##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

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

For the quarterly period ended December 31, 2009.

OR



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

For the transition period from  to

Commission file number 000-23084.





Integrated Silicon Solution, Inc.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 77-0199971                          
|(State or other jurisdiction of 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  x    No   ̈

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

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



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

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

The number of outstanding shares of the registrants Common Stock as of February 5, 2010 was 25,099,026.









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##### Table of Contents

TABLE OF CONTENTS



|           |  |                                                                                                           |  |   
|---------- |  | --------------------------------------------------------------------------------------------------------- |  | --
|PART I     |  | Financial Information                                                                                     |  |   
|           |  |                                                                                                          
|Item 1.    |  | Financial Statements                                                                                      |  |   
|           |  |                                                                                                          
|           |  | Condensed Consolidated Statements of Operations Three months ended December 31, 2009 and 2008 (Unaudited) |  | 1 
|           |  |                                                                                                          
|           |  | Condensed Consolidated Balance Sheets December 31, 2009 (Unaudited) and September 30, 2009                |  | 2 
|           |  |                                                                                                          
|           |  | Condensed Consolidated Statements of Cash Flows Three months ended December 31, 2009 and 2008 (Unaudited) |  | 3 
|           |  |                                                                                                          
|           |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                          |  | 4 
|           |  |                                                                                                          
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  | 15
|           |  |                                                                                                          
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                |  | 22
|           |  |                                                                                                          
|Item 4.    |  | Controls and Procedures                                                                                   |  | 22
|           |  |                                                                                                          
|PART II    |  | Other Information                                                                                         |  |   
|           |  |                                                                                                          
|Item 1.    |  | Legal Proceedings                                                                                         |  | 23
|           |  |                                                                                                          
|Item 1A.   |  | Risk Factors                                                                                              |  | 24
|           |  |                                                                                                          
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                               |  | 33
|           |  |                                                                                                          
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                       |  | 33
|           |  |                                                                                                          
|Item 6.    |  | Exhibits                                                                                                  |  | 34
|           | 
|Signatures |  | 35                                                                                                       

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



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##### Table of Contents

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

Integrated Silicon Solution, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)



|                                                                 |  |                                |        |   |      |    |        |  
|---------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | -- | ------ | -
|                                                                 |  | Three Months EndedDecember 31, |       
|                                                                 |  | 2009                           |        |   | 2008 |   
|Net sales                                                        |  | $                              | 50,555 |   |      | $  | 37,665 |  
|Cost of sales                                                    |  |                                | 30,434 |   |      |    | 29,932 |  
|                                                                 |  |                                |        |   |      |    |        |  
|Gross profit                                                     |  |                                | 20,121 |   |      |    | 7,733  |  
|                                                                 |  |                                |        |   |      |    |        |  
|Operating expenses:                                              |  |                                |        |   |      |    |        |  
|Research and development                                         |  |                                | 4,989  |   |      |    | 5,208  |  
|Selling, general and administrative                              |  |                                | 7,626  |   |      |    | 7,301  |  
|                                                                 |  |                                |        |   |      |    |        |  
|Total operating expenses                                         |  |                                | 12,615 |   |      |    | 12,509 |  
|                                                                 |  |                                |        |   |      |    |        |  
|Operating income (loss)                                          |  |                                | 7,506  |   |      |    | (4,776 | )
|Interest and other income, net                                   |  |                                | 336    |   |      |    | 582    |  
|                                                                 |  |                                |        |   |      |    |        |  
|Income (loss) before income taxes                                |  |                                | 7,842  |   |      |    | (4,194 | )
|Provision (benefit) for income taxes                             |  |                                | 644    |   |      |    | (60    | )
|                                                                 |  |                                |        |   |      |    |        |  
|Consolidated net income (loss)                                   |  |                                | 7,198  |   |      |    | (4,134 | )
|                                                                 |  |                               
|Less: Net (income) loss attributable to noncontrolling interests |  |                                | (2     | ) |      |    | 64     |  
|                                                                 |  |                                |        |   |      |    |        |  
|Net income (loss)                                                |  | $                              | 7,196  |   |      | $  | (4,070 | )
|                                                                 |  |                                |        |   |      |    |        |  
|                                                                 |  |                               
|Basic net income (loss) per share                                |  | $                              | 0.29   |   |      | ($ | 0.16   | )
|                                                                 |  |                                |        |   |      |    |        |  
|Shares used in basic per share calculation                       |  |                                | 25,013 |   |      |    | 25,603 |  
|                                                                 |  |                                |        |   |      |    |        |  
|                                                                 |  |                               
|Diluted net income (loss) per share                              |  | $                              | 0.28   |   |      | ($ | 0.16   | )
|                                                                 |  |                                |        |   |      |    |        |  
|Shares used in diluted per share calculation                     |  |                                | 25,708 |   |      |    | 25,603 |  
|                                                                 |  |                                |        |   |      |    |        |  

See accompanying notes to condensed consolidated financial statements.



1



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Integrated Silicon Solution, Inc.

Condensed Consolidated Balance Sheets

(In thousands)



|                                                    |  |                  |          |   |                   |   |          |  
|--------------------------------------------------- |  | ---------------- | -------- | - | ----------------- | - | -------- | -
|                                                    |  | December 31,2009 |          |   | September 30,2009 |  
|                                                    |  | (unaudited)      |          |   | (1)               |  
|ASSETS                                              | 
|Current assets:                                     |  |                  |          |   |                   |   |          |  
|Cash and cash equivalents                           |  | $                | 55,993   |   |                   | $ | 54,944   |  
|Short-term investments                              |  |                  | 29,162   |   |                   |   | 28,542   |  
|Accounts receivable, net                            |  |                  | 28,860   |   |                   |   | 26,501   |  
|Inventories                                         |  |                  | 27,617   |   |                   |   | 19,275   |  
|Other current assets                                |  |                  | 3,443    |   |                   |   | 2,922    |  
|                                                    |  |                  |          |   |                   |   |          |  
|Total current assets                                |  |                  | 145,075  |   |                   |   | 132,184  |  
|Property, equipment and leasehold improvements, net |  |                  | 23,068   |   |                   |   | 23,218   |  
|Long-term investments                               |  |                  | 1,927    |   |                   |   | 1,408    |  
|Purchased intangible assets, net                    |  |                  | 2,045    |   |                   |   | 2,313    |  
|Goodwill                                            |  |                  | 1,251    |   |                   |   | 1,251    |  
|Other assets                                        |  |                  | 1,336    |   |                   |   | 1,556    |  
|                                                    |  |                  |          |   |                   |   |          |  
|Total assets                                        |  | $                | 174,702  |   |                   | $ | 161,930  |  
|                                                    |  |                  |          |   |                   |   |          |  
|                                                    |  |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                |  |                  |          |   |                   |  
|Current liabilities:                                |  |                  |          |   |                   |   |          |  
|Accounts payable                                    |  | $                | 30,329   |   |                   | $ | 26,825   |  
|Accrued compensation and benefits                   |  |                  | 4,201    |   |                   |   | 4,364    |  
|Accrued expenses                                    |  |                  | 6,703    |   |                   |   | 5,368    |  
|                                                    |  |                  |          |   |                   |   |          |  
|Total current liabilities                           |  |                  | 41,233   |   |                   |   | 36,557   |  
|                                                    |  |                 
|Other long-term liabilities                         |  |                  | 715      |   |                   |   | 797      |  
|                                                    |  |                  |          |   |                   |   |          |  
|Total liabilities                                   |  |                  | 41,948   |   |                   |   | 37,354   |  
|                                                    |  |                 
|Commitments and contingencies (See Note 12)         |  |                  |          |   |                   |   |          |  
|                                                    |  |                 
|Stockholders equity:                               |  |                  |          |   |                   |   |          |  
|Common stock                                        |  |                  | 3        |   |                   |   | 2        |  
|Additional paid-in capital                          |  |                  | 309,146  |   |                   |   | 309,649  |  
|Accumulated deficit                                 |  |                  | (178,285 | ) |                   |   | (185,481 | )
|Accumulated other comprehensive income (loss)       |  |                  | 76       |   |                   |   | (1,344   | )
|Noncontrolling interest                             |  |                  | 1,814    |   |                   |   | 1,750    |  
|                                                    |  |                  |          |   |                   |   |          |  
|Total stockholders equity                          |  |                  | 132,754  |   |                   |   | 124,576  |  
|                                                    |  |                  |          |   |                   |   |          |  
|Total liabilities and stockholders equity          |  | $                | 174,702  |   |                   | $ | 161,930  |  
|                                                    |  |                  |          |   |                   |   |          |  



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

See accompanying notes to condensed consolidated financial statements.



2



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Integrated Silicon Solution, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)



|                                                                                         |  |                                |        |   |      |   |        |  
|---------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                         |  | Three Months EndedDecember 31, |       
|                                                                                         |  | 2009                           |        |   | 2008 |  
|Cash flows from operating activities                                                     |  |                                |        |   |      |   |        |  
|Net income (loss)                                                                        |  | $                              | 7,196  |   |      | $ | (4,070 | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                |        |   |      |   |        |  
|Depreciation and amortization                                                            |  |                                | 801    |   |      |   | 999    |  
|Stock-based compensation                                                                 |  |                                | 552    |   |      |   | 916    |  
|Amortization of intangibles                                                              |  |                                | 268    |   |      |   | 206    |  
|Net foreign currency transaction (gains) losses                                          |  |                                | (27    | ) |      |   | (99    | )
|Other non-cash items                                                                     |  |                                | 57     |   |      |   | (19    | )
|Net income (loss) attributable to noncontrolling interests                               |  |                                | 2      |   |      |   | (64    | )
|Net effect of changes in current and other assets and current liabilities                |  |                                | (6,308 | ) |      |   | 2,224  |  
|                                                                                         |  |                                |        |   |      |   |        |  
|Net cash provided by operating activities                                                |  |                                | 2,541  |   |      |   | 93     |  
|                                                                                         |  |                               
|Cash flows from investing activities                                                     |  |                                |        |   |      |   |        |  
|Acquisition of property, equipment and leasehold improvements                            |  |                                | (594   | ) |      |   | (918   | )
|Proceeds from sale of assets                                                             |  |                                |       |   |      |   | 3      |  
|Proceeds from noncontrolling shareholders of consolidated subsidiary                     |  |                                |       |   |      |   | 304    |  
|Purchases of available-for-sale securities                                               |  |                                |       |   |      |   | (5,521 | )
|Proceeds from sales of available-for-sale securities                                     |  |                                |       |   |      |   | 7,330  |  
|                                                                                         |  |                                |        |   |      |   |        |  
|Net cash provided by (used in) investing activities                                      |  |                                | (594   | ) |      |   | 1,198  |  
|                                                                                         |  |                               
|Cash flows from financing activities                                                     |  |                                |        |   |      |   |        |  
|Repurchases and retirements of common stock                                              |  |                                | (1,097 | ) |      |   | (2,964 | )
|Proceeds from issuance of common stock                                                   |  |                                | 33     |   |      |   |       |  
|                                                                                         |  |                                |        |   |      |   |        |  
|Net cash used in financing activities                                                    |  |                                | (1,064 | ) |      |   | (2,964 | )
|                                                                                         |  |                               
|Effect of exchange rate changes on cash and cash equivalents                             |  |                                | 166    |   |      |   | (227   | )
|                                                                                         |  |                                |        |   |      |   |        |  
|                                                                                         |  |                               
|Net increase (decrease) in cash and cash equivalents                                     |  |                                | 1,049  |   |      |   | (1,900 | )
|Cash and cash equivalents at beginning of period                                         |  |                                | 54,944 |   |      |   | 42,175 |  
|                                                                                         |  |                                |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                               |  | $                              | 55,993 |   |      | $ | 40,275 |  
|                                                                                         |  |                                |        |   |      |   |        |  

See accompanying notes to condensed consolidated financial statements.



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

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

The Companys operating results for the three months ended December 31, 2009 are not necessarily indicative of the results that
may be expected for the fiscal year ending September 30, 2010 or for any other period. The financial statements included herein should be read in conjunction with the Companys Annual Report on Form 10-K for the fiscal year ended
September 30, 2009. The Company has evaluated subsequent events through February 12, 2010, the date the financial statements were issued.

2. Use of Estimates

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

3. Impact of Recently Issued Accounting Standards

Accounting
Pronouncements

In January 2010, the FASB amended the disclosure requirements for the fair value measurements for
recurring and nonrecurring non-financial assets and liabilities. The guidance requires new disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3
measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The new disclosures and clarifications of existing disclosures are effective
for the Companys second quarter of fiscal year 2010, except for the disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements, which are effective for the Companys first quarter of fiscal year 2012.
The Company does not anticipate that the additional disclosure requirements will have a material impact on its consolidated financial statements.

Recently Adopted Accounting Pronouncements

During the first three
months of fiscal 2010, the Company adopted the following accounting standards, neither of which had a material effect on its consolidated results of operations during such period or financial condition at the end of such period:

Business Combinations

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



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



Noncontrolling Interest (Minority Interest)

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

4. Fair Value Measurements

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



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



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



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

As of December 31, 2009, the Companys financial assets utilizing Level 1 inputs included short-term and long-term investment securities traded on active securities exchanges. The Company did
not have any financial assets utilizing Level 2 inputs. Financial assets utilizing Level 3 inputs included short-term investments in auction rate securities consisting of securities collateralized by student loans, and a related put option.

At December 31, 2009, the Companys investment portfolio included $20.0 million par value ($18.0 million fair
value) of AAA rated investments in auction rate securities (ARS), for which all of the underlying assets are student loans backed by the federal government under the Federal Family Education Loan Program. The Company continued to earn interest on
all of its auction rate securities as of December 31, 2009. Due to adverse events in the credit markets, the ARS held by the Company have experienced failed auctions since February 2008. As such, quoted prices in active markets are not readily
available. The Company used a discounted cash flow model to estimate the fair value of its ARS as of December 31, 2009. The assumptions used in preparing the discounted cash flow model include estimates for interest rate, liquidity risk
premium, credit quality, and timing of cash flows. The Company concluded that the pricing model, given the lack of available market pricing, provided a reasonable basis for determining fair value of the ARS as of December 31, 2009.

In November 2008, the Company entered into an agreement (the Agreement) with UBS AG (UBS), the investment firm that sold the
ARS to the Company. The Agreement covers all of the Companys ARS as of December 31, 2009. By entering into the Agreement, the Company (1) received the right (Put Option) to sell these ARS back to UBS at par, at its sole
discretion, anytime during the period from June 30, 2010 through July 2, 2012, and (2) gave UBS the right to purchase these ARS securities or sell them on the Companys behalf at par anytime after the execution of the Agreement
through July 2, 2012. The Company elected to measure the Put Option at fair value with gains and losses recognized as a component of net income. At the same time, the Company transferred these ARS from available-for-sale to trading
investment securities. The Company valued the Put Option using the Black-Scholes model. The Put Option will continue to be measured at fair value utilizing Level 3 inputs until the earlier of its maturity or exercise date.



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



The following table represents the Companys fair value hierarchy for financial
assets measured at fair value on a recurring basis as of December 31, 2009:



|                                                                       |  |                                                            |        |                                        |   |        |  |   |       
|---------------------------------------------------------------------- |  | ---------------------------------------------------------- | ------ | -------------------------------------- | - | ------ |  | - | ------
|                                                                       |  | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) |        | SignificantUnobservableInputs(Level 3) |   | Total 
|                                                                       |  |                                                            |        | (in thousands)                         |   |       
|Money market instruments (1)                                           |  | $                                                          | 12,120 |                                        | $ |       |  | $ | 12,120
|Auction rate securities (2)(4)                                         |  |                                                            |       |                                        |   | 18,040 |  |   | 18,040
|Auction rate securities Put Option (2)(4)                              |  |                                                            |       |                                        |   | 1,910  |  |   | 1,910 
|Certificates of deposit (1)(2)                                         |  |                                                            | 9,991  |                                        |   |       |  |   | 9,991 
|Mutual funds (2)                                                       |  |                                                            | 2,814  |                                        |   |       |  |   | 2,814 
|Ralink common stock (2)                                                |  |                                                            | 2,714  |                                        |   |       |  |   | 2,714 
|Semiconductor Manufacturing International Corp.(SMIC) common stock (3) |  |                                                            | 1,927  |                                        |   |       |  |   | 1,927 
|                                                                       |  |                                                            |        |                                        |   |        |  |   |       
|Total                                                                  |  | $                                                          | 29,566 |                                        | $ | 19,950 |  | $ | 49,516
|                                                                       |  |                                                            |        |                                        |   |        |  |   |       



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

|(2) | Included in short-term investments
|--- | ----------------------------------

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

|(4) | Classified as trading securities
|--- | --------------------------------

The following table presents the valuation of the Companys financial assets that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in the FASB guidance for the three months
ended December 31, 2009:



|                                             |  |                                         |        |  
|-------------------------------------------- |  | --------------------------------------- | ------ | -
|                                             |  | SignificantUnobservableInputs (Level 3) |       
|                                             |  | (in thousands)                          |       
|Balance on September 30, 2009                |  | $                                       | 19,950 |  
|Gains or losses included in earnings:        |  |                                         |        |  
|Unrealized loss from auction rate securities |  |                                         | (2     | )
|Unrealized gain from Put Option              |  |                                         | 2      |  
|                                             |  |                                         |        |  
|Balance on December 31, 2009                 |  | $                                       | 19,950 |  
|                                             |  |                                         |        |  

As of December 31, 2009, the Company did not have any liabilities or non-financial assets that are
measured on a fair value basis on a recurring basis.



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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



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



|                                                    |  |               |         |   |                             |   |                              |  |   |           |   |  |   |         |  
|--------------------------------------------------- |  | ------------- | ------- | - | --------------------------- | - | ---------------------------- |  | - | --------- | - |  | - | ------- | -
|December 31, 2009                                   |  | AmortizedCost |         |   | GrossUnrealizedHoldingGains |   | GrossUnrealizedHoldingLosses |  |   | FairValue |  
|                                                    |  |               |         |   | (In thousands)              |   |                              |  |  
|Money market instruments                            |  | $             | 12,120  |   |                             | $ |                             |  | $ |          |   |  | $ | 12,120  |  
|Certificates of deposit                             |  |               | 9,991   |   |                             |   |                             |  |   |          |   |  |   | 9,991   |  
|Mutual funds                                        |  |               | 2,810   |   |                             |   | 4                            |  |   |          |   |  |   | 2,814   |  
|SMIC common stock                                   |  |               | 3,426   |   |                             |   |                             |  |   | (1,499    | ) |  |   | 1,927   |  
|Ralink common stock                                 |  |               | 459     |   |                             |   | 2,255                        |  |   |          |   |  |   | 2,714   |  
|                                                    |  |               |         |   |                             |   |                              |  |   |           |   |  |   |         |  
|Total                                               |  |               | 28,806  |   |                             |   | 2,259                        |  |   | (1,499    | ) |  |   | 29,566  |  
|Less: Amounts included in cash and cash equivalents |  |               | (18,427 | ) |                             |   |                             |  |   |          |   |  |   | (18,427 | )
|                                                    |  |               |         |   |                             |   |                              |  |   |           |   |  |   |         |  
|                                                    |  | $             | 10,379  |   |                             | $ | 2,259                        |  | $ | (1,499    | ) |  | $ | 11,139  |  
|                                                    |  |               |         |   |                             |   |                              |  |   |           |   |  |   |         |  



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



7



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



5. Stock-based Compensation

Stock-Based Benefit Plans

The Company grants stock-based compensation awards under its 2007 Incentive Compensation Plan (the 2007 Plan) which permits the grant of stock options, stock appreciation rights, restricted
stock awards, restricted stock units (RSUs), performance shares and performance units. The Company has outstanding grants under prior plans, though no further grants can be made under these prior plans. At December 31, 2009,
2,129,000 shares were available for future grant under the 2007 Plan. Options generally vest ratably over a four-year period with a 6-month or 1-year cliff vest and then vesting ratably over the remaining period. Options granted prior to
October 1, 2005 expire ten years after the date of grant; options granted after October 1, 2005 expire seven years after the date of the grant. RSUs generally vest annually over a three-year period based upon continued employment with the
Company.

In addition, the Company has an Employee Stock Purchase Plan (ESPP) that 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, 2009, 1,282,000 shares were available for future issuance under the ESPP.

Stock-Based Compensation

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



|                                       |  |                                |     |      |   |    
|-------------------------------------- |  | ------------------------------ | --- | ---- | - | ---
|                                       |  | Three Months EndedDecember 31,
|                                       |  | 2009                           |     | 2008
|                                       |  | (In thousands)                
|Stock-based compensation               |  |                                |     |      |   |    
|Cost of sales                          |  | $                              | 28  |      | $ | 56 
|Research and development               |  |                                | 193 |      |   | 385
|Selling, general and administrative    |  |                                | 331 |      |   | 475
|                                       |  |                                |     |      |   |    
|Total stock-based compensation         |  | $                              | 552 |      | $ | 916
|Tax effect on stock-based compensation |  |                                |    |      |   |   
|                                       |  |                                |     |      |   |    
|Net effect on net income (loss)        |  | $                              | 552 |      | $ | 916
|                                       |  |                                |     |      |   |    

As of December 31, 2009, there was approximately
$4.3 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 2.84 years. Future stock option grants will add to this total
whereas quarterly amortization and the vesting of the existing stock option grants will reduce this total. The Company also records compensation expense for its ESPP for the difference between the purchase price and the fair market value on the date
of purchase.



8



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



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



|                                      |  |                                    |      |   |                                    |   |      |  
|------------------------------------- |  | ---------------------------------- | ---- | - | ---------------------------------- | - | ---- | -
|                                      |  | Three Months EndedDecember 31,2009 |      |   | Three Months EndedDecember 31,2008 |  
|Weighted-average fair value of grants |  | $                                  | 1.83 |   |                                    | $ | 0.73 |  
|Expected term in years                |  |                                    | 4.54 |   |                                    |   | 4.54 |  
|Volatility                            |  |                                    | 48   | % |                                    |   | 41   | %
|Risk-free interest rate               |  |                                    | 2.23 | % |                                    |   | 2.30 | %
|Dividend yield                        |  |                                    | 0.00 | % |                                    |   | 0.00 | %

A summary of the
Companys stock option activity and related information for the three months ended December 31, 2009 follows (stock option amounts and aggregate intrinsic value are presented in thousands):



|                                                    |  |                 |   |  |                                |      |                                           |      |                          |   |      
|--------------------------------------------------- |  | --------------- | - |  | ------------------------------ | ---- | ----------------------------------------- | ---- | ------------------------ | - | -----
|                                                    |  | Number ofShares |   |  | Weighted-AverageExercise
Price |      | Weighted-AverageRemainingContractual Term |      | AggregateIntrinsic Value
|Outstanding at September 30, 2009                   |  | 4,801           |   |  | $                              | 4.97 |                                           |      |                          |   |      
|Granted                                             |  | 960             |   |  | $                              | 4.34 |                                           |      |                          |   |      
|Exercised                                           |  | (13             | ) |  | $                              | 2.52 |                                           |      |                          | $ | 27   
|Cancelled/Expired                                   |  | (217            | ) |  | $                              | 4.84 |                                           |      |                          |   |      
|                                                    |  |                 |   |  |                                |      |                                           |      |                          |   |      
|Outstanding at December 31, 2009                    |  | 5,531           |   |  | $                              | 4.87 |                                           | 4.87 |                          | $ | 8,075
|                                                    |  |                 |   |  |                                |      |                                           |      |                          |   |      
|Exercisable at December 31, 2009                    |  | 2,863           |   |  | $                              | 6.00 |                                           | 3.91 |                          | $ | 2,618
|Vested and expected to vest after December 31, 2009 |  | 5,243           |   |  | $                              | 4.94 |                                           | 4.79 |                          | $ | 7,505

A summary of the
Companys RSU activity and related information for the three months ended December 31, 2009 under the 2007 Plan follows (RSU amounts and aggregate intrinsic value are presented in thousands):



|                                  |  |                 |   |  |                                      |      |                          |   |    
|--------------------------------- |  | --------------- | - |  | ------------------------------------ | ---- | ------------------------ | - | ---
|                                  |  | Number ofShares |   |  | Weighted-AverageGrant DateFair Value |      | AggregateIntrinsic Value
|Outstanding at September 30, 2009 |  | 66              |   |  | $                                    | 5.60 |                          |   |    
|Granted                           |  |                |   |  | $                                    |     |                          |   |    
|Vested                            |  |                |   |  | $                                    |     |                          | $ |   
|Forfeited                         |  | (7              | ) |  | $                                    | 5.60 |                          |   |    
|                                  |  |                 |   |  |                                      |      |                          |   |    
|Outstanding at December 31, 2009  |  | 59              |   |  | $                                    | 5.60 |                          | $ | 336
|                                  |  |                 |   |  |                                      |      |                          |   |    



9



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



6. Concentrations

In each of the three months ended December 31, 2009 and December 31, 2008, revenue recognized for one distributor, accounted for 12% of net sales.

7. Inventories

The
following is a summary of inventories by major category:



|                     |  |                  |        |                   |   |       
|-------------------- |  | ---------------- | ------ | ----------------- | - | ------
|                     |  | December 31,2009 |        | September 30,2009
|                     |  | (In thousands)  
|Purchased components |  | $                | 9,544  |                   | $ | 5,667 
|Work-in-process      |  |                  | 2,921  |                   |   | 1,106 
|Finished goods       |  |                  | 15,152 |                   |   | 12,502
|                     |  |                  |        |                   |   |       
|                     |  | $                | 27,617 |                   | $ | 19,275
|                     |  |                  |        |                   |   |       

During the three months ended December 31, 2009
and 2008, the Company recorded inventory write-downs of $0.9 million and $4.3 million, respectively. The inventory write-downs were predominately for lower of cost or market and excess and obsolescence issues on certain of the Companys
products.

8. Comprehensive Income (Loss)

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

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



|                                                |  |                                |       |   |      |   |        |  
|----------------------------------------------- |  | ------------------------------ | ----- | - | ---- | - | ------ | -
|                                                |  | Three Months EndedDecember 31, |      
|                                                |  | 2009                           |       |   | 2008 |  
|                                                |  | (In thousands)                 |      
|Net income (loss)                               |  | $                              | 7,196 |   |      | $ | (4,070 | )
|Other comprehensive income (loss), net of tax:  |  |                                |       |   |      |   |        |  
|Change in cumulative translation adjustment     |  |                                | 329   |   |      |   | (1,239 | )
|Change in unrealized gain (loss) on investments |  |                                | 1,103 |   |      |   | 1,235  |  
|Change in retirement plan transition obligation |  |                                | (12   | ) |      |   | (38    | )
|                                                |  |                                |       |   |      |   |        |  
|Comprehensive income (loss)                     |  | $                              | 8,616 |   |      | $ | (4,112 | )
|                                                |  |                                |       |   |      |   |        |  



10



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



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



|                                                                        |  |                  |        |   |                   |   |        |  
|----------------------------------------------------------------------- |  | ---------------- | ------ | - | ----------------- | - | ------ | -
|                                                                        |  | December 31,2009 |        |   | September 30,2009 |  
|                                                                        |  | (In thousands)   |       
|Accumulated foreign currency translation adjustments                    |  | $                | (1,244 | ) |                   | $ | (1,573 | )
|Accumulated net unrealized gain on Ralink                               |  |                  | 2,255  |   |                   |   | 1,673  |  
|Accumulated net unrealized loss on SMIC                                 |  |                  | (1,499 | ) |                   |   | (2,018 | )
|Accumulated net unrealized gain on other available-for-sale investments |  |                  | 4      |   |                   |   | 2      |  
|Accumulated net retirement plan transition obligation                   |  |                  | 396    |   |                   |   | 408    |  
|Accumulated net retirement plan actuarial losses                        |  |                  | 164    |   |                   |   | 164    |  
|                                                                        |  |                  |        |   |                   |   |        |  
|Total accumulated other comprehensive income (loss)                     |  | $                | 76     |   |                   | $ | (1,344 | )
|                                                                        |  |                  |        |   |                   |   |        |  

9. Income Taxes

As of December 31, 2009, the Company had approximately $140,000 of unrecognized tax positions that would impact its effective tax rate. In the three months ended December 31, 2009, there was no
change to the amount of the unrecognized tax benefits.

The Company recorded an income tax expense of $644,000 for the three
months ended December 31, 2009. The income tax expense is comprised of a federal tax refund, state income tax, foreign alternative minimum tax and foreign withholding taxes. The Company recorded $769,000 for foreign alternative minimum tax for
the periods ending September 30, 2007 and 2008 and current period state income tax of $85,000. This tax expense is reduced for a refund of previously paid Federal alternative minimum tax of $211,000. On November 6, 2009, the Worker,
Homeownership, and Business Assistance Act of 2009 was signed into law. One of the provisions in the Act allows a taxpayer, at the taxpayers election, to carryback either its 2008, 2009 or 2010 net operating losses 3, 4, or 5 years whereas
generally, net operating losses can only be carried back up to 2 years.

The Company recorded an income tax benefit of $60,000
for the three months ended December 31, 2008. The income tax benefit recorded for the period ended December 31, 2008 is primarily a result of the Housing and Economic Recovery Act of 2008. Under this Act, corporations otherwise
eligible to claim first year bonus depreciation for assets placed in service between April 1, 2008 and December 31, 2008 may elect to claim a refund of its previously generated tax credits in lieu of claiming the bonus
depreciation. The benefit recorded for the period represents this refund claim partially offset by state minimum taxes.



11



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



10. Per Share Data

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



|                                                             |  |                                |        |      |   |        |  
|------------------------------------------------------------ |  | ------------------------------ | ------ | ---- | - | ------ | -
|                                                             |  | Three Months EndedDecember 31, |       
|                                                             |  | 2009                           |        | 2008 |  
|Numerator for basic and diluted net income (loss) per share: |  |                                |        |      |   |        |  
|Net income (loss)                                            |  | $                              | 7,196  |      | $ | (4,070 | )
|                                                             |  |                                |        |      |   |        |  
|Denominator for basic net income (loss) per share:           |  |                                |        |      |   |        |  
|Weighted average common shares outstanding                   |  |                                | 25,013 |      |   | 25,603 |  
|Dilutive effect of stock options and awards                  |  |                                | 695    |      |   |       |  
|                                                             |  |                                |        |      |   |        |  
|Denominator for diluted net income (loss) per share          |  |                                | 25,708 |      |   | 25,603 |  
|                                                             |  |                                |        |      |   |        |  
|Basic net income (loss) per share                            |  | $                              | 0.29   |      | $ | (0.16  | )
|                                                             |  |                                |        |      |   |        |  
|Diluted net income (loss) per share                          |  | $                              | 0.28   |      | $ | (0.16  | )
|                                                             |  |                                |        |      |   |        |  

For the three months ended December 31, 2009 and December 31, 2008, 3,329,000 and 6,443,000 stock
options and awards were excluded from diluted earnings per share by the application of the treasury stock method.

11. Common Stock
Repurchase Program

The Company paid approximately $1.1 million and $3.0 million in connection with the repurchase of
244,941 shares and 1,364,536 shares of its common stock during the three months ended December 31, 2009 and December 31, 2008, respectively. As of December 31, 2009, the Company had repurchased and retired an aggregate of 13,679,711
shares of common stock at a cost of approximately $84.5 million since September 2007. As of December 31, 2009, $3.8 million remained available under the existing repurchase authorization.

12. Commitments and Contingencies

Patents and Licenses

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



12



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



Legal Proceedings

SRAM Antitrust Litigation

Thirty-three purported class action lawsuits were filed by U.S. Direct-Purchaser and U.S. Indirect-Purchaser Plaintiffs against the Company and other SRAM suppliers in various U.S. federal courts alleging
violations of the Sherman Act, violations of state unfair competition laws, and unjust enrichment relating to the sale and pricing of SRAM products. The U.S. lawsuits have been consolidated in a single federal court for coordinated pre-trial
proceedings. The U.S. lawsuits seek treble damages for the alleged damages sustained by purported class members, in addition to restitution, costs and attorneys fees, as well as an injunction against the allegedly unlawful conduct. As of
August 30, 2007, the Company was voluntarily dismissed from all lawsuits brought by the U.S. Indirect-Purchaser Plaintiffs pursuant to a Tolling Agreement between the Company and the U.S. Indirect-Purchaser Plaintiffs. The U.S.
Indirect-Purchaser Plaintiffs agreed not to name the Company as a defendant unless the Tolling Agreement is terminated according to terms specified in that agreement. On January 9, 2008, the Company was voluntarily dismissed without prejudice
from one of the lawsuits brought by the U.S. Direct-Purchaser Plaintiffs. The Company remains a defendant in three lawsuits brought by the U.S. Direct-Purchaser Plaintiffs. On September 29, 2008, the court certified a class of direct
purchasers. On October 5, 2009, the Company entered into a settlement agreement with the U.S. Direct-Purchaser Plaintiffs that remains subject to approval by the court before it becomes final. As part of the agreement, the Company will receive
a release for all Direct-Purchaser SRAM claims and does not admit any wrongdoing or liability.

Other Legal Proceedings

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

Commitments to Wafer Fabrication Facilities and Contract Manufacturers

The Company issues purchase orders for wafers to various 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, 2009, the Company had approximately $21.9
million of purchase orders for which the related wafers had been entered into wafer work-in-process (i.e., manufacturing had begun).



13



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##### Table of Contents

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



13. Geographic and Segment Information

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



|                             |  |                                |        |      |   |       
|---------------------------- |  | ------------------------------ | ------ | ---- | - | ------
|                             |  | Three Months EndedDecember 31,
|                             |  | 2009                           |        | 2008
|                             |  | (In thousands)                
|Net sales                    |  |                                |        |      |   |       
|United States                |  | $                              | 8,164  |      | $ | 7,896 
|China                        |  |                                | 3,138  |      |   | 1,418 
|Hong Kong                    |  |                                | 13,796 |      |   | 10,433
|Taiwan                       |  |                                | 6,786  |      |   | 4,420 
|Japan                        |  |                                | 2,384  |      |   | 2,410 
|Korea                        |  |                                | 5,019  |      |   | 2,133 
|Other Asia Pacific countries |  |                                | 2,990  |      |   | 2,375 
|Europe                       |  |                                | 7,939  |      |   | 6,202 
|Other                        |  |                                | 339    |      |   | 378   
|                             |  |                                |        |      |   |       
|Total net sales              |  | $                              | 50,555 |      | $ | 37,665
|                             |  |                                |        |      |   |       



|                  |  |                  |        |                   |   |       
|----------------- |  | ---------------- | ------ | ----------------- | - | ------
|                  |  | December 31,2009 |        | September 30,2009
|                  |  | (In thousands)  
|Long-lived assets |  |                  |        |                   |   |       
|United States     |  | $                | 2,594  |                   | $ | 2,857 
|Hong Kong         |  |                  | 27     |                   |   | 30    
|China             |  |                  | 833    |                   |   | 865   
|Taiwan            |  |                  | 19,614 |                   |   | 19,466
|                  |  |                  |        |                   |   |       
|                  |  | $                | 23,068 |                   | $ | 23,218
|                  |  |                  |        |                   |   |       



14



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##### Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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



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

Overview

We are a fabless semiconductor company that designs and markets high performance integrated circuits for the following key markets: (i) digital consumer electronics, (ii) networking and telecommunications, (iii) mobile
communications, (iv) automotive electronics and (v) industrial applications. Our primary products are high speed and low power SRAM and low and medium density DRAM in both package and Known Good Die (KGD) form. In the three months ended
December 31, 2009 and in fiscal 2009, approximately 88% and 86%, respectively, of our revenue was derived from our SRAM and DRAM products. Through our Giantec business unit, we also design and market application specific standard products
(ASSP) primarily EEPROMs and SmartCards focused on our key markets. We were founded in October 1988 and initially focused on high performance, low cost SRAM for PC cache memory applications. In 1997, we introduced our first low and medium
density DRAM products. Prior to fiscal 2003, our SRAM product family generated a majority of our revenue. However, sales of our low and medium density DRAM products have represented a majority of our net sales in each year since fiscal 2003.

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

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

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



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

We market and sell our products in Asia, the U.S.,
Europe and other locations through our direct sales force, distributors and sales representatives. The percentage of our sales shipped outside the U.S. was approximately 84%, 79%, 85%, 84% and 82% in the first quarter of fiscal 2010, the first
quarter of fiscal 2009, and in fiscal 2009, fiscal 2008 and fiscal 2007, respectively. We measure sales location by the shipping destination. We anticipate that sales to international customers will continue to represent a significant percentage of
our net sales. The percentages of our net sales by region are set forth in the following table:



|       |  |                                |   |  |                                 |   |  |      |   |  |      |   |  |      |  
|------ |  | ------------------------------ | - |  | ------------------------------- | - |  | ---- | - |  | ---- | - |  | ---- | -
|       |  | Three Months EndedDecember 31, |   |  | Fiscal Years EndedSeptember 30, |  
|       |  | 2009                           |   |  | 2008                            |   |  | 2009 |   |  | 2008 |   |  | 2007 |  
|Asia   |  | 67                             | % |  | 62                              | % |  | 70   | % |  | 66   | % |  | 67   | %
|Europe |  | 16                             |   |  | 16                              |   |  | 14   |   |  | 17   |   |  | 15   |  
|U.S.   |  | 16                             |   |  | 21                              |   |  | 15   |   |  | 16   |   |  | 18   |  
|Other  |  | 1                              |   |  | 1                               |   |  | 1    |   |  | 1    |   |  |     |  
|       |  |                                |   |  |                                 |   |  |      |   |  |      |   |  |      |  
|Total  |  | 100                            | % |  | 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.

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

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



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Due to the continued uncertain economic conditions, our current or potential customers may
delay or reduce purchases of our products, which would adversely affect our revenues and harm our business and financial results. In addition, the continued uncertainty in the financial markets may have an adverse effect on the
U.S. and world economies, which may negatively impact the spending patterns of businesses including our current and potential customers. There can be no assurances that the government responses to the disruptions in the financial
markets in late 2008 and 2009 will restore confidence in the U.S. and global markets. We expect our business to be adversely impacted by any further downturn in the U.S. or global economies. In the past, industry downturns have
resulted in reduced demand and declining average selling prices for our products which adversely affected our business. We expect to continue to experience these adverse business conditions in the event of further downturns. The
uncertainty regarding the U.S. and global economies has also made it more difficult for us to forecast and manage our business. Although we are continuing actions to control our expenses and inventory levels, there can be no assurance that
these actions will be sufficient to address the impact of any further economic slowdown and allow us to meet our operating objectives.

Critical Accounting Policies

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

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

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

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



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

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

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

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

Accounting Changes and Recent Accounting Pronouncements

For a description of accounting changes and recent accounting pronouncements, including the expected dates of adoption and estimated effects,
if any, on our consolidated condensed financial statements, see Note 3: Impact of Recently Issued Accounting Standards in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q.

Three Months Ended December 31, 2009 Compared to Three Months Ended December 31, 2008

Net Sales. Net sales consist principally of total product sales less estimated sales returns. Net sales increased by 34% to $50.6
million in the three months ended December 31, 2009 from $37.7 million in the three months ended December 31, 2008. The increase in net sales of $12.9 million was principally due to a significant increase in unit shipments of our DRAM
products in the three months ended December 31, 2009 compared to the three months ended December 31, 2008. In addition, unit shipments of both our SRAM products and our application specific standard products (ASSP) which include our
EEPROM, Smart Card and logic products increased in the three months ended December 31, 2009 compared to the three months ended December 31, 2008. 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.



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In each of the three months ended December 31, 2009 and December 31, 2008, revenue
recognized for one distributor accounted for 12% of our 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 $12.4 million to $20.1 million in the
three months ended December 31, 2009 from $7.7 million in the three months ended December 31, 2008. Our gross margin was 39.8% in the three months ended December 31, 2009 compared to 20.5% in the three months ended December 31,
2008. The increase in gross margin in the three months ended December 31, 2009 compared to the three months ended December 31, 2008 can be attributed to the favorable impact in the current period from the sales of items previously written
down to lower of cost or market combined with a decrease in inventory write-downs. Our gross margin for the three months ended December 31, 2009 included inventory write-downs of $0.9 million while our gross margin for the three months ended
December 31, 2008 included inventory write-downs of $4.3 million. The inventory write-downs were for excess and obsolescence issues and lower of cost or market accounting on certain of our products. Our gross margin for the three months ended
December 31, 2009 and December 31, 2008 benefited from the sale of $1.3 million and $0.3 million, respectively, of products previously written down to zero carrying value. The increase in our gross profit in the three months ended
December 31, 2009 compared to December 31, 2008 was primarily a result of an increase in unit shipments across all our products but more significantly for our DRAM products. We believe that the average selling prices of our products will
decline over time and, unless we are able to reduce our cost per unit to the extent necessary to offset such declines, the decline in average selling prices will result in a material decline in our gross margin. In addition, product costs could
increase if our suppliers raise prices, which could result in a material decline in our gross margin. In the past, foundries have raised wafer prices when demand for end products increased. Although we have product cost reduction programs in place
that involve efforts to reduce internal costs and supplier costs, there can be no assurance that product costs will be reduced or that such reductions will be sufficient to offset the expected declines in average selling prices. We do not believe
that such cost reduction efforts are likely to have a material adverse impact on the quality of our products or the level of service provided by us.

Research and Development. Research and development expenses decreased by 4% to $5.0 million in the three months ended December 31, 2009 compared to $5.2 million in the three months ended
December 31, 2008. As a percentage of net sales, research and development expenses decreased to 9.9% in the three months ended December 31, 2009 from 13.8% in the three months ended December 31, 2008. The decrease in research and
development expenses of $0.2 million can be attributed to a decrease in product development costs, testing fees and depreciation and amortization partially offset by an increase in headcount related expenses associated with our acquisition of Enable
Semiconductor and the addition of a new design team in Taiwan. We expect the dollar amount of our research and development expenses to remain relatively constant and expect such expenses to fluctuate as a percentage of net sales depending on our
overall level of sales.

Selling, General and Administrative. Selling, general and administrative expenses
increased by 4% to $7.6 million in the three months ended December 31, 2009 from $7.3 million in the three months ended December 31, 2008. As a percentage of net sales, selling, general and administrative expenses decreased to 15.1% in the
three months ended December 31, 2009 from 19.4% in the three months ended December 31, 2008. The increase in selling, general and administrative expenses of $0.3 million was mainly attributable to an increase in sales commissions in the
three months ended December 31, 2009 compared to the three months ended December 31, 2008 as a result of our higher revenue. We expect the dollar amount of our selling, general and administrative expenses to remain relatively constant and
expect such expenses to fluctuate as a percentage of net sales depending on our overall level of sales.

Interest
and other income, net. Interest and other income, net was $0.3 million in the three months ended December 31, 2009 compared to $0.6 million in the three months ended December 31, 2008. The $0.3 million of interest and other income in
the three months ended December 31, 2009 is comprised primarily of net interest income of $0.1 million and $0.2 million in rental income from the lease of excess space in our Taiwan facility. The $0.6 million of interest and other income in the
three months ended December 31, 2008 is comprised primarily of net interest income of $0.2 million and $0.4 million in rental income from the lease of excess space in our Taiwan facility. The decrease in interest income is primarily
attributable to a decrease in the interest rates in the three months ended December 31, 2009 compared to the three months ended December 31, 2008.



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Provision (benefit) for income taxes.We recorded an income tax expense of $644,000
for the three months ended December 31, 2009. The income tax expense is comprised of a federal tax refund, state income tax, foreign alternative minimum tax and foreign withholding tax. We recorded $769,000 for foreign alternative minimum tax
for the periods ending September 30, 2007 and 2008 and current period state income tax of $85,000. This tax expense is reduced for a refund of previously paid Federal alternative minimum tax of $211,000. On November 6, 2009, the Worker,
Homeownership, and Business Assistance Act of 2009 was signed into law. One of the provisions in the Act allows a taxpayer, at the taxpayers election, to carryback either its 2008, 2009 or 2010 net operating losses 3, 4, or 5 years whereas
generally, net operating losses can only be carried back up to 2 years.

We recorded an income tax benefit of $60,000 for the
three months ended December 31, 2008 which is primarily a result of the Housing and Economic Recovery Act of 2008. Under this Act, corporations otherwise eligible to claim first year bonus depreciation for assets placed in service between
April 1, 2008 and December 31, 2008 may elect to claim a refund of its previously generated tax credits in lieu of claiming the bonus depreciation. The benefit recorded for the period represents this refund claim partially offset by
state minimum taxes.

Net (income) loss attributable to noncontrolling interests.The net
(income) loss attributable to noncontrolling interests was income of $2,000 in the three months ended December 31, 2009 compared to a loss of $64,000 in the three months ended December 31, 2008.

Liquidity and Capital Resources

As of December 31, 2009, our principal sources of liquidity included cash, cash equivalents and short-term investments of approximately $85.2 million. During the three months ended December 31,
2009, operating activities provided cash of approximately $2.5 million compared to $0.1 million provided in the three months ended December 31, 2008. The cash provided by operations in the three months ended December 31, 2009 was primarily
due to our net income of $7.2 million adjusted for non-cash items of $1.6 million, increases in accounts payable of $3.4 million and increases in accrued liabilities of $1.1 million. This was partially offset by increases in inventories of $8.2
million, increases in accounts receivable of $2.3 million and increases in other assets of $0.3 million. The cash provided by operations in the three months ended December 31, 2008 was primarily due to decreases in accounts receivable of $13.9
million, decreases in other assets of $1.6 million and decreases in inventories of $0.5 million. This was offset by decreases in accounts payable of $11.9 million, decreases in accrued liabilities of $1.9 million and our net loss of $4.1 million
adjusted for non-cash items of $2.0 million.

In the three months ended December 31, 2009, we used $0.6 million for
investing activities compared to $1.2 million generated in the three months ended December 31, 2008. The cash used in the three months ended December 31, 2009, was for the acquisition of property, equipment and leasehold improvements. In
the three months ended December 31, 2008, we generated $1.8 million from the net sales of available-for-sale securities. We also received proceeds of approximately $0.3 million from the minority investee in our consolidated subsidiary Wintram
Inc.

In the three months ended December 31, 2009, we made capital expenditures of approximately $0.6 million compared to
$0.9 million in the three months ended December 31, 2008. The expenditures in the three months ended December 31, 2009 were primarily for engineering tools and computer hardware. We expect to spend approximately $3.0 million to $5.0
million to purchase capital equipment during the next twelve months, principally for the purchase of additional test equipment, design and engineering tools, and computer hardware and software. We expect to fund our capital expenditures from our
existing cash and cash equivalent balances.

We used $1.1 million for financing activities during the three months ended
December 31, 2009 compared to $3.0 million used during the three months ended December 31, 2008. In the three months ended December 31, 2009, we used $1.1 million for the repurchase and retirement of our common stock. Our source of
financing for the three months ended December 31, 2009 was proceeds from the issuance of common stock of $33,000 from stock option exercises. In the three months ended December 31, 2008, we used $3.0 million for the repurchase and
retirement of our common stock.



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We have $12.7 million available through a number of short-term lines of credit with various
financial institutions in Taiwan. These lines of credit expire at various times through October 2010. As of December 31, 2009, we had no outstanding borrowings under these short-term lines of credit.

At December 31, 2009, our investment portfolio included $20.0 million par value ($18.0 million fair value) of AAA rated investments in
auction rate securities, for which all of the underlying assets are student loans, which are backed by the federal government under the Federal Family Education Loan Program. Liquidity for these securities was initially provided by an auction
process that reset the applicable interest rate at pre-determined intervals, usually every 7 to 35 days. Continued liquidity issues in the global credit markets has caused auctions for all of our auction rate securities to fail because the amount of
securities offered for sale exceeded the amount of bids. As a result, the liquidity of our auction rate securities has greatly diminished. We expect this decreased liquidity will continue for as long as the present depressed global credit market
environment persists, or until issuers refinance and replace these securities with other instruments. Despite the current auction market, we believe the credit quality of our auction rate securities remains high due to the creditworthiness of the
issuers. We continue to collect interest when due and at this time we expect to continue to do so going forward.

In November
2008, we entered into an agreement (the Agreement) with UBS AG (UBS) the investment firm that sold us our auction rate securities. The Agreement covers all of our auction rate securities as of December 31, 2009. By entering into the
Agreement, we (1) received the right to sell these auction rate securities back to UBS at par, at our sole discretion, anytime during the period from June 30, 2010 through July 2, 2012, and (2) gave UBS the right to purchase
these auction rate securities or sell them on our behalf at par anytime after the execution of the Agreement through July 2, 2012. However, if the rights are not exercised before July 2, 2012 they will expire and UBS will have no
further rights or obligation to buy our auction rate securities. So long as we hold our auction rate securities, they will continue to accrue interest as determined by the auction process or the term of the auction rate securities if the
auction process fails. In addition, UBS Bank USA has established a no net cost credit line for us in an amount up to $13.4 million collateralized by our auction rate securities. As of December 31, 2009, we had no borrowings under this line of
credit.

In November 2006, we entered into a lease for approximately 30,000 square feet of office space in San Jose and
relocated our headquarters there in February 2007. The lease on this building expires in June 2013. Outside of the U.S., we have operations in leased sites in China and Hong Kong. In addition to these sites, we lease sales offices in the U.S.,
Europe and Asia. These leases expire at various dates through 2011. In Taiwan, we own and occupy our building. The land upon which our building is situated is leased under an operating lease that expires in March 2016. Our outstanding commitments
under these leases were approximately $3.1 million at December 31, 2009.

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

At December 31, 2009, we had outstanding authorization from our Board to purchase up to $3.8
million of our common stock from time to time.

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

Off-Balance Sheet Arrangements

As of December 31, 2009, we did not have any off-balance sheet arrangements as defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.



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

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

We anticipate that international sales will continue to account for a significant portion of our consolidated revenue. Our international
sales are largely denominated in U.S. dollars and therefore are not subject to material foreign currency exchange risk. However, we have operations in China, Europe, Taiwan, Hong Kong, India, Japan, Korea and Singapore where our expenses are
denominated in each countrys local currency and are subject to foreign currency exchange risk. In the three months ended December 31, 2009, we recorded exchange gains of approximately $27,000, whereas, in fiscal 2009, we recorded exchange
losses of approximately $0.3 million. We could be negatively impacted by exchange rate fluctuations in the future. We do not currently engage in any hedging activities.

We had cash, cash equivalents and short-term investments of $85.2 million at December 31, 2009. The primary objective of our investment activities is to preserve principal while at the same time
maximizing yields without incurring significant risk. We invest primarily in high-quality, short-term debt instruments and instruments issued by high quality financial institutions and companies, including money market instruments. A hypothetical
one percentage point decrease in interest rates would result in approximately a $0.8 million decrease in our interest income. Included within our investment portfolio are $20.0 million par value ($18.0 million fair value) of AAA rated investments in
auction rate securities. The underlying assets of these auction rate securities are student loans which are backed by the federal government under the Federal Family Education Loan Program. We have experienced market risk and liquidity issues
related to our auction rate securities. See the Liquidity and Capital Resources section in Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations for more detail on these
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 our cost basis of shares of SMIC. We account for our shares in SMIC under the provisions of FASB ASC 320 and mark the shares to the market value with the offset recorded in accumulated other comprehensive income. The cost basis of our
shares in SMIC is approximately $3.4 million and the market value at December 31, 2009 was approximately $1.9 million and is included in long-term investments. The market value of SMIC shares is subject to fluctuations and our carrying value
will be subject to adjustments to reflect changes in SMICs market value in future periods. In the event the decline in the market value of our SMIC shares below our cost basis is determined to be other-than-temporary, we may be required to
recognize a loss on our investment through operating results.

We own shares in Ralink Technology, Co. (Ralink). On
April 8, 2008, Ralink completed an initial public offering (IPO) and its common shares are traded on the Taiwan Stock Exchange. Since Ralinks IPO, we account for our shares in Ralink under the provisions of FASB ASC 320 and have marked
our investment to the market value as of December 31, 2009 with the offset recorded in accumulated other comprehensive income. The cost basis of our shares in Ralink is approximately $0.5 million and the market value at December 31, 2009
was approximately $2.7 million. The market value of our Ralink shares is subject to fluctuations and our carrying value will be subject to adjustments to reflect the current market value.



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

Our Chief Executive Officer and our Chief Financial Officer, based on the evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) required by
paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that, as of December 31, 2009, our disclosure controls and procedures were effective to ensure that the information we are required to disclose in reports that we file or submit
under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our
management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.



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Remediation of Material Weakness in Internal Control over Financial Reporting

We have commenced efforts to address the material weakness in our internal control over financial reporting related to
adequate management oversight or supervision over non-routine accounting functions and the judgments used in developing financial estimates for inventory reserves and the ineffectiveness of our disclosure controls and procedures that we reported in
our report on Form 10-K for the year ended September 30, 2009. To remediate the material weakness, we have implemented additional control procedures, management reviews and employee training. We are also improving the documentation of our
policies and procedures.

Changes in Internal Control over Financial Reporting

Other than as described above, during the three months ended December 31, 2009, there were no changes in our internal control over
financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION



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

SRAM Antitrust Litigation

Thirty-three purported class action lawsuits were filed by U.S.
Direct-Purchaser and U.S. Indirect-Purchaser Plaintiffs against us and other SRAM suppliers in various U.S. federal courts alleging violations of the Sherman Act, violations of state unfair competition laws, and unjust enrichment relating to the
sale and pricing of SRAM products. The U.S. lawsuits have been consolidated in a single federal court for coordinated pre-trial proceedings. The U.S. lawsuits seek treble damages for the alleged damages sustained by purported class members, in
addition to restitution, costs and attorneys fees, as well as an injunction against the allegedly unlawful conduct. As of August 30, 2007, we were voluntarily dismissed from all lawsuits brought by the U.S. Indirect-Purchaser Plaintiffs
pursuant to a Tolling Agreement between us and the U.S. Indirect-Purchaser Plaintiffs. The U.S. Indirect-Purchaser Plaintiffs agreed not to name us as a defendant unless the Tolling Agreement is terminated according to terms specified in that
agreement. On January 9, 2008, we were voluntarily dismissed without prejudice from one of the lawsuits brought by the U.S. Direct-Purchaser Plaintiffs. We remain a defendant in three lawsuits brought by the U.S. Direct-Purchaser Plaintiffs. On
September 29, 2008, the court certified a class of direct purchasers. On October 5, 2009, we entered into a settlement agreement with the U.S. Direct-Purchaser Plaintiffs that remains subject to approval by the court before it becomes
final. As part of the agreement, we will receive a release for all Direct-Purchaser SRAM claims and do not admit any wrongdoing or liability.

Other Legal Proceedings

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



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

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

Substantially all of our products are incorporated into products for the digital consumer electronics, networking, mobile communications,
automotive electronics and industrial markets. Historically, these markets have experienced cyclical depressed business conditions, often in connection with, or in anticipation of, a decline in general economic conditions, or due to adverse supply
and demand conditions in such markets. Industry downturns have resulted in reduced demand and declining average selling prices for our products which adversely affected our business. Due to the continued uncertain economic conditions, our current or
potential customers may delay or reduce purchases of our products which would adversely affect our revenues and harm our business and financial results. In addition, the continued uncertainty in the economy may negatively impact the spending
patterns of businesses including our current and potential customers. There can be no assurance that the government responses to the disruptions in the financial markets in late 2008 and 2009 will restore confidence in the U.S. and global
markets. We expect our business to be adversely impacted by any further downturn in the U.S. or global economies. In particular, while we currently expect our revenue for the quarter ending March 31, 2010 to be relatively flat
compared to our revenue in the quarter ended December 31, 2009, our expected revenue in the March 2010 quarter will still be significantly below our quarterly revenue prior to the start of the recession in 2008. The uncertainty regarding
the U.S. and global economies has also made it more difficult for us to forecast and manage our business. Although we are continuing actions to control our expenses and inventory levels, there can be no assurance that these actions will be
sufficient to address the impact of any further economic slowdown and allow us to meet our operating objectives.

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 2010 and in fiscal 2009, approximately 88% and 86%, respectively, of our net sales were derived from the sale of DRAM and SRAM products, which are subject to unit volume
fluctuations and declines in average selling prices that could harm our business. We experienced a sequential decline in revenue from $37.7 million in our December 2008 quarter to $31.3 million in our March 2009 quarter primarily as a result of
a significant decrease in unit shipments of our SRAM products and a decline in the average selling prices for our DRAM products. We also experienced a sequential decline in revenue from $55.3 million in our September 2008 quarter to $37.7 million in
our December 2008 quarter primarily as a result of a significant decrease in unit shipments of both our DRAM and SRAM products. We may not be able to offset any future price declines for our products by higher volumes or by higher prices on newer
products. Historically, average selling prices for semiconductor memory products have declined, and we expect that average selling prices for our products will decline in the future. Our ability to maintain or increase revenues will depend upon our
ability to increase unit sales volume of existing products and introduce and sell new products that compensate for the anticipated declines in the average selling prices of our existing products.

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

If we are unable to obtain an adequate supply of wafers from our current suppliers or any alternative sources in a timely manner, our
business will be harmed. Our principal manufacturing relationships are with Nanya, Powerchip Semiconductor, SMIC, TSMC, IBM and Chartered Semiconductor Manufacturing. Each of our wafer foundries also supplies wafers to other semiconductor companies,
including certain of our competitors or for their own account. Although we are allocated wafer capacity from our key suppliers, we may not be able to obtain such capacity in periods of tight supply. If any of our suppliers experience manufacturing
failures or yield shortfalls, severe financial or operational difficulties, choose to prioritize capacity for other uses, or reduce or eliminate deliveries to us for any other reason, we may not be able to obtain enough wafers to meet the market
demand for our products which would adversely affect our revenues. Once a product is in production at a particular foundry, it is time consuming and costly to have such product manufactured at a different foundry. In addition, we may not be able to
qualify additional manufacturing sources for existing or new products in a timely manner and we cannot be certain that other manufacturing sources would be able to deliver an adequate supply of wafers to us or at the same cost.

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

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



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



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



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



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



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



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



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

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

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:



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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

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

We were profitable in the December 2009 quarter and though we were also
profitable in the September 2009 quarter, we incurred a loss of $5.1 million in fiscal 2009, which included a $0.7 million charge for acquired in-process technology. Though we were profitable in each of the first three quarters of fiscal 2008, we
incurred a loss of $17.8 million in fiscal 2008, which included charges for the impairment of goodwill of $25.3 million. There is no assurance that we will maintain profitability in future periods. Our ability to achieve 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. Adverse developments with respect to these or other factors could result in quarterly or annual operating losses in the future.



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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 further decline in average selling prices and the stated value of our inventory. In the first quarter of fiscal 2010, in fiscal 2009 and in fiscal 2008, we recorded inventory write-downs of $0.9 million,
$10.8 million, and $11.3 million, respectively. The inventory write-downs related to valuing our inventory at the lower-of-cost-or-market, and adjusting our inventory valuation for certain excess and obsolete products.

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

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

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



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



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



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



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



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



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



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



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



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

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



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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 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.

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. In this regard, in April
2009, we announced the acquisition of Enable Semiconductor Corporation, a private Taiwan and Korea based company. Acquisitions may result in the use of our cash resources, potentially dilutive issuances of equity securities, incurrence of debt and
contingent liabilities, amortization expenses related to intangible assets, and the possible impairment of goodwill, which could harm our profitability. In addition, acquisitions involve numerous risks, including:



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



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



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



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



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



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



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

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

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, 2009, approximately 16% of our net sales was attributable to
customers located in the U.S., 16% was attributable to customers located in Europe and 67% was attributable to customers located in Asia. In fiscal 2009, approximately 15% of our net sales was attributable to customers located in the U.S., 14% was
attributable to customers located in Europe and 70% was attributable to customers located in Asia. In fiscal 2008, approximately 16% of our net sales was attributable to customers located in the U.S., 17% was attributable to customers located in
Europe and 66% was attributable to customers located in Asia. We anticipate that sales to international sites will continue to represent a significant percentage of our net sales. Although our international sales are largely denominated in U.S.
dollars, we do have sales transactions in New Taiwan dollars, in Hong Kong dollars and in Chinese renminbi. In addition, our wafer foundries and assembly and test subcontractors are primarily located in Taiwan and China. A substantial majority of
our employees are located outside of the U.S and the expenses for our foreign operations are generally denominated in local currency. As a result, a devaluation of the New Taiwan dollar or Chinese renminbi could substantially increase the cost of
our operations in Taiwan or China.



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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;
| | - |  | -----------------------------------------------------------------------------------



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



| |  |  | earthquakes 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, technical, marketing, distribution and other resources than us. We may not be able to compete successfully against any of these competitors. Our
ability to compete successfully in the memory market depends on factors both within and outside of our control, including:



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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

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



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

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

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 also seek and obtain damages from us for their losses. From
time to time, we have been involved in disputes regarding product warranty issues. Although we seek to limit our liability, a product liability claim brought against us, even if unsuccessful, would likely be time consuming and could be costly to
defend.

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

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

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

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

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



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

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

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

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

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

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



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



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



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



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



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

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

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

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

Our
short-term investments include auction rate securities and if auctions continue to fail for amounts we have invested, our investment will not be liquid. If the issuer is unable to successfully close future auctions and their credit rating
deteriorates, we may be required to further adjust the carrying value of our investment through an impairment charge to earnings.

In February 2008, all of the auctions for our auction-rate securities failed as a result of negative conditions in the global credit markets. Each of these securities had been subject to auction processes
for which there had been insufficient bidders on the scheduled rollover dates. The failure resulted in the interest rates on these investments resetting at the maximum rate allowed per security. Until the auctions are successful, a buyer is found
outside of the auction process or the notes are redeemed, the investments are not liquid. We currently believe these securities are not significantly impaired, primarily due to the government backing of the underlying securities. However, if the
issuers are unable to successfully close future auctions and their credit ratings deteriorate, we may be required to further adjust the carrying value of these investments and record an impairment charge to earnings for the decline in the fair
values. In November 2008, we elected to participate in the Auction Rate Securities Rights offering by the broker through which we purchased our $20.0 million in auction rate securities. These rights will entitle us to sell our auction rate
securities to the broker for a price equal to par value plus accrued but unpaid dividends beginning in June 2010. In addition, UBS Bank USA has established a no net cost credit line for us in an amount up to $13.4 million collateralized by our
auction rate securities.



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

From September 2007 through December 2009, we repurchased shares of our common stock in the open market under Rule 10b-18 and pursuant to our tender offers. In particular, in the three months ended
December 31, 2009, we repurchased 244,941 shares of our common stock in the open market at an aggregate price of approximately $1.1 million. In addition, in fiscal 2009, we repurchased 2,050,340 shares of our common stock in the open market at
an aggregate price of approximately $4.9 million, and in fiscal 2008 we repurchased 10,203,282 shares for an aggregate price of $71.1 million which includes 10,000,000 shares we repurchased in January 2008 for an aggregate price of $70 million
pursuant to a tender offer. At December 31, 2009, we had outstanding authorization from our Board to purchase up to an additional $3.8 million of our common stock from time to time. Although our Board of Directors has determined that these
repurchase programs are in the best interests of our stockholders, these repurchases expose us to a number of risks including:



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



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



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



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

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

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



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##### Table of Contents

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

Purchases of Equity Securities by the Issuer and Affiliated Purchasers



|                                   |  |                               |  |                          |      |                                                               |         |                                                            |   |           |    
|---------------------------------- |  | ----------------------------- |  | ------------------------ | ---- | ------------------------------------------------------------- | ------- | ---------------------------------------------------------- | - | --------- | ---
|Period                             |  | TotalNumberof SharesPurchased |  | AveragePricePaidPerShare |      | TotalNumber ofSharesPurchasedAs Part ofPubliclyAnnouncedPlans |         | Dollar Valueof SharesThat MayYet BePurchasedUnder thePlans |  
|October 1, 2009October 31, 2009   |  |                              |  | $                        |     |                                                               |        |                                                            | $ | 4,881,154 | (1)
|November 1, 2009November 30, 2009 |  | 205,885                       |  | $                        | 4.41 |                                                               | 205,885 |                                                            | $ | 3,972,432 | (1)
|December 1, 2009December 31, 2009 |  | 39,056                        |  | $                        | 4.82 |                                                               | 39,056  |                                                            | $ | 3,784,000 | (1)
|                                   |  |                               |  |                          |      |                                                               |         |                                                            |   |           |    
|Total                              |  | 244,941                       |  | $                        | 4.48 |                                                               | 244,941 |                                                            |   |           |    
|                                   |  |                               |  |                          |      |                                                               |         |                                                            |   |           |    



|(1) | On November 28, 2007, we announced that our board of directors had approved the repurchase of up to $80 million of our shares of common stock. We used $70 million
of this approved amount to repurchase 10 million shares of our common stock through a self-tender offer which expired on January 3, 2008. The additional $10 million is expected to be used for the repurchase of additional shares, from time
to time, through open-market transactions under Rule 10b-18. As indicated in the above table, as of December 31, 2009, approximately $3.8 million remained available under our repurchase program.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

Our Annual Meeting of Stockholders was held on Friday, February 5, 2010 at 3:30 p.m., local time, in San Jose, California.

(a) The following nominees for Directors were elected. Each person elected as a Director will serve until the next annual meeting of
stockholders or until such persons successor is elected and qualified:



|                 |  |               |  |              
|---------------- |  | ------------- |  | -------------
|Name of Nominee  |  | Votes inFavor |  | VotesWithheld
|Jimmy S.M. Lee   |  | 15,179,870    |  | 641,936      
|Scott Howarth    |  | 15,322,865    |  | 498,941      
|Kong-Yeu Han     |  | 15,205,646    |  | 616,160      
|Paul Chien       |  | 14,095,249    |  | 1,726,557    
|Jonathan Khazam  |  | 14,097,068    |  | 1,724,738    
|Keith McDonald   |  | 15,264,617    |  | 557,189      
|Stephen Pletcher |  | 15,278,146    |  | 543,660      
|Bruce A. Wooley  |  | 14,633,799    |  | 1,188,007    
|John Zimmerman   |  | 14,075,434    |  | 1,746,372    

(b) Our
stockholders ratified the appointment of Grant Thornton LLP as our independent registered public accountants for the fiscal year ending September 30, 2010, with 21,430,130 votes in favor, 235,615 votes against and 75,106 votes abstaining.



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##### Table of Contents

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

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



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



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.



|                         |  |  |  |                                             
|------------------------ |  |  |  | --------------------------------------------
|                         |  |  |  | Integrated Silicon Solution, Inc.           
|                         |  |  |  | (Registrant)                                
|                         |  | 
|Dated: February 12, 2010 |  |  |  | /s/    JOHN M.
COBB                         
|                         |  |  |  | John M. Cobb                                
|                         |  |  |  | Vice President and Chief Financial Officer  
|                         |  |  |  | (Principal Financial and Accounting Officer)



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