Integrated Silicon Solution (ISSI) 10-K 2007 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2007

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 0-23084

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)

Registrant’s telephone number, including area code (408) 969-6600

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨    No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

Large accelerated filer  ¨            Accelerated filer  x            Non-accelerated filer  ¨

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

The aggregate market value of the common stock held by non-affiliates of the registrant, based upon the price at which the registrant’s Common Stock was last sold as of March 30, 2007 (the last business day of the registrant’s second quarter of fiscal 2007), was approximately $126.6 million. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of outstanding shares of the registrant’s Common Stock on November 29, 2007 was 36,537,841.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant’s 2008 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

TABLE OF CONTENTS

Special Note Regarding Forward-Looking Statements		1
	PART I
Item 1.	Business	2
Item 1A.	Risk Factors	12
Item 1B.	Unresolved Staff Comments	24
Item 2.	Properties	24
Item 3.	Legal Proceedings	24
Item 4.	Submission of Matters to a Vote of Security Holders	26
	PART II
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities	27
Item 6.	Selected Consolidated Financial Data	30
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 8.	Financial Statements and Supplementary Data	43
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	82
Item 9A.	Controls and Procedures	82
Item 9B.	Other Information	83
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	84
Item 11.	Executive Compensation	84
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	84
Item 13.	Certain Relationships and Related Transactions, and Director Independence	84
Item 14.	Principal Accountant Fees and Services	84
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	85
SIGNATURES		87

References in this Annual Report on Form 10-K to “we,” “us,” “our” and “ISSI” mean Integrated Silicon Solution, Inc. and all entities owned or controlled by Integrated Silicon Solution, Inc.

All brand names, trademarks and trade names referred to in this report are the property of their respective holders.

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 our forward-looking statements as a result of certain factors, including those set forth in “Risk Factors” beginning on page 12 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.

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

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PART I

Item 1. Business

Overview

We are a fabless semiconductor company that designs and markets high performance integrated circuits for the following key markets: (i) digital consumer electronics, (ii) networking, (iii) mobile communications and (iv) automotive electronics. Our primary products are high speed and low power SRAM and low and medium density DRAM. In fiscal 2007, approximately 86% of our revenue was derived from our SRAM and DRAM products. We also design and market EEPROMs, SmartCards, and selected non-memory products focused on our key markets. We target large markets with our low cost, high quality semiconductor products and seek to build long-term relationships with our customers. Part of our strategy is to remain committed to supplying many of the lower density legacy DRAM and SRAM memories that are of less interest to many larger manufacturers and our customers frequently cite our commitment to long-term supply of these memories as one reason they buy products from ISSI.

Our outsourced manufacturing model is based upon a history of joint process technology development relationships with key Asian foundries. We have had such programs with several foundries, including Taiwan Semiconductor Manufacturing Corporation (TSMC), Chartered Semiconductor Manufacturing, and Semiconductor Manufacturing International Corporation (SMIC). We have an established presence in the important Asian market that includes our design groups in Shanghai, China and Hsinchu, Taiwan. These locations also have product engineering, sales and marketing, quality assurance, production control, and other operating functions. Our world headquarters are in San Jose, California.

Our customers include leaders in each of our four target markets, including LG Electronics, Lexmark, Mitsubishi, NEC, Sharp, Panasonic, Samsung, Sony, and Toshiba in consumer electronics; AlcatelŸLucent, Cisco, Foxconn, Fujitsu, Huawei Technologies, Nortel, Polycom, Tellabs, UT Starcom and ZTE in networking; Ericsson, Garmin, LG Electronics, Motorola, Nokia, and VTech in mobile communications; and Bosch, Bose, Delphi, Johnson Controls, Philips, Siemens VDO, Temic, and TRW in automotive electronics. Due to their significant size and market influence, these customers generally drive memory volumes in their market segments and help define the direction of future memory needs.

Company Background

We were incorporated in California in October 1988 and changed our state of incorporation to Delaware in August 1993. Our principal executive offices are located at 1940 Zanker Road, San Jose, California 95112, and our telephone number is (408) 969-6600. On our Investor Relations web site, located atwww.issi.com, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All such documents on our Investor Relations web site are available free of charge.

Market Background

In recent years, the need for sophisticated semiconductor memory architecture has expanded beyond the PC market and into electronic systems in a wide variety of markets, including digital consumer electronics, networking, mobile communications and automotive electronics. Advances in technology have allowed for increasingly complex digital consumer systems, set-top boxes, digital cameras and HDTVs. Significant memory content is often required in these products to manage large amounts of data that create images and sounds in a digital format. As a result, virtually all digital consumer electronic systems incorporate semiconductor memory devices to enable and enhance system performance.

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As more consumers and businesses utilize the internet and broadband communications networks and as users upgrade their equipment, the demand for products that connect to networks has accelerated. Consumers and businesses require high speed access to internet content and other services to transmit and receive large amounts of data, such as highly graphical web sites, MP3 audio files and streaming multimedia applications. The numerous and complex applications that facilitate connections within networking and broadband products, such as cable and DSL modems, switches and routers, require optimized high speed memory architectures to maximize bus bandwidth and speed data transfer.

Mobile communication products have gained broad acceptance among consumers. Applications for cellular communications, wireless local area networks (WLAN) and global positioning systems (GPS) are increasingly able to access a wide range of data services, from internet connectivity to location detection, and are delivering information to consumers through mobile products. Mobile products connect without wires to a base station that receives and sends data or voice to the mobile device. As more data and user content is accessed and stored on the mobile devices, advanced memory is required to store and access this information in the mobile products.

The complexity of automobile electronics is also increasing rapidly. The significant increase in automotive electronics systems has resulted in an increase in microcontrollers and memory responsible for delivering control and command functionality. Automobile designers are increasing semiconductor content in automobiles to allow for improved telematics, digital audio and video entertainment systems, and powertrain functions such as engine control and fuel efficiency management systems. These systems require memory devices that must meet the automotive industry’s high quality and reliability standards.

Integrated circuits that address the semiconductor memory market can be segmented into volatile memory, such as DRAM and SRAM, and non-volatile memory, such as Flash and EEPROM. Volatile memory loses its data if the electricity is turned off, while non-volatile memory retains its data when the electricity is turned off. SRAM is used for applications that require very high speed access to stored data and typically requires four to six transistors to store each bit of data. DRAM uses only a single transistor to store each bit of data. As a result, the storage capacity of DRAM tends to be much greater than that of SRAM. SRAM is faster than DRAM, but more expensive on a cost per bit basis. The same equipment manufacturers that use high performance SRAM may also use low and medium density DRAM and such products can be sold through the same channels.

System designers use SRAM in the most performance sensitive portions of their memory architecture. High performance SRAM operates at either very high speed or very low power or both. High speed SRAM is used in applications such as base stations, bridges, routers, modems and peripherals. Low power SRAM is used in applications such as the wireless handheld and mobile phone markets.

The DRAM market can be segmented into high density devices (currently 1 Gb and above) and low and medium density devices (currently 512 Mb and below). High density DRAM is used in applications that require high capacity storage, such as PCs and other high-end computing devices. Currently, DRAM in PCs is migrating from 512 Mb to 1 Gb and above. Low and medium density DRAM is used in applications such as digital consumer electronics, networking, mobile communications, and automotive electronics, which require less memory capacity than PCs and high end computing applications. Large captive memory manufacturers tend to focus production on higher density DRAM devices, where the volumes are greater and manufacturing economies of scale can be optimized. As a result, to the extent the large, captive memory manufacturers limit or cease production of low and medium density DRAM, customers may seek a new long-term, steady supply of these products. Several fabless memory companies, including ISSI, focus on providing low and medium density DRAM products to this market segment.

Memory suppliers compete on the basis of speed, power consumption, density, reliability, and cost, all of which are a function of process technology and design expertise. Success in the memory market is determined not only by the quality of the device design, but also by the process through which the device can be fabricated. Process technology improvements allow design line widths to be reduced, which in turn allow the integrated

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circuit design to operate at faster speeds and increased memory density. To meet the demands for high performance memories, a memory supplier must also have a wafer fabrication strategy allowing it to migrate to the newest generations of process technology on a timely basis. Process technology shifts occur frequently and are developed in high end wafer fabrication facilities that typically cost over $1.0 billion. Although most of the large multinational memory companies fabricate their own semiconductor wafers, fabless suppliers rely on third-party wafer foundries. The fabless model is much less capital intensive, but requires strong relationships with foundries to secure wafer supply and access to advanced process technology.

We believe the demand for high performance memory products across a variety of end markets provides a substantial opportunity for a focused supplier of high performance memory integrated circuits.

Strategy

Since our inception in 1988, we have developed a broad range of SRAM products that enable designers to meet the demanding density, speed, cost, reliability and power consumption requirements of semiconductors used in high technology products. In the late 1990’s, we began to establish ourselves as a supplier of low and medium density DRAM products, which are complementary to our SRAM products. For both product lines, we emphasize our commitment to be a long-term provider of the legacy, smaller density products that are of less interest to some of our larger competitors. Our customers are among the largest manufacturers in the digital consumer electronics, networking, mobile communications and automotive electronic markets. Unlike many other fabless semiconductor companies, we employ our own process development team to work collaboratively with our key foundry suppliers, which are all located in Asia. From time to time, we have also made equity purchases in selected wafer foundries. Our management has extensive experience working with Asian foundries. These factors allow us to build strong relationships with our foundry suppliers and facilitate access to leading edge process technology and wafer capacity. The key elements of our strategy are:

Target Niche-oriented and Application Specific Market Segments.    The memory markets are large and diverse, but also prone to the economics of demand and supply imbalances which can cause fluctuations in product prices. We work to market and sell our SRAM and DRAM products into certain specific markets that provide sufficient volume for sales, but also provide better stability in prices over time. Examples of the market segments that we target are industrial applications, automotive, die sales, networking, telecommunications, and some medical equipment.

Build Collaborative Relationships with Leading Edge Foundries.    We work in a highly collaborative mode with our principal wafer foundries in developing leading edge process technology that is critical in advanced memories. Through this collaborative model, we have been able to repeatedly be in the forefront as process technology moves to smaller geometries. In addition, from time to time we will agree to design a specific memory device requested by a foundry. We believe our collaborative development efforts have enabled us to have more secure access to wafer capacity even during industry up cycles.

Commit to Being a Long-Term Supplier of our Products.    We are a long-term supplier of products to many of our customers. Our fabless model provides us the flexibility to accommodate small volume production runs for products such as low and medium density memories. In contrast, many large captive suppliers will reduce or cease production of lower density products in periods of tight capacity, as manufacturing such products is less attractive to them than making higher density memories, which typically have higher volumes and greater economies of scale. As an example, we still supply low density 4 Mb EDO 3.3 volt DRAM and 64K SRAM, while most large captive memory companies ceased production of such devices several years ago.

Continue to Develop and Offer High Performance Products.    We provide cost effective, high performance products, including a complete family of SRAM products and a range of low and medium density DRAM products. We work with our customers to identify the memory requirements of their next generation products and then focus our development efforts on achieving high performance standards through advanced process

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technology, circuit density, high speed, reliability and optimized power consumption. Examples of our high performance product offerings include a 72 Mb synchronous high speed SRAM product targeting high-end networking applications and a 512 Mb DDR DRAM product targeting the digital consumer electronics and networking markets.

Expand our Low Cost Asian-Based Development Teams Close to our Customers.    We intend to continue to capitalize on our extensive experience in Asia. We have established low cost engineering development teams close to our customers through our subsidiaries in Taiwan and China and have a full complement of research and development and sales and marketing capability in both of our Asian subsidiaries.

Further Penetrate Industry Leading Customers.    We leverage our expertise in producing high quality memory products to penetrate our target markets through industry leading accounts, such as LG Electronics, Lexmark, Mitsubishi, NEC, Panasonic, Samsung, Sharp, Sony, and Toshiba in digital consumer electronics; 3Com, Alcatel·Lucent, Cisco, Foxconn, Fujitsu, Huawei Technologies, Nortel, Polycom, Tellabs, UT Starcom, and ZTE in networking; Ericsson, Garmin, LG Electronics, Motorola, Nokia, and VTech in mobile communications; and Bosch, Bose, Delphi, Johnson Controls, Philips, Siemens VDO, Temic, and TRW in automotive electronics. We target these customers because we believe they drive high volumes in their markets and define the direction of future memory requirements. We believe our success with these market leaders enables us to attract other customers and diversify our customer base.

Develop Selected Non-Memory Products for Key Markets.    We are developing selected non-memory products for use in our key markets. Our goal is to increase product diversification and to offer products that are synergistic with our SRAM and DRAM expertise. Currently, these products include primarily EEPROM and SmartCards.

Customers and Marketing

Over the years, we have established a strong customer base, including industry leading accounts. Our key customers in each of our target markets are presented in the following table:

Digital Consumer Electronics	Networking	Mobile Communications	Automotive Electronics
Lexmark	3Com	Ericsson	Bosch
LG Electronics	AlcatelŸLucent	Garmin	Bose
Mitsubishi	Cisco	LG Electronics	Delphi
NEC	Foxconn	Motorola	Johnson Controls
Panasonic	Fujitsu	Nokia	Philips
Samsung	Huawei	VTech	Siemens VDO
Sharp	Nortel		Temic
Sony	Polycom		TRW
Toshiba	Tellabs
	UT Starcom
	ZTE

Our sales and marketing efforts are directed from our San Jose headquarters, but we also have sales and marketing teams in Asia and a sales team in Europe. We market and sell our products in Asia, the U.S. and Europe through our direct sales force, independent sales representatives and distributors. We have distributors in North America and in many countries in Europe, including a Pan-European distributor. In Asia, we sell primarily through distributors who work closely with our Asian resident direct sales force. We have sales offices in the U.S., Europe, Taiwan, China, Hong Kong, Japan, India, Korea, and Singapore. Our marketing group focuses on product strategy, product development road maps, new product introduction, demand assessment and competitive analysis. The group also helps ensure that product launches, channel marketing programs, and ongoing demand and supply planning occur on a well-managed, timely basis.

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In fiscal 2007, fiscal 2006 and fiscal 2005, no single customer accounted for over 10% of our total net sales. The percentage of our sales from customers located outside the U.S. was approximately 82%, 83%, and 85% in fiscal 2007, 2006, and 2005, respectively. We measure sales location by the shipping destination, even if the customer is headquartered in the U.S. We anticipate that sales to international customers will continue to represent a significant percentage of our net sales. The percentages of our sales by region are set forth in the following table:

	Fiscal Year Ended September 30,
	2007		2006		2005
Asia	67	%	73	%	75	%
Europe	15		10		9
U.S.	18		17		15
Other	—		—		1
Total	100	%	100	%	100	%

Information regarding our long-lived assets is contained in Note 15 to our Consolidated Financial Statements.

Our sales are generally made pursuant to standard purchase orders, which can be revised by our customers to reflect changes in the customer’s requirements. Generally, our purchase orders and OEM agreements allow customers to reschedule delivery dates and cancel purchase orders without significant penalties. For these reasons, we believe that our backlog, while useful for scheduling production, is not necessarily a reliable indicator of future revenues.

Markets and Products

Our memory products are used in a variety of specific applications within the digital consumer electronics, networking, mobile communications and automotive electronics markets. In particular, our SRAM products are used in WLANs, cell phones, base stations, networking switches and routers, fiber to the home (FTTH), DSL modems, LCD TVs, set-top boxes, GPS systems, instrumentation, engine control systems, medical equipment, telematics, audio and video equipment, satellite radio, POS terminals, fax machines, copiers, tape drives, and other applications. Our low and medium density DRAM products are used in WLANs, base stations, FTTH, DSL and cable modems, set top boxes, digital cameras, MP3, flat panel TVs, LCD TVs, HDTVs, video phones, VOIP, printers, disk drives, tape drives, audio/video equipment, GPS, telematics, infotainment, and other applications. Many of the same customers that purchase our SRAM products also purchase our DRAM products.

Prior to fiscal 2003, SRAM products generated a majority of our revenue, largely for networking and telecommunications applications. However, in the last several years, these markets remained relatively flat and, in the same period, we experienced growth in the consumer electronics market for our low and medium density DRAM products. As a result, for the past five fiscal years, we have derived a majority of our revenue from DRAM products.

SRAM.    Our SRAM strategy is to offer a broad range of devices and be a complete supplier of a customer’s SRAM requirements. We offer advanced, leading-edge products, such as our 72 Mb synchronous SRAM, and we also make long-term supply commitments on established SRAM products, such as a 32K x 8, 5 volt asynchronous SRAM. Our high performance SRAM products generally focus on either high speed or low power applications.

We offer both asynchronous and synchronous high speed SRAM products. Our high speed asynchronous SRAM products are used in applications such as LANs, telecommunication equipment and base stations, bridges, routers, modems, automotive electronics, multimedia products, peripherals, and industrial instrumentation. We

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have also developed a low power family of SRAM products for wireless applications. Our high speed synchronous SRAM products are used in a variety of networking and telecommunications applications, such as high performance switches and routers, as well as in automotive applications. Additional SRAM products under development are expected to include performance-leading features in speed, configuration, power levels, density and packaging. We are also developing certain Psuedo SRAM products as a cost effective replacement for ultra low power SRAMs.

The following table illustrates our principal SRAM products and the markets in which they can be used:

Product Description	Configuration	Density	Speed	Digital Consumer Electronics	Networking	Mobile Communications	Automotive Electronics
Asynchronous SRAM
High Speed 5 Volt (3.3 Volt)	128K x 8	1 Mb	8 ns	ü	ü	ü	ü
High Speed 5 Volt (3.3 Volt)	64K x 16	1 Mb	8 ns	ü	ü	ü	ü
High Speed (3.3 Volt)	128K x 16	2 Mb	8 ns	ü	ü	ü	ü
High Speed 5 Volt (3.3 Volt)	256K x 16	4 Mb	8 ns	ü	ü	ü	ü
High Speed 5 Volt (3.3 Volt)	512K x 8	4 Mb	8 ns	ü	ü		ü
High Speed (3.3 Volt)	512K x 16	8 Mb	8 ns	ü	ü	ü	ü
High Speed (3.3 Volt)	1M x 8	8 Mb	8 ns	ü	ü		ü
High Speed (3.3 Volt)	1M x 16	16 Mb	8 ns		ü		ü
High Speed (3.3 Volt)	2M x 8	16 Mb	8 ns		ü		ü
Low/Ultra Low Power	128K x 8	1 Mb	45 ns	ü			ü
Low/Ultra Low Power	64K x 16	1 Mb	45 ns	ü		ü	ü
Low/Ultra Low Power	128K x 16	2 Mb	45 ns	ü			ü
Low/Ultra Low Power	256K x 8	2 Mb	45 ns	ü			ü
Low/Ultra Low Power	256K x 16	4 Mb	45 ns	ü
Low/Ultra Low Power	512K x 8	4 Mb	45 ns		ü	ü
Low/Ultra Low Power	1M x 8	8 Mb	45 ns			ü	ü
Low/Ultra Low Power	512K x 16	8 Mb	45 ns		ü
Synchronous SRAM
Pipeline Burst/FlowThru	128K x 32/36	4 Mb	250 Mhz	ü	ü		ü
Pipeline Burst/FlowThru	256K x 18	4 Mb	250 Mhz		ü
Pipeline Burst/FlowThru/No Wait	256K x 36	9 Mb	250 Mhz		ü		ü
Pipeline Burst/FlowThru/No Wait	512K x 18	9 Mb	250 Mhz		ü
Pipeline Burst/FlowThru/No Wait	256K x 72	18 Mb	250 Mhz		ü
Pipeline Burst/FlowThru/No Wait	512K x 36	18 Mb	250 Mhz		ü
Pipeline Burst/FlowThru/No Wait	1M x 18	18 Mb	250 Mhz		ü
Quad/DDR II/ Pipeline Burst/FlowThru/No Wait	2M x 18	36 Mb	250 Mhz		ü
Quad/DDR II/Pipeline Burst/FlowThru/No Wait	1M x 36	36 Mb	250 Mhz		ü

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DRAM.    Our DRAM strategy is to be a long-term supplier of low and medium density DRAM products. Our DRAM products are not targeted at the main memory DRAM market and we do not compete in markets requiring the highest density DRAM products used in PCs and workstations. Instead, we provide 4, 16, 64, 128, 256 and 512 Mb DRAM products, including a 1.8 volt low power version of our 16, 64, 128 and 256 Mb synchronous DRAM (SDRAM) products. Applications for our low and medium density DRAM products include products such as WLANs, base stations, FTTH, DSL and cable modems, set top boxes, digital cameras, MP3, flat panel TVs, LCD TVs, HDTVs, video phones, VOIP, printers, disk drives, tape drives, audio/video equipment, GPS, telematics, infotainment, and other applications. Most of these applications do not require high density products, and our customers’ memory component strategy typically follows one or more generations behind the high density DRAM market. Additional DRAM products, including DDR and DDRII products, are under development. For most SDRAM products, we offer both packaged and unpacked, die only, solutions. We also offer FBGA packages, which are very small and thin, for all of our synchronous and low power DRAM products.

The following table describes our principal DRAM products and the markets in which they can be used:

Product Description	Configuration	Density	Digital Consumer Electronics	Networking	Mobile Communications	Automotive Electronics
Synchronous 3.3 Volt	1M x 16	16 Mb	ü	ü	ü	ü
Synchronous 3.3 Volt	4M x 16	64 Mb	ü	ü	ü	ü
Synchronous 3.3 Volt	2M x 32	64 Mb	ü	ü		ü
Synchronous 3.3 Volt	16M x 8	128 Mb	ü			ü
Synchronous 3.3 Volt	8M x 16	128 Mb	ü	ü	ü	ü
Synchronous 3.3 Volt	4M x 32	128 Mb	ü	ü		ü
Synchronous 3.3 Volt	32M x 8	256 Mb	ü			ü
Synchronous 3.3 Volt	16M x 16	256 Mb	ü	ü		ü
Synchronous 3.3 Volt	8M x 32	256 Mb	ü	ü		ü
Synchronous 3.3 Volt	32M x 16	512 Mb	ü	ü	ü	ü
Synchronous 3.3 Volt	16M x 32	512 Mb	ü	ü	ü	ü
Low Power Synchronous 1.8 Volt	1M x 16	16 Mb	ü		ü
Low Power Synchronous 1.8 Volt	4M x 16	64 Mb	ü		ü
Low Power Synchronous 1.8 Volt	2M x 32	64 Mb	ü	ü	ü
Low Power Synchronous 1.8 Volt	8M x 16	128 Mb	ü		ü
Low Power Synchronous 1.8 Volt	4M x 32	128 Mb	ü	ü	ü
Low Power Synchronous 1.8 Volt	16M x 16	256 Mb	ü		ü
Low Power Synchronous 1.8 Volt	8M x 32	256 Mb	ü	ü	ü
Double Data Rate Synchronous 2.5 Volt	8M x 16	128 Mb	ü	ü		ü
Double Data Rate Synchronous 2.5 Volt	4M x 32	128 Mb	ü	ü		ü
Double Data Rate Synchronous 2.5 Volt	16M x 16	256 Mb	ü	ü	ü	ü

EEPROM and Other Products.    Our other products include high performance serial EEPROM, embedded EEPROM products targeted at SmartCard applications and selected non-memory products focused on its key markets. Applications for these products include TVs, networking systems, modems, telephone sets, security

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systems, video games, automobiles and other consumer products. Sales from these products was approximately 14%, 9% and less than 5% in fiscal 2007, 2006, and 2005, respectively.

Product Warranty.    Consistent with semiconductor memory industry practice, we generally provide a limited warranty that our semiconductor memory devices are in compliance with specifications existing at the time of delivery. Liability for a stated warranty period is usually limited to replacement of defective items or return of amounts paid.

Manufacturing

We outsource our manufacturing operations, including wafer fabrication, assembly and testing. Since memory products are particularly well suited for the development of advanced process technology, we seek to participate in developing and refining the process technology used to manufacture many of our products. We believe that this strategy gives us a competitive advantage and enables us to achieve the early introduction of smaller geometries for our memory products, which results in increased performance and lower manufacturing costs, as well as facilitates access to needed capacity. Our principal manufacturing relationships are with Chartered Semiconductor, Powerchip, SMIC, and TSMC.

The manufacturing of our products begins at independent wafer foundries. Once the foundry has completed wafer processing, the wafers are shipped to subcontractors for wafer testing. They are then cut into individual memory chips, assembled into final packages and tested at our third-party subcontractors in Taiwan, China and the Philippines. Our operations groups in the U.S., China and Taiwan perform subcontractor management. We are certified under ISO 9001/2000 standards and ISO 14001, the environmental standard, and our quality system is periodically reviewed and approved by both ISO certifiers and our customers. We plan to achieve compliance with ISO/TS 16949:2002, the new automotive standard in the future.

Each of our wafer suppliers also fabricates for other integrated circuit companies, including certain of our competitors. In addition, some of our wafer suppliers manufacture memories for their own account. Although we are allocated specific wafer capacity from our suppliers, we may not be able to obtain such capacity in periods of tight supply. There can be no assurance that the foundries we use will not encounter construction or production difficulties or that they will allocate sufficient wafer capacity to satisfy our wafer requirements, especially in times of wafer capacity shortages. Moreover, there can be no assurance that we would be able to qualify additional manufacturing sources for existing or new products in a timely manner or that such additional manufacturing sources would be able to produce an adequate supply of wafers. If we were unable to obtain an adequate supply of wafers from our current or any alternative sources in a timely manner, our business and operating results would be harmed.

Our suppliers for wafer testing, assembly, and final test also provide services to other companies. There can be no assurance that these suppliers will not encounter production difficulties or that they will allocate sufficient capacity to satisfy our requirements. If we were unable to obtain an adequate supply of wafer testing, assembly, or final test services, our business and operating results would be harmed.

Competition

The semiconductor market is intensely competitive and has been characterized by cyclical market conditions, an oversupply of product, price erosion, rapid technological change and short product life cycles. Key factors impacting our competitive capabilities include:

• the pricing of our products;

• the supply and cost of wafers;

• product design, functionality, performance and reliability;

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• successful and timely product development;

• wafer manufacturing over or under capacity;

• access to advanced process technologies at competitive prices;

• access to assembly and test capacity; and

• time to market.

Any of these factors may impact our ability to compete successfully in the future and our failure to do so could harm our business.

In the market for SRAM products we compete with several domestic and international semiconductor companies including Cypress, Etron, GSI Technology, Integrated Device Technology, NEC, Renesas Technology, Samsung, Sony, and Toshiba. We also may face significant competition from other domestic and foreign integrated circuit manufacturers which have advanced technological capabilities but are not currently participating in the SRAM market sector.

In the low to medium density DRAM area we generally compete with Hynix, Micron, Nanya, Samsung, Oki and Winbond. In addition, there are several fabless Taiwanese companies that are competitors, including ESMT and Etron. Other large DRAM manufacturers could address the low and medium density DRAM market in the future.

In the EEPROM market, our primary competitors include Atmel, Catalyst, Microchip, and STMicroelectronics. We also compete with many small to medium-sized companies in one or more segments of the market.

In the Flash Controller chip market, a primary competitor is Silicon Motion Inc.

Certain of our competitors offer broader product lines and have greater financial, technical, marketing, distribution and other resources than us. In industry down cycles, they may be willing to sell below fully absorbed costs at prices we cannot match. We may not be able to compete successfully against any of these competitors.

The process technology used by our manufacturing sources, including process technology that we have developed jointly with our foundries, can be used by such foundries to produce products for other companies, including our competitors. Although we believe that our participation in the development of the processes provides us the advantage of early access to such processes, the knowledge of the wafer manufacturer may be used to benefit our competitors.

Research and Development

Rapid technological change and continuing price competition require research and development efforts on both new products and advanced processes employing smaller geometries. Our research and development activities are focused primarily on the development of new memory circuit designs at the smallest die size and utilization of advanced process technologies. We currently have design teams in San Jose, California, Taiwan and China. Our research and development expenditures in fiscal 2007, 2006, and 2005 were $20.2 million, $21.6 million, and $20.4 million, respectively.

New SRAM products in development include a die shrink on the 4Meg Asynchronous SRAM, the 16Mb Asynchronous SRAM, a 72Mb Synchronous SRAM, and an 8MB Pseudo SRAM. New DRAM products in development include 1.8 volt, low power 128Mb and 256Mb SDRAMs and DDR/DDRII DRAMs. We are developing new products on advanced 65-nanometer process technology as well as 0.09 micron, 0.11 micron,

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0.13 micron, and 0.14 micron process technology. In nonvolatile memory, we are currently designing a 256K density serial EEPROM. In addition, new SmartCard products are in development.

Patents and Intellectual Property

As of September 30, 2007, we held 115 U.S. patents. These patents expire between 2010 and 2024. We have three additional patent applications pending and expect to continue to file patent applications where appropriate to protect our proprietary technologies. In addition, through ICSI, we hold eight Taiwan patents which expire between 2021 and 2024 and have three patent applications which are pending. We also have two patent applications in China which are pending. Although patents are an important element of our intellectual property, we believe that our continued success depends primarily on factors such as the technological skills and innovation of our personnel rather than on our patents. The process of seeking patent protection can be expensive and time consuming. There can be no assurance that patents will be issued from pending or future applications or that, if patents are issued, they will not be challenged, invalidated or circumvented, or that any rights granted thereunder will provide meaningful protection or other commercial advantage to us. Moreover, there can be no assurance that any patent rights will be upheld in the future or that we will be able to preserve any of our other intellectual property rights.

In the semiconductor industry, it is not unusual for companies to receive notices alleging infringement of patents or other intellectual property rights of others. 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. Although patent holders commonly offer such licenses, 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 harm our business.

Part of our outsourcing strategy includes licensing product designs. To control our R&D expenses, we occasionally license some of our SRAM and DRAM designs from other companies or our foundries. We also license our own designs to other companies.

Employees

As of September 30, 2007, we had 417 employees worldwide, including 61 employees in the U.S., 116 in China, 216 in Taiwan, 9 in Hong Kong, 2 in Europe, 4 in India, 5 in Japan, 3 in Korea, and 1 in Singapore. Our future success will largely be dependent on our ability to attract, retain and motivate highly qualified technical and management personnel. The employment market for such personnel is competitive and there can be no assurance that we will successfully staff all necessary positions. Our employees are not represented by any collective bargaining agreements, we have never experienced a work stoppage and we believe our employee relations are good.

Executive Officers

Our executive officers and their ages as of December 1, 2007 are as follows:

Name	Age	Position
Jimmy S.M. Lee	52	Chairman, Chief Executive Officer, and Director
Kong Yeu Han	52	Vice Chairman
Scott D. Howarth	47	President and Chief Financial Officer
Chang-Chaio (James) Han	54	GM ISSI-Taiwan & SRAM/DRAM Business Division

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Set forth below is certain information relating to our executive officers.

Jimmy S.M. Lee has served as our Chairman, Chief Executive Officer and a director since he co-founded ISSI in October 1988. He reassumed the role of President in November 2005 until December 2007. From 1985 to 1988, Mr. Lee was engineering manager at International CMOS Technology, a semiconductor company, and from 1983 to 1985, he was a design manager at Signetics Corporation, a semiconductor company. He has served as a director of Chrontel, a video optics company, since July 1995 and as a director of Alpha & Omega Semiconductor, Inc., a developer of advanced power semiconductor solutions, since March 2006. Mr. Lee holds an M.S. degree in electrical engineering from Texas Tech University and a B.S. degree in electrical engineering from National Taiwan University.

Kong Yeu Han has served as our Vice Chairman since May 1, 2005 and as a director since August 11, 2005. He served as Chief Executive Officer of ICSI from January 1999 to May 2005. Mr. Han was a co-founder of ISSI and served as the Company’s Executive Vice President from April 1995 to December 1998, as Vice President from December 1988 to March 1995, and as General Manager, ISSI-Taiwan from September 1990 to December 1998. Mr. Han holds an M.S. degree in electrical engineering from the University of California, Santa Barbara and a B.S. degree in electrical engineering from National Taiwan University.

Scott D. Howarth has served as our Vice President and Chief Financial Officer since February 2006 and as our President since December 2007. From September 2001 to February 2006, Mr. Howarth was the Vice President of Finance and Administration and Chief Financial Officer of Chrontel, Inc., a San Jose, California-based fabless video optics company. Prior to joining Chrontel, Mr. Howarth was with Securecom Networks, a start-up that was acquired. From 1984 to 2000, he was employed with Intel Corporation in both finance and operation positions, and held several group controller positions in the company. Mr. Howarth holds an MBA degree in Finance and a B.S. degree in Mining Engineering from the University of Idaho.

Chang-Chaio (James) Han has served as the Company’s General Manager, ISSI-Taiwan and SRAM/DRAM Business Division since May 2005. He served as President of ICSI from October 2003 to April 2005, and as Vice President of Design of ICSI from July 1998 to October 2003. Mr. Han holds a PhD degree in electrical engineering from Case Western Reserve University and MS and BS degrees in electrical engineering from National Taiwan University.

Officers serve at the discretion of the Board and are appointed annually. There are no family relationships between the directors or officers of ISSI.

Item 1A. Risk Factors

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

We incurred losses of $14.2 million in fiscal 2006, which included inventory write-downs of $16.5 million. We incurred losses of $39.8 million in fiscal 2005, which included inventory write-downs of $13.9 million, charges of $11.7 million related to our equity interest in ICSI, charges on impairment of goodwill and investments of $4.7 million and charges for in-process R&D of $2.8 million. Though we were profitable in fiscal 2007, we incurred inventory write-downs of $10.3 million and we would not have been profitable except that we achieved significant income from non-operating activities in such fiscal year. There is no assurance that we will maintain profitability in future periods. Our ability to maintain profitability on a quarterly or fiscal year basis in the future will depend on a variety of factors, including the need for future inventory write-downs, our ability to increase net sales, maintain or expand gross margins, introduce new products on a timely basis, secure sufficient wafer fabrication capacity and control operating expenses, including stock-based compensation as required by SFAS 123R. Adverse developments with respect to these or other factors could result in quarterly or annual operating losses in the future.

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

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

• the cyclicality of the semiconductor industry;

• declines in average selling prices of our products;

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

• excess inventory levels at our customers;

• decreases in the demand for our products;

• oversupply of memory products in the market;

• our ability to control or reduce our operating expenses;

• shortages in foundry, assembly or test capacity;

• disruption in the supply of wafers, assembly or test services;

• changes in our product mix which could reduce our gross margins;

• cancellation of existing orders or the failure to secure new orders;

• a failure to introduce new products and to implement technologies on a timely basis;

• market acceptance of ours and our customers’ products;

• economic slowness and low end-user demand;

• a failure to anticipate changing customer product requirements;

• fluctuations in manufacturing yields at our suppliers;

• fluctuations in product quality resulting in rework, replacement, or loss due to damages;

• a failure to deliver products to customers on a timely basis;

• the timing of significant orders;

• increased expenses associated with new product introductions, masks or process changes;

• the ability of customers to make payments to us;

• the outcome of any pending or future litigation; and

• the commencement of any future litigation or antidumping proceedings.

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

In fiscal 2007, fiscal 2006 and in fiscal 2005, approximately 86%, 91% and 88%, respectively, of our net sales were derived from the sale of DRAM and SRAM products, which are subject to unit volume fluctuations and declines in average selling prices that could harm our business. For example, we experienced a sequential decline in revenue from $62.1 million in our December 2006 quarter to $60.0 million in our March 2007 quarter. This decline in revenue was primarily the result of a decrease in unit shipments of our SRAM products. In addition, we experienced a sequential decline in revenue from $61.5 million in our September 2005 quarter to $51.1 million in our December 2005 quarter. This decline in revenue was primarily the result of a decrease in unit shipments and the average selling prices of our DRAM products. From time to time, we have turned down some orders for DRAM products that had unfavorable margins as a result of the decrease in the average selling

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prices in the market. We may not be able to offset any future price declines for our products by higher volumes or by higher prices on newer products. Historically, average selling prices for semiconductor memory products have declined, and we expect that average selling prices for our products will decline in the future. Our ability to maintain or increase revenues will depend upon our ability to increase unit sales volume of existing products and introduce and sell new products that compensate for the anticipated declines in the average selling prices of our existing products.

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

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

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

Several shareholder derivative lawsuits have been filed against certain of our current directors and officers and certain former directors and officers relating to our historical stock option practices and related accounting. We are named as nominal defendant in such matters. See “Item 3—Legal Proceedings” for a more detailed description of these proceedings. We may become the subject of additional private or government actions regarding these matters in the future. These pending actions are in the preliminary stages, and their ultimate outcome could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price for our securities. Litigation may be time-consuming, expensive and disruptive to our normal business operations, and the outcome of litigation is difficult to predict. The defense of these lawsuits has resulted and will continue to result in significant legal and accounting expenditures and the continued diversion of our management’s time and attention from the operation of our business. All or a portion of any amount we may be required to pay to satisfy a judgment or settlement of any or all of these claims may not be covered by insurance.

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

We have used and plan to use a significant amount of our cash resources to repurchase shares of our common stock and such repurchases present potential risks and disadvantages to ISSI and its continuing stockholders.

Since Bryant R. Riley joined our board of directors in September 2006, he has been a strong advocate of share repurchase programs as a way to create stockholder value and utilize our significant cash balances. During

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this time, we have repurchased shares in the open market under Rule 10b-18 and pursuant to our offer to purchase for cash up to $30 million in shares of our common stock at a price not greater than $6.30 nor less than $5.70 per share. Under this tender offer, in September 2007, we repurchased 1,181,148 shares of our common stock at an aggregate price of approximately $7.4 million. On December 3, 2007, we announced an additional tender offer for up to 10,000,000 shares of our common stock at a price of $7.00 per share. 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 existing 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 will reduce our “public float,” which is the number of our shares owned by non-affiliate stockholders and available for trading in the securities markets, and is likely to reduce 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.

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

Substantially all of our products are incorporated into products for the digital consumer electronics, networking, mobile communications and automotive electronics markets. Historically, these markets have experienced cyclical depressed business conditions, often in connection with, or in anticipation of, a decline in general economic conditions or due to adverse supply and demand conditions in such markets. Industry downturns have resulted in reduced demand and declining average selling prices for our products which adversely affected our business. We expect that our industry will remain cyclical, and we are unable to predict when any upturn or downturn will occur or how long it will last.

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

The semiconductor industry is highly cyclical and is subject to significant downturns resulting from excess capacity, overproduction, reduced demand or technological obsolescence. Shifts in industry-wide capacity from shortages to oversupply or from oversupply to shortages may result in significant fluctuations in our quarterly or annual operating results. These shifts in industry conditions can occur quickly with little or no advance notice to us. Adverse changes in industry conditions are likely to result in a decline in average selling prices and the stated value of inventory. In fiscal 2007, fiscal 2006, and fiscal 2005, we recorded inventory write-downs of $10.3 million, $16.5 million, and $13.9 million, respectively. The inventory write-downs related to valuing our inventory at the lower-of-cost-or-market, and adjusting our inventory valuation for certain excess and obsolete products.

We write down to zero dollars the carrying value of inventory on hand that has aged over one year to cover estimated excess and obsolete exposures, unless adjustments are made based on management’s judgments for newer products, end of life products, planned inventory increases or strategic customer supply. In making such judgments to write down inventory, management takes into account the product life cycles which can range from six to 30 months, the stage in the life cycle of the product, the impact of competitors’ announcements and product introductions on our products. Future additional inventory write-downs may occur due to lower of cost or market accounting, excess inventory or inventory obsolescence.

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

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

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

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

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

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

We may encounter difficulties in effectively integrating newly acquired businesses.

From time to time, we may acquire other companies or assets that we believe to be complementary to our business. Acquisitions may result in use of our cash resources, potentially dilutive issuances of equity securities, incurrence of debt and contingent liabilities, amortization expenses related to intangible assets, and the possible impairment of goodwill, which could harm our profitability. In addition, acquisitions involve numerous risks, including:

• higher than estimated acquisition expenses;

• difficulties in successfully assimilating the operations, technologies and personnel of the acquired company;

• difficulties in continuing to develop the new technologies and deliver products to market on time;

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• diversion of management’s attention from other business concerns;

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

• the risk that the markets for acquired products do not develop as expected; and

• the potential loss of key employees and customers as a result of the acquisition.

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

We rely on third-party contractors to assemble and test our products and our failure to successfully manage our relationships with these contractors could damage our relationships with our customers, decrease our sales and limit our growth.

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

• reduced control over product quality;

• potential price increases;

• reduced control over delivery schedules;

• possible capacity shortages;

• their inability to increase production and achieve acceptable yields on a timely basis;

• absence of long-term agreements;

• limited warranties on products supplied to us; and

• general risks related to conducting business internationally.

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

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 fiscal 2007, approximately 18% of our net sales was attributable to customers located in the U.S., 15% was attributable to customers located in Europe and 67% was attributable to customers located in Asia. In fiscal 2006, approximately 17% of our net sales was attributable to customers located in the U.S., 10% was attributable

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to customers located in Europe and 73% was attributable to customers located in Asia. In fiscal 2005, approximately 15% of our net sales was attributable to customers in the U.S., 9% was attributable to customers in Europe and 75% was attributable to customers in Asia. We anticipate that sales to international 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 in primarily located in Taiwan and China. A substantial majority of our employees are located outside of the U.S and the expenses for our foreign operations are generally denominated in local currency. As a result, a devaluation of the New Taiwan dollar or Chinese Renminbi could substantially increase the cost of our operations in Taiwan or China.

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

• global economic conditions, particularly in Taiwan and China;

• duties, tariffs and other trade barriers and restrictions;

• foreign currency fluctuations;

• changes in trade policy and regulatory requirements;

• transportation delays;

• the burdens of complying with foreign laws;

• imposition of foreign currency controls;

• language barriers;

• difficulties in hiring and retaining experienced engineers in countries such as China and Taiwan;

• difficulties in collecting foreign accounts receivable;

• 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;

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• the success of our customers’ products and end-user demand;

• access to advanced process technologies at competitive prices;

• achievement of acceptable yields of functional die;

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

• the gain or loss of significant customers;

• the nature of our competitors; and

• general economic conditions.

In addition, we are vulnerable to technology advances utilized by competitors to manufacture higher performance or lower cost products. In particular, a competitor with a materially smaller die size and lower cost could dramatically gain market share in a short period of time. We may not be able to compete successfully in the future as to any of these factors. Our failure to compete successfully in these or other areas could harm our business and financial results.

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

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

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

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that we may be infringing patents, maskwork rights or copyrights owned by third-parties. If it appears necessary or desirable, we may seek licenses under patents that we are alleged to be infringing. However, licenses may not be offered and the terms of any offered licenses may not be acceptable to us.

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

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

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

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

Over the last several years, we have acquired equity positions for strategic reasons in other technology companies and we may make similar equity purchases in the future. In this regard, we own shares in SMIC with a cost basis of approximately $5.9 million and a market value at September 30, 2007 of approximately $6.1 million. The market value of SMIC shares is subject to fluctuation and our carrying value will be subject to adjustments to reflect the current market value. At September 30, 2007, our strategic investments in non-marketable securities totaled $0.6 million. These equity investments may not increase in value and there is the possibility that they could decrease in value over time, even to the point of becoming completely worthless. These equity securities are evaluated for impairment on a recurring basis and any reductions in the carrying value would lower our profitability. For example, we recorded approximately a $0.4 million impairment loss on one of our equity positions in fiscal 2006 and $0.3 million impairment losses on two equity investments in fiscal 2005.

Changes in securities laws and regulations are increasing our costs.

The Sarbanes-Oxley Act of 2002 that became law in July 2002, as well as rules subsequently implemented by the Securities and Exchange Commission and the Nasdaq Stock Market, have required changes to some of our accounting and corporate governance practices, including the report on our internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002. These rules and regulations have increased our accounting, legal and other costs, and have made some activities more difficult, time consuming and/or costly. In particular, complying with the internal control requirements of Section 404 of the Sarbanes-Oxley Act has resulted in

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increased internal efforts, significantly higher fees from our independent registered public accounting firm and significantly higher fees from third party contractors. These rules and regulations could also make it more difficult for us to attract and retain qualified executive officers and qualified members of our board of directors, particularly to serve on our audit committee.

We may experience difficulties in complying with Sarbanes-Oxley Section 404 in future periods.

We concluded that our internal control over financial reporting was effective at September 30, 2007. A key element of Section 404 compliance involves an analysis of management information systems (MIS). We are in the process of implementing a new worldwide MIS system and we are continuing to use our current systems until the new system is fully implemented. If in the future we are unable to assert that our internal control over financial reporting is effective (or if our auditors are unable to express an opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price.

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

We prepare our financial statements in conformity with accounting principles generally accepted in the U.S. These accounting principles are subject to interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting policies. A change in these policies or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. For example, beginning in the first quarter of fiscal 2006, with the adoption of SFAS 123R, we now record a charge to earnings for employee stock option grants for all stock options unvested at and granted after October 1, 2005. This accounting pronouncement has and is expected to continue to negatively impact our financial results. Technology companies generally, and our company specifically, rely on stock options as a major component of our employee compensation packages. Because we are required to expense options, we may be less likely to sustain profitability or we may have to decrease or eliminate option grants. Decreasing or eliminating option grants may negatively impact our ability to attract and retain qualified employees.

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 II, Item 7 of this Form 10-K). 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 under SFAS 123R, requires us to use valuation methodologies (which were not developed for use in valuing employee stock options and restricted stock units) 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 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. Factors may arise over time 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.

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

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

Our stock price is expected to continue to be volatile.

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

• quarter-to-quarter variations in our operating results;

• general conditions or cyclicality in the semiconductor industry or the end markets that we serve;

• new or revised earnings estimates or guidance by us or industry analysts;

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

• aggregate valuations and movement of stocks in the broader semiconductor industry;

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

• 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;

• additions or departures of senior management; and

• other events or factors, many of which are beyond our control.

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

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

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

• purchases of equity or debt securities in foundries;

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• joint ventures;

• process development relationships with foundries;

• contracts that commit us to purchase specified quantities of wafers over extended periods;

• increased price for wafers;

• option payments or other prepayments to foundries; and

• nonrefundable deposits with, or loans to, foundries in exchange for capacity commitments.

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

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

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

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

Our worldwide operations could be subject to natural disasters and other business disruptions, which could seriously harm our revenue and financial condition and increase our costs and expenses. Our corporate headquarters, and a portion of our research and development activities, are located in California, and 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 and other natural or manmade disasters.

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

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

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Item 1B. Unresolved Staff Matters

None.

Item 2. Properties

Our headquarters consists of approximately 30,000 square feet of office space located in San Jose, California. Our lease on this facility was executed in November 2006 and expires in June 2013. We relocated our headquarters to this facility in February 2007. Our China subsidiary occupies approximately 31,000 square feet under a lease that expires in February 2008. In Taiwan we now own and occupy the ICSI building which consists of approximately 375,000 square feet, a portion of which is leased to other companies. The land upon which the ICSI building is situated is leased under an operating lease that expires in March 2016. We also lease field sales offices in the U.S., Asia and Europe. We believe our existing facilities are adequate to meet our current needs and that we can renew our existing leases or obtain alternative space on terms that would not have a material impact on our financial results.

Item 3. Legal Proceedings

Shareholder Derivative Actions

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

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

The parties in both the state and federal shareholder derivative litigation have agreed to enter into settlement discussions, and both Courts have issued orders staying the litigation until such time as the discussions result in a settlement which would then be presented to each Court for approval, or until such negotiations are unsuccessful, at which time litigation would resume. If the settlement negotiations are unsuccessful, plaintiffs in the state and

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federal derivative complaints are expected to amend their complaints. Defendants will move to dismiss both the state and federal complaints.

SRAM Antitrust Litigation

Thirty-two 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-trail 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 twenty-eight of the thirty-two pending lawsuits 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. We remain a defendant in the four lawsuits brought by the U.S. Direct-Purchaser Plaintiffs.

Three purported class action lawsuits were filed against us and other SRAM suppliers in three Canadian courts alleging violation of the Canadian Competition Act and other unlawful conduct. The Canadian complaints seek compensatory and punitive damages, in addition to declaratory relief, restitution, and costs.

We are committed to defending ourself against these claims and have instructed our counsel to contest these actions vigorously. Given the preliminary stage of these proceedings and the inherent uncertainty in litigation, we are unable to predict the outcome of these suits. The final resolution of these alleged violations of federal or state antitrust laws could have a material adverse effect on our business, results of operations, or financial condition.

SRAM Antitrust Civil Investigative Demand

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

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 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 4. Submission of Matters to a Vote of Security Holders

The Company’s Annual Meeting of Stockholders was held on Monday, July 30, 2007 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 in Favor	Votes Withheld
Jimmy S.M. Lee	26,722,191	7,541,457
Kong Yeu Han	33,495,183	768,465
Melvin Keating	33,506,177	757,471
Ping K. Ko	32,315,390	1,948,258
Keith McDonald	33,021,568	1,242,080
Bryant Riley	31,613,558	2,650,090
Bruce A. Wooley	31,856,375	2,407,273

(b) The Company’s stockholders approved the adoption of the Company’s 2007 Incentive Compensation Plan under which 3,000,000 shares of its common stock were initially reserved for grant thereunder with 18,368,461 votes in favor, 4,199,916 votes against, 19,267 votes abstaining and 11,676,004 broker non-votes.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Common Stock

Our common stock has been quoted on the Nasdaq National Market under the symbol ISSI since our initial public offering in February 1995. Prior to such date, there was no public market for our common stock. The following table sets forth, for the fiscal quarters indicated, the high and low sale prices per share for our common stock as reported on the Nasdaq National Market. These prices are over-the-counter market quotations which reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

	High		Low
Fiscal Year 2006
First Quarter	$	8.59	$	6.41
Second Quarter	$	6.98	$	5.97
Third Quarter	$	6.84	$	4.97
Fourth Quarter	$	5.79	$	4.23
Fiscal Year 2007
First Quarter	$	6.37	$	5.10
Second Quarter	$	6.37	$	5.43
Third Quarter	$	6.49	$	5.38
Fourth Quarter	$	6.95	$	5.24

Holders of Record

As of December 10, 2007 there were approximately 176 stockholders of record of our common stock.

Dividends

We have never declared or paid cash dividends. We currently intend to retain any earnings for use in our business and do not anticipate paying any cash dividends on our capital stock in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans

The information required by Item 201(d) of Regulation S-K regarding securities authorized for issuance under equity compensation plans is incorporated by reference in our 2008 Proxy Statement to be filed in connection with our Annual Meeting of Stockholders.

Recent Sales of Unregistered Securities

None.

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Dollar Value of shares That May Yet Be Purchased Under the Plans
July 1, 2007–July 31, 2007	—	$	—	—	$	30,000,000	(1)
August 1, 2007–August 31, 2007	—	$	—	—	$	30,000,000	(1)
September 1, 2007–September 30, 2007	1,181,148	$	6.30	1,181,148	$	—	(2)
Total	1,181,148	$	6.30	1,181,148

(1) On June 7, 2007, we announced that our board of directors had authorized us to repurchase up to $30 million of our common stock pursuant to repurchases to have been conducted under Rule 10b-18 under the Securities Exchange Act of 1934 through programs, including company stock purchase plans under Rule 10b5-1, through brokers or in privately-negotiated transactions with nonaffiliated stockholders. In connection with the approval of our offer to purchase announced in August 2007, our board of directors terminated the repurchase program. No shares were repurchased prior to the termination.

(2) On August 15, 2007, we commenced an offer to purchase for cash up to $30 million in shares of our common stock at a price not greater than $6.30 nor less than $5.70 per share (the “Offer”). Following the expiration of the Offer on September 15, 2007, we accepted for payment 1,181,148 shares of our common stock at a purchase price of $6.30 per share pursuant to the terms of the Offer, resulting in aggregate payments of approximately $7,441,000.

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Stock Performance Graph

The following graph sets forth the Company’s total cumulative stockholder return compared to the Standard & Poor’s 500 Index and the Philadelphia Semiconductor Index (“SOX”), for the period September 30, 2002 through September 30, 2007. Total stockholder return assumes $100 invested at the beginning of the period in the common stock of the Company, the stocks represented in the Standard & Poor’s 500 Index and the stocks represented in the Philadelphia Semiconductor Index, respectively. Total return also assumes reinvestment of dividends; the Company has paid no dividends on its common stock.

Comparison of Five-Year Cumulative Return

September 30, 2002 to September 30, 2007

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Item 6. Selected Consolidated Financial Data

The selected consolidated financial data set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements and the Notes thereto included elsewhere in this report. The consolidated statement of operations data set forth below for the three year period ended September 30, 2007 and the consolidated balance sheet data set forth below at September 30, 2007 and 2006 have been derived from our audited financial statements included elsewhere in this report. The consolidated balance sheet as of September 30, 2005 and the consolidated statement of operations for the fiscal year ended September 30, 2004 have been derived from our audited financial statements not included in this report. The data for the consolidated balance sheets as of September 30, 2004 and 2003 and the consolidated statements of operations for the fiscal year ended September 30, 2003 is derived from the books and records of the Company. Our historical results are not necessarily indicative of the results to be expected for any future period.

	Fiscal Years Ended September 30,
	2007			2006			2005 (2)			2004			2003
	(In thousands, except per share data)
Consolidated Statement of Operations Data:
Net sales	$	245,395		$	217,492		$	181,438		$	181,012		$	97,660
Cost of sales		196,959			188,386			165,718			154,344			86,077
Gross profit		48,436			29,106			15,720			26,668			11,583
Operating expenses
Research and development		20,174			21,617			20,365			22,442			25,473
Selling, general and administrative		32,660			28,328			24,171			17,752			15,413
Acquired in-process technology		—			499			2,764			—			—
Impairment of goodwill		—			—			4,400			—			—
Total operating expenses		52,834			50,444			51,700			40,194			40,886
Operating loss		(4,398	)		(21,338	)		(35,980	)		(13,526	)		(29,303	)
Other income (expense), net		20,025			7,057			7,054			12,112			(255	)
Provision (benefit) for income taxes		4			(33	)		(268	)		436			3
Equity in net income (loss) of affiliates/minority interest		(262	)		6			(11,147	)		2,405			(2,711	)
Net income (loss)	$	15,361		$	(14,242	)	$	(39,805	)	$	555		$	(32,272	)
Basic net income (loss) per share (1)	$	0.41		$	(0.38	)	$	(1.09	)	$	0.02		$	(1.16	)
Diluted net income (loss) per share (1)	$	0.40		$	(0.38	)	$	(1.09	)	$	0.02		$	(1.16	)
Consolidated Balance Sheet Data:
Cash, cash equivalents, restricted cash and short-term investments	$	133,815		$	113,333		$	124,212		$	138,965		$	58,442
Total assets		262,715			260,278			284,116			300,864			158,099
Total long-term obligations and current portion of long-term obligations		—			—			—			—			—
Stockholders’ equity		213,751			203,192			222,886			262,949			131,633

(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the basis used to calculate net income (loss) per share.

(2) See Company Background section in Management’s Discussion and Analysis of Financial Condition and Results of Operations for discussion regarding comparability of fiscal 2005 results.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Company Background

On January 25, 2005, we announced our intention to acquire ICSI. ICSI was a public company in Taiwan and traded on the Gre Tai Securities Market (OTC). ICSI is a fabless semiconductor company whose principal products are DRAM and controller chips. Prior to this transaction, we owned approximately 29% of ICSI. In the nine months ended September 30, 2005, we purchased additional shares of ICSI in the open market for approximately $52.5 million increasing our ownership percentage to approximately 83% at September 30, 2005. In fiscal 2006, we purchased additional shares of ICSI for approximately $13.9 million increasing our ownership percentage to approximately 98% at September 30, 2006. In fiscal 2007, we purchased additional shares of ICSI for approximately $0.3 million and our ownership percentage was approximately 98% at September 30, 2007.

Our financial results for fiscal 2007, fiscal 2006 and for fiscal 2005 beginning May 1, 2005 reflect accounting for ICSI on a consolidated basis. On May 1, 2005, we assumed effective control of ICSI and in accordance with generally accepted accounting principles we began consolidating the financial results of ICSI with our results as of such date. Our financial results for fiscal 2005 through the period ended April 30, 2005 reflect accounting for ICSI on the equity basis and include our percentage share of the results of ICSI’s operations.

In February 2006, we sold approximately 77% of our shares in Signia Technologies Inc. (Signia), a developer of wireless semiconductors, thereby reducing our ownership percentage to approximately 16%. Effective March 1, 2006, we resumed accounting for Signia on the cost basis. During the period from December 1, 2004 through February 28, 2006, our financial results reflect accounting for Signia on a consolidated basis. Our financial results through the period ended November 30, 2004 reflect accounting for Signia on the cost basis. At September 30, 2007, we owned approximately 6% of Signia.

In December 2006, we sold our remaining investment in Key Stream Corp. (KSC), a semiconductor company. Our financial results for fiscal 2007, until our sale, for fiscal 2006 and for fiscal 2005 beginning May 1, 2005 reflect accounting for KSC on the equity basis.

Overview

We are a fabless semiconductor company that designs and markets high performance integrated circuits for the following key markets: (i) digital consumer electronics, (ii) networking, (iii) mobile communications and (iv) automotive electronics. Our primary products are high speed and low power SRAM and low and medium density DRAM. We also design and market EEPROMs, SmartCards, and selected non-memory products 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 limit and control our operating expenses, in recent years we reduced our headcount in the U.S. and transferred various functions to Taiwan and China. Our acquisition of ICSI was a key part of this strategy. We believe this strategy has enabled us to limit our operating expenses while simultaneously locating these functions closer to our manufacturing partners and our customers. As a result of these efforts, we currently have significantly more employees in Asia than we do in the U.S. We intend to continue these strategies going forward.

As a fabless semiconductor company, our business model is less capital intensive because we rely on third parties to manufacture, assemble and test our products. Because of our dependence on third-party wafer

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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 fiscal 2005, in fiscal 2006 and in fiscal 2007. We expect average selling prices for our products to decline in the future, principally due to increased market competition and an increased supply of competitive products in the market. Any future decreases in our average selling prices could have an adverse impact on our revenue growth rate, gross margins and operating margins. Our ability to maintain or increase revenues will be highly dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products in quantities sufficient to compensate for the anticipated declines in average selling prices of existing products. Declining average selling prices will adversely affect our gross margins unless we are able to offset such declines with commensurate reductions in per unit costs or changes in product mix in favor of higher margin products.

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

We market and sell our products in Asia, the U.S. and Europe and other locations through our direct sales force, distributors and sales representatives. The percentage of our sales shipped outside the U.S. was approximately 82%, 83% and 85% in fiscal 2007, 2006 and 2005, respectively. We measure sales location by the shipping destination, even if the customer is headquartered in the U.S. We anticipate that sales to international customers will continue to represent a significant percentage of our net sales. The percentages of our net sales by region are set forth in the following table:

	Fiscal Years Ended September 30,
	2007		2006		2005
Asia	67	%	73	%	75	%
Europe	15		10		9
U.S.	18		17		15
Other	—		—		1
Total	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, broad fluctuations in our overall business in the past several years makes it difficult for us to assess the impact of seasonal factors on our business.

We are subject to the risks of conducting business internationally, including economic conditions in Asia, particularly Taiwan and China, changes in trade policy and regulatory requirements, duties, tariffs and other trade

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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.

Fiscal Year Ended September 30, 2007 Compared to Fiscal Year Ended September 30, 2006

Net Sales.    Net sales consist principally of total product sales less estimated sales returns. Net sales increased by 13% to $245.4 million in fiscal 2007 from $217.5 million in fiscal 2006. The increase in net sales of $27.9 million can be attributed primarily to higher sales of our application specific standard products (ASSP) which includes our EEPROM, Smart Card and logic products as well as our SRAM products. An increase in unit shipments of our SRAM products in fiscal 2007 compared to fiscal 2006 more than offset a decline in average selling prices for such products resulting in an overall increase in SRAM revenue. Sales of ASSP products also increased in fiscal 2007 compared to fiscal 2006, but such products accounted for only about 13% of our total sales in fiscal 2007. In addition, an increase in unit shipments of our DRAM products, specifically our 128 Mb and 256 Mb DRAM products, in fiscal 2007 compared to fiscal 2006 more than offset a decrease in average selling prices resulting in an overall increase in DRAM revenue. We anticipate that the average selling prices of our existing products will generally decline over time, although the rate of decline may fluctuate for certain products. There can be no assurance that any future price declines will be offset by higher volumes or by higher prices on newer products.

In fiscal 2007 and fiscal 2006, no single customer accounted for over 10% 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 $19.3 million to $48.4 million in fiscal 2007 from $29.1 million in fiscal 2006. Our gross margin increased to 19.7% in fiscal 2007 from 13.4% in fiscal 2006. Our gross profit for fiscal 2007 included inventory write-downs of $10.3 million compared to $16.5 million of inventory write-downs in fiscal 2006. The inventory write-downs were for excess and obsolescence issues and lower of cost or market accounting on certain of our products. Our gross profit for fiscal 2007 and fiscal 2006, benefited from the sale of $3.2 million and $3.0 million, respectively, of previously written down products. The increase in gross profit in fiscal 2007 compared to fiscal 2006 can be attributed to increased unit shipments of our SRAM and ASSP products which more than offset declines in average selling prices for such products. In addition, declines in the cost of our SRAM products more than offset declines in the average selling prices of our SRAM products in fiscal 2007. This contributed to an increase in our SRAM gross margin. Our DRAM gross margin increased in fiscal 2007 compared to fiscal 2006 as a result of a shift in product mix to higher density higher margin products. We believe that the average selling prices of our products will decline over time and, unless we are able to reduce our cost per unit to the extent necessary to offset such declines, the decline in average selling prices will result in a material decline in our gross margin. In addition, product costs could increase if our suppliers raise prices, which could result in a material decline in our gross margin. In the past, foundries have raised wafer prices when demand for end products increases. Although we have product cost reduction programs in place that involve efforts to reduce internal costs and supplier costs, there can be no assurance that product costs will be reduced or that such reductions will be sufficient to offset the expected declines in average selling prices. We do not believe that such cost reduction efforts are likely to have a material adverse impact on the quality of our products or the level of service provided by us.

Research and development.    Research and development expenses decreased by 7% to $20.2 million in fiscal 2007 from $21.6 million in fiscal 2006. As a percentage of net sales, research and development expenses decreased to 8.2% in fiscal 2007 from 9.9% in fiscal 2006. The decrease in research and development expenses

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can be attributed to a decrease in maskwork expenses in fiscal 2007 compared to fiscal 2006 and a decrease in expenses for our Bluetooth and Flash controller development projects which we exited in the March 2006 quarter. These factors were partially offset by an increase in development costs for new DRAM and SRAM products as well as an increase in costs of associated with the development for products for automotive and industrial applications. Our research and development expenses could increase in absolute dollars in future periods due to increased costs associated with the development of new products.

Selling, general and administrative.    Selling, general and administrative expenses increased by 15% to $32.7 million in fiscal 2007 from $28.3 million in fiscal 2006. As a percentage of net sales, selling, general and administrative expenses increased to 13.3% in fiscal 2006 from 13.0% in fiscal 2006. The increase in selling, general and administrative expenses was mainly attributable to approximately $4.7 million in legal expenses and accounting fees in fiscal 2007 attributable to our stock option backdating investigation and shareholder derivative lawsuits compared to approximately $1.1 million of such expenses in fiscal 2006. In addition, there was an increase in selling commissions associated with higher revenues in fiscal 2007 compared fiscal 2006.

Acquired in-process technology charge.    In fiscal 2006, we incurred a $0.5 million acquired in-process technology charge (IPR&D) in connection with our purchase of additional shares of ICSI. The $0.5 million allocated to IPR&D was expensed in fiscal 2006 as it was deemed to have no future alternative use.

Interest and other income (expense), net.    Interest and other income (expense), net was $8.2 million in fiscal 2007 compared to $4.9 million in fiscal 2006. The $8.2 million of interest and other income (expense), net in fiscal 2007 is comprised primarily of interest income of $4.5 million, a $2.3 million gain in connection with the settlement of a commercial dispute, $1.7 million in rental income from the lease of excess space in our Taiwan facility and $0.5 million expense estimated for the settlement of derivative lawsuits. The $4.9 million of interest and other income (expense), net in fiscal 2006 is comprised primarily of interest income of $2.7 million, $0.9 million in foreign currency exchange gains, $0.9 million in rental income from the lease of excess space in our Taiwan facility, and $0.5 million from the sale of assets from our Bluetooth business offset by an impairment charge of approximately $(0.4) million related to our investment in Signia.

Gain on sale of investments.    The gain on the sale of investments was $12.0 million in fiscal 2007 compared to $2.5 million in fiscal 2006. In fiscal 2007, we sold shares of Ralink (a cost method equity investment) for approximately $8.9 million and recorded a pre-tax gain of approximately $7.9 million. In addition, in fiscal 2007, we sold approximately 212.8 million shares of SMIC for approximately $24.4 million which resulted in a pre-tax gain of approximately $3.8 million. We also sold our remaining shares of KSC for approximately $1.2 million which resulted in a pre-tax gain of approximately $0.3 million. In fiscal 2006, we sold our shares in E-CMOS for approximately $1.5 million which resulted in a pre-tax gain of $0.3 million. In addition, we sold approximately 77% of our shares in Signia for approximately $4.6 million which resulted in a pre-tax gain of $2.2 million. In addition, in September 2006, we sold a cost method equity investment for approximately $0.1 million resulting in a gain of approximately $26,000.

Provision (benefit) for income taxes.    For fiscal 2007, we recorded an income tax provision of $4,000 consisting of federal and state minimum taxes and foreign withholding taxes net of the reversal of previously provided taxes. For fiscal 2006, we recorded an income tax benefit of $33,000 consisting of the reversal of previously provided taxes that are no longer necessary offset by foreign withholding tax, taxes in certain foreign jurisdictions and state minimum taxes.

We have a recorded a valuation allowance against our deferred tax assets due to our operating loss history and our expectation of future taxable income. We review the realization of these deferred tax assets on an ongoing basis. Any release of the valuation allowance would have a favorable impact on the provision for income taxes within our statement of operations.

Minority interest in net(income) loss of consolidated subsidiaries.    The minority interest in net (income) loss of consolidated subsidiaries was income of $0.2 million in fiscal 2007 compared to a loss of $0.7 million in

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fiscal 2006. The minority interest in net income of consolidated subsidiaries for fiscal 2007 represents the minority shareholders’ proportionate share of the net income of ICSI. The minority interest in net loss of consolidated subsidiaries for fiscal 2006 represents the minority shareholders’ proportionate share of the net loss of ICSI for such period and the minority shareholders’ proportionate share of the net loss of Signia for the five months ended February 28, 2006. Effective March 2006, we account for Signia on the cost basis.

Equity in net loss of affiliated companies.    Equity in net loss of affiliated companies was $0.1 million in fiscal 2007 compared to $0.7 million in fiscal 2006. This related to our equity interest in KSC which we sold in December 2006.

Fiscal Year Ended September 30, 2006 Compared to Fiscal Year Ended September 30, 2005

Net Sales.    Net sales increased by 20% to $217.5 million in fiscal 2006 from $181.4 million in fiscal 2005. The increase in net sales of $36.1 million can principally be attributed to our acquisition of a controlling interest in and the resulting consolidation of ICSI’s results of operations beginning in May 2005. An increase in unit shipments of our SRAM products in fiscal 2006 compared to fiscal 2005 more than offset a decline in average selling prices for such products resulting in an overall increase in SRAM revenue. In addition, an increase in unit shipments of our DRAM products, specifically our 16 Mb, 128 Mb and 256 Mb DRAM products, in fiscal 2006 compared to fiscal 2005 more than offset a decrease in average selling prices for such products resulting in an overall increase in DRAM revenue.

In fiscal 2006 and fiscal 2005, no single customer accounted for over 10% of our net sales.

Gross profit.    Gross profit increased by $13.4 million to $29.1 million in fiscal 2006 from $15.7 million in fiscal 2005. Our gross margin increased to 13.4% in fiscal 2006 from 8.7% in fiscal 2005. Our gross profit for fiscal 2006 included inventory write-downs of $16.5 million compared to $13.9 million of inventory write-downs in fiscal 2005. The inventory write-downs were for excess and obsolescence issues and lower of cost or market accounting on certain of our products. The increase in gross profit in fiscal 2006 can be attributed to increased unit shipments of DRAM and SRAM products due to our acquisition of ICSI which more than offset declines in average selling prices for such products. Also, we recognized $3.0 million of gross profit on inventory sold during fiscal 2006 that had been previously written-off. The increase in the gross margin in fiscal 2006 compared to fiscal 2005 can be primarily attributed to declines in the cost of our DRAM products which more than offset declines in the average selling prices of our DRAM products. This contributed to an increase in our DRAM gross margin. However, declines in the average selling prices of our SRAM products more than offset declines in the cost of our SRAM products in fiscal 2006 compared to fiscal 2005 resulting in a decline in our SRAM gross margin.

Research and development.    Research and development expenses increased by 6% to $21.6 million in fiscal 2006 from $20.4 million in fiscal 2005. As a percentage of net sales, research and development expenses decreased to 9.9% in fiscal 2006 from 11.2% in fiscal 2005. Fiscal 2006 includes stock-based compensation expense under SFAS 123R of approximately $2.1 million and fiscal 2005 includes stock-based compensation of approximately $1.0 million. Research and development expenses also increased from fiscal 2005 to fiscal 2006 due to our consolidation of ICSI but such increase was offset by a decrease in research and development expenses in the U.S. and for Bluetooth and Flash controller development projects which we exited in the March 2006 quarter. Our research and development expenses for fiscal 2006 included $0.5 million attributable to SRAM mask works acquired in an asset purchase from Alliance Semiconductor.

Selling, general and administrative.    Selling, general and administrative expenses increased by 17% to $28.3 million in fiscal 2006 from $24.2 million in fiscal 2005. As a percentage of net sales, selling, general and administrative expenses decreased to 13.0% in fiscal 2006 from 13.3% in fiscal 2005. Fiscal 2006 includes stock-based compensation expense under SFAS 123R of approximately $2.4 million and fiscal 2005 includes stock-based compensation of $0.9 million. In addition, fiscal 2006 includes approximately $1.1 million in legal

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expenses in the September 2006 quarter attributable to our stock option backdating investigation. Fiscal 2005 includes a charge to allowance for doubtful accounts of approximately $1.0 million, primarily for amounts due from Delphi Electronics and a $1.1 million write-off of excess facility space in our former Santa Clara headquarters. Excluding the aforementioned items, the increase in selling, general and administrative expenses was primarily attributable to our consolidation of ICSI.

Acquired in-process technology charge.    In fiscal 2006, we incurred a $0.5 million acquired in-process technology charge (IPR&D) in connection with our purchase of additional shares of ICSI. The $0.5 million allocated to IPR&D was expensed in fiscal 2006 as it was deemed to have no future alternative use. In fiscal 2005, we incurred a $2.8 million IPR&D charge of which $2.5 million related to our acquisition of ICSI shares in the five months ended September 30, 2005 and $0.3 million related to our acquisition of Signia in December 2004.

Interest and other income (expense), net.    Interest and other income (expense), net was $4.9 million in fiscal 2006 compared to $2.2 million in fiscal 2005. The $4.9 million of interest and other income (expense), net in fiscal 2006 is comprised primarily of interest income of $2.7 million, $0.9 million in foreign currency exchange gains, $0.9 million in rental income from the lease of excess space in our Taiwan facility, and $0.5 million from the sale of assets from our Bluetooth business offset by an impairment charge of approximately $(0.4) million related to our investment in Signia. The $2.2 million of other income in fiscal 2005 is comprised primarily of interest income of $2.6 million and the gain on the sale of assets of $0.5 million offset by $(0.8) million in foreign currency exchange losses and $(0.3) million in impairment losses related to two of our cost method equity investments.

Gain on sale of investments.    The gain on the sale of investments was $2.5 million in fiscal 2006 compared to $5.0 million in fiscal 2005. In fiscal 2006, we sold our shares in E-CMOS for approximately $1.5 million which resulted in a pre-tax gain of $0.3 million. In addition, we sold approximately 77% of our shares in Signia for approximately $4.6 million which resulted in a pre-tax gain of $2.2 million. As a result of the sale of the Signia shares, we reduced our ownership percentage to approximately 16% and effective March 2006 account for Signia on the cost basis. In addition, in September 2006, we sold a cost method equity investment for approximately $0.1 million resulting in a gain of approximately $26,000. In fiscal 2005, we sold shares of SMIC for approximately $8.7 million which resulted in a pre-tax gain of $4.4 million. In addition, we sold our investment in NexFlash (including shares held by ICSI) for approximately $3.2 million, which resulted in a pre-tax gain of $0.6 million.

Benefit for income taxes.    For fiscal 2006, we recorded an income tax benefit of $33,000 consisting of the reversal of previously provided taxes that are no longer necessary offset by foreign withholding tax, taxes in certain foreign jurisdictions and state minimum taxes. The benefit for income taxes for fiscal 2005 of $268,000 consists of the reversal of previously provided taxes that are no longer necessary offset by foreign withholding tax and state minimum taxes.

Minority interest in net loss of consolidated subsidiaries.    The minority interest in net loss of consolidated subsidiaries was $0.7 million in fiscal 2006 compared to $0.8 million in fiscal 2005. The minority interest in net loss of consolidated subsidiaries for fiscal 2006 represents the minority shareholders’ proportionate share of the net loss of ICSI for such period and the minority shareholders’ proportionate share of the net loss of Signia for the five months ended February 28, 2006. Effective March 2006, we account for Signia on the cost basis. The minority interest in net loss of consolidated subsidiaries for fiscal 2005 represents the minority shareholders’ proportionate share of the net loss of Signia for the ten months ended September 30, 2005 and the minority shareholders’ proportionate share of the net loss of ICSI for the five months ended September 30, 2005.

Equity in net loss of affiliated companies.    Equity in net loss of affiliated companies was $0.7 million in fiscal 2006 compared to $11.9 million loss in fiscal 2005. In fiscal 2006, we recorded a loss of approximately $0.7 million related to our equity interest in KSC. In fiscal 2005, we recorded a loss of approximately

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$11.9 million related primarily to our equity interest in ICSI prior to our consolidation of ICSI’s financial results effective May 1, 2005.

Liquidity and Capital Resources

As of September 30, 2007, our principal sources of liquidity included cash, cash equivalents and short-term investments of approximately $133.8 million. During fiscal 2007, operating activities provided cash of approximately $22.4 million compared to $2.6 million provided in fiscal 2006. The cash provided by operations in fiscal 2007 was primarily due decreases in inventories of $21.2 million. The cash provided by operations in fiscal 2006 was primarily due to decreases in inventories of $7.1 million as a result a decrease in inventory purchases in an effort to manage inventory levels, increases in accounts payable of $4.3 million and increases in accrued expenses and other liabilities of $2.5 million. This was partially offset by our uses of cash in fiscal 2006, including our net loss of $14.2 million adjusted for non-cash items of $6.6 million (gain on the sale of Signia shares of $(2.2) million, gain on the sale of assets of $(0.6) million, gain on the sale of E-CMOS of $(0.3) million, stock-based compensation expense of $4.6 million, equity in net loss of affiliated companies of $0.7 million, depreciation and amortization of $3.5 million, amortization of intangibles of $1.8 million, acquired in-process technology charge of $0.5 million and other non-cash items of $(1.4) million) and increases in accounts receivable of $3.2 million.

In fiscal 2007, we generated $0.8 million from investing activities compared to $10.2 million generated in fiscal 2006. In fiscal 2007, we generated approximately $28.2 million from the sale of shares of SMIC, resulting in a pre-tax gain of approximately $3.8 million, generated approximately $8.9 million from the sale of shares of Ralink, resulting in a pre-tax gain of approximately $7.9 million and generated approximately $1.2 million from our sale of shares of KCS, resulting in a pre-tax gain of approximately $0.3 million. We used $32.9 million for net purchases of available-for-sale securities and $0.3 million for the purchase of additional shares of ICSI. The cash generated from investing activities in fiscal 2006 primarily resulted from net sales of available-for-sale securities of $18.5 million. In addition, during fiscal 2006, we generated $1.5 million from the sale of our investment in E-CMOS resulting in a pre-tax gain of approximately $0.3 million, $4.6 million from the sale of Signia shares resulting in a pre-tax gain of approximately $2.2 million (which was offset by $0.1 million from the deconsolidation of Signia) and $1.3 million from the sale of Bluetooth and other assets. We used approximately $13.9 million in fiscal 2006 for the purchase of additional shares of ICSI.

In fiscal 2007, we made capital expenditures of approximately $4.4 million for computer software and hardware, test equipment and engineering tools compared to $1.7 million in fiscal 2006. We expect to spend approximately $1.5 million to $3.0 million to purchase capital equipment during the next twelve months, principally for the purchase of design and engineering tools, additional test equipment, and computer software and hardware. We expect to fund our capital expenditures from our existing cash and cash equivalent balances.

We used $7.0 million for financing activities during fiscal 2007 compared to $3.0 million used in fiscal 2006. In fiscal 2007, we used $28.9 million for the repayment of short-term borrowings and $7.4 million for the repurchase and retirement of our common stock. Our sources of financing for fiscal 2007 were borrowings of $27.2 million under ICSI lines of credit, borrowings of $0.6 million under equipment financing loans and proceeds from the issuance of common stock of $1.5 million from stock option exercises. In fiscal 2006, we used $65.9 million for the repayment of short-term borrowings. Our sources of financing for fiscal 2006 were borrowings of $60.9 million under ICSI lines of credit, proceeds from the issuance of common stock of $1.8 million from stock option exercises and sales under our employee stock purchase plan and a decrease in restricted cash of $0.2 million.

We have $12.9 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 August 2008. As of September 30, 2007, we had outstanding borrowings of approximately $0.6 million under these short-term lines of credit. Our unused short-term lines of credit amounted to approximately $12.3 million at September 30, 2007.

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In November 2006, we entered into a lease for approximately 30,000 square feet of office space in San Jose and relocated our headquarters there in February 2007. The lease on this building expires in June 2013. Outside of the U.S., we have operations in leased sites in China and Hong Kong. In addition to these sites, we lease sales offices in the U.S., Europe and Asia. These leases expire at various dates through 2009. In Taiwan, we own and occupy the ICSI building. The land upon which the ICSI building is situated is leased under an operating lease that expires in March 2016. Our outstanding commitments under these leases were approximately $4.3 million at September 30, 2007.

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.

Our contractual cash obligations at September 30, 2007 are outlined in the table below:

	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(In thousands)
Operating leases	$	4,265	$	734	$	1,147	$	1,294	$	1,090
Purchase obligations with wafer foundries		26,677		26,677		—		—		—
Non-cancelable purchase commitments		—		—		—		—		—
Total contractual cash obligations	$	30,942	$	27,411	$	1,117	$	1,294	$	1,090

On November 28, 2007, we announced that our board of directors had approved the repurchase of up to $80 million of shares of our common stock. We intend to use $70 million of this amount to repurchase up to 10 million of our common stock through a self-tender offer at a price of $7.00 per share. The offer commenced on December 3, 2007 and is expected to close in early January 2008.

We believe our existing funds will satisfy our anticipated working capital and other cash requirements through at least the next 12 months. We may from time to time take actions to further increase our cash position through equity or debt financings, sales of shares of investments, bank borrowings, or the disposition of certain assets. From time to time, we may also commit to acquisitions or equity investments, including strategic investments in wafer fabrication foundries or assembly and test subcontractors. To the extent we enter into such transactions, 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 September 30, 2007, we did not have any off-balance sheet arrangements, as defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies

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

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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 other expense when we record impairments; (v) the valuation of our non-marketable equity securities, which impacts other expense when we record impairments and (vi) accounting for stock-based compensation which impacts costs of goods sold, research and development expense and selling, general and administrative expense. Each of these policies is described in more detail below. We also have other key accounting policies that may not require us to make estimates and judgments that are as subjective or difficult. For instance, our policies with regard to revenue recognition, including the deferral of revenues on sales to distributors with sales price rebates and product return privileges. These policies are described in the notes to our financial statements contained elsewhere in this Report on Form 10-K.

Valuation of inventory.    Our inventories are stated at the lower of cost or market value. Determining market value requires us to project unit prices and volumes for future periods in which we expect to sell inventory on hand as of the balance sheet date. As a result of these estimates, we may record a charge to cost of goods sold, which decreases our gross profit, in advance of when the inventory is actually sold to reflect market values, net of sales commission costs, that are below our manufacturing costs. Conversely, if we sell inventory that has previously been written down to the lower of cost or market at more favorable prices than we had forecasted at the time of the write-down, our gross profit may be higher. In addition to lower of cost or market write-downs, we also analyze inventory to determine whether any of it is excess, obsolete or defective. We write down to zero dollars (which is a charge to cost of goods sold) the carrying value of inventory on hand that has aged over one year to cover estimated excess and obsolete exposures, unless adjustments are made based on our judgments for newer products, end of life products, planned inventory increases or strategic customer supply. In making such judgments to write down inventory, we take into account the product life cycles which can range from six to 30 months, the stage in the life cycle of the product, and the impact of competitors’ announcements and product introductions on our products. Once established, these adjustments are considered permanent.

Valuation of allowance for sales returns and allowances.    Net sales consist principally of total product sales less estimated sales returns. To estimate sales returns and allowances, we analyze potential customer specific product application issues, potential quality and reliability issues and historical returns. We evaluate quarterly the adequacy of the 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.

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 Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations.” Under this method, the total consideration paid, excluding, if any, the contingent consideration that has not been earned, is allocated over the fair value of the net assets acquired, including in-process research

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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. In fiscal 2005, we recorded charges for impairment of goodwill in the amount of $4.4 million.

Valuation of non-marketable securities.    Our ability to recover our strategic investments in equity securities that are non-marketable and to earn a return on these investments is largely dependent on financial market conditions and the occurrence of liquidity events, such as initial public offerings, mergers or acquisitions, and private equity transactions. The timing of when any of these events may occur is uncertain and very difficult to predict. In addition, under our accounting policy, we are required to periodically review all of our investments for impairment. In the case of non-marketable equity securities, this requires significant judgment on our part, including an assessment of the investees’ financial condition, the existence of subsequent rounds of financing and the impact of any relevant equity preferences, as well as the investees’ historical results of operations and projected results and cash flows. If the actual outcomes for the investees’ are significantly different from their forecasts, the carrying value of our non-marketable equity securities may be above fair value, and we may incur additional charges in future periods, which will decrease our profitability. In fiscal 2006, we recorded an impairment loss of approximately $0.4 million related to one of our non-marketable equity securities. In fiscal 2005, we recorded approximately $0.3 million impairment losses related to two of our non-marketable equity securities. At September 30, 2007, our strategic investments in non-marketable securities totaled $0.6 million.

Accounting for stock-based compensation.    Effective October 1, 2005, we adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), using the modified prospective transition method and therefore have not restated results for prior periods. Under SFAS 123R, stock option costs 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, SFAS 123R requires forfeitures to be estimated 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. Based upon the Securities and Exchange Commission (SEC) issuance of Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC’s interpretation of SFAS 123R, we use the simplified calculation of expected life. 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.

40

Impact of Recently Issued Accounting Standards

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

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

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

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This Statement replaces SFAS No. 141,Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called thepurchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) will apply prospectively to business combinations for which the acquisition date is on or after Company’s fiscal year beginning October 1, 2009. While we have not yet evaluated this statement for the impact, if any, that SFAS No. 141(R) will have on its consolidated financial statements, we will be required to expense costs related to any acquisitions after September 30, 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. We have not yet determined the impact, if any, that SFAS No. 160 will have on its consolidated financial statements. SFAS No. 160 is effective for the Company’s fiscal year beginning October 1, 2009

41

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

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

We anticipate that international sales will continue to account for a significant portion of our consolidated revenue. Our international sales are largely denominated in U.S. dollars and therefore are not subject to material foreign currency exchange risk. However, we have operations in China, Europe, Taiwan, Hong Kong, India, Japan, Korea and Singapore where our expenses are denominated in each country’s local currency and are subject to foreign currency exchange risk. In fiscal 2007 and in fiscal 2006, we recorded exchange gains of approximately $0.1 million and $0.9 million, respectively. However, in fiscal 2005, we recorded exchange losses of approximately $0.8 million. While in recent periods, we have not experienced any significant negative impact on our operations as a result of fluctuations in foreign currency exchange rates, 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 $127.7 million at September 30, 2007 excluding $6.1 million of SMIC stock included in short-term investments. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without increasing risk. We invest primarily in high-quality, short-term debt instruments such as municipal auction rate certificates and instruments issued by high quality financial institutions and companies, including money market instruments. A hypothetical one percentage point decrease in interest rates would result in approximately a $1.3 million decrease in our interest income. As our portfolio consists mainly of short-term investments whose interest rates reset, a hypothetical one percentage point change in interest rates would not have a material affect on the value of our investments.

We own ordinary shares in SMIC which has been a publicly traded company since March 2004. SMIC’s ordinary shares are traded on the Hong Kong Stock Exchange and SMIC American Depository Receipts (“ADR”) are traded on the New York Stock Exchange. Each SMIC ADR represents fifty (50) ordinary shares. We use the weighted-average cost method to determine the cost basis of shares of SMIC. In fiscal 2007, we sold shares of SMIC and recorded gross proceeds of approximately $28.2 million and a pre-tax gain of approximately $3.8 million. Since SMIC’s IPO, we account for our shares in SMIC under the provisions of FASB 115 and mark the shares to the market value with the offset recorded in accumulated other comprehensive income. The cost basis of our shares in SMIC is approximately $5.9 million and the market value at September 30, 2007 was approximately $6.1 million. The cost basis of our shares in SMIC is approximately $3.4 million and the market value at December 13, 2007 was approximately $2.9 million. The market value of SMIC shares is subject to fluctuations and our carrying value will be subject to adjustments to reflect changes in SMIC’s market value in future periods. In the event the market value of our SMIC shares declines below our cost basis, and the decline is other-than-temporary, we may be required to recognize a loss on our investment through operating results.

We have investments in equity securities of privately held companies of approximately $0.6 million at September 30, 2007. These investments are generally in companies in the semiconductor industry. These investments are included in other assets and are accounted for using the equity or cost method. For investments in which no public market exists, our policy is to review the operating performance, recent financing transactions and cash flow forecasts for such companies in assessing whether our investments in these companies are impaired below our cost basis. Impairment losses on equity investments are recorded when events and circumstances indicate that such assets are impaired and the decline in value is other than temporary. In this regard, we recorded approximately a $0.4 million impairment loss on one of our equity positions in fiscal 2006.

42

Item 8. Financial Statements and Supplementary Data

INTEGRATED SILICON SOLUTION, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm	44
Financial Statements:
Consolidated Statements of Operations For Fiscal Years Ended September 30, 2007, September 30, 2006, and September 30, 2005	47
Consolidated Balance Sheets As of September 30, 2007 and September 30, 2006	48
Consolidated Statements of Stockholders’ Equity For Fiscal Years Ended September 30, 2007, September 30, 2006, and September 30, 2005	49
Consolidated Statements of Cash Flows For Fiscal Years Ended September 30, 2007, September 30, 2006, and September 30, 2005	50
Notes to Consolidated Financial Statements	51

43

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Integrated Silicon Solution, Inc.

We have audited the accompanying consolidated balance sheet of Integrated Silicon Solution, Inc. (the “Company”), a Delaware Corporation, as of September 30, 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended September 30, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Integrated Silicon Solution, Inc. as of September 30, 2007, and the consolidated results of its operations and its cash flows for the year ended September 30, 2007 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 13 to the consolidated financial statements, effective October 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Integrated Silicon Solution, Inc.’s internal control over financial reporting as of September 30, 2007, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 14, 2007, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/    GRANT THORNTON LLP

San Jose, California

December 14, 2007

44

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders,

Integrated Silicon Solution, Inc.

We have audited Integrated Silicon Solution, Inc.’s (a Delaware Corporation), internal control over financial reporting as of September 30, 2007, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Integrated Silicon Solution, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on Integrated Silicon Solution, Inc.’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Integrated Silicon Solution, Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2007, based on criteria established inInternal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheet of Integrated Silicon Solution Inc. as of September 30, 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended September 30, 2007, and our report dated December 14, 2007, expressed an unqualified opinion on those consolidated financial statements.

/s/    GRANT THORNTON LLP

San Jose, California

December 14, 2007

45

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Integrated Silicon Solution, Inc.

We have audited the accompanying consolidated balance sheet of Integrated Silicon Solution, Inc. as of September 30, 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended September 30, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Integrated Silicon Solution, Inc. at September 30, 2006, and the consolidated results of its operations and its cash flows for each of the two years in the period ended September 30, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, in the year ended September 30, 2006, the Company changed its method of accounting for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123R, “Share-Based Payment.”

/s/    ERNST & YOUNG LLP

San Jose, California

May 24, 2007

46

INTEGRATED SILICON SOLUTION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended September 30,
	2007			2006			2005
	(in thousands, except per share data)
Net sales (See Note 19)	$	245,395		$	217,492		$	181,438
Cost of sales (See Note 19)		196,959			188,386			165,718
Gross profit		48,436			29,106			15,720
Operating expenses
Research and development		20,174			21,617			20,365
Selling, general and administrative		32,660			28,328			24,171
Acquired in-process technology charge		—			499			2,764
Impairment of goodwill		—			—			4,400
Total operating expenses		52,834			50,444			51,700
Operating loss		(4,398	)		(21,338	)		(35,980	)
Interest and other income (expense), net		8,188			4,855			2,229
Interest expense		(195	)		(278	)		(177	)
Gain on sales of investments, net		12,032			2,480			5,002
Income (loss) before income taxes, minority interest and equity in net loss of affiliated companies		15,627			(14,281	)		(28,926	)
Provision (benefit) for income taxes		4			(33	)		(268	)
Income (loss) before minority interest and equity in net loss of affiliated companies		15,623			(14,248	)		(28,658	)
Minority interest in net (income) loss of consolidated subsidiaries		(170	)		693			767
Equity in net loss of affiliated companies		(92	)		(687	)		(11,914	)
Net income (loss)	$	15,361		$	(14,242	)	$	(39,805	)
Basic net income (loss) per share	$	0.41		$	(0.38	)	$	(1.09	)
Shares used in basic per share calculation		37,631			37,419			36,663
Diluted net income (loss) per share	$	0.40		$	(0.38	)	$	(1.09	)
Shares used in diluted per share calculation		37,975			37,419			36,663

See the accompanying notes to consolidated financial statements

47

INTEGRATED SILICON SOLUTION, INC.

CONSOLIDATED BALANCE SHEETS

	As of September 30,
	2007			2006
	(in thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents	$	53,722		$	37,318
Short-term investments		80,093			76,015
Accounts receivable, net of allowance for doubtful accounts of $1,465 in 2007 and $1,913 in 2006		37,030			31,500
Accounts receivable from related parties (See Note 19)		—			406
Inventories		32,056			52,417
Other current assets		6,134			4,799
Total current assets		209,035			202,455
Property, equipment and leasehold improvements, net		23,284			21,984
Goodwill		25,338			25,338
Purchased intangible assets, net		3,538			5,391
Other assets		1,520			5,110
Total assets	$	262,715		$	260,278
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt and notes	$	614		$	1,632
Accounts payable		36,509			35,683
Accounts payable to related parties (See Note 19)		—			4,440
Accrued compensation and benefits		3,588			2,928
Accrued expenses		6,734			9,665
Total current liabilities		47,445			54,348
Other long-term liabilities		793			2,048
Total liabilities		48,238			56,396
Commitments and contingencies (See Note 16)		—			—
Minority interest		726			690
Stockholders’ equity:
Preferred stock, $0.0001 par value: Authorized shares—5,000 in 2007 and 2006. No shares outstanding		—			—
Common stock, $0.0001 par value: Authorized shares—70,000 in 2007 and 2006. Issued and outstanding shares—36,655 in 2007 and 37,612 in 2006		4			4
Additional paid-in capital		376,998			379,038
Accumulated deficit		(162,668	)		(178,029	)
Accumulated comprehensive income (loss)		(583	)		2,179
Total stockholders’ equity		213,751			203,192
Total liabilities and stockholders’ equity	$	262,715		$	260,278

See the accompanying notes to consolidated financial statements

48

INTEGRATED SILICON SOLUTION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Stock				Additional Paid-In Capital			Accumulated Deficit			Accumulated Comprehensive Income (Loss)			Deferred Stock-Based Compensation			Total Stockholders’ Equity
	Shares		Amount
	(in thousands)
Balance at September 30, 2004	36,178		$	4	$	371,893		$	(123,982	)	$	20,570		$	(5,536	)	$	262,949
Components of comprehensive loss:
Net loss	—			—		—			(39,805	)		—			—			(39,805	)
Change in cumulative translation adjustment, net of tax	—			—		—			—			2,746			—			2,746
Change in unrealized gain on investments, net of tax	—			—		—			—			(9,207	)		—			(9,207	)
Total comprehensive loss																		(46,266	)
Adjustment to stockholders’ equity due to disproportional acquisition of investee companies’ new shares	—			—		486			—			—			—			486
Stock options exercised	738			—		2,797			—			—			—			2,797
Shares issued under stock purchase plan	284			—		999			—			—			—			999
Unearned compensation associated with stock options granted at less than fair market value	—			—		2,904			—			—			(2,904	)		—
Cancellation of stock options	—			—		(102	)		—			—			—			(102	)
Reversal of unearned compensation on options associated with employee terminations	—			—		(2,500	)		—			—			2,500			—
Amortization of deferred stock-based compensation	—			—		—			—			—			2,023			2,023
Balance at September 30, 2005	37,200			4		376,477			(163,787	)		14,109			(3,917	)		222,886
Components of comprehensive loss:
Net loss	—			—		—			(14,242	)		—			—			(14,242	)
Change in cumulative translation adjustment, net of tax	—			—		—			—			(528	)		—			(528	)
Change in unrealized gain on investments, net of tax	—			—		—			—			(11,402	)		—			(11,402	)
Total comprehensive loss																		(26,172	)
Adjustment to stockholders’ equity due to disproportional acquisition of investee companies’ new shares	—			—		3			—			—			—			3
Stock options exercised	198			—		769			—			—			—			769
Shares issued under stock purchase plan	214			—		1,067			—			—			—			1,067
Reversal of deferred stock-based compensation	—			—		(3,917	)		—			—			3,917			—
Stock-based compensation	—			—		4,639			—			—			—			4,639
Balance at September 30, 2006	37,612			4		379,038			(178,029	)		2,179			—			203,192
Components of comprehensive loss:
Net income	—			—		—			15,361			—			—			15,361
Change in cumulative translation adjustment, net of tax	—			—		—			—			742			—			742
Change in unrealized gain on investments, net of tax	—			—		—			—			(4,461	)		—			(4,461	)
Total comprehensive income																		11,642
Adjustment for initially applying SFAS No. 158, net of tax	—			—		—			—			957			—			957
Stock options exercised	224			—		1,461			—			—			—			1,461
Stock-based compensation	—			—		3,940			—			—			—			3,940
Shares repurchased under tender offer	(1,181	)		—		(7,441	)		—			—			—			(7,441	)
Balance at September 30, 2007	36,655		$	4	$	376,998		$	(162,668	)	$	(583	)	$	—		$	213,751

See the accompanying notes to consolidated financial statements

49

INTEGRATED SILICON SOLUTION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended September 30,
	2007			2006			2005
	(in thousands)
Cash flows from operating activities:
Net income (loss)	$	15,361		$	(14,242	)	$	(39,805	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Stock-based compensation		3,940			4,639			1,921
Depreciation and amortization		3,042			3,523			3,565
Amortization of intangibles		2,027			1,755			540
Acquired in-process technology charge		—			499			2,764
Net gain on sale of investments		(12,032	)		(2,480	)		(5,002	)
Loss on embedded derivative		—			—			21
Impairment of investments		—			426			304
Impairment of goodwill		—			—			4,400
Loss (gain) on sale of property, equipment and leasehold improvements		18			(575	)		(321	)
Provision for bad debts		(184	)		(338	)		1,039
Net foreign currency transaction (gains) losses		(53	)		(881	)		757
Equity in net loss of affiliated companies		92			687			11,914
Minority interest in net income (loss) of consolidated subsidiaries		170			(693	)		(767	)
Changes in operating assets and liabilities:
Accounts receivable and accounts receivable from related parties (See Note 19)		(4,762	)		(3,246	)		12,194
Inventories		21,181			7,118			19,362
Other assets		284			(351	)		3,418
Accounts payable and accounts payable to related parties (See Note 19)		(3,989	)		4,272			(8,353	)
Accrued expenses and other liabilities		(2,655	)		2,458			(3,424	)
Net cash provided by operating activities		22,440			2,571			4,527
Cash flows from investing activities:
Acquisition of property, equipment and leasehold improvements		(4,402	)		(1,702	)		(1,048	)
Proceeds from sale of assets		—			1,288			549
Purchases of available-for-sale securities		(102,900	)		(58,900	)		(105,776	)
Sales of available-for-sale securities		69,971			77,363			168,848
Investment in Signia Technologies, Inc. (Signia), net of cash and cash equivalents		—			—			(7,173	)
Cash impact of deconsolidation of Signia		—			(149	)		—
Investment in Integrated Circuit Solution, Inc. (ICSI), net of cash and cash equivalents		(307	)		(13,860	)		(44,122	)
Investment in NexFlash		—			—			(452	)
Proceeds from sale of Ralink equity securities		8,938			—			—
Proceeds from sale of Keystream Corporation (KSC) equity securities		1,237			—			—
Proceeds from sale of NexFlash equity securities		—			—			3,169
Proceeds from sale of Signia equity securities		—			4,620			—
Proceeds from sale of Semiconductor Manufacturing International Corp. (SMIC) equity securities		28,234			—			8,692
Proceeds from sale of E-CMOS equity securities		—			1,454			—
Proceeds from the sale of other equity securities		—			126			—
Net cash provided by investing activities		771			10,240			22,687
Cash flows from financing activities:
Repurchases and retirements of common stock		(7,441	)		—			—
Proceeds from issuance of stock through compensation plans		1,461			1,836			3,796
Proceeds from borrowings under equipment financing loans		606			—			—
Proceeds from borrowings under short-term lines of credit		27,259			60,866			17,852
Principal payments of notes payable, equipment financing and long-term obligations		(28,893	)		(65,866	)		(22,989	)
Payment of convertible debentures		—			—			(16,352	)
Decrease in restricted cash		—			150			1,190
Net cash used in financing activities		(7,008	)		(3,014	)		(16,503	)
Effect of exchange rate changes on cash and cash equivalents		201			37			(242	)
Net increase in cash and cash equivalents		16,404			9,834			10,469
Cash and cash equivalents at beginning of year		37,318			27,484			17,015
Cash and cash equivalents at end of year	$	53,722		$	37,318		$	27,484

See the accompanying notes to consolidated financial statements

50

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Organization and Significant Accounting Policies

Organization

Integrated Silicon Solution, Inc. (the “Company”) was incorporated in California on October 27, 1988 and reincorporated in Delaware on August 9, 1993. The Company is a fabless semiconductor company that designs and markets high performance integrated circuits for the following key markets: (i) digital consumer electronics, (ii) networking, (iii) mobile communications and (iv) automotive electronics. The Company’s primary products are high speed and low power SRAM and low and medium density DRAM. The Company also designs and markets EEPROMs, SmartCards, and selected non-memory products focused on its key markets.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Integrated Silicon Solution, Inc. and its wholly and majority owned subsidiaries, after elimination of all significant intercompany accounts and transactions.

The Company’s financial results for fiscal 2007, fiscal 2006 and fiscal 2005 effective May 1, 2005 reflect accounting for Integrated Circuit Solution, Inc. (ICSI) on a consolidated basis. The Company’s financial results for fiscal 2005 through the period ended April 30, 2005 reflect accounting for its investment in ICSI using the equity method and include its percentage share of the results of ICSI’s operations during those periods. On May 1, 2005, the Company assumed effective control of ICSI and in accordance with generally accepted accounting principles the Company began consolidating the financial results of ICSI with its results. At September 30, 2007, the Company owned approximately 98% of ICSI.

In February 2006, the Company sold approximately 77% of its shares in Signia Technologies Inc. (Signia), a developer of wireless semiconductors, thereby reducing its ownership percentage to approximately 16%. Effective March 1, 2006, the Company resumed accounting for Signia on the cost basis. During the period from December 1, 2004 through February 28, 2006, the Company’s financial results reflect accounting for Signia on a consolidated basis. The Company’s financial results through the period ended November 30, 2004 reflect accounting for Signia on the cost basis. At September 30, 2007, the Company owned approximately 6% of Signia.

In December 2006, the Company sold its remaining investment in Key Stream Corp. (KSC), a semiconductor company. KSC was an equity investment of ICSI. The Company’s financial results for fiscal 2007, until its sale, for fiscal 2006 and for fiscal 2005 beginning May 1, 2005 reflect accounting for KSC using the equity method.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained at various financial institutions.

Investments

Under Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” all affected debt securities must be classified as held-to-maturity, trading, or available-for-sale and equity securities must be classified as trading or available-for-sale. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date.

51

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At September 30, 2007 and 2006, all marketable debt and equity securities, other than long-term investments, were designated as available-for-sale. Available-for-sale securities are reported at fair value, with unrealized gains or losses, net of tax, reported in a separate component of stockholders’ equity. The amortized cost for available-for-sale debt securities is adjusted for the amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest and other income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in loss on investments. The cost of fixed income securities sold is based on the specific identification method and the weighted-average method is used to determine the cost basis of publicly traded equity securities disposed of. Interest and dividends on securities classified as available-for-sale are included in interest and other income.

The Company also has investments that are accounted for under the cost method of accounting. These investments are generally in privately held companies and are included in other assets in the Consolidated Balance Sheets. Except for the gains recognized on the sales of equity securities of KSC, Ralink, SMIC, E-CMOS, Signia and NexFlash (see Note 2 and Note 4), there were no gains or losses on the sale of securities for the fiscal years ended September 30, 2007, 2006 and 2005.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. The Company’s inventory valuation process is done on a part-by-part basis. Lower of cost or market adjustments, specifically identified on a part-by-part basis, reduce the carrying value of the related inventory and takes into consideration reductions in sales prices. The Company regularly monitors inventory quantities on hand and records a write-down for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand and production requirements. Once established, these adjustments are considered permanent.

Property, Equipment and Leasehold Improvements

Property, equipment, and leasehold improvements are stated at cost. Depreciation and amortization are computed using the straight-line method, based upon the shorter of the estimated useful lives ranging from two to ten years for property and equipment and fifty years for buildings or the lease term for leasehold improvements to leased properties.

Goodwill and Purchased Intangible Assets

Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and is written down when impaired in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” For goodwill, the Company performs a two-step impairment test. In the first step, the Company compares the fair value of the reporting unit to the carrying value, including goodwill. The Company determines the fair value of the reporting units based on a weighting of income and market approaches. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company performs the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference.

Based on the impairment tests performed, the Company recorded impairment charges for goodwill of $4.4 million in fiscal 2005. Purchased intangible assets other than goodwill are amortized over their useful lives

52

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

unless these lives are determined to be indefinite. Purchased intangible assets with definite lives are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally six months to six years. Purchased in-process research and development without alternative future use is expensed when acquired.

Valuation of Long-Lived Assets and Certain Identifiable Intangibles

The Company evaluates the recoverability of property, plant and equipment and identifiable intangible assets in accordance with Statement of Financial Accounting Standards No. 144 (SFAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company performs periodic reviews to determine whether facts and circumstances exist that would indicate that the carrying amounts of property, plant and equipment and identifiable intangible assets exceed their fair values. If facts and circumstances indicate that the carrying amount of property, plant and equipment might not be fully recoverable, projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful life is compared against their respective carrying amounts. In the event that the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets.

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 and unrealized gains and losses on investments.

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

	Years Ended September 30,
	2007			2006			2005
	(in thousands)
Net income (loss)	$	15,361		$	(14,242	)	$	(39,805	)
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment
Changes arising during current period		742			(528	)		2,746
Change in unrealized gain (loss) on investments
Changes arising during current period		(729	)		(11,402	)		(6,101	)
Reclassification for gain included in net income		(3,732	)		—			(3,106	)
Comprehensive income (loss)	$	11,642		$	(26,172	)	$	(46,266	)

The components of accumulated other comprehensive income (loss), net of tax, were as follows at September 30:

	2007			2006
	(In thousands)
Accumulated foreign currency translation adjustments	$	(1,732	)	$	(2,474	)
Accumulated net unrealized gain on SMIC		197			4,643
Accumulated net unrealized gain (loss) on other available-for-sale investments		(5	)		10
Accumulated net transition obligation		1,026			—
Accumulated net actuarial losses		(69	)		—
Total accumulated other comprehensive income (loss)	$	(583	)	$	2,179

53

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The adjustment for initially applying SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (SFAS No. 158), net of tax, was recorded to accumulated other comprehensive income (loss) for $957,000 as of September��30, 2007. See “Note 13: Retirement Plan.”

The estimated net prior service cost, actuarial loss, and transition obligation for the defined benefit plan that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost during fiscal year 2008 is zero, zero, and $79,000, respectively.

Revenue Recognition and Accounts Receivable Allowances

Revenue from product sales to the Company’s direct customers is recognized upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed and determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements and there are no remaining significant obligations. The Company must make estimates of potential future product returns and sales allowances related to current period product revenue. Management analyzes historical returns, changes in customer demand, and acceptance of products when evaluating the adequacy of sales returns and allowances. Estimates made by the Company may differ from actual product returns and sales allowances. These differences may materially impact reported revenue and amounts ultimately collected on accounts receivable.

A portion of the Company’s sales is made to distributors under agreements that provide the possibility of certain sales price rebates and limited product return privileges. Given the uncertainties associated with the levels of returns and other credits that will be issued to these distributors, the Company defers recognition of such sales until the 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 the products are sold by the Company to the distributors. Accounts receivable from such distributors are recognized and inventory is relieved upon shipment, as title to inventories generally transfers upon shipment, at which point the Company has a legally enforceable right to collection under normal terms.

In addition, the Company monitors collectibility of accounts receivable primarily through review of the accounts receivable aging. When facts and circumstances indicate the collection of specific amounts or from specific customers is at risk, the Company assesses the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made.

The following describes activity in the accounts receivable allowance for doubtful accounts for the years ended September 30, 2007, 2006 and 2005.

Description	Balance at Beginning of Period		Adjustments to Costs and Expenses(1)			Deductions			Balance at End of Period
	(in thousands)
Accounts receivable—Allowance for doubtful accounts:
2005	$	984	$	1,039		$	228	(2)(3)	$	2,251
2006		2,251		(338	)		—			1,913
2007		1,913		(184	)		(264	)		1,465

(1) Includes increases/(decreases) charged or credited to costs and expenses.

(2) Uncollectible accounts written off, net of recoveries

(3) Includes approximately $539,000 related to the acquisition of ICSI

54

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Research and Development

Research and development expenditures are charged to operations as incurred.

Foreign Currency Translation

The Company uses the local currency as its functional currency for all foreign subsidiaries. Translation adjustments, which result from the process of translating foreign currency financial statements into U.S. dollars, are included in the accumulated comprehensive income component of stockholders’ equity.

Advertising Costs

The Company expenses advertising costs as incurred and includes these costs in selling, general and administrative expenses in the Consolidated Statement of Operations. Advertising costs totaled $108,000, $148,000 and $127,000 for the fiscal years ended September 30, 2007, 2006 and 2005, respectively.

Income Taxes

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), “Accounting for Income Taxes”. Under SFAS 109, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance against deferred tax assets when it is more likely than not that such assets will not be realized.

Stock-Based Compensation

Effective October 1, 2005, the Company accounts for stock-based compensation arrangements in accordance with the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R). Prior to the adoption of SFAS 123R, the Company recognized stock-based compensation expense in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). Under APB 25, when the exercise price of the Company’s employee stock options was equal to the market price of the underlying stock on the date of the grant, no compensation expense was recognized. Under SFAS 123R, compensation is measured at the grant date, based on the fair value of the award. The Company amortizes the compensation costs on a straight-line basis over the requisite service period of the option, which is generally the option vesting term of four years. The Company estimates the fair value of stock options using the Black-Scholes valuation model. The Black-Scholes valuation model requires the Company to estimate key assumptions such as expected term, volatility and forfeiture rates to determine the fair value of a stock option. The estimate of these key assumptions is based on historical information and judgment regarding market factors and trends.

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

55

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

Fair Value of Financial Instruments

The fair value of certain of the Company’s financial instruments, including cash and cash equivalents, accrued compensation and benefits, and other accrued liabilities approximate carrying value because of their short maturities. The fair value of investments is determined using quoted market prices for those securities or similar financial instruments.

Concentration of Credit Risk

The Company operates in one business segment, which is to design, develop, and market high performance SRAM, DRAM, and other memory and non-memory products. The Company markets and distributes its products on a worldwide basis, primarily to original equipment manufacturers, contract manufacturers, and distributors. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral. In fiscal 2007, fiscal 2006 and fiscal 2005, no single customer accounted for over 10% of net sales.

The Company maintains cash, cash equivalents, and short-term investments with various high credit quality financial institutions. The Company’s investment policy is designed to limit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are considered in its investment strategy. The Company is exposed to credit risk in the event of default by the financial institutions or issuers of investments to the extent of the amount recorded on the balance sheet. To date, the Company has not incurred losses related to these investments.

Product Warranty and Indemnifications

The Company generally warrants its products against defects in materials and workmanship for a period of 12 months. Liability for a stated warranty period is usually limited to replacement of defective items or return of amounts paid. If there is a material increase in the rate of customer claims or the Company’s estimates of probable losses relating to specifically identified warranty exposures are inaccurate, the Company may record a charge against future cost of sales. Warranty expense has historically been immaterial to the Company’s financial statements.

The Company indemnifies certain customers, distributors, suppliers, and subcontractors for attorney fees and damages and costs awarded against these parties in certain circumstances in which its products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. The terms of the Company’s indemnification obligations are generally perpetual from the effective date of the agreement. In certain cases, there are limits on and exceptions to the Company’s potential liability for indemnification relating to intellectual property infringement claims. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company’s bylaws provide that indemnification may be provided to the Company’s agents. As described in Note 16, several lawsuits have been filed against certain of the Company’s current directors and officers and certain former directors and officers relating to the Company’s historical stock option practices and related accounting; the Company is named as nominal defendant in such matters. Under the Company’s indemnification agreements with its present and former directors and officers, the Company has been indemnifying each director or officer against expenses, including attorneys’ fees, paid by such individual in connection with the pending litigation, subject to applicable Delaware law. The Company has directors’ and officers’ insurance pursuant to which the Company may be reimbursed for certain of these

56

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

indemnity expenses, subject to the insurers’ reservation of rights. The Company cannot estimate the amount of potential future indemnity expenses that it may be required to make. The amount of available directors’ and officers’ insurance may not be sufficient to cover the Company’s indemnity obligations, which may have a material adverse effect on the Company’s results of operations in future periods.

Net Income (Loss) Per Share

Basic and diluted net loss per share and basic net income per share is computed using the weighted number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding, if applicable, during the period. Common equivalent shares consist of the shares issuable upon the assumed exercise of stock options under the treasury stock method.

Impact of Recently Issued Accounting Standards

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

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

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

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This Statement replaces SFAS No. 141,Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called thepurchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) will apply prospectively to business combinations for which the acquisition date is on or after Company’s fiscal year beginning October 1, 2009. While the Company has not yet evaluated this statement for the impact, if any, that SFAS No. 141(R) will

57

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

have on its consolidated financial statements, the Company will be required to expense costs related to any acquisitions after September 30, 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The Company has not yet determined the impact, if any, that SFAS No. 160 will have on its consolidated financial statements. SFAS No. 160 is effective for the Company’s fiscal year beginning October 1, 2009

Note 2.    Cash, Cash Equivalents and Investments

Cash, cash equivalents and investments consisted of the following at September 30:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
2007
Cash	$	17,343	$	—	$	—		$	17,343
Money market instruments		21,740		—		—			21,740
Commercial paper		10,644		—		(5	)		10,639
Certificates of deposit		5,995		—		—			5,995
Municipal notes and bonds		71,950		—		—			71,950
SMIC common stock—saleable within 12 months		5,951		197		—			6,148
Total	$	133,623	$	197	$	(5	)	$	133,815
Reported as:
Cash and cash equivalents								$	53,722
Short-term investments									80,093
Total								$	133,815

	Amortized Cost		Gross Unrealized Gains		Fair Value
	(in thousands)
2006
Cash	$	19,576	$	—	$	19,576
Money market instruments		7,601		—		7,601
Commercial paper		10,131		10		10,141
Certificates of deposit		2,326		—		2,326
Municipal notes and bonds		38,700		—		38,700
SMIC common stock—saleable within 12 months		30,346		4,643		34,989
Total	$	108,680	$	4,653	$	113,333
Reported as:
Cash and cash equivalents					$	37,318
Short-term investments						76,015
Total					$	113,333

58

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

All debt securities held at September 30, 2007 and September 30, 2006 are due in less than one year. As of September 30, 2007 and 2006, the Company had cash, cash equivalents and short-term investments of $13.0 million and $11.0 million, respectively, in foreign institutions.

In fiscal 2007, the Company sold approximately 212.8 million shares of Semiconductor Manufacturing International Corp. (SMIC), a related party through July 2007, and recorded gross proceeds of approximately $28.2 million and a pre-tax gain of approximately $3.8 million. In fiscal 2005, the Company sold shares of SMIC and recorded gross proceeds of approximately $8.7 million and a pre-tax gain of approximately $4.4 million. The Company uses the weighted-average cost method to determine the cost basis of shares of SMIC. The market value of SMIC shares is subject to fluctuations and the Company’s carrying value will be subject to adjustments to reflect the current market value. The Company’s shares in SMIC were subject to certain lockup restrictions which lapsed in February 2007. Therefore all of the Company’s shares in SMIC are freely tradable.

Note 3.    Inventories

Inventories consisted of the following at September 30:

	2007		2006
	(in thousands)
Purchased components	$	4,583	$	10,744
Work-in-process		9,673		21,467
Finished goods		17,800		20,206
	$	32,056	$	52,417

In fiscal 2007, 2006 and 2005, the Company recorded inventory write-downs of $10.3 million, $16.5 million and $13.9 million, respectively. The inventory write-downs were predominately for lower of cost or market and excess and obsolescence issues on certain of its products.

Note 4.    Other Assets

Other assets consisted of the following at September 30:

	2007		2006
	(in thousands)
Equity method investments	$	—	$	1,062
Cost method equity investments		624		1,904
Restricted assets		316		916
Other		580		1,228
	$	1,520	$	5,110

The Company accounts for investments in 50% or less owned companies over which it has the ability to exercise significant influence using the equity method of accounting. The Company accounts for investments in less than 20% owned companies at cost. The Company periodically reviews these investments for other-than-temporary declines in market value and writes down these investments to their fair value when an other-than-temporary decline has occurred.

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

59

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In fiscal 2007, the Company sold approximately 61% of its shares of Ralink (a cost method investment) for approximately $8.9 million and recorded a pre-tax gain of approximately $7.9 million. The market value of Ralink was approximately $7.0 million at September 30, 2007.

The Company sold its investment in E-CMOS in April 2006 for approximately $1.5 million which resulted in a pre-tax gain of $0.3 million. In addition, in September 2006 the Company sold a cost method equity investment for approximately $0.1 million resulting in a gain of approximately $26,000.

The Company sold approximately 77% of its investment in Signia in February 2006 for approximately $4.6 million which resulted in a pre-tax gain of $2.2 million. As a result of the sale of the Signia shares, the Company reduced its ownership percentage to approximately 16%, or approximately $0.7 million, and effective March 2006 accounts for its investment in Signia on the cost basis. In prior periods, Signia’s financial position and results of operation were consolidated with the Company’s financial statements. The deconsolidation of Signia did not have a material impact on the Company’s balance sheet and will not have a material effect on the Company’s revenues or results of operations. In the September 2006 quarter, the Company recorded an impairment charge of approximately $0.4 million related to its investment in Signia.

KSC issued new shares of capital stock in December 2005 and July 2005. The Company did not purchase any additional shares and its ownership percentage decreased by approximately 2%. The decrease in the investment ownership percentage and therefore the increase in equity in net assets for the KSC investment amounted to approximately $0 and $0.5 million in December 2005 and July 2005, respectively. The changes were recorded to increase the carrying value of the investment and additional paid-in capital.

In fiscal 2005, the Company sold its investment in NexFlash (including shares held by ICSI) for approximately $3.2 million, which resulted in a pre-tax gain of $0.6 million.

In fiscal 2005, the Company recorded approximately $0.3 million impairment losses related to two of its cost method equity investments.

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

Note 5.    Property, Equipment, and Leasehold Improvements, net

Property, equipment, and leasehold improvements, net consisted of the following at September 30:

	2007			2006
	(in thousands)
Machinery and equipment	$	31,169		$	27,870
Furniture and fixtures		2,380			2,899
Land, buildings and improvements		25,092			25,617
		58,641			56,386
Less accumulated depreciation and amortization		(35,357	)		(34,402	)
	$	23,284		$	21,984

60

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 6.    Lease Payment Receivable

ICSI entered into a machinery lease contract on March 6, 2003 for a term of 5 years commencing from April 1, 2003. The lessee will obtain the title of the property upon the termination of this agreement. Lease payment receivable consisted of the following at September 30:

	2007					2006
	Current			Non-current		Current			Non-current
	(in thousands)
Lease payment receivable	$	586		$	—	$	1,153		$	576
Less: Unearned interest revenue		(1	)		—		(5	)		—
Net	$	585		$	—	$	1,148		$	576

Expected future receipts of long-term lease payment receivable are as follows (in thousands):

Fiscal year ending:
2008	$	585
Thereafter		—
Total	$	585

The current portion of lease payment receivable is included in other current assets and the non-current portion of the lease payment receivable is included in other assets.

The Company rents out certain floors in its office building in HsinChu, Taiwan. These leases are cancelable with either three months or six months notice. The value of the assets leased to others is included in fixed assets in the Company’s balance sheet. Rental income and the depreciation of the assets are included in other income (expense), net and amounted to approximately $1.7 million and $0.3 million, $0.9 million and $0.1 million, and $0.2 million and $0.1 million, in fiscal 2007 fiscal 2006 and fiscal 2005, respectively.

The assets leased consisted of the following at September 30:

	2007			2006
	(in thousands)
Buildings and improvements	$	6,974		$	6,865
Less accumulated depreciation		(2,862	)		(2,548	)
	$	4,112		$	4,317

Note 7.    Purchased Intangible Assets

The following table presents details of the purchased intangible assets acquired during fiscal 2007 and 2006:

	Technology			Customer Relationships			Other
	Estimated Useful Life (in Years)	Amount		(in thousands, except years)			Estimated Useful Life (in Years)	Amount		Total
				Estimated Useful Life (in Years)	Amount
Fiscal 2007
ICSI	4.0	$	174	—	$	—	—	$	—	$	174
Fiscal 2006
Other	—	$	—	—	$	—	1.5	$	390	$	390
ICSI	5.3		821	2.9		617	—		—		1,438
		$	821		$	617		$	390	$	1,828

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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following tables present details of the Company’s total purchased intangible assets:

	Gross		Accumulated Amortization		Net
	(in thousands)
September 30, 2007
Technology	$	3,933	$	1,442	$	2,491
Customer relationships		2,995		2,013		982
Other		390		325		65
Total	$	7,318	$	3,780	$	3,538
September 30, 2006
Technology	$	3,972	$	882	$	3,090
Customer relationships		2,995		1,019		1,976
Other		390		65		325
Total	$	7,357	$	1,966	$	5,391

The following table presents details of the amortization expense of purchased intangible assets as reported in the Consolidated Statements of Operations:

Year Ended	September 30, 2007		September 30, 2006		September 30, 2005
	(in thousands)
Reported as:
Cost of sales	$	1,898	$	1,619	$	469
Operating expenses		129		136		71
Total	$	2,027	$	1,755	$	540

The estimated future amortization expense of purchased intangible assets as of September 30, 2007 is as follows (in thousands):

Fiscal year
2008	$	1,538
2009		824
2010		770
2011		406
Thereafter		—
Total	$	3,538

62

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Goodwill

There were no changes in goodwill during fiscal 2007.

The following table presents the changes in goodwill during fiscal 2006:

	Balance at September 30, 2005		Acquired		Other			Balance at September 30, 2006
	(in thousands)
Signia	$	1,120	$	—	$	(1,120	)	$	—
ICSI		19,112		6,226		—			25,338
Total	$	20,232	$	6,226	$	(1,120	)	$	25,338

During fiscal 2006, the Company sold approximately 77% of its investment in Signia in February 2006 and as a result of the sale of the Signia shares, the Company reduced its ownership percentage to approximately 16% and effective March 2006 accounts for its investment in Signia on the cost basis. As a result of the deconsolidation of Signia, the Company reduced the recorded amount of its goodwill by approximately $1.1 million.

In September 2005, the Company recorded an impairment charge of approximately $4.4 million related to the goodwill from its acquisition of Signia. The write-off was required as it became evident, based on anticipated cash flows, that the product line had not and would be unable to generate future cash flows to support the goodwill amount.

Note 8.    Borrowings

Short term debt at September 30, 2007 was comprised of a working capital loan with an interest rate of 2.69%. Short term debt and notes at September 30, 2006 were comprised of working capital loans with a weighted average interest rate of 2.47%.

At September 30, 2007, ICSI had short-term lines of credit with various financial institutions whereby it could borrow in aggregate up to approximately $12.9 million denominated in a combination of U.S. and New Taiwan dollars. As of September 30, 2007, the Company had borrowings of approximately $0.6 million outstanding under these lines of credit. These lines of credit expire at various times through August 2008. There were no assets pledged as collateral for short-term debt or notes. Commitment fees relating to these lines are not material. The Company’s unused short-term lines of credit amounted to approximately $12.3 million at September 30, 2007.

Note 9.    Accrued Expenses

Accrued expenses consisted of the following at September 30:

	2007		2006
	(in thousands)
Deferred distributor margin	$	1,811	$	1,836
Other		4,923		7,829
	$	6,734	$	9,665

63

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 10.    Capital Stock

The Company’s Restated Certificate of Incorporation provides for 70,000,000 authorized shares of Common Stock and 5,000,000 authorized shares of preferred stock. The terms of the preferred stock may be fixed by the board of directors, who have the right to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future.

As of September 30, 2007, shares of common stock were reserved for future issuance as follows:

Common shares reserved under Employee Stock Purchase Plan	1,072,000
Common shares reserved under stock option plans	8,226,000

On August 15, 2007, the Company commenced an offer to purchase for cash up to $30 million in shares of its common stock at a price not greater than $6.30 nor less than $5.70 per share (the “Offer”). Following the expiration of the Offer on September 15, 2007, the Company accepted for payment 1,181,148 shares of its common stock at a purchase price of $6.30 per share pursuant to the terms of the Offer, resulting in aggregate payments of approximately $7,441,000.

Note 11.    Stock-Based Compensation

Stock-Based Benefit Plans

The Company has stock option plans under which options to purchase shares of the Company’s common stock may be granted to employees and directors. At September 30, 2007, the total number of shares subject to options outstanding under all plans was 5,153,000. At September 30, 2007, 3,073,000 shares were available for grant under all plans. 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.

2007 Incentive Compensation Plan

At the 2007 annual meeting of stockholders held on July 30, 2007, the Company’s stockholders approved, upon recommendation of the Company’s board of directors, the adoption of the Integrated Silicon Solution, Inc. 2007 Incentive Compensation Plan (the “2007 Plan”). The 2007 Plan is the successor to each of our 1998 Stock Plan, 1996 Nonstatutory Stock Plan and 1995 Director Stock Option Plan (the “Predecessor Plans”), and no further grants shall be made under the Predecessor Plans.

The 2007 Plan permits the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares and performance units. The Compensation Committee of the Company’s board of directors has the authority to determine the type of incentive award, as well as the terms and conditions of the award, under the 2007 Plan. As of September 30, 2007, only stock options had been granted under the 2007 Plan.

3,000,000 shares of the Company’s common stock were initially reserved for issuance under the 2007 Plan. To the extent any options outstanding under the Predecessor Plans on the date of the Annual Meeting subsequently terminate unexercised or any unvested shares outstanding under the Predecessor Plans at such time are subsequently forfeited or repurchased by ISSI, the number of shares of common stock subject to those

64

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

terminated options, together with the forfeited shares, will be added to the share reserve available for issuance under the 2007 Plan, up to an additional 4,000,000 shares.

Other Stock Plans

The Company has outstanding grants under its 1989 Stock Plan, 1998 Stock Plan, 1996 Nonstatutory Stock Plan and 1995 Director Stock Option 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, except for options granted under the 1995 Director Stock Option Plan, which generally vest over 12 months. 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.

The Company has shares of common stock reserved for future issuance under our 1995 Employee Stock Purchase Plan. Offering periods under the 1995 Employee Stock Purchase Plan have a duration of six months and the purchase price is equal to 85% of the fair value of our common stock on the purchase date. The offering periods under the 1995 Employee Stock Purchase Plan commence on approximately February 1 and August 1 of each year. During fiscal 2007, 2006 and 2005, 0, 214,000, and 284,000 shares were issued under the plan, respectively. As of September 30, 2007, 1,072,000 shares were available under the plan for future issuance.

Non-Plan Option Agreements

On February 21, 2006, the Company entered into a Stand-Alone Stock Option Agreement (the “Option”) with Scott Howarth, the Company’s President and Chief Financial Officer. The Option is a non-qualified stock option to purchase 100,000 shares of the Company’s common stock and has the following terms: (i) an exercise price equal to $6.33 per share which was the fair market value of the Company’s common stock on the grant date of February 21, 2006, (ii) a term of 7 years from the date of grant, and (iii) vesting as to 12.5% of the shares on the six (6) month anniversary of his employment start date, and as to 1/48th of the total shares each month thereafter until the option is fully vested.

Amendment to Stock Options

On July 19, 2007, the Company accepted for amendment certain options to purchase an aggregate of approximately 486,000 shares of its common stock as contemplated by the Company’s offer to amend certain outstanding options and, if applicable, receive a cash payment as set forth under the Offer to Amend Certain Options dated June 14, 2007 (the “Offer to Amend”). The Company issued amended options to purchase up to an aggregate of approximately 436,000 shares of its common stock and promised to make aggregate cash payments in the amount of $192,000 in exchange for the options surrendered for amendment in accordance with the terms of the Offer to Amend.

Accounting for Stock-Based Compensation

Beginning in fiscal 2006, the Company accounts for stock-based compensation arrangements in accordance with the provisions of SFAS No. 123(R) “Share-Based Payment” (SFAS 123R) as discussed in“Note 1—Significant Accounting Policies”. Under SFAS 123R, compensation cost is calculated by the Company on the date of grant using the fair value of the option as determined using the Black-Scholes option pricing model. The compensation cost is then amortized ratably over the vesting period of the individual option grants. The Black-Scholes valuation calculation requires the Company to estimate key assumptions such as expected term, volatility and interest rates to determine the fair value of the stock options. The estimate of these key assumptions is based on the Company’s historical stock price volatility, employees’ historical exercise patterns and judgment

65

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

regarding market factors and trends. SFAS 123R also requires that forfeitures be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on its historical forfeiture rates as it believes these rates to be the most indicative of the Company’s expected forfeiture rate.

As of September 30, 2007, there was approximately $7.5 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 2.29 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 will also record compensation expense for its ESPP for the difference between the purchase price and the fair market value on the day of purchase.

Prior to the adoption of SFAS 123R, the Company presented all tax benefits resulting from the exercise of stock options as operating cash flows in its Statement of Cash Flows. SFAS 123R requires that these cash flows be classified as financing cash flows. As the Company has a valuation allowance for all of its deferred tax assets, a tax benefit associated with stock option exercises has not been recognized.

The Company issues new shares of common stock upon exercise of stock options. During fiscal year 2007, options to purchase 224,000 shares were exercised at an aggregate intrinsic value of $598,000, determined as of the date of option exercise. During fiscal year 2006, options to purchase 198,000 shares were exercised at an aggregate intrinsic value of $564,000, determined as of the date of option exercise.

The table below outlines the effects of total stock-based compensation for fiscal years 2007, 2006, and 2005. For fiscal year 2005, the Company accounted for stock-based compensation expense under the recognition and measurement provisions of APB No. 25 under which the Company did not have to recognize stock-based compensation expense on employee stock option grants that were made at fair market value on the date of grant, or on shares issued under the ESPP.

	Years Ended September 30,
	2007		2006		2005
	(in thousands, except per share amounts)
Stock-based compensation
Cost of sales	$	104	$	126	$	25
Research and development		1,828		2,080		986
Selling, general and administrative		2,008		2,433		910
Total stock-based compensation	$	3,940	$	4,639	$	1,921
Tax effect on stock-based compensation		—		—		—
Net effect on net income	$	3,940	$	4,639	$	1,921
Effect on earnings per share
Basic	$	0.10	$	0.12	$	0.05
Diluted	$	0.10	$	0.12	$	0.05

Prior to Adoption of SFAS 123R

Prior to October 1, 2005, the Company accounted for stock options under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related Interpretations, as permitted by SFAS Statement No. 123, “Accounting for Stock-Based Compensation”

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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(SFAS 123). The Company provided the disclosures required under SFAS 123 as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosures.” The Company generally did not recognize stock-based compensation expense in its statement of operations for periods prior to the adoption of SFAS 123R except when options were granted at an exercise price lower than the market value of the underlying common stock on the date of grant.

The following table illustrates the effect on net loss and net loss per share as if the Company had applied the fair value recognition provisions of SFAS 123R to options granted under the Company’s stock-based compensation plans prior to its adoption of SFAS 123R. For purposes of this pro forma disclosure, the value of the options was estimated using a Black-Scholes option pricing formula and amortized on a straight-line basis over the respective vesting periods.

	2005
	(in thousands, except per share data)
Net loss—as reported	$	(39,805	)
Intrinsic value method expense included in reported net loss, net of tax		1,921
Fair value method expense, net of tax		(6,197	)
Net loss—pro forma	$	(44,081	)
Basic and diluted net loss per share—as reported	$	(1.09	)
Basic and diluted net loss per share—pro forma	$	(1.20	)

Valuation Assumptions

The Company uses the Black-Scholes option pricing model to estimate the fair value of the options granted. The Company utilizes the simplified calculation of expected life under the provisions of the SEC’s Staff Accounting Bulletin 107, as the Company shortened the contractual life of employee stock options from ten years to seven years. Estimated volatilities are based on historical stock price volatilities of the period immediately preceding the option grant that is equal in length to the option’s expected term. The Company believes that historical volatility is the best estimate of future volatility. The Company bases the risk-free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The Company has never paid dividends and does not anticipate doing so over the expected life of the options and therefore used 0% for dividend yield.

The estimated values of stock option grants, as well as the weighted average assumptions used in calculating these values during the fiscal years ended September 30, 2007, 2006 and 2005, were based on estimates at the date of grant as follows:

	Stock Options									ESPP
	2007			2006			2005			2007	2006	2005
Expected term in years		4.52			4.52			2.75		—	—		1.25
Expected volatility		0.61			0.69			0.66		—	—		0.53
Risk-free interest rate		4.65	%		4.54	%		3.77	%	—	—		3.30	%
Dividend yield		0.00	%		0.00	%		0.00	%	—	—		0.00	%
Weighted-average fair value of grants	$	3.06		$	3.59		$	3.78		—	—	$	2.29

67

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A summary of the Company’s stock option activity and related information for the last three fiscal years under the 1989, 1996 Nonstatutory, 1998, 1995 Director Stock Option Plans and the 2007 Incentive Compensation Plan follows (stock option amounts and aggregate intrinsic value are presented in thousands):

	Outstanding Options
	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Balance at September 30, 2004	5,001		$	7.86
Options Granted	3,037		$	6.95
Options Exercised	(738	)	$	3.79
Options Cancelled	(1,124	)	$	8.29
Balance at September 30, 2005	6,176		$	7.82
Options Granted	1,388		$	6.24
Options Exercised	(198	)	$	3.88
Options Cancelled	(1,368	)	$	8.84
Balance at September 30, 2006	5,998		$	7.35
Options Granted	1,076		$	5.91
Options Exercised	(224	)	$	3.79
Options Cancelled	(1,697	)	$	8.24
Balance at September 30, 2007	5,153		$	7.22	5.52	$	2,596
Exercisable at September 30, 2007	3,412		$	7.68	5.13	$	2,123
Vested and expected to vest after September 30, 2007	4,891		$	7.28	5.48	$	2,511
Options exercisable at:
September 30, 2005	3,017		$	8.75	4.06
September 30, 2006	3,515		$	7.74	4.92
September 30, 2007	3,412		$	7.68	5.13

The following table summarizes information about options outstanding and exercisable at September 30, 2007:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Options Outstanding (in thousands)	Wtd. Average Remaining Contractual Life (in years)	Wtd. Average Exercise Price		Number of Options Exercisable (in thousands)	Wtd. Average Exercise Price
$ 2.35-$ 5.54	1,126	4.75	$	4.19	793	$	3.71
5.55-   6.43	1,353	5.46		6.19	667		6.26
6.48-   7.00	1,431	6.77		6.86	851		6.88
7.09-   15.45	1,033	5.25		9.50	891		9.83
16.08-   35.38	210	2.73		21.39	210		21.40
$ 2.35-$ 35.38	5,153	5.52	$	7.22	3,412	$	7.68

68

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 12.    Income Taxes

The provision (benefit) for income taxes consisted of the following for the years ended September 30:

	2007			2006			2005
	(in thousands)
Current:
Federal	$	(15	)	$	(236	)	$	(369	)
State		9			2			2
Foreign		10			201			99
Total current	$	4		$	(33	)	$	(268	)
Deferred:
Federal		—			—			—
State		—			—			—
Foreign		—			—			—
Total deferred		—			—			—
Total provision (benefit)	$	4		$	(33	)	$	(268	)

Pretax income (loss) from foreign operations was approximately $6.1 million, $(13.0) million, and $(13.3) million for 2007, 2006, and 2005, respectively.

The Company’s provision (benefit) for income taxes differs from the amount computed by applying the U.S. federal statutory rate (35%) to income before taxes and minority interest as follows for the years ended September 30:

	2007			2006			2005
	(in thousands)
Income taxes computed at the U.S. federal statutory rate	$	5,469		$	(4,998	)	$	(10,125	)
Unbenefited foreign (income) losses		(2,137	)		4,578			4,731
Non-deductible stock compensation		612			774			271
Nontaxable gain on foreign investment		—			(868	)		—
Non-deductible impairment charge		—			—			1,540
Valuation allowance		—			—			399
U.S. operating loss not benefited (benefited)		(3,961	)		509			3,258
Reversal of previously provided taxes		(25	)		(236	)		(369	)
Other individually immaterial items		46			208			27
Total provision (benefit)	$	4		$	(33	)	$	(268	)

As of September 30, 2007, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $123.2 million and $81.6 million, respectively. The federal and state net operating loss will expire at various dates beginning in 2014, if not utilized. The Company has federal research and development tax credit and foreign tax credit carryforwards of approximately $1.4 million and $0.9 million, respectively. The Company also has state research and development tax credit carryforwards of approximately $3.0 million. The federal tax credits will expire at various dates beginning in 2008 through 2025, if not utilized. The California state research and development tax credit can be carried forward indefinitely.

Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended,

69

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

and similar state provisions. The annual limitation, should it become effective, may result in the expiration of net operating losses and credits before utilization.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes consisted of the following at September 30:

	2007			2006
	(in thousands)
Deferred tax assets:
Depreciation	$	850		$	490
Inventory and other valuation reserves		1,480			6,690
Accrued expenses		3,260			3,320
Federal and state credit carryforwards		4,780			5,450
Federal and state net operating loss carryforwards		47,060			47,680
Non-deductible stock options		7,410			7,300
Other, net		2,080			2,830
Subtotal		66,920			73,760
Valuation allowance		(65,220	)		(70,260	)
Total deferred tax assets	$	1,700		$	3,500
Deferred tax liabilities:
Unrealized gain on investment		(70	)		(1,840	)
Equity investment basis difference		(1,630	)		(1,660	)
Subtotal		(1,700	)		(3,500	)
Net deferred tax assets	$	—		$	—

Management has established a valuation allowance for a portion of the gross deferred tax assets based on management’s expectations of future taxable income and the actual taxable income during the three years ended September 30, 2007. The valuation allowance for deferred tax assets decreased by $5.0 million in fiscal 2007 and increased by $6.7 million in fiscal 2006. Approximately $13.7 million of the valuation allowance is attributable to tax benefits of stock option deductions which will be credited to paid-in capital when recognized.

Note 13.    Retirement Plan

In connection with the acquisition of ICSI during 2005, the Company assumed pension plans covering substantially all of ICSI’s Taiwan based employees. The pension plans are based on the Labor Standards Law, a defined benefit plan (Benefit Plan) and the Labor Pension Act, a defined contribution plan (Contribution Plan).

Under the Labor Standards Law, the Benefit Plan provides for a lump sum payment upon retirement based on years of service and the employee’s compensation during the last six months of employment. In accordance with the Labor Standards Law of the R.O.C., the Company makes monthly contributions equal to 2% of its wages and salaries. The fund is administered by the Employees’ Retirement Fund Committee and is registered in this committee’s name. Accordingly, the pension fund is not included in the financial statements of the Company.

Under the Labor Pension Act effective July 1, 2005, employees may choose the requirements under the Labor Standards Law or the new statute. For employees subject to the new statute, the Company shall contribute no less than 6% of the employees’ wages and salaries to the Contribution Plan.

70

INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Effective for fiscal year 2007, the Company adopted the provisions of SFAS No. 158. SFAS No. 158 requires that the funded status of defined-benefit postretirement plans be recognized on the company’s consolidated balance sheet, and changes in the funded status be reflected in comprehensive income. SFAS No. 158 also requires the measurement date of the plan’s funded status to be the same as the company’s fiscal year-end. Since the Company uses its fiscal year end as the measurement date for its Benefit Plan, there is no impact on the projected benefit obligation and accumulated other comprehensive income (loss) due to measurement date provision of SFAS No. 158. The incremental effect of applying SFAS No. 158 on individual line items on the consolidated balance sheet as of September 30, 2007 was as follows:

	Before Application of SFAS No. 158			Adjustments			After Application of SFAS No. 158
	(In thousands)
Other long-term liabilities	$	1,750		$	(957	)	$	793
Accumulated other comprehensive income (loss)	$	(1,540	)	$	957		$	(583	)

As of September 30, 3007 and 2006, the Company’s Benefit Plan had projected benefit obligations in excess of plan assets. The changes in the benefit obligations and plan assets for the Benefit Plan described above were as follows:

	2007			2006
	(in thousands)
Change in projected benefit obligation:
Beginning benefit obligation	$	1,815		$	1,998
Service cost		16			15
Interest cost		65			59
Actuarial gain		(11	)		(262	)
Currency exchange rate changes		29			5
Ending projected benefit obligation	$	1,914		$	1,815

	2007		2006
	(in thousands)
Change in fair value plan assets:
Beginning fair value of plan assets	$	1,520	$	1,356
Actual return on plan assets		39		29
Employer contributions		101		131
Currency exchange rate changes		24		4
Ending fair value of plan assets	$	1,684	$	1,520

The following table summarizes the amounts recognized on the consolidated balance sheet as of September 30:

	2007		2006
	(in thousands)
Other long-term liabilities	$	231	$	1,361
Accumulated other comprehensive income	$	957		—
Amount recognized	$	1,188	$	1,361

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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes the amounts recorded to accumulated other comprehensive income (loss) before taxes, as of September 30:

	2007
	(in thousands)
Reclassification adjustment of transition obligation	$	1,026
Net actuarial gain		(69	)
Net prior service cost		—
Defined benefit plan, net	$	957

The following table summarizes the funding status as of September 30:

	2006
	(in thousands)
Ending funded status	$	296
Unrecognized transition obligation (asset)		1,088
Unrecognized net actuarial (gain) loss		(64	)
Other		41
Net amount recognized/accrued benefit liability	$	1,361

The following table summarizes the accumulated benefit obligation as of September 30:

	2007		2006
	(in thousands)
Accumulated benefit obligation	$	1,228	$	1,134

Weighted-average actuarial assumptions used to determine benefit obligations and plan assets for the Benefit Plan at September 30 were as follows:

	2007		2006
Discount rate	3.00	%	3.50	%
Expected return on plan assets	3.00	%	3.50	%
Rate of compensation increase	3.00	%	3.00	%

The assumptions used in the expected long-term rate of return on plan assets are determined by the Bureau of Labor Insurance in Taiwan.

The net periodic benefit cost for the Benefit Plan included the following components at September 30:

	2007			2006			2005
	(in thousands)
Service cost	$	16		$	15		$	90
Interest cost		65			59			24
Expected return on plan assets		(54	)		(48	)		(18	)
Amortization and deferred amount		(79	)		(78	)		(26	)
Net periodic benefit cost	$	(52	)	$	(52	)	$	70

The balance of vested benefit amounted to approximately $110,000 and $105,000 as of September 30, 2007 and 2006, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Non-U.S. Plan Assets

For the Benefit Plan, the Company deposits funds into government-managed accounts, and/or accrues for the unfunded portion of the obligation.

Estimated Future Benefit Payments

The following table reflects the benefit payments, which include the amount that will be funded from retiree contributions, that the Company expects to pay in the periods noted (in thousands):

Fiscal year ending:
2008	$	110
2009		—
2010		259
2011		7
2012		83
2013-2017		868

Estimated Future Contributions

The Company’s expected contributions to be paid to the Benefit Plan during fiscal 2008 is $100,000.

Note 14.    Per Share Data

The calculations of basic and diluted net income (loss) per share for each of the three years ended September 30, 2007, 2006 and 2005 are as follows:

	Years Ended September 30,
	2007		2006			2005
	(in thousands, except per share data)
Numerator for basic and diluted net income (loss) per share:
Net income (loss)	$	15,361	$	(14,242	)	$	(39,805	)
Denominator for basic net income (loss) per share:
Weighted average common shares outstanding		37,631		37,419			36,663
Dilutive effect of stock options		344		—			—
Denominator for diluted net income (loss) per share		37,975		37,419			36,663
Basic net income (loss) per share	$	0.41	$	(0.38	)	$	(1.09	)
Diluted net income (loss) per share	$	0.40	$	(0.38	)	$	(1.09	)

The diluted earnings per share calculations for the years ended September 30, 2006 and 2005 do not include approximately 395,000 and 794,000 potential common shares from outstanding stock options because their inclusion would be anti-dilutive. For the years ended September 30, 2007, 2006 and 2005, an additional 4,975,000, 5,069,000 and 3,109,000 stock options were excluded from diluted earnings per share by the application of the treasury stock method.

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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 15.    Geographic and Segment Information

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

	Years Ended September 30,
	2007		2006		2005
	(in thousands)
Net Sales
United States	$	45,040	$	36,751	$	26,965
China		9,564		13,785		26,024
Hong Kong		68,200		43,313		34,400
Taiwan		44,164		54,596		49,433
Japan		15,482		21,344		—
Other Asia Pacific countries		25,762		24,245		27,152
Europe		36,047		22,463		15,615
Other		1,136		995		1,849
Total net sales	$	245,395	$	217,492	$	181,438
Long-lived assets
United States	$	3,247	$	1,269	$	2,057
Hong Kong		72		80		34
China		921		1,055		1,360
Taiwan		19,044		19,580		20,185
Total long-lived assets	$	23,284	$	21,984	$	23,636

Revenues are attributed to countries based on the shipping location of customers.

Long-lived assets by geographic area are those assets used in the Company’s operations in each area.

Net foreign currency transaction gains (losses) of approximately $53,000, $881,000, and ($757,000) for the years ended September 30, 2007, 2006, and 2005, respectively, were primarily the result of the settlement of intercompany transactions and are included in the determination of net income (loss).

Note 16.    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

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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

Litigation

Shareholder Derivative Actions

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

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

The parties in both the state and federal shareholder derivative litigation have agreed to enter into settlement discussions, and both Courts have issued orders staying the litigation until such time as the discussions result in a settlement which would then be presented to each Court for approval, or until such negotiations are unsuccessful, at which time litigation would resume. If the settlement negotiations are unsuccessful, plaintiffs in the state and federal derivative complaints are expected to amend their complaints. Defendants will move to dismiss both the state and federal complaints.

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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SRAM Antitrust Litigation

Thirty-two 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-trail 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 twenty-eight of the thirty-two pending lawsuits 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. The Company remains a defendant in the four lawsuits brought by the U.S. Direct-Purchaser Plaintiffs.

Three purported class action lawsuits were filed against the Company and other SRAM suppliers in three Canadian courts alleging violation of the Canadian Competition Act and other unlawful conduct. The Canadian complaints seek compensatory and punitive damages, in addition to declaratory relief, restitution, and costs.

The Company is committed to defending itself against these claims and has instructed its counsel to contest these actions vigorously. Given the preliminary stage of these proceedings and the inherent uncertainty in litigation, the Company is unable to predict the outcome of these suits. The final resolution of these alleged violations of federal or state antitrust laws could have a material adverse effect on the Company’s business, results of operations, or financial condition.

SRAM Antitrust Civil Investigative Demand

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

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 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 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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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Operating Leases

The Company leases its facilities and the land upon which the ICSI building is situated under operating lease agreements that expire at various dates through 2016. The Company entered into a six year lease effective February 2007 for its headquarters facility in San Jose, California. Minimum rental commitments under these leases are as follows (in thousands):

Fiscal year ending:
2008	$	734
2009		631
2010		516
2011		638
2012		656
Thereafter		1,090
Total minimum rental commitments	$	4,265

Total rental expense, recorded on a straight-line basis, for the years ended September 30, 2007, 2006 and 2005 was approximately $1.1 million (net of sublease income of $42,000), $1.1 million (net of sublease income of $173,000) and $2.6 million (net of sublease income of $165,000), respectively.

Write-off of Excess Facility Space

In fiscal 2005, the Company recorded a $1.1 million write-off of excess facility space in its Santa Clara headquarters. The write-off is included in selling, general and administrative expenses in the Company’s Statement of Operations.

Commitments to Wafer Fabrication Facilities

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, as a matter of practice it becomes increasingly difficult to cancel the purchase order. As of September 30, 2007, the Company had approximately $26.7 million of purchase orders for which the related wafers had been entered into wafer work-in-process (manufacturing had begun).

Note 17.    Employee 401(k) Plan

In August 1992, the Company established a defined contribution retirement plan with 401(k) plan features to provide retirement benefits to its eligible United States employees. Employees may make contributions through payroll withholdings of up to the lesser of $15,500 ($20,500 for participants older than 50) or 60% of their annual compensation for 2007. The Company elected to make no matching contributions during the years ended September 30, 2007, 2006 and 2005. Administrative expenses relating to the plan are insignificant.

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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 18.    Supplemental Cash Flow Information

	Years Ended September 30,
	2007		2006		2005
	(in thousands)
Cash paid for interest	$	157	$	195	$	1,912
Cash paid (refunded) for income taxes		13		187		(259	)
Assets acquired from ICSI		—		—		93,832
Liabilities assumed from ICSI		—		—		53,708
Assets acquired from Signia		—		—		4,497
Liabilities assumed from Signia		—		—		1,143

Note 19.    Related Party Transactions

Prior to May 2005, when the Company gained control and began consolidating the results of ICSI, ICSI was a related party. For the seven months ended April 30, 2005, purchases of goods and services by the Company from ICSI were approximately $1,056,000. The Company also paid ICSI for certain product development costs, license fees and royalties. For the seven months ended April 30, 2005, these charges totaled approximately $169,000.

The Company purchases goods from SMIC in which the Company has less than a 1% ownership interest. Lip-Bu Tan, a director of the Company through July 30, 2007, has been a director of SMIC since January 2002. For the ten months ended July 31, 2007 and the fiscal years ended September 30, 2006 and 2005, purchases of goods from SMIC were approximately $17,520,000, $21,352,000, and $52,471,000, respectively. Accounts payable to SMIC was approximately $4,440,000 at September 30, 2006.

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

The Company sells memory products to Flextronics. Lip-Bu Tan, a director of the Company through July 30, 2007, has been a director of Flextronics since April 2003. The Company had been doing business with Flextronics prior to Mr. Tan joining the board of directors of Flextronics.

The Company provided manufacturing support services to Signia. In February 2006, the Company sold approximately 77% of its shares in Signia, thereby reducing its ownership percentage to approximately 16%. Effective March 1, 2006, the Company resumed accounting for Signia on the cost basis. During the period from December 1, 2004 through February 28, 2006, the Company’s financial results reflect accounting for Signia on a consolidated basis. The Company’s financial results through the period ended November 30, 2004 reflect the accounting for Signia on the cost basis. At September 30, 2007, the Company had approximately a 6% ownership interest in Signia. The Company’s Chairman and CEO, Jimmy S.M. Lee, was a director of Signia until September 2006. For the two months ended November 30, 2004, the Company provided services of approximately $382,000, to Signia.

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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Accounts receivable from related parties consisted of the following at September 30:

	2007		2006
	(in thousands)
Flextronics	$	—	$	251
KSC		—		155
Total	$	—	$	406

The following table shows sales to related parties for the years ended September 30:

	Years Ended September 30,
	2007		2006		2005
	(in thousands)
Sales to related parties
Flextronics	$	1,751	$	830	$	3,215
ICSI (1)		—		—		3,185
KSC		13		140		—
Others		—		—		115
Total	$	1,764	$	970	$	6,515

(1) Sales to ICSI after May 1, 2005 are eliminated in consolidation.

Note 20.    Acquisition of Signia Technologies Inc.

In December 2004, the Company acquired a majority ownership interest in Signia. Signia is a privately held wireless chipset company based in Taipei, Taiwan.

In fiscal 2005, the Company increased its ownership to approximately 68% by buying common shares from other shareholders. The cost of this additional investment was approximately $8.1 million in cash which includes $0.4 million in estimated transaction costs. Prior to this increase, the Company owned approximately 15% of the outstanding equity of Signia and accounted for its investment on the cost basis. Since the Company increased its ownership to 68%, beginning December 1, 2004 the Company consolidated Signia’s financial statements with its own. The total purchase price, including the previous investment of $1.1 million, was $9.2 million.

In the December 2004 quarter, the Company consolidated Signia based on preliminary valuation data. During the March 2005 and the September 2005 quarters, the valuation data was refined and the Company’s final purchase price allocation was presented as of September 30, 2005. The allocation of the purchase price of Signia included both tangible assets and acquired intangible assets including both developed technology as well as in-process research and development (IPR&D). The excess of the purchase price over the fair value allocated to the net assets is goodwill. The amounts allocated to IPR&D were expensed as it was deemed to have no future alternative value.

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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The purchase price allocation is as follows (in thousands):

Net tangible assets	$	3,354
Intangible assets:
IPR&D		294
Purchased intangible assets		1,099
Goodwill		5,520
Minority interest		(1,088	)
Total purchase price	$	9,179

The developed technology was being amortized over five years.

In September 2005, the Company recorded an impairment charge for the goodwill acquired of approximately $4.4 million. The write-off was required as it became evident, based on anticipated cash flows, that the product line had not generated and would be unable to generate future cash flows to support the goodwill amount.

The Company sold approximately 77% of its investment in Signia in February 2006 for approximately $4.6 million which resulted in a pre-tax gain of $2.2 million. As a result of the sale of the Signia shares, the Company reduced its ownership percentage to approximately 16%, or approximately $0.7 million, and effective March 2006 accounts for its investment in Signia on the cost basis. In prior periods, Signia’s financial position and results of operation were consolidated with the Company’s financial statements. The deconsolidation of Signia did not have a material impact on the Company’s balance sheet and is not expected to have a material effect on the Company’s sales or results of operations. In the September 2006 quarter, the Company recorded an impairment charge of approximately $0.4 million related to its investment in Signia.

Note 21.    Acquisition of ICSI

On January 25, 2005, the Company announced its intent to acquire the remaining 71% of ICSI that the Company did not then own. On May 1, 2005, ISSI assumed control of ICSI and began consolidating the financial results of ICSI with its own results. In the nine months ended September 30, 2005, the Company purchased additional shares of ICSI for approximately $52.5 million, increasing its ownership percentage to approximately 83%. The total purchase price allocation in fiscal 2005 of $61.0 million included our previous investment of $8.5 million. In fiscal 2006, the Company purchased additional shares of ICSI for approximately $13.9 million, increasing its percentage ownership to approximately 98%. In fiscal 2007, the Company purchased additional shares of ICSI for approximately $0.3 million. The Company owned approximately 98% of ICSI at September 30, 2007.

The Company’s decision to acquire ICSI was driven by several considerations including the opportunity to enhance sales, the ability to reduce the combined company’s operating expenses, create stronger purchasing power, expand sales channels, and enhance opportunities to develop non-memory product lines.

The Company is accounting for the acquisition of ICSI as a step acquisition. The allocation of the purchase price of ICSI includes both tangible assets and acquired intangible assets including both developed technology and in-process research and development (IPR&D). The excess of the purchase price over the fair value allocated to the net assets is goodwill. The Company currently does not expect to receive a tax benefit for goodwill. The amounts allocated to IPR&D have been expensed as it was deemed to have no future alternative value.

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INTEGRATED SILICON SOLUTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The purchase price allocation as of September 30 is as follows (in thousands):

	September 30, 2007		September 30, 2006		September 30, 2005
	(in thousands)
Net tangible assets	$	—	$	1,097	$	40,124
Intangible assets:
In-process research and development		—		499		2,470
Purchased intangible assets		174		1,438		5,583
Goodwill		—		6,226		19,112
Minority interest		133		4,600		(6,245	)
Total purchase price allocation	$	307	$	13,860	$	61,044

The developed technology is being amortized over lives ranging from four to six years and the other amortizable intangible assets are being amortized over lives ranging from six months to five years.

Note 22.    Quarterly Financial Information (unaudited)

The following tables show the quarterly results of operations for each of the years ended September 30, 2007 and 2006.

Fiscal 2007	Fourth Quarter		Third Quarter			Second Quarter			First Quarter
Net sales	$	63,329	$	59,927		$	59,995		$	62,144
Gross profit	$	12,762	$	11,735		$	11,394		$	12,545
Operating income (loss)	$	1,052	$	(1,119	)	$	(2,421	)	$	(1,910	)
Net income	$	3,252	$	4,918		$	7,061		$	130
Basic and diluted net income per share	$	0.09	$	0.13		$	0.19		$	0.00
Market price range common stock:
High	$	6.95	$	6.49		$	6.37		$	6.37
Low	$	5.24	$	5.38		$	5.43		$	5.10

Fiscal 2006	Fourth Quarter			Third Quarter			Second Quarter			First Quarter
Net sales	$	59,905		$	53,249		$	53,245		$	51,093
Gross profit	$	11,738		$	4,338		$	5,644		$	7,386
Operating loss	$	(1,273	)	$	(7,630	)	$	(7,359	)	$	(5,076	)
Net income (loss)	$	112		$	(6,912	)	$	(3,554	)	$	(3,888	)
Basic and diluted net income (loss) per share	$	0.00		$	(0.18	)	$	(0.10	)	$	(0.10	)
Market price range common stock:
High	$	5.79		$	6.84		$	6.98		$	8.59
Low	$	4.23		$	4.97		$	5.97		$	6.41

Note 23.    Subsequent Event (unaudited)

On November 28, 2007, the Company announced that its board of directors had approved the repurchase of up to $80 million of shares for the repurchase of its common stock. The Company intends to use $70 million of this amount to repurchase up to 10 million shares of its common stock through a self-tender offer at a price of $7.00 per share. The offer commenced on December 3, 2007 and is expected to close in early January 2008.

81

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report on Form 10-K, as required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act of 1934, as amended, we evaluated under the supervision of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective at September 30, 2007 to ensure that 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 Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. Management’s assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Management assessed our internal control over financial reporting as of September 30, 2007, the end of our fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed by our finance organization.

Based on our assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.

Our independent registered accounting firm, Grant Thornton LLP, who also audited our consolidated financial statements, audited the effectiveness of our internal control over financial reporting. Grant Thornton LLP has issued their attestation report, which is included in Part II, Item 8 of this Annual Report on Form 10-K.

82

Changes in Internal Control over Financial Reporting

During the three months ended September 30, 2007, 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 except as described above.

Item 9B. Other Information

Not applicable.

83

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Executive Officers—See the section entitled “Executive Officers” in Part I, Item 1 hereof.

Directors—The information required by this Item is incorporated by reference from the section entitled “Election of Directors” in our 2008 Proxy Statement.

The disclosure required by Item 405 of Regulation S-K is incorporated by reference from the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2008 Proxy Statement.

The Company had adopted a Code of Business Conduct and Ethics that applies to all directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Company’s Code of Business Conduct and Ethics is posted on its website athttp://www.issi.com/. The Company intends to disclose future amendments to certain provisions of the Code of Business Conduct and Ethics, or waivers of such provisions granted to executive officers and directors, on its website within four business days following the date of such amendment or waiver.

The disclosure required by Items 407 (c)(3), (d)(4), and (d)(5) of Regulation S-K is incorporated by reference from the section entitled “Election of Directors” in our 2008 Proxy Statement.

Item 11. Executive Compensation

The information appearing in our 2008 Proxy Statement contained in the sections entitled “Compensation of Executive Officers,” “Compensation of Directors,” “Compensation Committee Interlocks and Insider Participation,” and “Report of the Compensation Committee of the Board of Directors,” is incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The disclosure required by Item 403 of Regulation S-K is incorporated by reference from the sections entitled “Principal Share Ownership—Beneficial Owners” and “Principal Share Ownership—Security Ownership of Management” in our 2008 Proxy Statement.

Equity Compensation Plan Information

The information required by Item 201(d) of Regulation S-K is incorporated by reference from the section entitled “Equity Compensation Plan Information” in our 2008 Proxy Statement.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated by reference from the sections entitled “Certain Transactions” and “Election of Directors” in our 2008 Proxy Statement.

Item 14. Principal Accountant Fees and Services

Information about principal accounting fees and services as well as related pre-approval policies appears under “Fees Paid to Accountants” and “Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors” in our 2008 Proxy Statement. Those portions of the Proxy Statement are incorporated by reference to this report.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) List of documents filed as part of this Report.

1. Financial Statements:See “Index to Consolidated Financial Statements” under Item 8 on page 35 of this Annual Report.

The following consolidated financial statements of Integrated Silicon Solution, Inc. are contained in Part II, Item 8 of this Report on Form 10-K:

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Operations

Consolidated Balance Sheets

Consolidated Statements of Cash Flows

Consolidated Statements of Stockholders’ Equity

Notes to Consolidated Financial Statements

2. Financial Statement Schedules

All other schedules for which provision is made in the Applicable Accounting Regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted, as the information is contained in Part II, Item 8 of this Report on Form 10-K.

3. Exhibits

Exhibit Number	Description of Document
3.1(2)	Restated Certificate of Incorporation of Registrant.
3.2(8)	Amendment to Restated Certificate of Incorporation of Registrant.
3.3	Bylaws of Registrant.
4.2(1)	Form of Common Stock Certificate.
10.1(1)	Form of Indemnification Agreement.
10.2(6)*	Form of 1993 Employee Stock Purchase Plan, as amended, and form of Subscription Agreement.
10.3(3)*	Form of 1989 Stock Plan, as amended, and form of Stock Option Agreements.
10.4(8)*	1995 Director Stock Option Plan, as amended.
10.5(5)*	Nonstatutory Stock Plan, as amended.
10.6(4)*	1998 Stock Plan, as amended.
10.7(10)*	2007 Incentive Compensation Plan.
10.8(7)	Letter Agreement, dated August 28, 2006, among Integrated Silicon Solution, Inc., Riley Investment Management, LLC, SACC Partners, LP, Bryant R. Riley, R. Riley & Co. Retirement Trust and B. Riley & Co., Inc.
10.9(8)	Standstill Agreement dated as of September 7, 2006, among Integrated Silicon Solution, Inc., Riley Investment Management, LLC, SACC Partners, LP, Bryant R. Riley, B. Riley & Co. Retirement Trust and B. Riley & Co., Inc.
10.10(9)	Letter Agreement dated as of December 5, 2006, among Integrated Silicon Solution, Inc., Riley Investment Management, LLC, SACC Partners, LP, Bryant R. Riley, B. Riley & Co. Retirement Trust and B. Riley & Co., Inc.

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Exhibit Number	Description of Document
10.11(11)	Letter Agreement dated as of November 28, 2007, among Integrated Silicon Solution, Inc., Riley Investment Management, LLC, Riley Investment Partners Master Fund, L.P., Bryant R. Riley, B. Riley & Co. Retirement Trust, and B. Riley & Co., LLC.
10.12(11)	Letter Agreement dated as of November 28, 2007, between Integrated Silicon Solution, Inc. and Melvin Keating.
10.13(11)	Standstill Agreement dated as of November 28, 2007 among Integrated Silicon Solution, Inc., Riley Investment Management, LLC, Riley Investment Partners Master Fund, L.P., Bryant R. Riley, B. Riley & Co. Retirement Trust, and B. Riley & Co., LLC.
10.14(11)	Standstill Agreement dated as of November 28, 2007, by and among Integrated Silicon Solution, Inc., Trust A-4 - Lloyd I. Miller, an Ohio trust, Trust C - Lloyd I. Miller, an Ohio trust, Milgrat I(OOOOO), an Ohio trust, Milgrat II(FF), an Ohio trust, Milgrat I(XXX), an Ohio trust, Milgrat I(ZZZZ), an Ohio trust, Milfam II L.P., a Georgia limited partnership and Lloyd I. Miller, III.
21.1	Subsidiaries of the Registrant.
23.1	Consent of Independent Registered Public Accounting Firm (Grant Thornton LLP).
23.2	Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP).
24.1	Power of Attorney (see page 73).
31.1	Certification Pursuant to SEC Release No. 33-8238, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification Pursuant to SEC Release No. 33-8238, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Report on Form 10-K pursuant to item 15(b) of this report.

(1) Incorporated by reference to the Company’s Registration Statement on Form S-1, as amended (file no. 33-72960).

(2) Incorporated by reference to the Company’s Registration Statement on Form S-1, as amended (file no. 33-91520).

(3) Incorporated by reference to the Company’s Registration Statement on Form S-8 filed April 22, 1998.

(4) Incorporated by reference to the Company’s Registration Statement on Form S-8 filed March 9, 2001.

(5) Incorporated by reference to the Company’s Registration Statement on Form S-8 filed November 21, 2002.

(6) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2005.

(7) Incorporated by reference to the Company’s Report on Form 8-K filed August 30, 2006.

(8) Incorporated by reference to the Company’s Report on Form 8-K filed September 12, 2006.

(9) Incorporated by reference to the Company’s Report on Form 8-K filed December 7, 2006.

(10) Incorporated by reference to the Company’s Report on Form 8-K filed August 14, 2007.

(11) Incorporated by reference to the Company’s Report on Form 8-K filed December 3, 2007.

(b) Exhibits

See (3) above

(c) Financial statement schedules

See (2) above

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

INTEGRATED SILICON SOLUTION, INC.
By	/s/    JIMMY S.M. LEE
	Jimmy S.M. Lee Chairman of the Board and Chief Executive Officer
Date: December 14, 2007

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Jimmy S.M. Lee and Scott D. Howarth, and each of them acting individually, as his attorney-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said Report.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated.

Signature	Title
/s/    JIMMY S.M. LEE         (Jimmy S.M. Lee)	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
/s/    SCOTT D. HOWARTH         (Scott D. Howarth)	President and Chief Financial Officer (Principal Financial and Principal Accounting Officer)
/s/    KONG-YEU HAN         (Kong-Yeu Han)	Director and Vice Chairman
/s/    MELVIN L. KEATING         (Melvin L. Keating)	Director
/s/    PING K. KO         (Ping K. Ko)	Director
/s/    KEITH MCDONALD         (Keith McDonald)	Director
/s/    BRYANT RILEY         (Bryant Riley)	Director
/s/    BRUCE A. WOOLEY         (Bruce A. Wooley)	Director

Date: December 14, 2007

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EXHIBIT INDEX

Exhibit Number	Description of Document
3.1(2)	Restated Certificate of Incorporation of Registrant.
3.2(8)	Amendment to Restated Certificate of Incorporation of Registrant.
3.3	Bylaws of Registrant.
4.2(1)	Form of Common Stock Certificate.
10.1(1)	Form of Indemnification Agreement.
10.2(6)*	Form of 1993 Employee Stock Purchase Plan, as amended, and form of Subscription Agreement.
10.3(3)*	Form of 1989 Stock Plan, as amended, and form of Stock Option Agreements.
10.4(8)*	1995 Director Stock Option Plan, as amended.
10.5(5)*	Nonstatutory Stock Plan, as amended.
10.6(4)*	1998 Stock Plan, as amended.
10.7(10)*	2007 Incentive Compensation Plan.
10.8(7)	Letter Agreement, dated August 28, 2006, among Integrated Silicon Solution, Inc., Riley Investment Management, LLC, SACC Partners, LP, Bryant R. Riley, R. Riley & Co. Retirement Trust and B. Riley & Co., Inc.
10.9(8)	Standstill Agreement dated as of September 7, 2006, among Integrated Silicon Solution, Inc., Riley Investment Management, LLC, SACC Partners, LP, Bryant R. Riley, B. Riley & Co. Retirement Trust and B. Riley & Co., Inc.
10.10(9)	Letter Agreement dated as of December 5, 2006, among Integrated Silicon Solution, Inc., Riley Investment Management, LLC, SACC Partners, LP, Bryant R. Riley, B. Riley & Co. Retirement Trust and B. Riley & Co., Inc.
10.11(11)	Letter Agreement dated as of November 28, 2007, among Integrated Silicon Solution, Inc., Riley Investment Management, LLC, Riley Investment Partners Master Fund, L.P., Bryant R. Riley, B. Riley & Co. Retirement Trust, and B. Riley & Co., LLC.
10.12(11)	Letter Agreement dated as of November 28, 2007, between Integrated Silicon Solution, Inc. and Melvin Keating.
10.13(11)	Standstill Agreement dated as of November 28, 2007 among Integrated Silicon Solution, Inc., Riley Investment Management, LLC, Riley Investment Partners Master Fund, L.P., Bryant R. Riley, B. Riley & Co. Retirement Trust, and B. Riley & Co., LLC.
10.14(11)	Standstill Agreement dated as of November 28, 2007, by and among Integrated Silicon Solution, Inc., Trust A-4 - Lloyd I. Miller, an Ohio trust, Trust C - Lloyd I. Miller, an Ohio trust, Milgrat I(OOOOO), an Ohio trust, Milgrat II(FF), an Ohio trust, Milgrat I(XXX), an Ohio trust, Milgrat I(ZZZZ), an Ohio trust, Milfam II L.P., a Georgia limited partnership and Lloyd I. Miller, III.
21.1	Subsidiaries of the Registrant.
23.1	Consent of Independent Registered Public Accounting Firm (Grant Thornton LLP).
23.2	Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP).
24.1	Power of Attorney (see page 87).

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

* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Report on Form 10-K pursuant to item 15(b) of this report.

(1) Incorporated by reference to the Company’s Registration Statement on Form S-1, as amended (file no. 33-72960).

(2) Incorporated by reference to the Company’s Registration Statement on Form S-1, as amended (file no. 33-91520).

(3) Incorporated by reference to the Company’s Registration Statement on Form S-8 filed April 22, 1998.

(4) Incorporated by reference to the Company’s Registration Statement on Form S-8 filed March 9, 2001.

(5) Incorporated by reference to the Company’s Registration Statement on Form S-8 filed November 21, 2002.

(6) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2005.

(7) Incorporated by reference to the Company’s Report on Form 8-K filed August 30, 2006.

(8) Incorporated by reference to the Company’s Report on Form 8-K filed September 12, 2006.

(9) Incorporated by reference to the Company’s Report on Form 8-K filed December 7, 2006.

(10) Incorporated by reference to the Company’s Report on Form 8-K filed August 14, 2007.

(11) Incorporated by reference to the Company’s Report on Form 8-K filed December 3, 2007.

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