we will received a release for all Direct-Purchaser SRAM claims and did not admit any wrongdoing or liability.

DRAM Technologies LLC v. Integrated Silicon Solution, Inc., et al.

On or about February 23, 2010, we were purportedly served with a patent infringement suit against us and several other semiconductor
companies in the United States District Court for the Eastern District of Texas by DRAM Technologies LLC, for the alleged infringement of various patents related to certain technology allegedly applicable to DRAM devices (Case No. 2:10-CV-45)
(the Complaint). The Complaint also alleges willful infringement of the patents by us and seeks a permanent injunction of the alleged infringing acts by us, as well as up to the trebling of unspecified damages. The litigation
is still in its early stages and we have not yet answered the Complaint. We will file an answer to the Complaint as prescribed by the Federal Rules of Civil Procedure.

Other Legal Proceedings

In the ordinary course of our business, as is common in the semiconductor industry, we have been involved in a limited number of
other legal actions, both as plaintiff and defendant, and could incur uninsured liability in any one or more of them. Although the outcome of these actions is not presently determinable, we believe that the ultimate resolution of these matters
will not have a material adverse effect on our financial position, cash flows or results of operations. However, no assurances can be given with respect to the extent or outcome of any such litigation in the future.



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

Uncertain general
economic conditions and any future downturn in the markets we serve are expected to adversely affect our business and financial results.

Substantially all of our products are incorporated into products for the digital consumer electronics, networking, mobile communications,
automotive electronics and industrial markets. Historically, these markets have experienced cyclical depressed business conditions, often in connection with, or in anticipation of, a decline in general economic conditions, or due to adverse supply
and demand conditions in such markets. Industry downturns have resulted in reduced demand and declining average selling prices for our products which adversely affected our business. Due to the continued uncertain economic conditions, our current or
potential customers may delay or reduce purchases of our products which would adversely affect our revenues and harm our business and financial results. In addition, the continued uncertainty in the economy may negatively impact the spending
patterns of businesses including our current and potential customers. We expect our business to be adversely impacted by any further downturn in the U.S. or global economies.



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Our sales depend on DRAM and SRAM products and reduced demand for these products or a decline in average
selling prices could harm our business.

In the nine months ended June 30, 2010 and in fiscal 2009, approximately 90%
and 86%, respectively, of our net sales were derived from the sale of DRAM and SRAM products, which are subject to unit volume fluctuations and declines in average selling prices that could harm our business. We experienced a sequential decline in
revenue from $37.7 million in our December 2008 quarter to $31.3 million in our March 2009 quarter primarily as a result of a significant decrease in unit shipments of our SRAM products and a decline in the average selling prices for our DRAM
products. We also experienced a sequential decline in revenue from $55.3 million in our September 2008 quarter to $37.7 million in our December 2008 quarter primarily as a result of a significant decrease in unit shipments of both our DRAM and SRAM
products. We may not be able to offset any future price declines for our products by higher volumes or by higher prices on newer products. While we have experienced increases in the average selling prices for certain of our products in the nine
months ended June 30, 2010, historically, average selling prices for semiconductor memory products have declined, and we expect that average selling prices for our products will decline in the future. Our ability to maintain or increase
revenues will depend upon our ability to increase unit sales volume of existing products and introduce and sell new products that compensate for the anticipated declines in the average selling prices of our existing products.

If we are unable to obtain an adequate supply of wafers, our business will be harmed.

If we are unable to obtain an adequate supply of wafers from our current suppliers or any alternative sources in a timely manner, our
business will be harmed. Our principal manufacturing relationships are with Nanya, Powerchip Semiconductor, SMIC, TSMC, IBM and Chartered Semiconductor Manufacturing. Each of our wafer foundries also supplies wafers to other semiconductor companies,
including certain of our competitors or for their own account. Although we are allocated wafer capacity from our key suppliers, we may not be able to obtain such capacity in periods of tight supply. If any of our suppliers experience manufacturing
failures or yield shortfalls, severe financial or operational difficulties, choose to prioritize capacity for other uses, or reduce or eliminate deliveries to us for any other reason, we may not be able to obtain enough wafers to meet the market
demand for our products which would adversely affect our revenues. From time to time, certain of our wafer foundries announce that they will no longer produce a specific type of wafer we may need. In such event, we have had to and may in the future
have to place large last time buy orders which expose us to risk of inventory obsolescence. Once a product is in production at a particular foundry, it is time consuming and costly to have such product manufactured at a different foundry. In
addition, we may not be able to qualify additional manufacturing sources for existing or new products in a timely manner and we cannot be certain that other manufacturing sources would be able to deliver an adequate supply of wafers to us or at the
same cost.

Foundry capacity has tightened in recent periods resulting in higher wafer prices, and we may be required to pay even higher
prices for wafers or to enter into costly arrangements to secure foundry capacity in the future.

In response to improving
semiconductor industry conditions, foundry capacity has tightened in recent periods. If we are not able to obtain additional foundry capacity as required, our relationships with our customers would be harmed and our future sales would be adversely
impacted. In order to secure foundry capacity, we have entered into in the past, and may enter into in the future, various arrangements with suppliers, which could include:



| |  |  | option payments or other prepayments to foundries;
| | - |  | --------------------------------------------------



| |  |  | increased prices for wafers;
| | - |  | ----------------------------



| |  |  | purchases of equity or debt securities in foundries;
| | - |  | ----------------------------------------------------



| |  |  | joint ventures;
| | - |  | ---------------



| |  |  | process development relationships with foundries;
| | - |  | -------------------------------------------------



| |  |  | contracts that commit us to purchase specified quantities of wafers over extended periods; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | nonrefundable deposits with, or loans to, foundries in exchange for capacity commitments.
| | - |  | -----------------------------------------------------------------------------------------

We may not be able to make any such arrangements in a timely fashion or at all, and such arrangements, if any, may not be on terms
favorable to us. Once we make commitments to secure foundry capacity, we may incur significant financial penalties if we subsequently determine that we are not able to utilize all of that capacity. Such penalties may be substantial and could harm
our financial results.



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We rely on third-party contractors to fabricate, assemble and test our products. Our business is highly
dependent on the continued operations of such contractors and our failure to successfully manage our relationships with these contractors could damage our relationships with our customers, decrease our sales and limit our growth.

We rely on third-party contractors located in Asia to fabricate, assemble and test our products. Any continued uncertain economic
conditions or continued uncertainty in the U.S. and global credit markets could materially impact the financial condition or operations of our third-party contractors such as our wafer foundries, test contractors and assembly contractors.
Our business is highly dependent on the continued operations of such contractors. Any deterioration in the financial condition of our contractors or any disruption in the operations of our contactors could adversely impact the flow of
our products to our end customers and materially adversely impact our business and results of operation. There are significant risks associated with our reliance on these third-party contractors, including:



| |  |  | potential price increases;
| | - |  | --------------------------



| |  |  | possible capacity shortages;
| | - |  | ----------------------------



| |  |  | financial viability of our contractors;
| | - |  | ---------------------------------------



| |  |  | reduced control over product quality;
| | - |  | -------------------------------------



| |  |  | reduced control over delivery schedules;
| | - |  | ----------------------------------------



| |  |  | their inability to increase production and achieve acceptable yields on a timely basis;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | absence of long-term agreements;
| | - |  | --------------------------------



| |  |  | limited warranties on products supplied to us; and
| | - |  | --------------------------------------------------



| |  |  | general risks related to conducting business internationally.
| | - |  | -------------------------------------------------------------

If any of these risks are realized, our business and results of operations could be adversely affected until our subcontractor is able to
remedy the problem or until we are able to secure an alternative subcontractor.

Our foundries may experience lower than expected yields
which could adversely affect our business.

The manufacture of integrated circuits is a highly complex and technically
demanding process. Production yields and device reliability can be affected by a large number of factors. As is typical in the semiconductor industry, our outside foundries have from time to time experienced lower than anticipated manufacturing
yields and device reliability problems, particularly in connection with the introduction of new products and changes in such foundrys processing steps. There can be no assurance that our foundries will not experience lower than expected
manufacturing yields or device reliability problems in the future, which could materially and adversely affect our business and operating results.

Our operating results are expected to continue to fluctuate and may not meet our financial guidance or published analyst forecasts. This may cause the
price of our common stock to decline significantly.

Our future quarterly and annual operating results are subject to
fluctuations due to a wide variety of factors, including:



| |  |  | changes in the global economy;
| | - |  | ------------------------------



| |  |  | the cyclicality of the semiconductor industry;
| | - |  | ----------------------------------------------



| |  |  | declines in average selling prices of our products;
| | - |  | ---------------------------------------------------



| |  |  | shortages in foundry, assembly or test capacity;
| | - |  | ------------------------------------------------



| |  |  | disruption in the supply of wafers, assembly or test services;
| | - |  | --------------------------------------------------------------



| |  |  | changes in the pricing for wafers or assembly or test services;
| | - |  | ---------------------------------------------------------------



| |  |  | oversupply of memory products in the market;
| | - |  | --------------------------------------------



| |  |  | inventory write-downs for lower of cost or market or excess and obsolete;
| | - |  | -------------------------------------------------------------------------



| |  |  | cancellation of existing orders or the failure to secure new orders;
| | - |  | --------------------------------------------------------------------



| |  |  | excess inventory levels at our customers;
| | - |  | -----------------------------------------



| |  |  | decreases in the demand for our products;
| | - |  | -----------------------------------------



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##### Table of Contents

| |  |  | our ability to control or reduce our operating expenses;
| | - |  | --------------------------------------------------------



| |  |  | increased expenses associated with new product introductions, masks or process changes;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | the ability of customers to make payments to us;
| | - |  | ------------------------------------------------



| |  |  | changes in our product mix which could reduce our gross margins;
| | - |  | ----------------------------------------------------------------



| |  |  | a failure to introduce new products and to implement technologies on a timely basis;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | market acceptance of ours and our customers products;
| | - |  | ------------------------------------------------------



| |  |  | a failure to anticipate changing customer product requirements;
| | - |  | ---------------------------------------------------------------



| |  |  | fluctuations in manufacturing yields at our suppliers;
| | - |  | ------------------------------------------------------



| |  |  | fluctuations in product quality resulting in rework, replacement, or loss due to damages;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | a failure to deliver products to customers on a timely basis;
| | - |  | -------------------------------------------------------------



| |  |  | the timing of significant orders;
| | - |  | ---------------------------------



| |  |  | the outcome of any pending or future litigation; and
| | - |  | ----------------------------------------------------



| |  |  | the commencement of any future litigation or antidumping proceedings.
| | - |  | ---------------------------------------------------------------------

We have incurred significant losses in certain recent periods, and there can be no assurance that we will be able to sustain profitability in the
future.

We were profitable in each of the first three quarters of fiscal 2010 and though we were also profitable in the
September 2009 quarter, we incurred a loss of $5.1 million in fiscal 2009, which included a $0.7 million charge for acquired in-process technology. Though we were profitable in each of the first three quarters of fiscal 2008, we incurred a loss of
$17.8 million in fiscal 2008, which included charges for the impairment of goodwill of $25.3 million. There can be no assurance that we will maintain profitability in future periods. Our ability to maintain profitability on a quarterly or fiscal
year basis in the future will depend on a variety of factors, including the need for future inventory write-downs, our ability to increase net sales, maintain or expand gross margins, introduce new products on a timely basis, secure sufficient wafer
fabrication and assembly and test capacity and control operating expenses, including stock-based compensation. Adverse developments with respect to these or other factors could result in quarterly or annual operating losses in the future.

Shifts in industry-wide capacity may cause our results to fluctuate. These shifts may occur quickly with little or no advance notice. Such
shifts have historically resulted in significant inventory write-downs.

The semiconductor industry is highly cyclical and
is subject to significant downturns resulting from excess capacity, overproduction, reduced demand or technological obsolescence. Shifts in industry-wide capacity from shortages to oversupply or from oversupply to shortages may result in significant
fluctuations in our quarterly or annual operating results. These shifts in industry conditions can occur quickly with little or no advance notice to us. Adverse changes in industry conditions are likely to result in a decline in average selling
prices and the stated value of our inventory. In the first nine months of fiscal 2010, in fiscal 2009 and in fiscal 2008, we recorded inventory write-downs of $1.9 million, $10.8 million, and $11.3 million, respectively. The inventory
write-downs related to valuing our inventory at the lower-of-cost-or-market, and adjusting our inventory valuation for certain excess and obsolete products.

Differences in forecasted average selling prices used in calculating lower of cost or market adjustments can result in significant
changes in the estimated net realizable value of inventory and accordingly the amount of write-down recorded. If the estimated market value of products in inventory at quarter-end is below the manufacturing cost of these products, we will recognize
charges to write down the carrying value of our inventories to market value. In addition, we write down to zero dollars the carrying value of inventory on hand that has aged over one year to cover estimated excess and obsolete exposures, unless
adjustments are made based on managements judgments for newer products, end of life products, planned inventory increases or strategic customer supply. In making such judgments to write down inventory, management takes into account the product
life cycles which can range from six to 30 months, the stage in the life cycle of the product, the impact of competitors announcements and product introductions on our products. Future additional inventory write-downs may occur due to lower of
cost or market accounting, excess inventory or inventory obsolescence.



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Strong competition in the semiconductor memory market may harm our business.

The semiconductor memory market is intensely competitive and has been characterized by an oversupply of product, price erosion, rapid
technological change, short product life cycles, cyclical market patterns, and heightened foreign and domestic competition. Many of our competitors offer broader product lines and have greater financial, technical, marketing, distribution and other
resources than us. We may not be able to compete successfully against any of these competitors. Our ability to compete successfully in the memory market depends on factors both within and outside of our control, including:



| |  |  | the pricing of our products;
| | - |  | ----------------------------



| |  |  | the supply and cost of wafers;
| | - |  | ------------------------------



| |  |  | product design, functionality, performance and reliability;
| | - |  | -----------------------------------------------------------



| |  |  | successful and timely product development;
| | - |  | ------------------------------------------



| |  |  | the performance of our competitors and their pricing policies;
| | - |  | --------------------------------------------------------------



| |  |  | wafer manufacturing over or under capacity;
| | - |  | -------------------------------------------



| |  |  | real or perceived imbalances in supply and demand for our products;
| | - |  | -------------------------------------------------------------------



| |  |  | the rate at which OEM customers incorporate our products into their systems;
| | - |  | ----------------------------------------------------------------------------



| |  |  | the success of our customers products and end-user demand;
| | - |  | -----------------------------------------------------------



| |  |  | access to advanced process technologies at competitive prices;
| | - |  | --------------------------------------------------------------



| |  |  | achievement of acceptable yields of functional die;
| | - |  | ---------------------------------------------------



| |  |  | the capacity of our third-party contractors to assemble and test our products;
| | - |  | ------------------------------------------------------------------------------



| |  |  | the gain or loss of significant customers;
| | - |  | ------------------------------------------



| |  |  | the nature of our competitors;
| | - |  | ------------------------------



| |  |  | our financial strength and the financial strength of our competitors; and
| | - |  | -------------------------------------------------------------------------



| |  |  | general economic conditions.
| | - |  | ----------------------------

In addition, we are vulnerable to technology advances utilized by competitors to manufacture higher performance or lower cost products.
We may not be able to compete successfully in the future as to any of these factors. Our failure to compete successfully in these or other areas could harm our business and financial results.

We may encounter difficulties in effectively integrating newly acquired businesses.

From time to time, we have acquired and expect in the future to acquire other companies or assets that we believe to be complementary to
our business. In this regard, in April 2009, we announced the acquisition of Enable Semiconductor Corporation, a private Taiwan and Korea based company. Acquisitions may result in the use of our cash resources, potentially dilutive issuances of
equity securities, incurrence of debt and contingent liabilities, amortization expenses related to intangible assets, and the possible impairment of goodwill, which could harm our profitability. In addition, acquisitions involve numerous risks,
including:



| |  |  | higher than estimated acquisition expenses;
| | - |  | -------------------------------------------



| |  |  | difficulties in successfully assimilating the operations, technologies and personnel of the acquired company;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in continuing to develop new technologies and deliver products to market on time;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | diversion of managements attention from other business concerns;
| | - |  | -----------------------------------------------------------------



| |  |  | risks of entering markets in which we have no, or limited, direct prior experience;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | lower than expected sales of any acquired products;
| | - |  | ---------------------------------------------------



| |  |  | the risk that the markets for acquired products do not develop as expected; and
| | - |  | -------------------------------------------------------------------------------



| |  |  | the potential loss of key employees and customers as a result of the acquisition.
| | - |  | ---------------------------------------------------------------------------------

There is no assurance that any of our recent or future acquisitions will contribute positively to our business or operating results.



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The loss of a significant customer or a reduction in orders from one or more large customers could
adversely affect our operating results.

As sales to our customers are executed pursuant to purchase orders and no
purchasing contracts typically exist, our customers can cease doing business with us at any time. We may not be able to retain our key customers, such customers may cancel or reschedule orders, and in the event of canceled orders, such orders may
not be replaced by other sales. In addition, sales to any particular customer may fluctuate significantly from quarter to quarter, and such fluctuating sales could harm our business and financial results.

We have significant international sales and operations and risks related to our international activities could harm our operating results.

In the nine months ended June 30, 2010, approximately 15% of our net sales was attributable to customers located in
the U.S., 18% was attributable to customers located in Europe and 66% was attributable to customers located in Asia. In fiscal 2009, approximately 15% of our net sales was attributable to customers located in the U.S., 14% was attributable to
customers located in Europe and 70% was attributable to customers located in Asia. We anticipate that sales to international sites will continue to represent a significant percentage of our net sales. Although our international sales are largely
denominated in U.S. dollars, we do have sales transactions in New Taiwan dollars, in Hong Kong dollars and in Chinese renminbi. In addition, our wafer foundries and assembly and test subcontractors are primarily located in Taiwan and China. A
substantial majority of our employees are located outside of the U.S and the expenses for our foreign operations are generally denominated in local currency. As a result, a devaluation of the New Taiwan dollar or Chinese renminbi could substantially
increase the cost of our operations in Taiwan or China.

We are subject to the risks of conducting business internationally,
including:



| |  |  | global economic conditions, particularly in Taiwan and China;
| | - |  | -------------------------------------------------------------



| |  |  | duties, tariffs and other trade barriers and restrictions;
| | - |  | ----------------------------------------------------------



| |  |  | foreign currency fluctuations;
| | - |  | ------------------------------



| |  |  | changes in trade policy and regulatory requirements;
| | - |  | ----------------------------------------------------



| |  |  | transportation delays;
| | - |  | ----------------------



| |  |  | the burdens of complying with foreign laws;
| | - |  | -------------------------------------------



| |  |  | imposition of foreign currency controls;
| | - |  | ----------------------------------------



| |  |  | language barriers;
| | - |  | ------------------



| |  |  | difficulties in hiring and retaining experienced engineers in countries such as China and Taiwan;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | difficulties in collecting foreign accounts receivable;
| | - |  | -------------------------------------------------------



| |  |  | difficulties in protecting our intellectual property rights;
| | - |  | ------------------------------------------------------------



| |  |  | political instability, including any changes in relations between China and Taiwan;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | public health outbreaks such as SARS or avian flu; and
| | - |  | ------------------------------------------------------



| |  |  | earthquakes and other natural disasters.
| | - |  | ----------------------------------------

Our revenues and business would be harmed if we are not able to successfully develop, introduce and sell new products and develop and implement new
manufacturing technologies in a timely manner. Our research and development expenses could increase and our business could be harmed if the implementation of these new manufacturing technologies is unsuccessful.

We operate in highly competitive, quickly changing markets which are characterized by rapid obsolescence of existing products. As a
result, our future success depends on our ability to develop and introduce new products that our customers choose to buy in significant quantities. If we fail to introduce new products in a timely manner or if our customers products do not
achieve commercial success, our business and results of operations could be seriously harmed. The design and introduction of new products is challenging as such products typically incorporate more functions and operate at faster speeds than prior
products. Increasing complexity generally requires smaller features on a chip. This makes developing new generations of products substantially more difficult than prior generations. The cost to develop products utilizing these new technologies is
expensive and requires significant research and development spending and, as a result, our research and development expenses could increase in the future. Further, new products may not work properly in our customers applications. If we are
unable to design, introduce, manufacture, market and sell new products successfully, our business and financial results would be seriously harmed.



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Our products are complex and could contain defects, which could reduce sales of those products or result
in claims against us.

We develop complex and evolving products. Despite testing by us and our customers, errors may be
found in existing or new products. This could result in a delay in recognition or loss of revenues, loss of market share or failure to achieve market acceptance. The occurrence of defects could also cause us to incur significant warranty, support
and repair costs, could divert the attention of our engineering personnel from our product development efforts, and could harm our relationships with our customers. The occurrence of these problems could also result in the delay or loss of market
acceptance of our products and would likely harm our business. Defects, integration issues or other performance problems in our products could result in financial or other damages to our customers. Our customers could also seek and obtain damages
from us for their losses. From time to time, we have been involved in disputes regarding product warranty issues. Although we seek to limit our liability, a product liability claim brought against us, even if unsuccessful, would likely be time
consuming and could be costly to defend.

Potential intellectual property claims and litigation could subject us to significant liability
for damages and could invalidate our proprietary rights.

In the semiconductor industry, it is not unusual for companies
to receive notices alleging infringement of patents or other intellectual property rights. We have been, and from time-to-time expect to be, notified of claims that we may be infringing patents, maskwork rights or copyrights owned by third-parties.
If it appears necessary or desirable, we may seek licenses under patents that we are alleged to be infringing. However, licenses may not be offered and the terms of any offered licenses may not be acceptable to us.

The failure to obtain a license under a key patent or intellectual property right from a third party for technology used by us could
cause us to incur substantial liabilities and to suspend the manufacture of the products utilizing the invention or to attempt to develop non-infringing products, any of which could harm our business. Furthermore, we may become involved in
protracted litigation regarding the alleged infringement by us of third-party intellectual property rights or litigation to assert and protect our patents or other intellectual property rights. Any litigation relating to patent infringement or other
intellectual property matters could result in substantial cost and diversion of our resources, which could harm our business.

We may be
unable to effectively protect our intellectual property, which would negatively impact our ability to compete.

We believe
that the protection of our intellectual proprietary rights will continue to be important to the success of our business. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our
intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants and business partners, and control access to and distribution of our documentation and other proprietary information. Despite
these efforts, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology. Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent
unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as do the laws of the U.S. Many U.S. companies have encountered substantial infringement problems in foreign
countries, including countries in which we design and sell our products. We cannot be certain that patents will be issued as a result of our pending applications nor can we be certain that any issued patents would protect or benefit us or give us
adequate protection from competing products. For example, issued patents may be circumvented or challenged and declared invalid or unenforceable. We also cannot be certain that others will not develop our unpatented proprietary technology or develop
competing technologies on their own.



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##### Table of Contents

We had a material weakness in our internal control over financial reporting and related difficulties in
complying with Sarbanes-Oxley Section 404. We may experience difficulties in complying with Sarbanes-Oxley Section 404 in future periods.

In our Annual Report on Form 10-K for our fiscal year ended September 30, 2009, we were required to furnish a report by our
management on our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002. Such report contained, among other matters, an assessment of the effectiveness of our internal control over financial reporting as
of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting was effective. Based on the material weakness regarding not having adequate management oversight or supervision over non-routine
accounting functions and the judgment used in developing financial estimates for inventory reserves as described in Item 9A(T) of our Form 10-K, our management concluded that our internal control over financial reporting was not effective as of
September 30, 2009. To remediate the material weakness, we have implemented additional control procedures, management reviews and employee training. We have also improved the documentation of our policies and procedures. Our disclosure controls
and procedures include components of our internal control over financial reporting. If in the future, we are unable to conclude that our internal control over financial reporting is effective or we are unable to conclude that our disclosure controls
and procedures are effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

Our results of operations could vary as a result of the methods, estimates, and judgments we use in applying our accounting policies.

The methods, estimates, and judgments we use in applying our accounting policies have a significant impact on our results of operations
(see Critical Accounting Policies in Part I, Item 2 of this Form 10-Q). Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that
lead us to change our methods, estimates, and judgments. Changes in those methods, estimates, and judgments could significantly affect our results of operations. In particular, the calculation of share-based compensation expense requires us to use
valuation methodologies (which were not developed for use in valuing employee stock options) and a number of assumptions, estimates, and conclusions regarding matters such as expected forfeitures, expected volatility of our share price, the expected
dividend rate with respect to our common stock, and the option exercise behavior of our employees. Furthermore, there are no means, under applicable accounting principles, to compare and adjust our expense if and when we learn about additional
information that may affect the estimates that we previously made, with the exception of changes in expected forfeitures of share-based awards. In the future, factors may arise that lead us to change our estimates and assumptions with respect to
future share-based compensation arrangements, resulting in variability in our share-based compensation expense over time. Changes in forecasted share-based compensation expense could impact our gross margin percentage, research and development
expenses, and selling, general and administrative expenses.

We depend on our ability to attract and retain our key technical and
management personnel.

Our success depends upon the continued service of our key technical and management personnel.
Several of our important manufacturing and other subcontractor relationships are based on personal relationships between our senior executive officers and such parties. In particular, our Executive Chairman has long-term relationships with our key
foundries. If we were to lose the services of any key executives, it may negatively impact the related business relationships since we have no long-term contractual agreements with such parties. Our success also depends on our ability to continue to
attract, retain and motivate qualified technical personnel, particularly experienced circuit designers and process engineers. The competition for such employees depends on general economic and industry conditions but such competition has been
intense in prior periods of industry growth. We have no employment contracts or key person life insurance policies with or for any of our employees. The loss of the service of one or more of our key personnel could harm our business.

Our stock price is expected to continue to be volatile.

The trading price of our common stock has been and is expected to be subject to wide fluctuations in response to:



| |  |  | quarter-to-quarter variations in our operating results;
| | - |  | -------------------------------------------------------



| |  |  | general conditions or cyclicality in the semiconductor industry or the end markets that we serve;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | new or revised earnings estimates or guidance by us or industry analysts;
| | - |  | -------------------------------------------------------------------------



| |  |  | comments or recommendations issued by analysts who follow us, our competitors or the semiconductor industry;
| | - |  | ------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | aggregate valuations and movement of stocks in the broader semiconductor industry;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | announcements of new products, strategic relationships or acquisitions by us or our competitors;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | increases or decreases in available wafer capacity;
| | - |  | ---------------------------------------------------



| |  |  | governmental regulations, trade laws and import duties;
| | - |  | -------------------------------------------------------



| |  |  | announcements related to future or existing litigation involving us or any of our competitors;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | announcements of technological innovations by us or our competitors;
| | - |  | --------------------------------------------------------------------



| |  |  | announcements regarding our share repurchase program and the timing and amount of shares we purchase under such program;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | additions or departures of senior management; and
| | - |  | -------------------------------------------------



| |  |  | other events or factors, many of which are beyond our control.
| | - |  | --------------------------------------------------------------

In addition, stock markets have recently experienced extreme price and trading volume volatility. This volatility has had a substantial
effect on the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations have adversely affected the market price of our common stock and may
continue to do so in the future.

We have used and may in the future use a significant amount of our cash resources to repurchase shares of
our common stock and such repurchases present potential risks and disadvantages to us and our continuing stockholders.

From September 2007 through December 2009, we repurchased shares of our common stock in the open market under Rule 10b-18 and pursuant to
our tender offers. While we did not repurchase any shares in the three month periods ended June 30, 2010 or March 31, 2010, in the three months ended December 31, 2009, we repurchased 244,941 shares of our common stock in the
open market at an aggregate price of approximately $1.1 million. In addition, in fiscal 2009, we repurchased 2,050,340 shares of our common stock in the open market at an aggregate price of approximately $4.9 million, in fiscal 2008 we repurchased
10,203,282 shares for an aggregate price of $71.1 million which included 10,000,000 shares we repurchased in January 2008 for an aggregate price of $70 million pursuant to a tender offer and in fiscal 2007, we repurchased 1,181,148 shares for an
aggregate price of $7.4 million. At June 30, 2010, we had outstanding authorization from our Board to purchase up to an additional $3.8 million of our common stock from time to time. Although our Board of Directors has determined that these
repurchase programs are in the best interests of our stockholders, these repurchases expose us to a number of risks including:



| |  |  | the use of a substantial portion of our cash reserves, which may reduce our ability to engage in significant cash acquisitions or to pursue other
business opportunities that could create significant value to our stockholders;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the risk that we would not be able to replenish our cash reserves by raising debt or equity financing in the future on terms acceptable to us, or
at all;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the risk that these repurchases have reduced our public float, which is the number of our shares owned by non-affiliate
stockholders and available for trading in the securities markets, and likely reduced the number of our stockholders, which may reduce the volume of trading in our shares and may result in lower stock prices and reduced liquidity in the
trading of our shares; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the risk that our stock price could decline and that we would be able to repurchase shares of our common stock at a lower price per share than
the prices we pay in our repurchase programs.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Business disruptions could seriously harm our future revenue and financial condition and increase our
costs and expenses.

Our worldwide operations, including the operations of our foundries and other suppliers, could be
subject to natural disasters and other business disruptions, which could seriously harm our revenue and financial condition and increase our costs and expenses. Our corporate headquarters, and a portion of our research and development activities,
are located in San Jose, California, and our other critical business operations and many of our suppliers are located in Asia, near major earthquake faults. The ultimate impact on us, our significant suppliers and our general infrastructure of being
located near major earthquake faults is unknown, but our revenue, profitability and financial condition could suffer in the event of a major earthquake or other natural disaster. Losses and interruptions could also be caused by earthquakes, power
shortages, telecommunications failures, water shortages, tsunamis, floods, typhoons, volcanic eruptions, fires, extreme weather conditions, medical epidemics such as a flu outbreak and other natural or manmade disasters.



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

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



|             |  |                                                                                                                         
|------------ |  | ------------------------------------------------------------------------------------------------------------------------
|Exhibit 31.1 |  | Certification Pursuant to SEC Release No. 33-8238, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|             | 
|Exhibit 31.2 |  | Certification Pursuant to SEC Release No. 33-8238, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|             | 
|Exhibit 32   |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 



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##### Table of Contents

SIGNATURES

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.



|                      |  |                                             
|--------------------- |  | --------------------------------------------
|                      |  | Integrated Silicon Solution, Inc.           
|                      |  | (Registrant)                                
|                      | 
|Dated: August 9, 2010 |  | /S/    JOHN M.
COBB                         
|                      |  | John M. Cobb                                
|                      |  | Vice President and Chief Financial Officer  
|                      |  | (Principal Financial and Accounting Officer)



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