Option holder presentation materials

2007 ISSI, INC. -

Page 1

Discounted Options, Section 409A &

ISSI’s

Tender Offer

June 14, 2007

Exhibit (a)(1)(I)

2007 ISSI, INC. -

Page 2

Understand

–

The 409A tax issue

–

What ISSI is doing for the affected options

–

Your choices

Review your next steps

Meeting Objectives

2007 ISSI, INC. -

Page 3

Why are we here today?

ISSI has determined that you hold certain stock

options that may be negatively affected by a recent

tax law change.

ISSI has developed a solution to address the

problem, but which requires your participation and

permission to implement.

If you do not participate, you may have adverse tax

consequences.

2007 ISSI, INC. -

Page 4

Tax Law Change:

409A

Tax Law Change:

409A

409A is a set of operating and tax rules for items

considered to be deferred compensation.

Certain stock options are now considered to be

deferred compensation.

What are the consequences of 409A?

–

Potential income taxation prior to exercise

–

40% additional tax (20% federal & 20% CA)

–

Interest penalty

2007 ISSI, INC. -

Page 5

Which options are affected?

Options granted at a price below the stock’s fair market

value (FMV) on the actual grant date (“Discount

Options”).

Only options that vest AFTER 12/31/04.

•

Thus, options granted prior to 409A’s enactment could be affected

by this new law if they vested 1/1/05 and later.

2007 ISSI, INC. -

Page 6

Example:

Option granted on Jan 1, 2003 –

10,000 shares

Option price = $2.50,

but fair market value at grant date =

$5.50

Vesting:

2,500 options vest on Jan 1, 2004

–

2,500 options vest on a monthly basis during 2004

–

2,500 options vest on a monthly basis during 2005

–

2,500 options vest on a monthly basis during 2006

–

CONCLUSION:

–

The 5,000 options that vested prior to 1/1/05 are NOT subject to

409A.

–

The 5,000 options that vest after 12/31/04 are subject to 409A

because they were granted at a discount.

2007 ISSI, INC. -

Page 7

Example: (continued)

Assume that the fair market value of the option shares on the

applicable tax date is $7.50 and no options were exercised.

409A Estimated Tax Impact:

W-2 Income Inclusion: $25,000

–

(= 5,000 options subject to 409A x $5.00 ($7.50 FMV -$2.50 Option Price))

Fed Ordinary Income Tax

$8,750

(35%)

CA Ordinary Income

Tax

$2,250

(9%)

Normal Stock Gain Tax Rate

$11,000

44%

409A Tax (Fed/CA)

$10,000

(40%)

409A Interest

2,250

(9%)

Tax Rate w/409A

$23,250

93%

This will occur until exercise or expiration of the option.

2007 ISSI, INC. -

Page 8

What are the solutions?

Program 1 for Options in the money

Program 2 for Options out of the money

2007 ISSI, INC. -

Page 9

Program 1: Tender Offer for Unexercised Options

ISSI expects to commence a formal tender offer for

certain outstanding stock options held by its employees.

We will notify you when that tender offer commences.

advise you to read the tender statement when it is

available because it will contain important information

relating to your stock options.

We will deliver the actual

tender offer documents to all affected employees via

electronic mail when the tender offer commences, and

those documents will also be available for free at the

Securities and Exchange Commission's public website.

2007 ISSI, INC. -

Page 10

Program 1: Tender Offer for Unexercised Options

Amend option to increase option price, AND

Provide a cash payment to help compensate for the

higher price

Only options issued below market and that vest after

12/31/04 will be subject to this program

2007 ISSI, INC. -

Page 11

ISSI’s

Solution:

Tender Offer

ISSI’s

Solution:

Tender Offer

Example:

–

Orig. Option Price:

–

Adjusted Option Price:

–

FMV at Tender Offer close:

$6.00

Example:

–

Orig. Option Price:

–

Adjusted Option Price:

$10

–

FMV at Tender Offer close:

2007 ISSI, INC. -

Page 12

ISSI’s

Solution:

Tender Offer

ISSI’s

Solution:

Tender Offer

Amend options to increase the option price

–

Option price will be the lower of:

•

Fair market value on the actual grant date, or

•

Closing price of ISSI stock the day after the tender offer

closes

All other terms will remain the same (including the

number of shares, vesting schedule and expiration

date)

2007 ISSI, INC. -

Page 13

ISSI’s

Solution:

Tender Offer

ISSI’s

Solution:

Tender Offer

Cash Bonus payment

–

Equal to the difference (if any) between the adjusted option

price and original option price

–

Will be made in January 2008 per IRS requirement

2007 ISSI, INC. -

Page 14

Eligibility

Must be an employee at the close of the Tender Offer

and subject to US income taxation.

Offer covers unexercised options that were granted

at a discount and vest after 12/31/04.

You can select which of your affected grants to

tender (i.e., participate with), but once selected, the

entire unexercised posrtion

subject to 409A must be

tendered.

2007 ISSI, INC. -

Page 15

Program 2: Options Out of the Money

If your new option exercise price would be higher than

the fair market value of ISSI stock on the day the tender

offer is completed, your option price will equal the ISSI

closing stock price but will not be higher

This will result in a lower stock option price for you

Since this will increase the value of the stock option, the

quantity of options will be converted to an economically

equivalent number of shares, which will be lower

–

Using a Black-Scholes

approach

2007 ISSI, INC. -

Page 16

Example

Option

granted

Jan

2003

–

10,000

Option price = $10.00,

but fair market value at grant date =

$15.00

Vesting:

2,500 options vest on Jan 1, 2004

–

2,500 options vest on a monthly basis during 2004

–

2,500 options vest on a monthly basis during 2005

–

2,500 options vest on a monthly basis during 2006

–

CONCLUSION:

–

The 5,000 options that vested prior to 1/1/05 are NOT subject to

409A.

–

The 5,000 options that vest after 12/31/04 are subject to 409A

because they were granted at a discount.

2007 ISSI, INC. -

Page 17

Example

Example:

–

Orig. Option Price:

$10

–

Adjusted Option Price:

$15

–

FMV at Tender Offer close:

Option is repriced

to the FMV of $6

Example: 5000 options have a Black-Scholes

value of

–

$1.19 per share at $10

–

$2.15 per share at $6

The number of shares would be reduced to 2767*

–

5000 shares x $1.19 / $2.15 = 2767

–

*Note, the exact amount will vary depending on various factors

2007 ISSI, INC. -

Page 19

What if I do nothing?

Tax Impact:

–

Income taxation before exercise

–

20% additional federal tax on income amount

–

20% additional California tax on income amount

•

Potentially other state additional taxes

–

Interest penalty on income amount

Will occur until exercise or expiration of the

discounted options.

Tender offer is a one-time offer to prevent future

adverse tax consequences.

2007 ISSI, INC. -

Page 21

Tender Offer Expected Timeline

Tender Offer Begins: June 18, 2007

Tender Offer Ends:

July 18, 2007

–

All elections MUST be received by 5:00PM Pacific Time on the

expiration date

–

Late submissions will not be accepted

Option Amendment:

July 19, 2007

How to submit your election: E-mail with instructions will be

sent to you.

Confirming e-mail will be sent to you upon completion of your

acceptance of the Offer.

2007 ISSI, INC. -

Page 22

Sample Statement

This is a sample statement of an employee’s entire stock option portfolio

2007 ISSI, INC. -

Page 23

What if I still have questions?

Follow-up meetings:

Watch your E-mail

Any

questions

should

directed

elai@issi.com

2007 ISSI, INC. -

Page 24

Tax Advice

Taxation of stock option transactions can be very

complicated.

ISSI policy prohibits any employees from providing

personal income tax advice to any other employee.

This presentation is general and you should consult

with your personal tax advisor for advice relevant to

your specific situation.

2007 ISSI, INC. -

Page 25

Circular 230 Disclaimer Notice

Any tax advice included in this presentation was not

intended or written to be used, and it cannot be used

by the taxpayer, for the purpose of avoiding any

penalties that may be imposed by any governmental

taxing authority or agency;

This tax advice was written to support the promotion

of the matter addressed by the presentation; and

The taxpayer should seek advice based on the

taxpayer’s particular circumstances from an

independent tax advisor.