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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended December 31, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number 000-23084



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Integrated Silicon Solution,
Inc.

(Exact name of registrant as specified in its charter)



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

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

Large accelerated
filer ̈Accelerated filer  x    Non-accelerated filer ̈

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 May 31, 2007 was 37,611,822.



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TABLE OF CONTENTS



|                 |  |                                                                                                                      |  |   
|---------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | --
|Explanatory Note |  | 1                                                                                                                   
|                 |  |                                                                                                                     
|PART I           |  | Financial Information                                                                                                |  |   
|                 |  |                                                                                                                     
|Item 1.          |  | Financial Statements                                                                                                 |  |   
|                 |  |                                                                                                                     
|                 |  | Condensed Consolidated Statements of Operations Three months ended December 31, 2006 and 2005 (restated) (Unaudited) |  | 2 
|                 |  |                                                                                                                     
|                 |  | Condensed Consolidated Balance Sheets December 31, 2006 (Unaudited) and September 30, 2006                           |  | 3 
|                 |  |                                                                                                                     
|                 |  | Condensed Consolidated Statements of Cash Flows Three months ended December 31, 2006 and 2005 (restated) (Unaudited) |  | 4 
|                 |  |                                                                                                                     
|                 |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                     |  | 5 
|                 |  |                                                                                                                     
|Item 2.          |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                |  | 18
|                 |  |                                                                                                                     
|Item 3.          |  | Quantitative and Qualitative Disclosures About Market Risk                                                           |  | 26
|                 |  |                                                                                                                     
|Item 4.          |  | Controls and Procedures                                                                                              |  | 27
|                 |  |                                                                                                                     
|PART II          |  | Other Information                                                                                                    |  |   
|                 |  |                                                                                                                     
|Item 1.          |  | Legal Proceedings                                                                                                    |  | 29
|                 |  |                                                                                                                     
|Item 1A.         |  | Risk Factors                                                                                                         |  | 31
|                 |  |                                                                                                                     
|Item 6.          |  | Exhibits                                                                                                             |  | 42
|                 | 
|Signatures       |  | 43                                                                                                                  



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



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##### Table of Contents

EXPLANATORY NOTE

In this Form 10-Q, we are restating our consolidated statement of operations and
consolidated statement of cash flows for the three months ended December 31, 2005, as a result of an independent stock option investigation commenced by the Special Committee of our Board of Directors (Special Committee). This restatement is
more fully described in Note 2 Restatement of Condensed Consolidated Financial Statements to Consolidated Financial Statements.

In our Form 10-K for the year ended September 30, 2006 (the 2006 Form 10-K) filed with the Securities and Exchange Commission (the SEC) on May 30, 2007, we restated our consolidated balance sheet as of
September 30, 2005, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the fiscal years ended September 30, 2005 and September 30, 2004. In total, the restatement resulted in
additional stock-based compensation and related payroll tax expenses, net of income taxes, of $32.1 million during fiscal years 1997 to 2005. In addition, we restated our unaudited quarterly financial information for all interim periods of fiscal
year 2005 and the interim periods ended December 31, 2005 and March 31, 2006. The 2006 Form 10-K also reflects the restatements of Selected Consolidated Financial Data in Item 6 for the fiscal years ended
September 30, 2005, 2004, 2003 and 2002.

Financial information included in our reports on Form 10-K, Form 10-Q and Form 8-K filed by
us prior to May 9, 2006, and the related opinions of our independent registered public accounting firm and all earnings press releases and similar communications issued by us prior to May 9, 2006 should not be relied upon and are
superseded in their entirety by this report and other reports on Form 10-K and Form 8-K filed by us with the SEC on and after May 9, 2006.

This Quarterly Report on Form 10-Q should be read in conjunction with our 2006 Form 10-K, as well as any current reports filed on Form 8-K.



1



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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 EndedDecember 31, |       
|                                                                                                             |  | 2006                           |        |   | 2005            |  
|                                                                                                             |  |                                |        |   | As restated (1) |  
|Net sales (See Note 16)                                                                                      |  | $                              | 62,144 |   |                 | $ | 51,093 |  
|Cost of sales (See Note 16)                                                                                  |  |                                | 49,599 |   |                 |   | 43,707 |  
|                                                                                                             |  |                                |        |   |                 |   |        |  
|Gross profit                                                                                                 |  |                                | 12,545 |   |                 |   | 7,386  |  
|                                                                                                             |  |                                |        |   |                 |   |        |  
|Operating expenses:                                                                                          |  |                                |        |   |                 |   |        |  
|Research and development                                                                                     |  |                                | 5,362  |   |                 |   | 5,690  |  
|Selling, general and administrative                                                                          |  |                                | 9,093  |   |                 |   | 6,597  |  
|Acquired in-process technology charge                                                                        |  |                                |       |   |                 |   | 175    |  
|                                                                                                             |  |                                |        |   |                 |   |        |  
|Total operating expenses                                                                                     |  |                                | 14,455 |   |                 |   | 12,462 |  
|                                                                                                             |  |                                |        |   |                 |   |        |  
|Operating loss                                                                                               |  |                                | (1,910 | ) |                 |   | (5,076 | )
|Interest and other income (expense), net                                                                     |  |                                | 1,552  |   |                 |   | 1,049  |  
|Gain on sale of investments                                                                                  |  |                                | 598    |   |                 |   |       |  
|                                                                                                             |  |                                |        |   |                 |   |        |  
|Income (loss) before income taxes, minority interest and equity in net income (loss) of affiliated companies |  |                                | 240    |   |                 |   | (4,027 | )
|Provision for income taxes                                                                                   |  |                                | 10     |   |                 |   | 62     |  
|                                                                                                             |  |                                |        |   |                 |   |        |  
|Income (loss) before minority interest and equity in net income (loss) of affiliated companies               |  |                                | 230    |   |                 |   | (4,089 | )
|                                                                                                             |  |                               
|Minority interest in net income (loss) of consolidated subsidiary                                            |  |                                | (8     | ) |                 |   | 424    |  
|Equity in net loss of affiliated companies                                                                   |  |                                | (92    | ) |                 |   | (223   | )
|                                                                                                             |  |                                |        |   |                 |   |        |  
|Net income (loss)                                                                                            |  | $                              | 130    |   |                 | $ | (3,888 | )
|                                                                                                             |  |                                |        |   |                 |   |        |  
|Basic net income (loss) per share                                                                            |  | $                              | 0.00   |   |                 | $ | (0.10  | )
|                                                                                                             |  |                                |        |   |                 |   |        |  
|Shares used in basic per share calculation                                                                   |  |                                | 37,612 |   |                 |   | 37,240 |  
|                                                                                                             |  |                                |        |   |                 |   |        |  
|Diluted net income (loss) per share                                                                          |  | $                              | 0.00   |   |                 | $ | (0.10  | )
|                                                                                                             |  |                                |        |   |                 |   |        |  
|Shares used in diluted per share calculation                                                                 |  |                                | 37,994 |   |                 |   | 37,240 |  
|                                                                                                             |  |                                |        |   |                 |   |        |  

See accompanying notes to condensed consolidated financial statements.

---

|(1) | See Note 2, Restatement of Condensed Consolidated Financial Statements, in Notes to Condensed Consolidated Financial Statements
|--- | ---------------------------------------------------------------------------------------------------------------------------------



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Integrated Silicon Solution, Inc.

Condensed Consolidated Balance Sheets

(In thousands)



|                                                       |  |                  |          |   |                   |   |          |  
|------------------------------------------------------ |  | ---------------- | -------- | - | ----------------- | - | -------- | -
|                                                       |  | December 31,2006 |          |   | September 30,2006 |  
|                                                       |  | (unaudited)      |          |   | (1)               |  
|ASSETS                                                 |  |                  |          |   |                   |   |          |  
|Current assets:                                        |  |                  |          |   |                   |   |          |  
|Cash and cash equivalents                              |  | $                | 41,132   |   |                   | $ | 37,318   |  
|Short-term investments                                 |  |                  | 68,237   |   |                   |   | 76,015   |  
|Accounts receivable, net                               |  |                  | 33,572   |   |                   |   | 31,500   |  
|Accounts receivable from related parties (See Note 16) |  |                  | 479      |   |                   |   | 406      |  
|Inventories                                            |  |                  | 55,745   |   |                   |   | 52,417   |  
|Other current assets                                   |  |                  | 5,412    |   |                   |   | 4,799    |  
|                                                       |  |                  |          |   |                   |   |          |  
|Total current assets                                   |  |                  | 204,577  |   |                   |   | 202,455  |  
|Property, equipment and leasehold improvements, net    |  |                  | 22,061   |   |                   |   | 21,984   |  
|Goodwill                                               |  |                  | 25,338   |   |                   |   | 25,338   |  
|Purchased intangible assets, net                       |  |                  | 4,906    |   |                   |   | 5,391    |  
|Other assets                                           |  |                  | 3,243    |   |                   |   | 5,110    |  
|                                                       |  |                  |          |   |                   |   |          |  
|Total assets                                           |  | $                | 260,125  |   |                   | $ | 260,278  |  
|                                                       |  |                  |          |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                   |  |                  |          |   |                   |   |          |  
|Current liabilities:                                   |  |                  |          |   |                   |   |          |  
|Short-term debt and notes                              |  | $                | 1,994    |   |                   | $ | 1,632    |  
|Accounts payable                                       |  |                  | 35,435   |   |                   |   | 35,683   |  
|Accounts payable to related parties (See Note 16)      |  |                  | 3,029    |   |                   |   | 4,440    |  
|Accrued compensation and benefits                      |  |                  | 3,630    |   |                   |   | 2,928    |  
|Accrued expenses                                       |  |                  | 9,705    |   |                   |   | 9,665    |  
|                                                       |  |                  |          |   |                   |   |          |  
|Total current liabilities                              |  |                  | 53,793   |   |                   |   | 54,348   |  
|Other long-term liabilities                            |  |                  | 2,046    |   |                   |   | 2,048    |  
|                                                       |  |                  |          |   |                   |   |          |  
|Total liabilities                                      |  |                  | 55,839   |   |                   |   | 56,396   |  
|                                                       |  |                 
|Commitments and contingencies                          |  |                  |          |   |                   |   |          |  
|                                                       |  |                 
|Minority interest                                      |  |                  | 698      |   |                   |   | 690      |  
|                                                       |  |                 
|Stockholders equity:                                  |  |                  |          |   |                   |   |          |  
|Common stock                                           |  |                  | 4        |   |                   |   | 4        |  
|Additional paid-in capital                             |  |                  | 380,062  |   |                   |   | 379,038  |  
|Accumulated deficit                                    |  |                  | (177,899 | ) |                   |   | (178,029 | )
|Accumulated comprehensive income                       |  |                  | 1,421    |   |                   |   | 2,179    |  
|                                                       |  |                  |          |   |                   |   |          |  
|Total stockholders equity                             |  |                  | 203,588  |   |                   |   | 203,192  |  
|                                                       |  |                  |          |   |                   |   |          |  
|Total liabilities and stockholders equity             |  | $                | 260,125  |   |                   | $ | 260,278  |  
|                                                       |  |                  |          |   |                   |   |          |  

---

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

See
accompanying notes to condensed consolidated financial statements.



3



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Integrated Silicon Solution, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)



|                                                                                     |  |                                |         |   |                 |   |         |  
|------------------------------------------------------------------------------------ |  | ------------------------------ | ------- | - | --------------- | - | ------- | -
|                                                                                     |  | Three Months EndedDecember 31, |        
|                                                                                     |  | 2006                           |         |   | 2005            |  
|                                                                                     |  |                                |         |   | As restated (1) |  
|Cash flows from operating activities                                                 |  |                                |         |   |                 |   |         |  
|Net income (loss)                                                                    |  | $                              | 130     |   |                 | $ | (3,888  | )
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |                                |         |   |                 |   |         |  
|Depreciation and amortization                                                        |  |                                | 791     |   |                 |   | 955     |  
|Stock based compensation                                                             |  |                                | 1,024   |   |                 |   | 1,205   |  
|Amortization of intangibles                                                          |  |                                | 485     |   |                 |   | 343     |  
|Acquired in-process technology charge                                                |  |                                |        |   |                 |   | 175     |  
|Gain on sale of shares of Semiconductor Manufacturing International Corp. (SMIC)     |  |                                | (339    | ) |                 |   |        |  
|Gain on sale of shares of Keystream Corporation (KSC)                                |  |                                | (259    | ) |                 |   |         |  
|Net foreign currency transaction gains                                               |  |                                | (308    | ) |                 |   | (139    | )
|Equity in net loss of affiliated companies                                           |  |                                | 92      |   |                 |   | 223     |  
|Minority interest in net loss of consolidated subsidiary                             |  |                                | 8       |   |                 |   | (424    | )
|Net effect of changes in current and other assets and current liabilities            |  |                                | (5,497  | ) |                 |   | (5,863  | )
|                                                                                     |  |                                |         |   |                 |   |         |  
|Net cash used in operating activities                                                |  |                                | (3,873  | ) |                 |   | (7,413  | )
|                                                                                     |  |                               
|Cash flows from investing activities                                                 |  |                                |         |   |                 |   |         |  
|Acquisition of property, equipment and leasehold improvements                        |  |                                | (652    | ) |                 |   | (686    | )
|Proceeds from sale of SMIC equity securities                                         |  |                                | 6,358   |   |                 |   |        |  
|Proceeds from sale of KSC equity securities                                          |  |                                | 1,237   |   |                 |   |        |  
|Investment in Integrated Circuit Solution, Inc. (ICSI)                             |  |                                |        |   |                 |   | (3,511  | )
|Purchases of available-for-sale securities                                           |  |                                |        |   |                 |   | (39,250 | )
|Proceeds from sales of available-for-sale securities                                 |  |                                | 362     |   |                 |   | 49,865  |  
|                                                                                     |  |                                |         |   |                 |   |         |  
|Net cash provided by investing activities                                            |  |                                | 7,305   |   |                 |   | 6,418   |  
|                                                                                     |  |                               
|Cash flows from financing activities                                                 |  |                                |         |   |                 |   |         |  
|Proceeds from issuance of common stock                                               |  |                                |        |   |                 |   | 341     |  
|Proceeds from borrowings under short-term lines of credit                            |  |                                | 13,784  |   |                 |   | 20,676  |  
|Principal payments of under short-term lines of credit                               |  |                                | (13,452 | ) |                 |   | (15,153 | )
|Decrease in restricted cash                                                          |  |                                |        |   |                 |   | 149     |  
|                                                                                     |  |                                |         |   |                 |   |         |  
|Net cash provided by financing activities                                            |  |                                | 332     |   |                 |   | 6,013   |  
|                                                                                     |  |                                |         |   |                 |   |         |  
|Effect of exchange rate changes on cash and cash equivalents                         |  |                                | 50      |   |                 |   | 125     |  
|                                                                                     |  |                                |         |   |                 |   |         |  
|Net increase in cash and cash equivalents                                            |  |                                | 3,814   |   |                 |   | 5,143   |  
|Cash and cash equivalents at beginning of period                                     |  |                                | 37,318  |   |                 |   | 27,484  |  
|                                                                                     |  |                                |         |   |                 |   |         |  
|Cash and cash equivalents at end of period                                           |  | $                              | 41,132  |   |                 | $ | 32,627  |  
|                                                                                     |  |                                |         |   |                 |   |         |  

See accompanying notes to condensed consolidated financial statements.

---

|(1) | See Note 2, Restatement of Condensed Consolidated Financial Statements, in 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 financial statements include the accounts of Integrated Silicon Solution, Inc. (the Company) and its consolidated majority owned subsidiaries, after elimination of all significant intercompany accounts and transactions and 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.

Operating results for the three months ended December 31, 2006 are not necessarily indicative of the results that may be expected for
the fiscal year ending September 30, 2007 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, 2006.



|2. | Restatement of Condensed Consolidated Financial Statements
|-- | ----------------------------------------------------------

Restatement of Previously Issued Financial Statements

In the Companys 2006 Form 10-K, the Company restated its
consolidated balance sheet as of September 30, 2005, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the fiscal years ended September 30, 2005 and September 30, 2004, as a
result of an independent stock option investigation commenced by the Special Committee of the Board of Directors (the Special Committee). In total, the restatement resulted in additional stock-based compensation and related payroll tax
expenses, net of income taxes, of $32.1 million during fiscal years 1997 to 2005. In addition, the Company restated the unaudited quarterly financial information for all interim periods of fiscal year 2005 and the interim periods ended
December 31, 2005 and March 31, 2006.

In this Form 10-Q, the Company is restating its consolidated statement of operations and
the related consolidated statement of cash flows for the three months ended December 31, 2005, as a result of an independent stock option investigation commenced by the Special Committee.



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents the effects of the stock-based compensation and related tax adjustments on the Companys previously
reported consolidated statement of operations.



|                                                                                           |  |                                       |        |   |             |   |       |             |  |   |        |  
|------------------------------------------------------------------------------------------ |  | ------------------------------------- | ------ | - | ----------- | - | ----- | ----------- |  | - | ------ | -
|                                                                                           |  | Three Months Ended December 31, 2005  |       
|                                                                                           |  | As reported                           |        |   | Adjustments |   |       | As restated | 
|                                                                                           |  | (in thousands, except per share data) |       
|Net sales                                                                                  |  | $                                     | 51,093 |   |             | $ |      |             |  | $ | 51,093 |  
|Cost of sales                                                                              |  |                                       | 43,710 |   |             |   | (3    | )           |  |   | 43,707 |  
|                                                                                           |  |                                       |        |   |             |   |       |             |  |   |        |  
|Gross profit                                                                               |  |                                       | 7,383  |   |             |   | 3     |             |  |   | 7,386  |  
|                                                                                           |  |                                       |        |   |             |   |       |             |  |   |        |  
|Operating expenses                                                                         |  |                                       |        |   |             |   |       |             |  |   |        |  
|Research and development                                                                   |  |                                       | 5,626  |   |             |   | 64    |             |  |   | 5,690  |  
|Selling, general and administrative                                                        |  |                                       | 6,478  |   |             |   | 119   |             |  |   | 6,597  |  
|Acquired in-process technology charge                                                      |  |                                       | 175    |   |             |   |      |             |  |   | 175    |  
|                                                                                           |  |                                       |        |   |             |   |       |             |  |   |        |  
|Total operating expenses                                                                   |  |                                       | 12,279 |   |             |   | 183   |             |  |   | 12,462 |  
|                                                                                           |  |                                       |        |   |             |   |       |             |  |   |        |  
|Operating loss                                                                             |  |                                       | (4,896 | ) |             |   | (180  | )           |  |   | (5,076 | )
|Interest and other income (expense), net                                                   |  |                                       | 1,049  |   |             |   |      |             |  |   | 1,049  |  
|                                                                                           |  |                                       |        |   |             |   |       |             |  |   |        |  
|Loss before income taxes, minority interest and equity in net loss of affiliated companies |  |                                       | (3,847 | ) |             |   | (180  | )           |  |   | (4,027 | )
|Provision for income taxes                                                                 |  |                                       | 62     |   |             |   |      |             |  |   | 62     |  
|                                                                                           |  |                                       |        |   |             |   |       |             |  |   |        |  
|Loss before minority interest and equity in net loss of affiliated companies               |  |                                       | (3,909 | ) |             |   | (180  | )           |  |   | (4,089 | )
|Minority interest in net loss of consolidated subsidiary                                   |  |                                       | 424    |   |             |   |      |             |  |   | 424    |  
|Equity in net loss of affiliated companies                                                 |  |                                       | (223   | ) |             |   |      |             |  |   | (223   | )
|                                                                                           |  |                                       |        |   |             |   |       |             |  |   |        |  
|Net loss                                                                                   |  | $                                     | (3,708 | ) |             | $ | (180  | )           |  | $ | (3,888 | )
|                                                                                           |  |                                       |        |   |             |   |       |             |  |   |        |  
|Basic and diluted net loss per share                                                       |  | $                                     | (0.10  | ) |             | $ | (0.00 | )           |  | $ | (0.10  | )
|                                                                                           |  |                                       |        |   |             |   |       |             |  |   |        |  
|Shares used in per share calculation                                                       |  |                                       | 37,240 |   |             |   |      |             |  |   | 37,240 |  
|                                                                                           |  |                                       |        |   |             |   |       |             |  |   |        |  



6



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following table presents the effects of the stock-based compensation and related tax adjustments on the Companys previously
reported consolidated statement of cash flows.



|                                                                            |  |                                      |         |   |             |   |      |             |  |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ----------- | - | ---- | ----------- |  | - | ------- | -
|                                                                            |  | Three Months Ended December 31, 2005 |        
|                                                                            |  | As reported                          |         |   | Adjustments |   |      | As restated | 
|                                                                            |  | (in thousands)                       |        
|Cash flows from operating activities:                                       |  |                                      |         |   |             |   |      |             |  |   |         |  
|Net loss                                                                    |  | $                                    | (3,708  | ) |             | $ | (180 | )           |  | $ | (3,888  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                      |         |   |             |   |      |             |  |   |         |  
|Stock-based compensation                                                    |  |                                      | 1,025   |   |             |   | 180  |             |  |   | 1,205   |  
|Depreciation and amortization                                               |  |                                      | 955     |   |             |   |     |             |  |   | 955     |  
|Amortization of intangibles                                                 |  |                                      | 343     |   |             |   |     |             |  |   | 343     |  
|Acquired in-process technology charge                                       |  |                                      | 175     |   |             |   |     |             |  |   | 175     |  
|Net foreign currency transaction gains                                      |  |                                      | (139    | ) |             |   |     |             |  |   | (139    | )
|Equity in net loss of affiliated companies                                  |  |                                      | 223     |   |             |   |     |             |  |   | 223     |  
|Minority interest in net loss of consolidated subsidiary                    |  |                                      | (424    | ) |             |   |     |             |  |   | (424    | )
|Net effect of changes in current and other assets and liabilities           |  |                                      | (5,863  | ) |             |   |     |             |  |   | (5,863  | )
|                                                                            |  |                                      |         |   |             |   |      |             |  |   |         |  
|Net cash used in operating activities                                       |  |                                      | (7,413  | ) |             |   |     |             |  |   | (7,413  | )
|Cash flows from investing activities:                                       |  |                                      |         |   |             |   |      |             |  |   |         |  
|Acquisition of property, equipment, and leasehold improvements              |  |                                      | (686    | ) |             |   |     |             |  |   | (686    | )
|Purchases of available-for-sale securities                                  |  |                                      | (39,250 | ) |             |   |     |             |  |   | (39,250 | )
|Proceeds from sales of available-for-sale securities                        |  |                                      | 49,865  |   |             |   |     |             |  |   | 49,865  |  
|Investment in ICSI                                                          |  |                                      | (3,511  | ) |             |   |     |             |  |   | (3,511  | )
|                                                                            |  |                                      |         |   |             |   |      |             |  |   |         |  
|Net cash provided by investing activities                                   |  |                                      | 6,418   |   |             |   |     |             |  |   | 6,418   |  
|Cash flows from financing activities:                                       |  |                                      |         |   |             |   |      |             |  |   |         |  
|Proceeds from issuance of common stock                                      |  |                                      | 341     |   |             |   |     |             |  |   | 341     |  
|Proceeds from borrowing under short-term lines of credit                    |  |                                      | 20,676  |   |             |   |     |             |  |   | 20,676  |  
|Principal payments of short-term lines of credit                            |  |                                      | (15,153 | ) |             |   |     |             |  |   | (15,153 | )
|Decrease in restricted cash                                                 |  |                                      | 149     |   |             |   |     |             |  |   | 149     |  
|                                                                            |  |                                      |         |   |             |   |      |             |  |   |         |  
|Net cash provided by financing activities                                   |  |                                      | 6,013   |   |             |   |     |             |  |   | 6,013   |  
|Effect of exchange rate changes on cash and cash equivalents                |  |                                      | 125     |   |             |   |     |             |  |   | 125     |  
|                                                                            |  |                                      |         |   |             |   |      |             |  |   |         |  
|Net increase in cash and cash equivalents                                   |  |                                      | 5,143   |   |             |   |     |             |  |   | 5,143   |  
|Cash and cash equivalents at beginning of period                            |  |                                      | 27,484  |   |             |   |     |             |  |   | 27,484  |  
|                                                                            |  |                                      |         |   |             |   |      |             |  |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                                    | 32,627  |   |             | $ |     |             |  | $ | 32,627  |  
|                                                                            |  |                                      |         |   |             |   |      |             |  |   |         |  



|3. | Use of Estimates
|-- | ----------------

The preparation of financial
statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and 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. Actual results could differ from those estimates, and such difference, may be material to the financial
statements.



7



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



|4. | Impact of Recently Issued Accounting Standards
|-- | ----------------------------------------------

In
June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109. The interpretation contains a two
step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is
more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being
realized upon ultimate settlement. The provisions are effective for the Company beginning in the first quarter of fiscal 2008. The Company is currently evaluating the impact this statement will have on its consolidated financial statements.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 gives guidance on how errors, built up over time in the balance sheet, should be considered from a materiality
perspective and corrected. SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for fiscal years
ending after November 15, 2006, and early application is encouraged. The Company is currently evaluating the impact that the provisions will have on the Companys consolidated balance sheet and statement of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157)
which establishes a framework for measuring fair value and enhance disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The measurement and disclosure requirements are effective
for the Company beginning in the first quarter of fiscal 2009. The Company is currently evaluating whether SFAS 157 will result in a change to its fair value measurements.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement
PlansAn Amendment of FASB Statements No. 87, 88, 106, and 132R (SFAS 158). SFAS 158 requires that the funded status of defined benefit postretirement plans be recognized on the Companys balance sheet, and changes in the funded
status be reflected in comprehensive income, effective for fiscal years ending after December 15, 2006. SFAS 158 also requires the measurement date of the plans funded status to be the same as the Companys fiscal year-end. This
requirement is not required until fiscal 2008. The Company is currently evaluating the impact that the provisions will have on the Companys consolidated balance sheet and statement of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159) which
permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings.
SFAS 159 is effective for the Company beginning in the first quarter of fiscal 2009, although earlier adoption is permitted. The Company is currently evaluating the impact SFAS 159 will have on its consolidated financial statements.



8



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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 has stock option plans under which options to purchase shares of the Companys common stock may be granted to
employees, consultants and directors. At December 31, 2006, 2,588,000 shares were available for future grant under all plans. Options generally vest ratably over a four-year period with a 6-month cliff vest and then vesting ratably over the
remaining period. Options granted prior to September 30, 2005 expire ten years after the date of grant and options granted after October 1, 2005 expire seven years after the date of the grant.

In addition, the Company has an Employee Stock Purchase Plan (ESPP) that is available to employees. The ESPP 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. The offering periods under the ESPP commence on approximately February 1 and August 1
of each year. At December 31, 2006, 1,072,000 shares were available for future issuance under the ESPP.

Stock-Based Compensation

Effective October 1, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123R Share-Based
Payment (SFAS 123R) using the modified prospective transition method.

The following table summarizes the stock-based compensation
charges:



|                                    |  |                                |       |             |   |      
|----------------------------------- |  | ------------------------------ | ----- | ----------- | - | -----
|                                    |  | Three Months EndedDecember 31,
|                                    |  | 2006                           |       | 2005       
|                                    |  |                                |       | As restated
|                                    |  | (In thousands)                
|Cost of sales                       |  | $                              | 22    |             | $ | 27   
|Research and development            |  |                                | 442   |             |   | 601  
|Selling, general and administrative |  |                                | 560   |             |   | 577  
|                                    |  |                                |       |             |   |      
|Stock-based compensation expense    |  | $                              | 1,024 |             | $ | 1,205
|                                    |  |                                |       |             |   |      

As of December 31, 2006, there was approximately $10.2 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 2.8 years. The Company also records compensation expense for its ESPP for the difference between the
purchase price and the fair market value on the day of purchase.

The Company uses the Black-Scholes option pricing model to estimates the
fair value of the options granted. The weighted average estimated values of stock option grants, as well as the weighted average assumptions used in calculating these values during the first quarter of fiscal 2007 and the first quarter of fiscal
2006, were based on estimates at the date of grant as follows:



|                                      |  |                                     |      |   |                                     |   |      |  
|------------------------------------- |  | ----------------------------------- | ---- | - | ----------------------------------- | - | ---- | -
|                                      |  | Three Months EndedDecember 31, 2006 |      |   | Three Months EndedDecember 31, 2005 |  
|Weighted-average fair value of grants |  | $                                   | 3.06 |   |                                     | $ | 3.96 |  
|Expected term in years                |  |                                     | 4.53 |   |                                     |   | 4.54 |  
|Volatility                            |  |                                     | 64   | % |                                     |   | 71   | %
|Risk-free interest rate               |  |                                     | 4.65 | % |                                     |   | 4.39 | %
|Dividend yield                        |  |                                     | 0.00 | % |                                     |   | 0.00 | %



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Estimated volatility ranged from 53% to 64% in the three months ended December 31, 2006 and was 71% in the three months ended
December 31, 2005.

Option activity as of December 31, 2006 and the changes during the three months ended December 31, 2006
were as 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, 2006                   |  | 5,998           |   |  | $                              | 7.35 |                                           |      |                          |   |      
|                                                    |  |                 |   | 
|Granted                                             |  | 591             |   |  | $                              | 5.54 |                                           |      |                          |   |      
|Exercised                                           |  |                |   |  | $                              |     |                                           |      |                          |   |      
|Cancelled/forfeited                                 |  | (393            | ) |  | $                              | 8.61 |                                           |      |                          |   |      
|                                                    |  |                 |   |  |                                |      |                                           |      |                          |   |      
|Outstanding at December 31, 2006                    |  | 6,196           |   |  | $                              | 7.09 |                                           | 5.65 |                          | $ | 2,542
|                                                    |  |                 |   |  |                                |      |                                           |      |                          |   |      
|Vested and expected to vest after December 31, 2006 |  | 5,750           |   |  | $                              | 7.15 |                                           | 5.57 |                          | $ | 2,495
|                                                    |  |                 |   | 
|Exercisable at September 30, 2006                   |  | 3,515           |   |  | $                              | 7.74 |                                           | 4.92 |                          | $ | 2,050
|                                                    |  |                 |   | 
|Exercisable at December 31, 2006                    |  | 3,567           |   |  | $                              | 7.57 |                                           | 4.86 |                          | $ | 2,266



|6. | Concentrations
|-- | --------------

In the three months ended
December 31, 2006 and 2005, no single customer accounted for over 10% of net sales.



10



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



|7. | Cash and Cash Equivalents and Short-term Investments
|-- | ----------------------------------------------------

Cash and cash equivalents and short-term investments consisted of the following:



|                                            |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|------------------------------------------- |  | -------------- | ------- | ---------------------- | - | ----------------------- |  | - | ---------- | - |  | - | -------
|December 31, 2006                           |  | Amortized Cost |         | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Fair Value
|                                            |  |                |         | (In thousands)         |   |                         | 
|Cash                                        |  | $              | 22,696  |                        | $ |                        |  | $ |           |   |  | $ | 22,696 
|Money market instruments                    |  |                | 7,701   |                        |   |                        |  |   |           |   |  |   | 7,701  
|Commercial paper                            |  |                | 10,745  |                        |   |                        |  |   | (10        | ) |  |   | 10,735 
|Certificates of deposit                     |  |                | 1,994   |                        |   |                        |  |   |           |   |  |   | 1,994  
|Municipal notes and bonds                   |  |                | 38,700  |                        |   |                        |  |   |           |   |  |   | 38,700 
|SMIC common stocksaleable within 12 months |  |                | 24,327  |                        |   | 3,216                   |  |   |           |   |  |   | 27,543 
|                                            |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|Total                                       |  | $              | 106,163 |                        | $ | 3,216                   |  | $ | (10        | ) |  | $ | 109,369
|                                            |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|Reported as:                                |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|Cash and cash equivalents                   |  |                |         |                        |   |                         |  |   |            |   |  | $ | 41,132 
|Short-term investments                      |  |                |         |                        |   |                         |  |   |            |   |  |   | 68,237 
|                                            |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|Total                                       |  |                |         |                        |   |                         |  |   |            |   |  | $ | 109,369
|                                            |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|                                            |  |                |         |                       
|September 30, 2006                          |  | Amortized Cost |         | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Fair Value
|                                            |  |                |         | (In thousands)         |   |                         | 
|Cash                                        |  | $              | 19,576  |                        | $ |                        |  | $ |           |   |  | $ | 19,576 
|Money market instruments                    |  |                | 7,601   |                        |   |                        |  |   |           |   |  |   | 7,601  
|Commercial paper                            |  |                | 10,131  |                        |   | 10                      |  |   |           |   |  |   | 10,141 
|Certificates of deposit                     |  |                | 2,326   |                        |   |                        |  |   |           |   |  |   | 2,326  
|Municipal notes and bonds                   |  |                | 38,700  |                        |   |                        |  |   |           |   |  |   | 38,700 
|SMIC common stocksaleable within 12 months |  |                | 30,346  |                        |   | 4,643                   |  |   |           |   |  |   | 34,989 
|                                            |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|Total                                       |  | $              | 108,680 |                        | $ | 4,653                   |  | $ |           |   |  | $ | 113,333
|                                            |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|Reported as:                                |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|Cash and cash equivalents                   |  |                |         |                        |   |                         |  |   |            |   |  | $ | 37,318 
|Short-term investments                      |  |                |         |                        |   |                         |  |   |            |   |  |   | 76,015 
|                                            |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|Total                                       |  |                |         |                        |   |                         |  |   |            |   |  | $ | 113,333
|                                            |  |                |         |                        |   |                         |  |   |            |   |  |   |        

All debt securities held at December 31, 2006 are due in less than one year. Certificates of
deposit are in foreign institutions.

In the three months ended December 31, 2006, the Company sold 52.5 million shares of
Semiconductor Manufacturing International Corp. (SMIC) and recorded gross proceeds of approximately $6.4 million and a pre-tax gain of approximately $0.3 million. The market value of SMIC shares is subject to fluctuations and the Companys
carrying value will be subject to adjustments to reflect the current market value. As of December 31, 2006, approximately $6.8 million of the Companys SMIC common stock is subject to lock-up provisions which expire by February 2007.



11



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



|8. | Inventories
|-- | -----------

The following is a summary of
inventories by major category:



|                     |  |                  |        |                   |   |       
|-------------------- |  | ---------------- | ------ | ----------------- | - | ------
|                     |  | December 31,2006 |        | September 30,2006
|                     |  | (In thousands)  
|Purchased components |  | $                | 11,666 |                   | $ | 10,744
|Work-in-process      |  |                  | 18,969 |                   |   | 21,467
|Finished goods       |  |                  | 25,110 |                   |   | 20,206
|                     |  |                  |        |                   |   |       
|                     |  | $                | 55,745 |                   | $ | 52,417
|                     |  |                  |        |                   |   |       

During the three months ended December 31, 2006 and 2005, the Company recorded inventory
write-downs of $3.5 million and $3.6 million, respectively. The inventory write-downs were predominately for lower of cost or market and excess and obsolescence issues on certain of its products.



|9. | Other Assets
|-- | ------------

Other assets consisted of the
following:



|                               |  |                  |       |                   |   |      
|------------------------------ |  | ---------------- | ----- | ----------------- | - | -----
|                               |  | December 31,2006 |       | September 30,2006
|                               |  | (In thousands)  
|Equity method investments      |  | $                |      |                   | $ | 1,062
|Cost method equity investments |  |                  | 1,929 |                   |   | 1,904
|Restricted assets              |  |                  | 315   |                   |   | 916  
|Other                          |  |                  | 999   |                   |   | 1,228
|                               |  |                  |       |                   |   |      
|                               |  | $                | 3,243 |                   | $ | 5,110
|                               |  |                  |       |                   |   |      

In December 2006, the Company sold its remaining shares of Key Stream Corp. (KSC) for
approximately $1.2 million and recorded a pre-tax gain of approximately $0.3 million.

The Company has various deposits including deposits
with suppliers for purchase guarantees and for customs clearance. These deposits are included in restricted assets.



12



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



|10. | Comprehensive Loss
|--- | ------------------

Comprehensive loss includes net
loss as well as other comprehensive loss. The Companys other comprehensive loss consists of changes in cumulative translation adjustment and unrealized gains and losses on investments.

Comprehensive loss, net of taxes, was as follows:



|                                                   |  |                                 |        |   |             |   |         |  
|-------------------------------------------------- |  | ------------------------------- | ------ | - | ----------- | - | ------- | -
|                                                   |  | Three Months Ended December 31, |       
|                                                   |  | 2006                            |        |   | 2005        |  
|                                                   |  |                                 |        |   | As restated |  
|                                                   |  | (In thousands)                  |       
|Net income (loss)                                  |  | $                               | 130    |   |             | $ | (3,888  | )
|Other comprehensive income (loss), net of tax:     |  |                                 |        |   |             |   |         |  
|Change in cumulative translation adjustment        |  |                                 | 689    |   |             |   | 510     |  
|Change in unrealized gains/(losses) on investments |  |                                 | (1,447 | ) |             |   | (10,555 | )
|                                                   |  |                                 |        |   |             |   |         |  
|Comprehensive loss                                 |  | $                               | (628   | ) |             | $ | (13,933 | )
|                                                   |  |                                 |        |   |             |   |         |  

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



|                                                            |  |                  |        |   |                   |   |        |  
|----------------------------------------------------------- |  | ---------------- | ------ | - | ----------------- | - | ------ | -
|                                                            |  | December 31,2006 |        |   | September 30,2006 |  
|                                                            |  | (In thousands)   |       
|Accumulated foreign currency translation adjustments        |  | $                | (1,785 | ) |                   | $ | (2,474 | )
|Accumulated net unrealized gain on SMIC                     |  |                  | 3,216  |   |                   |   | 4,643  |  
|Accumulated net unrealized gain (loss) on other investments |  |                  | (10    | ) |                   |   | 10     |  
|                                                            |  |                  |        |   |                   |   |        |  
|Total accumulated other comprehensive income                |  | $                | 1,421  |   |                   | $ | 2,179  |  
|                                                            |  |                  |        |   |                   |   |        |  



|11. | Borrowings
|--- | ----------

Short term debt and notes at
December 31, 2006 and September 30, 2006 were comprised of working capital loans with a weighted average interest rate of 2.47%.

There were no assets pledged as collateral for short-term debt or notes. The Company has guaranteed the borrowings of its subsidiary Integrated Circuit Solution, Inc. (ICSI) under a line of credit with a bank in Taiwan for a maximum amount
of approximately $4.9 million through January 2007. As of December 31, 2006, there were no borrowings outstanding under this line of credit.



|12. | Income Taxes
|--- | ------------

The income tax provision for the
three months ended December 31, 2006 and 2005 consists of foreign withholding taxes of $10,000 and $62,000, respectively.



13



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



|13. | Per Share Data
|--- | --------------

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



|                                                             |  |                                |        |             |   |        |  
|------------------------------------------------------------ |  | ------------------------------ | ------ | ----------- | - | ------ | -
|                                                             |  | Three Months EndedDecember 31, |       
|                                                             |  | 2006                           |        | 2005        |  
|                                                             |  |                                |        | As restated |  
|Numerator for basic and diluted net income (loss) per share: |  |                                |        |             |   |        |  
|Net income (loss)                                            |  | $                              | 130    |             | $ | (3,888 | )
|                                                             |  |                                |        |             |   |        |  
|Denominator for basic net income (loss) per share:           |  |                                |        |             |   |        |  
|Weighted average common shares outstanding                   |  |                                | 37,612 |             |   | 37,240 |  
|Dilutive stock options                                       |  |                                | 382    |             |   |       |  
|                                                             |  |                                |        |             |   |        |  
|Denominator for diluted net income (loss) per share          |  |                                | 37,994 |             |   | 37,240 |  
|                                                             |  |                                |        |             |   |        |  
|Basic net income (loss) per share                            |  | $                              | 0.00   |             | $ | (0.10  | )
|                                                             |  |                                |        |             |   |        |  
|Diluted net income (loss) per share                          |  | $                              | 0.00   |             | $ | (0.10  | )
|                                                             |  |                                |        |             |   |        |  

For the three months ended December 31, 2006, 5,397,000 stock options were excluded from
diluted earnings per share by the application of the treasury stock method. For the three months ended December 31, 2005, approximately 508,000 potential common shares from outstanding stock options were excluded from the calculation of diluted
earnings per share because their inclusion would have been anti-dilutive. For the three months ended December 31, 2005, an additional 4,528,000 stock options were excluded from diluted earnings per share by the application of the treasury stock
method.



|14. | Commitments and Contingencies
|--- | -----------------------------

Legal Proceedings

The Company is subject to various legal proceedings and claims as discussed below. In addition, in the ordinary course of its business,
the Company has been involved in a number of 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 harm our business and will not have a material adverse effect on our financial position, cash flows or results of operations. Litigation relating to the semiconductor industry is not uncommon,
and we are, and from time to time have been, subject to such litigation. No assurances can be given with respect to the extent or outcome of any such litigation in the future.

Shareholder Derivative Actions

On July 18, 2006 and July 26, 2006, two purported
shareholder derivative actions were filed against certain current and former directors and officers of ISSI in the United States District Court for the Northern District of California, entitled (1) Rick Tope v. Jimmy S.M. Lee, et al.,
Case No. C06-04387, and (2) Murray Donnelly v. Jimmy S.M. Lee, et al., Case No. C06-04545. The complaints purport to assert claims against the individual defendants on behalf of ISSI for breach of fiduciary duty, violations of
Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 promulgated thereunder, unjust enrichment, and restitution based upon our alleged stock option grant practices from 1995 through 2002. The Company is
named solely as a nominal defendant. The complaints seek damages in an unspecified amount against the individual defendants, disgorgement of stock options or proceeds, equitable relief, attorneys fees, and other unspecified relief. Pursuant to
the parties stipulation, the Court consolidated the two derivative actions on August 22, 2006, under the caption In re Integrated Silicon Solution, Inc. Shareholder Derivative Litigation, Master File No. C-06-04387 RMW.



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Plaintiffs filed a consolidated shareholder derivative complaint on November 27, 2006, based upon the same underlying facts and
circumstances alleged in the prior complaints. In addition to the claims asserted and the relief sought in the original complaints, the consolidated complaint purports to assert claims against the individual defendants for aiding and abetting and
violating Sections 14(a) and 20(a) of the Exchange Act and seeks an accounting. The Company is again named solely as a nominal defendant.

On October 31, 2006, another purported shareholder derivative action was filed against certain current and former directors and officers of ISSI in the Superior Court of California for the County of Santa Clara, entitled Alex
Chuzhoy v. Jimmy S.M. Lee, et al., Case No. 1:06-CV-074031. The complaint purports to assert claims against the individual defendants on behalf of ISSI for insider trading in violation of California Corporations Code Sections 25402 /
25502.5, breach of fiduciary duty including in connection with the alleged insider selling and misappropriation, abuse of control, gross mismanagement, constructive fraud, corporate waste, unjust enrichment, and rescission, based upon the
Companys alleged stock option grant practices from 1995 through 2002. The Company is named solely as a nominal defendant. The complaint seeks damages in an unspecified amount against the individual defendants, an accounting, certain corporate
governance changes, a constructive trust over the defendants stock options or proceeds, punitive damages, attorneys fees, and other unspecified relief.

Plaintiffs in the state and federal derivative complaints will amend their complaints after the Company concludes its financial restatements. Defendants intend to move to dismiss both the state and federal complaints.

Nasdaq Delisting

On
August 17, 2006, the Company received a letter from The NASDAQ Stock Market indicating that the Company was not in compliance with the NASDAQ requirements for continued listing set forth in NASDAQ Marketplace Rule 4310(c)(14), and faces a
possible delisting. On December 7, 2006, following a hearing before the Nasdaq Listing Qualifications Panel (Panel), the Panel notified the Company that it would remain listed on Nasdaq subject to the filing by February 13,
2007 of all required restatements and delinquent periodic reports, communication with the Panel about the results of the independent committees investigation, and compliance with all other requirements for continued listing on the Nasdaq Stock
Market. The Company also received letters from The NASDAQ Stock Market indicating that as a result of its failure to timely file its Form 10-K for the fiscal year ended September 30, 2006, and its Form 10-Qs for the quarters ended June 30,
2006, December 31, 2006 and March 31, 2007, it was not in compliance with the NASDAQ requirements for continued listing set forth in NASDAQ Marketplace Rule 4310(c)(14).

On January 19, 2007, the Nasdaq Listing and Hearing Review Council (Listing Council) notified the Company that, pursuant to its
discretionary authority, it had called for review the December 7, 2006 decision of the Panel and stayed any determinations to suspend the Companys securities from trading pending further action by the Listing Council. On May 9, 2007,
the Company was advised by the Listing Council that it would remain listed on NASDAQ if it concludes its restatement and files its delinquent required SEC filings by June 5, 2007. The Company filed its Form 10-Q for the quarter ended
June 30, 2006 and its Form 10-K for the fiscal year ended September 30, 2006 in May 2007.

SRAM Antitrust Litigation

Thirty-two purported class action lawsuits were filed 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 have been consolidated in a single federal court for coordinated pre-trail proceedings. The U.S.
complaints 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. Two purported class action
lawsuits were filed against us and other SRAM suppliers in two Canadian courts alleging violation of the Canadian Competition Act and unlawful conduct at common law. The Canadian complaints seek compensatory and punitive damages, in addition to
declaratory relief, restitution, and costs. The Company is committed to defending itself against these claims and has instructed its counsel to contest these actions vigorously. Given the preliminary stage of these proceedings and the inherent
uncertainty in litigation, the Company is unable to predict the outcome of these suits. The final resolution of these alleged violations of federal or state antitrust laws could have a material adverse effect on the Companys business, results
of operations, or financial condition.



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

SRAM Antitrust Civil Investigative Demand

In May 2007, the Company received a civil investigative demand (CID) from the Attorney General of the State of Florida. The CID is issued pursuant to the Florida Antitrust Act in the course of an official
investigation to determine whether there is, has been, or may be a violation of state or federal antitrust laws. Although not alleging any wrongdoing, the CID seeks documents and data relating to the Companys business. The Company intends to
cooperate fully with the Attorney General of Florida in this investigation. Because the investigation is at an early stage, the Company cannot predict the outcome of the investigation and its effect, if any, on its business.

Commitments to Wafer Fabrication Facilities and Contract Manufacturers

The Company issues purchase orders for wafers to various wafer 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 December 31, 2006, the Company had approximately $15.4 million of purchase
orders for which the related wafers had been entered into wafer work-in-process (i.e., manufacturing had begun).



|15. | 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 EndedDecember 31,
|                             |  | 2006                           |        | 2005
|                             |  | (In thousands)                
|Net sales                    |  |                                |        |      |   |       
|United States                |  | $                              | 12,552 |      | $ | 8,080 
|China                        |  |                                | 3,556  |      |   | 4,440 
|Hong Kong                    |  |                                | 14,125 |      |   | 8,735 
|Taiwan                       |  |                                | 12,156 |      |   | 13,263
|Japan                        |  |                                | 3,935  |      |   | 6,756 
|Other Asia Pacific countries |  |                                | 6,042  |      |   | 5,441 
|Europe                       |  |                                | 9,365  |      |   | 4,266 
|Other                        |  |                                | 413    |      |   | 112   
|                             |  |                                |        |      |   |       
|Total net sales              |  | $                              | 62,144 |      | $ | 51,093
|                             |  |                                |        |      |   |       



|                  |  |                  |        |                   |   |       
|----------------- |  | ---------------- | ------ | ----------------- | - | ------
|                  |  | December 31,2006 |        | September 30,2006
|                  |  | (In thousands)  
|Long-lived assets |  |                  |        |                   |   |       
|United States     |  | $                | 1,546  |                   | $ | 1,269 
|Hong Kong         |  |                  | 73     |                   |   | 80    
|China             |  |                  | 1,020  |                   |   | 1,055 
|Taiwan            |  |                  | 19,422 |                   |   | 19,580
|                  |  |                  |        |                   |   |       
|                  |  | $                | 22,061 |                   | $ | 21,984
|                  |  |                  |        |                   |   |       



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



|16. | Related Party Transactions
|--- | --------------------------

The Company purchases
goods from SMIC in which the Company has less than a 2% ownership interest. Lip-Bu Tan, a director of the Company, has been a director of SMIC since January 2002. For the three months ended December 31, 2006 and December 31, 2005,
purchases of goods from SMIC were approximately $5,448,000 and $4,381,000, respectively. Accounts payable to SMIC was approximately $3,029,000 and $4,440,000 at December 31, 2006 and September 30, 2006, respectively.

The Company sells memory products to Flextronics. Lip-Bu Tan, a director of the Company, has been a director of Flextronics since April 3, 2003. The
Company had been doing business with Flextronics prior to Mr. Tan joining the board of directors of Flextronics.

The Company sells
semiconductor products to KSC in which the Company had an approximate 22% equity interest until it sold its investment in December 2006. Kong-Yeu Han, a director of the Company, was a director of KSC until December 2006.

Accounts receivable from related parties consisted of the following:



|            |  |                  |     |                   |   |    
|----------- |  | ---------------- | --- | ----------------- | - | ---
|            |  | December 31,2006 |     | September 30,2006
|            |  | (In thousands)  
|Flextronics |  | $                | 479 |                   | $ | 251
|KSC         |  |                  |    |                   |   | 155
|            |  |                  |     |                   |   |    
|Total       |  | $                | 479 |                   | $ | 406
|            |  |                  |     |                   |   |    

The following table shows net sales to related parties:



|            |  |                                |     |      |   |    
|----------- |  | ------------------------------ | --- | ---- | - | ---
|            |  | Three months endedDecember 31,
|            |  | 2006                           |     | 2005
|            |  | (In thousands)                
|Flextronics |  | $                              | 402 |      | $ | 111
|KSC         |  |                                | 13  |      |   |   
|            |  |                                |     |      |   |    
|Total       |  | $                              | 415 |      | $ | 111
|            |  |                                |     |      |   |    



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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 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.

All forward-looking statements attributable to 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.



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

Background

On January 25, 2005, we announced our intention to acquire ICSI. ICSI was a public
company in Taiwan and traded on the Gre Tai Securities Market. ICSI is a fabless semiconductor company whose principal products are DRAM and controller chips. Prior to this transaction, we owned approximately 29% of ICSI. In the nine months ended
September 30, 2005, we purchased additional shares of ICSI in the open market for approximately $52.5 million increasing our ownership percentage to approximately 83% at September 30, 2005. In fiscal 2006, we purchased additional shares of
ICSI for approximately $13.9 million increasing our ownership percentage to approximately 98% at September 30, 2006. At December 31, 2006, we owned approximately 98% of ICSI.

Our financial results for fiscal 2007 and fiscal 2006 reflect accounting for ICSI on a consolidated basis. On May 1, 2005, we assumed effective
control of ICSI and in accordance with U.S. generally accepted accounting principles we began consolidating the financial results of ICSI with our results as of such date.

In February 2006, we sold approximately 77% of our shares in Signia Technologies Inc. (Signia), a developer of wireless semiconductors, thereby reducing
our ownership percentage to approximately 16%. Effective March 1, 2006, we account for Signia on the cost basis. During the period from December 1, 2004 through February 28, 2006, our financial results reflect accounting for Signia on
a consolidated basis. At December 31, 2006, we owned approximately 6% of Signia.

In December 2006, we sold our remaining investment
in Key Stream Corp. (KSC), a semiconductor company. Our financial results for fiscal 2007, until our sale, and for fiscal 2006 reflect accounting for KSC on the equity basis.

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, (iii) mobile communications and (iv) automotive electronics. Our primary products are high speed and low power SRAM and low and medium
density DRAM. We also design and market EEPROMs, SmartCards, and card reader-writer controller chips. 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.



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In order to limit and control our operating expenses, in recent years we have reduced our headcount in
the U.S. and transferred various functions to Taiwan and China. Our acquisition of ICSI was a key part of this strategy. 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.

The average selling prices of our SRAM and DRAM products are very 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 certain of our products in fiscal 2006 and in the first quarter of fiscal 2007. We expect average selling prices for our products to
decline in the future, principally due to increased market competition and an increased supply of competitive products in the market. Any future decreases in our average selling prices would 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 and 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 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. and 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 80%, 83%, 85% and 87% in the first quarter of fiscal 2007 and in fiscal 2006, fiscal
2005 and fiscal 2004, respectively. We measure sales location by the shipping destination, even if the customer is headquartered in the U.S. 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:



|       |  |                                      |      |  |                                  |      |  |     |      |  |     |  
|------ |  | ------------------------------------ | ---- |  | -------------------------------- | ---- |  | --- | ---- |  | --- | -
|       |  | Three Months Ended December 31, 2006 |      |  | Fiscal Years Ended September 30, |     
|       |  |                                      | 2006 |  |                                  | 2005 |  |     | 2004 | 
|Asia   |  | 64                                   | %    |  | 73                               | %    |  | 75  | %    |  | 75  | %
|Europe |  | 15                                   |      |  | 10                               |      |  | 9   |      |  | 11  |  
|U.S.   |  | 20                                   |      |  | 17                               |      |  | 15  |      |  | 13  |  
|Other  |  | 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 is not 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.



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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, broad fluctuations in our overall business in the past several years
makes it 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 China 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.

Restatement of Previously Issued Financial Statements

The information below has been adjusted to reflect the restatement of our financial results which is more fully described in the Explanatory Note immediately preceding Part 1, Item 1 and in Note 2 Restatement of
Condensed Consolidated Financial Statements to our Condensed Consolidated Financial Statements in this Form 10-Q.

In this Form 10-Q,
we are restating our consolidated statement of operations and related consolidated statement of cash flows for the three months ended December 31, 2005, as a result of an independent stock option investigation commenced by the Special Committee
of our Board of Directors. In our 2006 Form 10-K filed with the SEC on May 30, 2007, we restated our consolidated balance sheet as of September 30, 2005, and the related consolidated statements of operations, shareholders equity, and
cash flows for each of the fiscal years ended September 30, 2005 and September 30, 2004. In total, the restatement resulted in additional stock-based compensation and related payroll tax expenses, net of income taxes, of $32.1 million
during fiscal years 1997 to 2005. In addition, we restated our unaudited quarterly financial information for all interim periods of fiscal year 2005 and the interim periods ended December 31, 2005 and March 31, 2006. The 2006 Form 10-K
also reflects the restatements of Selected Consolidated Financial Data in Item 6 for the fiscal years ended September 30, 2005, 2004, 2003 and 2002.

Financial information included in our reports on Form 10-K, Form 10-Q and Form 8-K filed by us prior to May 9, 2006, and the related opinions of our independent registered public accounting firm and all earnings
press releases and similar communications issued by us prior to May 9, 2006 should not be relied upon and are superseded in their entirety by this report and other reports on Form 10-Q and Form 8-K filed by us with the SEC on and after
May 9, 2006.

This Quarterly Report on Form 10-Q should be read in conjunction with our 2006 Form 10-K, as well as any current reports
filed on Form 8-K.

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.



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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 other expense when we record impairments; (v) the valuation of our non-marketable equity securities, which impacts other expense when we record
impairments and (vi) 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, 2006.

Valuation of inventory. Our inventories are stated at the lower of cost or market value. Determining market value requires us to project unit
prices and volumes for future periods in which we expect to sell inventory on hand as of the balance sheet date. As a result of these estimates, we may record a charge to cost of goods sold, which decreases our gross profit, in advance of when the
inventory is actually sold to reflect market values, net of sales commission costs, that are below our manufacturing costs. Conversely, if we sell inventory that has previously been written down to the lower of cost or market at more favorable
prices than we had forecasted at the time of the write-down, our gross profit may be higher. 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 in excess of six months historical sales volumes to cover estimated excess and obsolete exposures, unless adjustments are made based on our
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.

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

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 SFAS 142, Goodwill and Other Intangible Assets. Under this method, the total consideration paid, excluding, if any, the contingent consideration that has not been earned, 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. We engage a qualified third party valuation firm that specializes in the valuation of tangible and intangible assets to advise us in the valuation analysis. The valuation firm will
deliver a written analysis of the values assessed. 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 and our valuation firm 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.



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We perform goodwill impairment tests on an annual basis and between annual tests in certain
circumstances. 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
goodwill.

Valuation of non-marketable securities. Our ability to recover our strategic investments in equity securities that
are non-marketable and to earn a return on these investments is largely dependent on financial market conditions and the occurrence of liquidity events, such as initial public offerings, mergers or acquisitions, and private equity transactions. The
timing of when any of these events may occur is uncertain and very difficult to predict. In addition, under our accounting policy, we are required to periodically review all of our investments for impairment. In the case of non-marketable equity
securities, this requires significant judgment on our part, including an assessment of the investees financial condition, the existence of subsequent rounds of financing and the impact of any relevant equity preferences, as well as the
investees historical results of operations and projected results and cash flows. If the actual outcomes for the investees are significantly different from their forecasts, the carrying value of our non-marketable equity securities may be
above fair value, and we may incur additional charges in future periods, which will decrease our profitability. In fiscal 2006, we recorded an impairment loss of approximately $0.4 million related to one of our non-marketable equity securities. At
December 31, 2006, our strategic investments in non-marketable securities totaled $1.9 million.

Accounting for stock-based
compensation.Effective October 1, 2005, we adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), using the modified prospective transition method and therefore
have not restated results for prior periods. Under this transition method, stock-based compensation expense in fiscal 2006 included stock-based compensation expense for all share-based payment awards granted prior to, but not yet vested as of
October 1, 2005, based on the grant-date fair value estimated in accordance with the original provision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). Stock-based compensation expense for all
share-based payment awards granted after October 1, 2005 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. We recognize these compensation costs on a straight-line basis over the requisite
service period of the option, which is generally the option vesting term of four years. Prior to the adoption of SFAS 123R, we recognized stock-based compensation expense in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). Under APB 25, when the exercise price of our employee stock options was equal to the market price of the underlying stock on the date of the grant, no compensation expense was
recognized. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SECs interpretation of SFAS 123R and the valuation of share-based payments for public companies. We have applied the
provisions of SAB 107 in our adoption of SFAS 123R.

Impact of Recently Issued Accounting Standards

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109. The interpretation contains a two step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate
the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The
second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The provisions are effective us beginning in the first quarter of fiscal 2008. We are currently evaluating the
impact this statement will have on our consolidated financial statements.

In September 2006, the SEC issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 gives guidance on how errors, built up over time in the balance sheet,
should be considered from a materiality perspective and corrected. SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement.
SAB 108 is effective for fiscal years ending after November 15, 2006, and early application is encouraged. We are currently evaluating the impact that the provisions will have on our consolidated balance sheet and statement of operations.



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In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157,
Fair Value Measurements (SFAS 157) which establishes a framework for measuring fair value and enhance disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The
measurement and disclosure requirements are effective for us beginning in the first quarter of fiscal 2009. We are currently evaluating whether SFAS 157 will result in a change to our fair value measurements.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement
PlansAn Amendment of FASB Statements No. 87, 88, 106, and 132R (SFAS 158). SFAS 158 requires that the funded status of defined benefit postretirement plans be recognized on our balance sheet, and changes in the funded status be
reflected in comprehensive income, effective for fiscal years ending after December 15, 2006. SFAS 158 also requires the measurement date of the plans funded status to be the same as our fiscal year-end. This requirement is not required
until fiscal 2008. We are currently evaluating the impact that the provisions will have on our consolidated balance sheet and statement of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159) which permits companies to choose to measure certain financial
instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 is effective for us beginning in the first quarter
of fiscal 2009, although earlier adoption is permitted. We are currently evaluating the impact SFAS 159 will have on our consolidated financial statements.

Three Months Ended December 31, 2006 Compared to Three Months Ended December 31, 2005

Net Sales.
Net sales consist principally of total product sales less estimated sales returns. Net sales increased by 22% to $62.1 million in the three months ended December 31, 2006 from $51.1 million in the three months ended December 31, 2005
principally due to higher sales of SRAM products. The increase in unit shipments of our SRAM products in the three months ended December 31, 2006 compared to the three months ended December 31, 2005, more than offset the decrease in the
average selling prices of such products resulting in an overall increase in SRAM revenue. In addition, the increase in unit shipments of our DRAM products in the three months ended December 31, 2006 compared to the three months ended
December 31, 2005 more than offset the decline in average selling prices of such products resulting in an overall increase in DRAM revenue. 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 month periods ended December 31, 2006 and 2005, no single customer accounted for over 10% 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 $5.1 million to $12.5 million in the three months ended December 31, 2006 from $7.4 million in the three months ended December 31,
2005. Our gross margin increased to 20.2% in the three months ended December 31, 2006 from 14.5% in the three months ended December 31, 2005. Our gross margin for the three month periods ended December 31, 2006 and 2005, benefited
from the sale of $1.5 million and $0.8 million, respectively, of previously written down products. Our gross margin for the three months ended December 31, 2006 included inventory write-downs of $3.5 million while our gross margin for the three
months ended December 31, 2005 included inventory write-downs of $3.6 million. The inventory write-downs were predominately for lower of cost or market accounting and excess and obsolescence issues on certain of our products. The increase in
gross profit in the three months ended December 31, 2006 compared to the three months ended December 31, 2005 can be attributed to increased unit shipments of our SRAM and DRAM products which more than offset declines in average selling
prices for such products. In addition, declines in the cost of our SRAM products more than offset declines in the average selling prices of our SRAM products in three months ended December 31, 2006. This contributed to an increase in our SRAM
gross margin. Our DRAM gross margin increased in the three months ended December 31, 2006 compared to the three months ended December 31, 2005 as a result of a shift in product mix to higher density higher margin 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 to the extent necessary to offset such



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declines, the decline in average selling prices will result in a material decline in our gross margin. In addition, 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 increases. 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 decreased by 6% to $5.4 million in the three months ended December 31, 2006 compared to $5.7 million in the three months ended December 31, 2005. As a percentage
of net sales, research and development expenses decreased to 8.6% in the three months ended December 31, 2006 from 11.1% in the three months ended December 31, 2005. The decrease in research and development expenses can be attributed to a
decrease in research and development expenses for our Bluetooth and Flash controller development projects which we exited in the March 2006 quarter partially offset by an increase in development costs for new DRAM and SRAM products. Our research and
development expenses could increase in absolute dollars in future periods due to increased costs associated with the development of new products.

Selling, General and Administrative. Selling, general and administrative expenses increased by 38% to $9.1 million in the three months ended December 31, 2006 from $6.6 million in the three months ended December 31, 2005.
As a percentage of net sales, selling, general and administrative expenses increased to 14.6% in the three months ended December 31, 2006 from 12.9% in the three months ended December 31, 2005. The increase in selling, general and
administrative expenses was mainly attributable to approximately $1.8 million in legal expenses and accounting fees in the December 2006 quarter attributable to our stock option backdating investigation. These expenses will continue to be incurred
through June 2007. In addition, there was an increase in selling commissions associated with higher revenues in the three months ended December 31, 2006 compared to the three months ended December 31, 2005.

Acquired in-process technology charge. In the three months ended December 31, 2005, we incurred $0.2 million of acquired in-process
technology charge (IPR&D) in connection with our purchase of additional shares of ICSI. The $0.2 million allocated to IPR&D was expensed in our quarter ending December 31, 2005, as it was deemed to have no future alternative value.

Interest and other income (expense), net. Interest and other income (expense), net was $1.6 million in the three months ended
December 31, 2006 compared to $1.0 million in the three months ended December 31, 2005. The $1.6 million of interest and other income (expense) in the three months ended December 31, 2006 is comprised primarily of interest income of
$0.9 million and foreign currency exchange gains of $0.3 million. The $1.0 million of interest and other income (expense) in the three months ended December 31, 2005 is comprised primarily of interest income of $0.7 and foreign currency
exchange gains of $0.1 million. The increase in interest income is primarily attributable to higher cash balances in the three months ended December 31, 2006.

Gain on sale of investments. In the three months ended December 31, 2006, we sold 52.5 million shares of SMIC for approximately $6.4 million which resulted in a pre-tax gain of approximately $0.3
million. In addition we sold our remaining shares of KSC for approximately $1.2 million which resulted in a pre-tax gain of approximately $0.3 million.

Provision for income taxes.The provision for income taxes for the three month periods ended December 31, 2006 and 2005 consists of foreign withholding taxes of $10,000 and $62,000, respectively.

Minority interest in net (income) loss of consolidated subsidiaries.The minority interest in net
(income) loss of consolidated subsidiaries was income of $8,000 in the three months ended December 31, 2006 compared to a loss of $0.4 million in the three months ended December 31, 2005. The minority interest in net income of consolidated
subsidiaries for the three months ended December 31, 2006 represents the minority shareholders proportionate share of the net income of ICSI. The minority interest in net loss of consolidated subsidiaries for the three months ended
December 31, 2005 represents the minority shareholders proportionate share of the net loss of Signia and the minority shareholders proportionate share of the net loss of ICSI.



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Equity in net loss of affiliated companies.Equity in net loss of affiliated companies was a $0.1
million in the three months ended December 31, 2006 compared to a $0.2 million in the three months ended December 31, 2005. This related to our equity interest in KSC which we sold in December 2006.

Liquidity and Capital Resources

As of
December 31, 2006, our principal sources of liquidity included cash, cash equivalents and short-term investments of approximately $109.4 million. During the three months ended December 31, 2006, operating activities used cash of
approximately $3.9 million compared to $7.4 million used in the three months ended December 31, 2005. The cash used by operations in the three months ended December 31, 2006 was primarily due to increases in inventories of $2.4 million,
increases in accounts receivable of $1.9 million and decreases in accounts payable of $2.1 million. This was partially offset by our net income of $0.1 million adjusted for non-cash items of $1.5 million (stock-based compensation expense of
$1.0 million, depreciation and amortization of $0.8 million, amortization of intangibles of $0.5 million, gain from the sale of SMIC and KSC equity securities of $(0.6) million and other non-cash items of $(0.2) million) and increases in accrued
liabilities of $0.7 million and decreases in other assets of $0.2 million. The cash used by operations in the three months ended December 31, 2005 was primarily due to increases in inventories of $8.1 million, increases in other assets of $0.7
million and our net loss of $3.9 million adjusted for non-cash items of $2.4 million (stock-based compensation expense of $1.2 million, equity in net loss of affiliated companies of $0.2 million, depreciation and amortization of $1.0
million, amortization of intangibles of $0.3 million, acquired in-process technology charge of $0.2 million and other non-cash items of $(0.5) million). This was partially offset by increases in accounts payable of $1.7 million and increases in
accrued expenses of $1.2 million.

In the three months ended December 31, 2006, we generated $7.3 million from investing
activities compared to $6.4 million generated in the three months ended December 31, 2005. In the three months ended December 31, 2006, we generated approximately $6.4 million from the sale of shares of SMIC, resulting in a pre-tax gain of
approximately $0.3 million and generated approximately $1.2 million from our sale of shares of KCS, resulting in a pre-tax gain of approximately $0.3 million. We also generated $0.4 million from the sales of available-for-sale securities. The cash
generated from investing activities in the three months ended December 31, 2005 primarily resulted from net sales of available-for-sale securities of $10.6 million. In addition, in the December 2005 quarter, we used approximately $3.5 million
for the purchase of additional shares of ICSI.

In the both the three month periods ended December 31, 2006 and 2005, we made capital
expenditures of approximately $0.7 million. The expenditures in the three months ended December 31, 2006 was primarily for test equipment and engineering tools. We expect to spend approximately $1.0 million to $3.0 million to purchase capital
equipment during the next twelve months, principally for the purchase of design and engineering tools, additional test equipment, and computer software and hardware. We expect to fund our capital expenditures from our existing cash and cash
equivalent balances.

We generated $0.3 million from financing activities during the three months ended December 31, 2006 compared to
$6.0 million in the three months ended December 31, 2005. In the three months ended December 31, 2006, we used $13.5 million for the repayment of short-term borrowings. The source of financing for the three months ended December 31,
2006, was borrowings of $13.8 million under lines of credit in Taiwan. In the three months ended December 31, 2005, we used $15.2 million for the repayment of short-term borrowings. The source of financing for the three months ended
December 31, 2005, was borrowings of $20.7 million under ICSI lines of credit, proceeds from the issuance of common stock of $0.3 million from stock option exercises and a decrease in restricted cash of $0.2 million.

We have $19.0 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 September 2007. As of December 31, 2006, we had outstanding borrowings of approximately $2.0 million under these short-term lines of credit. We guaranteed the borrowings of ICSI under a line of credit with a bank
in Taiwan for a maximum amount of approximately $4.9 million through January 2007. As of December 31, 2006, there were no borrowings outstanding under this line of credit. Our unused short-term lines of credit and unused lines of credit for
short-term notes amounted to approximately $15.5 million and $1.5 million, respectively, at December 31, 2006.



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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. Prior to our relocation to San Jose, California, our headquarters consisted of approximately 93,400 square feet of office space in Santa,
Clara, California. 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 2009. In Taiwan, we own
and occupy the ICSI building. The land upon which the ICSI building is situated is leased under an operating lease that expires in March 2016. Our outstanding commitments under these leases were approximately $5.0 million at December 31, 2006.

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.

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 wafer
fabrication foundries or assembly and test subcontractors. To the extent we enter into such transactions, we may need 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 December 31, 2006, 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 fixed rate debt, our investments in marketable equity securities and our investments in private companies.

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 and Korea where expenses are denominated in each
countrys local currency and are subject to foreign currency exchange risk. In the three months ended December 31, 2006 and in fiscal 2006, we recorded exchange gains of approximately $0.3 million and $0.9 million, respectively. Prior to
this we had not experienced any significant negative impact on our operations as a result of fluctuations in foreign currency exchange rates. We do not currently engage in any hedging activities.

We had cash, cash equivalents and short-term investments of $81.8 million at December 31, 2006 excluding $27.6 million of SMIC stock included in
short-term investments. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without increasing risk. We invest primarily in high-quality, short-term debt instruments such as municipal
auction rate certificates and instruments issued by high quality financial institutions and companies, including money market instruments. A hypothetical one percentage point decrease in interest rates would result in approximately a $0.8 million
decrease in our interest income. As our portfolio consists mainly of short-term investments whose interest rates reset, a hypothetical one percentage point change in interest rates would not have a material affect on the value of our investments.

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 the cost basis
of shares of SMIC. In the three months ended December 31, 2006, we sold shares of



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SMIC and recorded gross proceeds of approximately $6.4 million and a pre-tax gain of approximately $0.3 million. Since SMICs IPO, we account for our
shares in SMIC under the provisions of FASB 115 and mark the shares to the market value with the offset recorded in accumulated other comprehensive income. The cost basis of our shares in SMIC is approximately $24.3 million and the market value at
December 31, 2006 was approximately $27.6 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 market value of our SMIC shares declines below our cost basis, and the decline is other-than-temporary, we may be required to recognize a loss on our investment through operating results. Our shares in SMIC are subject to certain lockup
restrictions and have been freely tradable only since February 2007. Through December 31, 2006, these lockup restrictions impacted our ability to sell the locked up portion of our SMIC shares.

We have investments in equity securities of privately held companies of approximately $1.9 million at December 31, 2006. These investments are
generally in companies in the semiconductor industry. These investments are included in other assets and are accounted for using the equity or cost method. For investments in which no public market exists, our policy is to review the operating
performance, recent financing transactions and cash flow forecasts for such companies in assessing whether our investments in these companies are impaired below our cost basis. Impairment losses on equity investments are recorded when events and
circumstances indicate that such assets are impaired and the decline in value is other than temporary. In this regard, we recorded approximately a $0.4 million impairment loss on one of our equity positions in fiscal 2006.



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

Our Chief Executive
Officer and 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 December 31, 2006, 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 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. During the three months ended December 31, 2006, there was no change in our internal control over
financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting
except that certain of the remedial actions described below had been implemented or were in the process of being implemented during such period.

Stock
Option Grant Practices and Restatement

As discussed Note 2 Restatement of Consolidated Financial Statements in Notes to the
Consolidated Financial Statements of our Form 10-K for the fiscal year ended September 30, 2006 (2006 Form 10-K) filed with the SEC in May 2007, during fiscal year 2006, an independent investigation related to our historical stock option
granting practices was carried out by a Special Committee of our Board of Directors. As a result of the investigation, we reached the conclusion that incorrect measurement dates were used for financial accounting purposes for certain stock option
grants made in prior periods. Therefore, we recorded additional non-cash stock-based compensation expense with regard to past stock option grants. In our 2006 Form 10-K, we restated our consolidated balance sheet as of September 30, 2005, and
the related consolidated statements of operations, shareholders equity, and cash flows for each of the fiscal years ended September 30, 2005 and September 30, 2004. We also restated the unaudited quarterly financial information for
all interim periods of fiscal year 2005 and the interim periods ended December 31, 2005 and March 31, 2006 in our 2006 Form 10-K.



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Remedial Measures

As a result of this investigation, we identified a material weakness in our internal control over financial reporting related to our stock option granting practices and the related accounting in periods ending prior
to March 31, 2006.

Before March 2006, we did not have sufficient safeguards in place to monitor our control practices regarding stock
option pricing and related financial reporting. Beginning in March 2006, we standardized and formalized the procedure for granting awards of stock options to employees and to executive officers. In addition, management, along with our Board of
Directors, has implemented or is in the process of implementing the following internal control systems and procedures, which were recommended by the Special Committee:



| | 1. | Limit authority to approve grants and any amendments to outstanding grants to members of the Board of Directors or the Compensation Committee (i.e., eliminate the Stock Option
Committee).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Establish fixed dates, in advance, on which all equity grants are to be made. Avoid dates near earnings announcements and off-cycle exception grants. For new hires, grants must be
made following their actual commencement of employment.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Grant only at in person or telephonic meetings of the Board or Compensation Committee that occur before the predetermined grant dates and not through unanimous written consent
actions. The Compensation Committee should meet monthly or every other month.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | Complete all grant documentation before the predetermined grant dates and circulate information to those approving the grants prior to the meeting. If there are any changes to the
grants resulting from the meeting, the changes will be documented.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. | Provide for participation by legal personnel (external counsel) in Board and Compensation Committee meetings and timely and accurately communicate Board and Compensation actions to
responsible human resources, finance, and stock administration personnel.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. | Ensure the completion and execution of Board and Compensation Committee minutes promptly after meetings, and approve them at the following Board or Compensation Committee meeting,
as applicable.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 7. | Establish controls to prohibit any revisions to lists of approved grants or modification of equity grants, whether direct or indirect (i.e., through adoption of separate individual
agreements which impact outstanding grants), including termination arrangements providing for accelerated vesting or extended vesting or exercising of options, without prior review by representatives of human resources, finance and legal and
approval by the Board or Compensation Committee.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 8. | Timely communicate material terms of grants to recipients following their effective date of grant.
| | -- | --------------------------------------------------------------------------------------------------



| | 9. | Maintain all documentation related to equity grant approval centrally (e.g., Compensation Committee minutes). One person should be responsible for entering stock option grants into
the equity tracking software program, and a second person should review the input in a timely manner to guard against errors. Grants should be entered into the system shortly after they are made, rather than at end of each quarter. Grant lists
should be marked to indicate the dates on which they become final, and the stock administrator should indicate the date on which grant lists and other relevant documents are received, so as to provide an appropriate audit trail.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10. | Establish written policies and procedures for equity grants, vesting, exercises, sales and recordkeeping consistent with the above that have been approved jointly by representatives
from finance and human resources (including stock administration personnel) and discussed with the Compensation Committee.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 11. | Monitor any guidance regarding equity grant procedures from the SEC and the public accounting community, to make sure procedures are in compliance.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------



| | 12. | Implement annual formal review of stock option documentation, including plan documents, agreements, and approving resolutions, to ensure compliance and understanding of material
terms by representatives of finance, human resources and stock administration personnel. Any proposed amendments to plan documents should be reviewed by finance, human resources and stock administration personnel before approval by Board.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 13. | Establish regular training programs for stock administration, human resources, and finance personnel, covering the equity grant process and proper accounting. Provide for active
involvement of external legal counsel or other appropriate experts in training and review of the equity grant process.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 14. | Establish and proactively monitor internal controls regarding the equity grant process, including the IT processes involved in grant procedures. Ensure that full audit functionality
of equity tracking software is understood and employed and kept up to date.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 15. | Establish and proactively monitor internal controls regarding cash exercises of stock options to ensure that such exercises and payments therefore are fully and accurately
documented, all necessary approvals are obtained and documented, and such exercises are accurately and timely entered into the Equity Edge tracking software system.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 16. | Ensure that our disclosure controls adequately address the processes for making, recording, disclosing and accounting for equity grants and exercises of such grants.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

We believe that the changes made in March 2006 remediated the past material weakness in our internal control over financial
reporting related to our stock option granting practices and the related accounting, and reduced to remote the likelihood that any incorrect measurement dates or any material error in accounting for stock options could have occurred during the three
months ended December 31, 2006 and not been detected as part of our financial reporting close process.

Part II. OTHER INFORMATION



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

We are subject to various
legal proceedings and claims as discussed below. In addition, in the ordinary course of our business, we have been involved in a number of 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 harm our business and will not have a material adverse effect on our financial position, cash flows or
results of operations. Litigation relating to the semiconductor industry is not uncommon, and we are, and from time to time have been, subject to such litigation. No assurances can be given with respect to the extent or outcome of any such
litigation in the future.

Shareholder Derivative Actions

On July 18, 2006 and July 26, 2006, two purported shareholder derivative actions were filed against certain current and former directors and officers of ISSI in the United States District Court for the
Northern District of California, entitled (1) Rick Tope v. Jimmy S.M. Lee, et al., Case No. C06-04387, and (2) Murray Donnelly v. Jimmy S.M. Lee, et al., Case No. C06-04545. The complaints purport to assert claims against the
individual defendants on behalf of ISSI for breach of fiduciary duty, violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 promulgated thereunder, unjust enrichment, and restitution based
upon our alleged stock option grant practices from 1995 through 2002. We are named solely as a nominal defendant. The complaints seek damages in an unspecified amount against the individual defendants, disgorgement of stock options or proceeds,
equitable relief, attorneys fees, and other unspecified relief. Pursuant to the parties stipulation, the Court consolidated the two derivative actions on August 22, 2006, under the caption In re Integrated Silicon Solution, Inc.
Shareholder Derivative Litigation, Master File No. C-06-04387 RMW. Plaintiffs filed a consolidated shareholder derivative complaint on November 27, 2006, based upon the same underlying facts and circumstances alleged in the prior
complaints. In addition to the claims asserted and the relief sought in the original complaints, the consolidated complaint purports to assert claims against the individual defendants for aiding and abetting and violating Sections 14(a) and 20(a) of
the Exchange Act and seeks an accounting. We are again named solely as a nominal defendant.



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On October 31, 2006, another purported shareholder derivative action was filed against certain
current and former directors and officers of ISSI in the Superior Court of California for the County of Santa Clara, entitled Alex Chuzhoy v. Jimmy S.M. Lee, et al., Case No. 1:06-CV-074031. The complaint purports to assert claims
against the individual defendants on behalf of ISSI for insider trading in violation of California Corporations Code Sections 25402 / 25502.5, breach of fiduciary duty including in connection with the alleged insider selling and misappropriation,
abuse of control, gross mismanagement, constructive fraud, corporate waste, unjust enrichment, and rescission, based upon our alleged stock option grant practices from 1995 through 2002. We are named solely as a nominal defendant. The complaint
seeks damages in an unspecified amount against the individual defendants, an accounting, certain corporate governance changes, a constructive trust over the defendants stock options or proceeds, punitive damages, attorneys fees, and
other unspecified relief.

Plaintiffs in the state and federal derivative complaints will amend their complaints after we conclude our
financial restatements. Defendants intend to move to dismiss both the state and federal complaints.

Nasdaq Delisting

On August 17, 2006, we received a letter from The NASDAQ Stock Market indicating that we were not in compliance with the NASDAQ requirements for
continued listing set forth in NASDAQ Marketplace Rule 4310(c)(14), and faces a possible delisting. On December 7, 2006, following a hearing before the Nasdaq Listing Qualifications Panel (Panel), the Panel notified us that we would
remain listed on Nasdaq subject to the filing by February 13, 2007 of all required restatements and delinquent periodic reports, communication with the Panel about the results of the independent committees investigation, and compliance
with all other requirements for continued listing on the Nasdaq Stock Market. We also received letters from The NASDAQ Stock Market indicating that as a result of our failure to timely file our Form 10-K for the fiscal year ended September 30,
2006, and our Form 10-Qs for the quarters ended June 30, 2006, December 31, 2006 and March 31, 2007, we were not in compliance with the NASDAQ requirements for continued listing set forth in NASDAQ Marketplace Rule 4310(c)(14).

On January 19, 2007, the Nasdaq Listing and Hearing Review Council (Listing Council) notified us that, pursuant to its
discretionary authority, it had called for review the December 7, 2006 decision of the Panel and stayed any determinations to suspend our securities from trading pending further action by the Listing Council. On May 9, 2007, we were
advised by the Listing Council that we would remain listed on NASDAQ if we conclude our restatement and file our delinquent required SEC filings by June 5, 2007. We filed our Form 10-Q for the quarter ended June 30, 2006 and our Form 10-K
for the fiscal year ended September 30, 2006 in May 2007.

SRAM Antitrust Litigation

Thirty-two purported class action lawsuits were filed 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 have been consolidated in a single federal court for coordinated pre-trial proceedings. The U.S.
complaints 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. Two purported class action
lawsuits were filed against us and other SRAM suppliers in two Canadian courts alleging violation of the Canadian Competition Act and unlawful conduct at common law. The Canadian complaints seek compensatory and punitive damages, in addition to
declaratory relief, restitution, and costs. We are committed to defending ourself against these claims and have instructed our counsel to contest these actions vigorously. Given the preliminary stage of these proceedings and the inherent uncertainty
in litigation, we are unable to predict the outcome of these suits. The final resolution of these alleged violations of federal or state antitrust laws could have a material adverse effect on our business, results of operations, or financial
condition.



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SRAM Antitrust Civil Investigative Demand

In May 2007, we received a civil investigative demand (CID) from the Attorney General of the State of Florida. The CID is issued pursuant to
the Florida Antitrust Act in the course of an official investigation to determine whether there is, has been, or may be a violation of state or federal antitrust laws. Although not alleging any wrongdoing, the CID seeks documents and data relating
to our business. We intend to cooperate fully with the Attorney General of Florida in this investigation. Because the investigation is at an early stage, we cannot predict the outcome of the investigation and its effect, if any, on our business.



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

We have been named as a party to several
lawsuits related to our historical stock option practices and related accounting, we may be named in additional litigation in the future and we are the subject of a formal SEC investigation, all of which could result in an unfavorable outcome and
have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price for our securities.

Several lawsuits have been filed against certain of our current directors and officers and certain former directors and officers relating to our historical stock option practices and related accounting. We are named
as nominal defendant in such matters. We are also subject to a formal SEC investigation with respect to such matters. See Item 1Legal Proceedings for a more detailed description of these proceedings. We may become the subject of
additional private or government actions regarding these matters in the future. These actions are in the preliminary stages, and their ultimate outcome could have a material adverse effect on our business, financial condition, results of operations,
cash flows and the trading price for our securities. Litigation may be time-consuming, expensive and disruptive to our normal business operations, and the outcome of litigation is difficult to predict. The defense of these lawsuits has resulted and
will continue to result in significant legal and accounting expenditures and the continued diversion of our managements time and attention from the operation of our business. All or a portion of any amount we may be required to pay to satisfy
a judgment or settlement of any or all of these claims may not be covered by insurance.

We have entered into indemnification agreements
with each of our present and former directors and officers. Under those agreements, we are required to indemnify each such director or officer against expenses, including attorneys fees, judgments, fines and settlements, paid by such
individual in connection with the pending litigation subject to applicable Delaware law.

If we do not maintain compliance with the listing requirements
of the NASDAQ Global Market, our common stock could be delisted, which could, among other things, reduce the price of our common stock and the levels of liquidity available to our stockholders.

In connection with the restatement of our financial statements, we were delinquent in filing certain of our periodic reports with the SEC, and
consequently we were not in compliance with the listing requirements under the NASDAQ Global Markets Marketplace Rules. Upon the filing of this Quarterly Report on Form 10-Q and our Quarterly Report on Form 10-Q for the period ended
March 31, 2007, we believe that we will be in compliance with the NASDAQ listing standards. However, our securities could be delisted in the future if we do not maintain compliance with applicable listing requirements. If our securities are
delisted from the NASDAQ Global Market, they would subsequently be transferred to the National Quotation Service Bureau, or Pink Sheets. The trading of our common stock on the Pink Sheets may reduce the price of our common stock and the
levels of liquidity available to our stockholders. If we are delisted in the future from the NASDAQ Global Market and transferred to the Pink Sheets, there may also be other negative implications, including the potential loss of confidence by
suppliers, customers and employees and the loss of institutional investor interest in our company.

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

We incurred
losses of $14.2 million in fiscal 2006, which included inventory write-downs of $16.5 million. We incurred losses of $39.8 million in fiscal 2005, which included inventory write-downs of $13.9 million, charges of



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$11.7 million related to our equity interest in ICSI, charges on impairment of goodwill and investments of $4.7 million and charges for in-process
R&D of $2.8 million. Though we were profitable in the September 2006 quarter and December 2006 quarter, there is no assurance that we will maintain or achieve profitability in subsequent quarters. Our ability to achieve and 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 capacity and control operating expenses, including stock-based compensation as required by SFAS 123R. Adverse developments with respect to these or other factors could result in quarterly or annual
operating losses in the future.

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:



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



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



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



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



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



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



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



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



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



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



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



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



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



| |  |  | economic slowness and low end-user demand;
| | - |  | ------------------------------------------



| |  |  | 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;
| | - |  | ---------------------------------



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



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



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



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

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 first quarter of fiscal 2007 and in fiscal 2006, approximately 86% and 91%, 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. For example, we experienced a sequential decline in revenue from $61.5 million in our September 2005 quarter to $51.1
million in our December 2005 quarter. This decline in revenue was primarily the result of a decrease in unit shipments and the average selling prices of our DRAM products. In the December 2005 quarter, we turned down some orders for DRAM products
that had unfavorable margins as a result of the decrease in the average selling prices in the market. We may not be able to offset any future price declines for our products by higher volumes or by higher prices on newer products. 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.

We are subject to pending legal proceedings related to the SRAM market.

We have been named as a
defendant in a number of civil antirust complaints filed against semiconductor companies on behalf of purported classes of direct and indirect purchasers of SRAM products throughout the United States. The complaints allege that the defendants
conspired to raise the price of SRAM in violation of Section 1 of the Sherman Act, the California Cartwright Act, and several other State antitrust, unfair competition and consumer protection statutes. We believe that we have meritorious
defenses to the allegations in the complaints, and we intend to defend these lawsuits vigorously. However, the litigation is in the preliminary stage and we cannot predict its outcome. Multidistrict antitrust litigation is particularly complex and
can extend for a protracted time, which can substantially increase the cost of such litigation. The defense of these lawsuits is also expected to divert the efforts and attention of some of our key management and technical personnel. As a
result, our defense of this litigation, regardless of its eventual outcome, will likely be costly and time consuming. Should the outcome of the litigation be adverse to us, we could be required to pay significant monetary damages, which could
adversely affect our business, financial condition, operating results and cash flows.

Any future downturn in the markets we serve would harm our
business and financial results.

Substantially all of our products are incorporated into products for the digital consumer electronics,
networking, mobile communications and automotive electronics 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. We expect that our industry will remain
cyclical, and we are unable to predict when any upturn or downturn will occur or how long it will last.

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 inventory. In the first



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quarter of fiscal 2007, in fiscal 2006, and in fiscal 2005, we recorded inventory write-downs of $3.5 million, $16.5 million and $13.9 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.

We write down to zero dollars the carrying value of inventory on hand in excess of six months historical sales volumes 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.

We believe that six months is an appropriate period because it is difficult to accurately forecast for a specific product beyond this time frame due to the potential introduction of products by competitors, technology
obsolescence or fluctuations in demand. Future additional inventory write-downs may occur due to lower of cost or market accounting, excess inventory or inventory obsolescence.

Our transition to lead-free parts may result in excess inventory of products packaged using traditional methods.

Customers are requiring that we offer our products in lead-free packages. Governmental regulations in certain countries and customers intention to produce products that are less harmful to the environment has
resulted in a requirement from many of our customers to purchase integrated circuits that do not contain lead. We have responded by offering our products in lead-free versions. While the lead-free versions of our products are expected to be more
friendly to the environment, the ultimate impact is uncertain. The transition to lead-free products may produce sudden changes in demand depending on the packaging method used, which may result in excess inventory of products packaged using
traditional methods. This may have an adverse effect on our results of operations. In addition, the quality, cost and manufacturing yields of the lead-free parts may be less favorable to us than the products packaged using more traditional materials
which may result in higher product costs.

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 Powerchip Semiconductor, SMIC, TSMC, 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 specific wafer capacity from our 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, choose to prioritize capacity for other uses, or reduce or eliminate deliveries to us, we may not be able to obtain enough wafers to meet the market demand for our products which would adversely affect our revenues. 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.

Our gross
margins may decline even in periods of increasing revenue.

Our gross margin is affected by a variety of factors, including our mix of
products sold, average selling prices for our products and cost of wafers. Even when our revenues are increasing, our gross margin may be adversely affected if such increased revenue is from products with lower margins or declining average selling
prices. During periods of strong demand, wafer capacity is likely to be in short supply and we will likely have to pay higher prices for wafers, which would adversely affect our gross margin unless we are able to increase our product prices to
offset such costs. To maintain our gross margins when average selling prices are declining, we must introduce new products with higher margins or reduce our cost per unit. There can be no assurance that we will be able to increase unit sales
volumes, introduce and sell new products or reduce our cost per unit.



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We may encounter difficulties in effectively integrating newly acquired businesses.

From time to time, we may acquire other companies or assets that we believe to be complementary to our business. Acquisitions may result in 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 the 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;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ---------------------------------------------------------------------------------

In this regard, in February 2006, we sold our shares of Signia as we decided to exit the Bluetooth market and focus on our core product strategy. We sold
approximately 77% of our investment in Signia for approximately $4.6 million which resulted in a pre-tax gain of $2.2 million. As a result of the sale of the Signia shares, we reduced our ownership percentage in Signia to approximately 16% and
effective March 2006 account for Signia on the cost basis. For the period ending September 30, 2005, we incurred an impairment charge of $4.4 million related to the goodwill acquired with Signia. There is no assurance that any future
acquisitions will contribute positively to our business or operating results.

We rely on third-party contractors to assemble and test our products 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 assemble and test our products. There are significant risks associated with our reliance on these
third-party contractors, including:



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



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



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



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



| |  |  | 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.



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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 three months ended December 31, 2006, approximately 20% of our net sales was attributable to customers located in the U.S., 15% was
attributable to customers located in Europe and 64% was attributable to customers located in Asia. In fiscal 2006, approximately 17% of our net sales was attributable to customers located in the U.S., 10% was attributable to customers located in
Europe and 73% was attributable to customers located in Asia. In fiscal 2005, approximately 15% of our net sales was attributable to customers in the U.S., 9% was attributable to customers in Europe and 75% was attributable to customers in Asia. We
anticipate that sales to international locations will continue to represent a significant percentage of our net sales. In addition, all of our wafer foundries and assembly and test subcontractors are located in Taiwan and China and a substantial
majority of our employees are located outside of the U.S. 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;
| | - |  | -------------------------------------------------------



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



| |  |  | earthquakes, diseases (SARS/ avian flu) and other natural disasters.
| | - |  | --------------------------------------------------------------------

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,



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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; and
| | - |  | ----------------------------------



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

In
addition, we are vulnerable to technology advances utilized by competitors to manufacture higher performance or lower cost products. In particular, a competitor with a materially smaller die size and lower cost could dramatically gain market share
in a short period of time. 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.

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, 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 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 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 effective competing technologies on their own.

We have acquired equity positions for strategic reasons in other companies which may significantly decrease in value.

Over
the last several years, we have acquired equity positions for strategic reasons in other technology companies and we may make similar equity purchases in the future. At December 31, 2006, our strategic investments in non-marketable securities
totaled $1.9 million. These equity investments may not increase in value and there is the possibility that they could decrease in value over time, even to the point of becoming completely worthless. These equity securities are evaluated for
impairment on a recurring basis and any reductions in the carrying value would lower our profitability.



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In this regard, we recorded approximately a $0.4 million impairment loss on one of our equity positions
in fiscal 2006 and $0.3 million impairment losses on two equity investments in fiscal 2005. In addition, we own shares in SMIC with a cost basis of approximately $24.3 million and a market value at December 31, 2006 of approximately $27.5
million. The market value of SMIC shares is subject to fluctuation and our carrying value will be subject to adjustments to reflect the current market value. Our shares in SMIC are subject to certain lockup restrictions and have been freely tradable
only since February 2007. Through December 31, 2006, these lockup restrictions impacted our ability to sell the locked up portion of our SMIC shares.

Changes in securities laws and regulations are increasing our costs.

The Sarbanes-Oxley Act of 2002 that became law in
July 2002, as well as rules subsequently implemented by the SEC and the Nasdaq Stock Market, have required changes to some of our accounting and corporate governance practices, including the report on our internal controls as required by
Section 404 of the Sarbanes-Oxley Act of 2002. These rules and regulations have increased our accounting, legal and other costs, and have made some activities more difficult, time consuming and/or costly. In particular, complying with the
internal control requirements of Section 404 of the Sarbanes-Oxley Act has resulted in increased internal efforts, significantly higher fees from our independent registered public accounting firm and significantly higher fees from third party
contractors. These rules and regulations could also make it more difficult for us to attract and retain qualified executive officers and qualified members of our board of directors, particularly to serve on our audit committee.

We may experience difficulties and increased expenses in complying with Sarbanes-Oxley Section 404.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-K for our fiscal year ending
September 30, 2005, we are required to furnish a report by our management on our internal control over financial reporting. Such report contains 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 is effective. This assessment includes disclosure of any material weaknesses in our internal control over financial
reporting identified by management and also contains a statement that our auditors have issued an attestation report on managements assessment of such internal controls. Public Company Oversight Board Auditing Standard No. 2 provides the
professional standards and related performance guidance for auditors to attest to, and report on, managements assessment of the effectiveness of internal control over financial reporting under Section 404.

We concluded that our internal control over financial reporting was effective and our auditors concurred with such assessment at September 30, 2006.
A key element of Section 404 compliance involves an analysis of management information systems (MIS). We are in the process of implementing a new worldwide MIS system and we are continuing to use our current systems until the new system is
fully implemented. If in the future we are unable to assert that our internal control over financial reporting is effective (or if our auditors are unable to attest that our managements report is fairly stated or they are unable to express an
opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

We prepare our financial statements in conformity with accounting principles generally accepted in the U.S. These accounting principles are subject to
interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create appropriate accounting policies. A change in these policies or
interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. For example, beginning in the first quarter of fiscal 2006, with the
adoption of SFAS 123R, we now record a charge to earnings for employee stock option grants for all stock options unvested at and granted after October 1, 2005. This



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accounting pronouncement has and is expected to continue to negatively impact our financial results. Technology companies generally, and our company
specifically, rely on stock options as a major component of our employee compensation packages. Because we are required to expense options, we may be less likely to sustain profitability or we may have to decrease or eliminate option grants.
Decreasing or eliminating option grants may negatively impact our ability to attract and retain qualified employees.

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 Chairman and Chief Executive Officer
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 is intense. 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;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | 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 or investigations involving us or any of our competitors;
| | - |  | ----------------------------------------------------------------------------------------------------------------



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



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



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

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



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Foundry capacity can be limited, and we may be required to enter into costly arrangements to secure foundry capacity.

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:



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | increased price for wafers;
| | - |  | ---------------------------



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

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.

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

Our worldwide operations 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 California, and 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, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters.



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Terrorist attacks, threats of further attacks, acts of war and threats of war may negatively impact all aspects of our
operations, revenues, costs and stock price.

Terrorist acts, conflicts or wars, as well as future events occurring in response or
connection to them, including future terrorist attacks against U.S. targets, rumors or threats of war, actual conflicts involving the U.S. or its allies (such as the war in Iraq), conflict between China and Taiwan, or trade disruptions impacting our
domestic or foreign suppliers or our customers, may impact our operations and may, among other things, cause delays or losses in the delivery of wafers or other products to us and decreased sales of our products. More generally, these events have
affected, and are expected to continue to affect, the general economy and customer demand for products sold by our customers. Any of these occurrences could have a significant impact on our operating results, revenues and costs, which in turn may
result in increased volatility in our common stock price and a decline in the price of our common stock.



|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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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: June 5, 2007 |  |  |  | /s/ Scott D. Howarth                        
|                    |  |  |  | Scott D. Howarth                            
|                    |  |  |  | Chief Financial Officer                     
|                    |  |  |  | (Principal Financial and Accounting Officer)



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