Company Background

At September 30, 2005, we owned approximately 83% of Integrated Circuit Solution, Inc. ("ICSI"). ICSI is a fabless semiconductor company whose principal products are DRAM and controller chips. 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. At September 30, 2008, we owned approximately 98% of ICSI. Our financial results for fiscal 2008, fiscal 2007 and fiscal 2006 reflect accounting for ICSI on a consolidated basis.

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

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%. Thereafter, we accounted for Signia on the cost method. Our financial results for fiscal 2006 reflect accounting for Signia on a consolidated basis through February 28, 2006. In October 2007, Signia was acquired by and merged into Terax Communication Technologies Inc ("Terax"). At September 30, 2008, we owned approximately 1% of Terax.

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, (iv) automotive electronics and (v) industrial. Our primary products are high speed and low power SRAM and low and medium density DRAM. In fiscal 2008, approximately 88% of our revenue was derived from our SRAM and DRAM products. We also design and market application specific standard products (ASSP) primarily EEPROMs and SmartCards focused on our key markets. We were founded in October 1988 and initially focused on high performance, low cost SRAM for PC cache memory applications. In 1997, we introduced our first low and medium density DRAM products. Prior to fiscal 2003, our SRAM product family generated a majority of our revenue. However, sales of our low and medium density DRAM products have represented a majority of our net sales in each year since fiscal 2003.

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

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

The average selling prices of our SRAM and DRAM products are very sensitive to supply and demand conditions in our target markets and have generally declined over time. We experienced declines in the average selling prices for many of our products in fiscal 2006, in fiscal 2007 and in fiscal 2008. 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 84%, 82% and 83% in fiscal 2008, 2007 and 2006, 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,
                                    2008       2007     2006
                           Asia        66 %      67 %     73 %
                           Europe      17        15       10
                           U.S.        16        18       17
                           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, due to the complex nature of the markets we serve, it difficult for us to assess the impact of seasonal factors on our business.

We are subject to the risks of conducting business internationally, including economic conditions in Asia, particularly Taiwan and China, changes in trade policy and regulatory requirements, duties, tariffs and other trade barriers and restrictions, the burdens of complying with foreign laws and, possibly, political instability. All of our foundries and assembly and test subcontractors are located in Asia. Although our international sales are largely denominated in U.S. dollars, we do have sales transactions in New Taiwan dollars, in Hong Kong dollars and in 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.

Due to the recent tightening of the credit markets and concerns regarding the availability of credit, our current or potential customers have delayed or reduced purchases of our products which is adversely affecting our revenues and harming our business and financial results. In addition, the recent turmoil in the financial

markets has had and is expected to continue to have an adverse effect on the U.S. and world economies, which is negatively impacting the spending patterns of businesses including our current and potential customers. There can be no assurances that the government responses to the disruptions in the financial markets will restore confidence in the U.S. and global markets. Many economists and other experts are predicting a recession in the U.S. and global economies or have stated that they believe a recession has already begun. We are unable to predict how deep or how long any recession will last. We expect our business to be adversely impacted by any significant or prolonged downturn in the U.S. or global economies. In particular, we currently expect our revenue for the quarter ending December 31, 2008 to decline from our revenue in the quarter ended September 30, 2008. In the past, industry downturns have resulted in reduced demand and declining average selling prices for our products which adversely affected our business. We are experiencing and expect to continue to experience these adverse business conditions. The uncertainty regarding the U.S. and global economies has also made it more difficult for us to forecast and manage our business. Although we are taking actions in the December quarter relating to controlling our expenses and inventory levels, there can be no assurance that these actions will be sufficient to address the impact of any economic slowdown and allow us to meet our operating objectives.

Fiscal Year Ended September 30, 2008 Compared to Fiscal Year Ended September 30, 2007

Net Sales. Net sales consist principally of total product sales less estimated sales returns. Net sales decreased by 4% to $235.2 million in fiscal 2008 from $245.4 million in fiscal 2007. The decrease in net sales of $10.2 million can be attributed primarily to declines in DRAM revenue and sales of our application specific standard products (ASSP), specifically our Flash controller products, partially offset by an increase in SRAM revenue. The decline in our DRAM revenue can be attributed primarily to a decline in both unit shipments and average selling prices of our 128 Mb DRAM products in fiscal 2008 compared to fiscal 2007. The decline in our ASSP revenue is primarily due to a decrease in shipments of our Flash controller products in fiscal 2008 compared to fiscal 2007 partially offset by an increase in shipments of our EEPROM and Smartcard products over such periods. An increase in unit shipments of our SRAM products in fiscal 2008 compared to fiscal 2007 more than offset a decline in average selling prices for such products resulting in an overall increase in SRAM revenue. We anticipate that our revenue will decline in the December 2008 quarter compared to the September 2008 quarter as a result of the deterioration in the global economic environment. In addition, 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 2008 and fiscal 2007, 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 $4.8 million to $53.2 million in fiscal 2008 from $48.4 million in fiscal 2007. Our gross margin increased to 22.6% in fiscal 2008 from 19.7% in fiscal 2007 primarily as a result of a shift in our product mix to higher margin SRAM products from low margin commodity DRAM products. The increase in gross profit in fiscal 2008 compared to fiscal 2007 can be attributed to increased unit shipments of our SRAM and DRAM products which was partially offset by a reduction in shipments of ASSP products, specifically our Flash controller 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 2008 which contributed to an increase in our SRAM gross margin. Declines in the cost of our DRAM products more than offset declines in the average selling prices of our DRAM products in fiscal 2008 as we limited our shipments of lower margin commodity DRAM products. This contributed to an increase in our DRAM gross margin. In addition, our gross profit for fiscal 2008 benefited from approximately $0.8 million of revenue for a DRAM development project. Our gross profit for fiscal 2008 included inventory write-downs of $11.3 million compared to $10.3 million of inventory write-downs in fiscal 2007. The inventory write-downs were for lower of cost or market accounting and excess and obsolescence issues on certain of our products. Our gross profit for fiscal 2008 and fiscal 2007 benefited from the sale of $3.1

million and $3.2 million, respectively, of previously written down products. In addition, our gross profit in fiscal 2008 benefited by a $1.0 million credit for the reversal of previously accrued liabilities for which we are no longer obligated. 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 increased by 3% to $20.8 million in fiscal 2008 from $20.2 million in fiscal 2007. As a percentage of net sales, research and development expenses increased to 8.9% in fiscal 2008 from 8.2% in fiscal 2007. The increase in research and development expenses of $0.6 million can be attributed to an increase in expenditures for the development of our SRAM and ASSP products in fiscal 2008 compared to fiscal 2007 partially offset by a decrease in expenditures for the development costs of our DRAM products. The $0.6 million increase includes the impact of the weaker U.S. dollar which resulted an increase in our expenses denominated in foreign currencies. The cost of developing new products utilizing newer technologies could result in an increase in our research and development expenses in future periods. We expect the dollar amount of our research and development expenses to remain relatively constant and expect such expenses to fluctuate as a percentage of net sales depending on our overall level of sales.

Selling, general and administrative. Selling, general and administrative expenses decreased by 4% to $31.4 million in fiscal 2008 from $32.7 million in fiscal 2007. As a percentage of net sales, selling, general and administrative expenses increased to 13.4% in fiscal 2008 from 13.3% in fiscal 2007. The decrease in selling, general and administrative expenses of $1.3 million was primarily attributable to a decrease in legal expenses and accounting fees attributable to our stock option backdating investigation which was completed in fiscal 2007 offset by expenses incurred in fiscal 2008 related to our $70 million stock repurchase and an increase in selling related expenses in an effort to expand our sales channels. In addition, the weaker U.S. dollar in fiscal 2008 compared to fiscal 2007 has resulted in an increase in our expenses denominated in foreign currencies. We expect the dollar amount of our selling, general and administrative expenses to remain relatively constant and expect such expenses to fluctuate as a percentage of net sales depending on our overall level of sales.

Impairment of goodwill. In September 2008, we performed an assessment of impairment for our goodwill. In the fourth quarter of fiscal 2008, we experienced a significant decline in our stock price. As a result of the decline in our stock price, our market capitalization fell significantly below the recorded value of our consolidated net assets. Based on the results of our assessment of goodwill for impairment, we determined that the fair value of our equity was less than the book value of our equity and an impairment existed. Therefore, we performed the second step of the impairment test to determine the implied fair value of goodwill. Specifically, we hypothetically allocated the estimated fair value of our equity as determined in the first step to recognized and unrecognized net assets, including allocations to intangible assets. The analysis indicated that there would be no remaining implied value attributable to goodwill and accordingly, we wrote off all $25.3 million of our goodwill.

Interest and other income, net. Interest and other income, net was $5.2 million in fiscal 2008 compared to $8.2 million in fiscal 2007. The $5.2 million of interest and other income in fiscal 2008 was comprised primarily of interest income of $3.0 million, $1.7 million in rental income from the lease of excess space in our Taiwan facility and $0.5 million in exchange gains. The $8.2 million of interest and other income, 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 partially offset by $0.5 million expense estimated for the settlement of derivative lawsuits.

Gain on sale of investments. The gain on the sale of investments was $1.8 million in fiscal 2008 compared to $12.0 million in fiscal 2007. In fiscal 2008, we sold approximately 0.3 million shares of Ralink for approximately $1.8 million and recorded a pre-tax gain of approximately $1.6 million. In addition, in fiscal 2008, we sold 22.0 million shares of SMIC for approximately $2.7 million which resulted in a pre-tax gain of approximately $0.2 million. In fiscal 2007, we sold approximately 1.5 million shares of Ralink 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. In fiscal 2007, 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.

Provision for income taxes. For fiscal 2008, we recorded an income tax provision of $197,000 consisting of federal and state minimum taxes and foreign withholding 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.

We have 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.

We adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109" (FIN 48), on October 1, 2007. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.

As of the date of adoption of FIN 48, we had $3.0 million of unrecognized tax benefits which included $2.9 million of unrecognized tax benefits that were previously included in the deferred tax asset account which carried a full valuation allowance. The unrecognized tax benefit as of the date of adoption had no effect on the beginning balance of accumulated deficit or the net balance sheet. We historically classified unrecognized tax benefits in current taxes payable and as a result of the adoption had reclassified $140,000 from current to long term liabilities.

Minority interest in net income of consolidated subsidiary. The minority interest in net income of consolidated subsidiary was $0.1 million in fiscal 2008 compared to $0.2 million in fiscal 2007. The minority interest in net income of consolidated subsidiary for fiscal 2008 and fiscal 2007 represents the minority shareholders' proportionate share of the net income of ICSI.

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

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

Net Sales. 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 ASSP products and 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.

In fiscal 2007 and fiscal 2006, no single customer accounted for over 10% of our net sales.

Gross profit. 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 which 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.

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 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.

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 2007 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 partially offset by $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 approximately 1.5 million 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 . . .