UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

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Commission File Number 0-26944

SILICON STORAGE TECHNOLOGY, INC.



|California                                                     | 77-0225590                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

1171 Sonora Court
                        Sunnyvale, California     94086

(408) 735-9110

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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 reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act).  YES [X] NO [   ]

Number of shares outstanding of our Common Stock, no par value, as of the latest
practicable date, October 31, 2004:   94,088,714.

1









SILICON STORAGE TECHNOLOGY, INC.
              FORM 10-Q: QUARTER ENDED SEPTEMBER 30, 2004
                                TABLE OF CONTENTS



|PART I - FINANCIAL INFORMATION                                                                                        | Page No.
|--------------------------------------------------------------------------------------------------------------------- | --------
|                                                                                                                      |         
|Item 1.   Condensed Consolidated Financial Statements (Unaudited):                                                    |         
|                                                                                                                      |         
|Condensed Consolidated Statements of Operations                                                                       | 3       
|                                                                                                                      |         
|Condensed Consolidated Balance Sheets                                                                                 | 4       
|                                                                                                                      |         
|Condensed Consolidated Statements of Cash Flows                                                                       | 5       
|                                                                                                                      |         
|Notes to Unaudited Condensed Consolidated Financial Statements                                                        | 6       
|                                                                                                                      |         
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations | 19      
|                                                                                                                      |         
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                  | 39      
|                                                                                                                      |         
|Item 4.   Controls and Procedures                                                                                     | 39      
|                                                                                                                      |         
|PART II - OTHER INFORMATION                                                                                           |         
|                                                                                                                      |         
|Item 1.  Legal Proceedings                                                                                            | 41      
|                                                                                                                      |         
|Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                                  | 41      
|                                                                                                                      |         
|Item 6.   Exhibits                                                                                                    | 42      
|                                                                                                                      |         
|Signatures                                                                                                            | 43      



2

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PART I - FINANCIAL INFORMATION



Item 1.	Unaudited Condensed Consolidated Financial Statements

SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (Unaudited)

                      (in thousands, except per share data)
Three Months Ended           Nine Months Ended
                                                              September 30,               September 30,
                                                         ------------------------    ------------------------
                                                            2003         2004           2003         2004
                                                         -----------  -----------    -----------  -----------
Net revenues:
     Product revenues - unrelated parties.............. $    21,069  $    52,840    $    58,950  $   132,175
     Product revenues - related parties................      44,328       48,420        115,228      176,026
     Technology licensing..............................       8,538       10,912         25,646       36,933
                                                         -----------  -----------    -----------  -----------
          Total net revenues...........................      73,935      112,172        199,824      345,134
                                                         -----------  -----------    -----------  -----------
Cost of revenues:
     Cost of revenues - unrelated parties..............      17,953       35,434         53,300       86,808
     Cost of revenues - related parties................      37,641       37,154        102,728      131,824
                                                         -----------  -----------    -----------  -----------
          Total cost of revenues.......................      55,594       72,588        156,028      218,632
                                                         -----------  -----------    -----------  -----------
Gross profit...........................................      18,341       39,584         43,796      126,502
                                                         -----------  -----------    -----------  -----------
Operating expenses:
     Research and development..........................      10,746       13,311         32,810       37,156
     Sales and marketing...............................       5,300        7,262         16,432       21,461
     General and administrative........................       3,207        4,259         10,288       12,837
     Other operating expenses..........................      36,478           --         36,478        1,479
                                                         -----------  -----------    -----------  -----------
          Total operating expenses.....................      55,731       24,832         96,008       72,933
                                                         -----------  -----------    -----------  -----------
Income (loss) from operations..........................     (37,390)      14,752        (52,212)      53,569
Interest and other income..............................       1,330          684          2,364        1,392
Interest and other expense.............................         (30)         (22)          (109)        (185)
Minority interest......................................          --          (42)            --          (42)
                                                         -----------  -----------    -----------  -----------
Income (loss) before provision for income taxes..........   (36,090)      15,372        (49,957)      54,734
Provision for income taxes.............................      22,928          850         24,315        3,880
                                                         -----------  -----------    -----------  -----------
Net income (loss)...................................... $   (59,018) $    14,522    $   (74,272) $    50,854
                                                         ===========  ===========    ===========  ===========

Net income (loss) per share - basic.................... $     (0.62) $      0.15    $     (0.79) $      0.53
                                                         ===========  ===========    ===========  ===========

Shares used in per share calculation - basic...........      95,002       94,896         94,553       95,601
                                                         ===========  ===========    ===========  ===========

Net income (loss) per share - diluted.................. $     (0.62) $      0.15    $     (0.79) $      0.51
                                                         ===========  ===========    ===========  ===========

Shares used in per share calculation - diluted.........      95,002       97,491         94,553       99,429
                                                         ===========  ===========    ===========  ===========

The accompanying notes are an integral part of these unaudited condensed
                       consolidated financial statements.
3

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                   (Unaudited)

                                 (in thousands)
December 31, September 30,
                                                                        2003         2004
                                                                   ------------  ------------
                             ASSETS

Current assets:
    Cash and cash equivalents.................................... $    124,625  $     88,876
    Short-term available-for-sale investments....................       60,569        32,558
    Trade accounts receivable-unrelated parties, net of allowance
      for doubtful accounts of $1,118 at December 31, 2003 and
      $1,223 at September 30, 2004...............................       14,110        29,490
    Trade accounts receivable-related parties....................       41,220        34,035
    Inventories..................................................       46,120       138,453
    Other current assets.........................................       13,232        15,685
                                                                   ------------  ------------
         Total current assets....................................      299,876       339,097
Equipment, furniture and fixtures, net...........................       11,325        15,619
Equity investment, GSMC..........................................       50,000        83,150
Equity investments, other........................................        8,077        11,930
Long-term available-for-sale investments.........................       24,969        20,188
Other assets.....................................................        2,114        12,264
                                                                   ------------  ------------
         Total assets............................................ $    396,361  $    482,248
                                                                   ============  ============
LIABILITIES

Current liabilities:
    Notes payable, current portion............................... $        393  $        427
    Trade accounts payable-unrelated parties.....................       37,342        56,618
    Trade accounts payable-related parties.......................       10,165        17,925
    Accrued expenses and other liabilities.......................       11,911        22,843
    Deferred revenue.............................................        3,630         3,333
                                                                   ------------  ------------
         Total current liabilities...............................       63,441       101,146
Other liabilities................................................        1,423         1,385
Minority interest................................................           --         2,332
                                                                   ------------  ------------
         Total liabilities.......................................       64,864       104,863
                                                                   ------------  ------------
Commitments and Contingencies (Notes 5 and 6)
SHAREHOLDERS' EQUITY

Common stock, no par value:
    Authorized: 250,000 shares
    Issued and outstanding: 95,328 shares at December 31, 2003
    and 94,034 shares at September 30, 2004......................      345,384       335,694
Accumulated other comprehensive income...........................        9,178        13,902
Retained earnings/(Accumulated deficit)..........................      (23,065)       27,789
                                                                   ------------  ------------
         Total shareholders' equity..............................      331,497       377,385
                                                                   ------------  ------------
         Total liabilities and shareholders' equity.............. $    396,361  $    482,248
                                                                   ============  ============

The accompanying notes are an integral part of these unaudited condensed
                       consolidated financial statements.

4

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (Unaudited)

                                 (in thousands)
Nine Months Ended
                                                                             September 30,
                                                                        ----------------------
                                                                           2003        2004
                                                                        ----------  ----------
Cash flows from operating activities:
    Net income (loss)................................................. $  (74,272) $   50,854
    Adjustments to reconcile net income/(loss) to net cash
      provided by/(used in) operating activities:
       Depreciation and amortization..................................      5,995       4,507
       Purchased in-process research and development..................         --       1,737
       Equity investment impairment...................................         --         497
       Impairment loss on operating lease.............................         --       1,489
       Provision (credit) for doubtful accounts receivable............        (56)        158
       Provision (credit) for sales returns...........................       (356)        391
       Provision for  write-down of
         inventories and adverse purchase commitments.................      6,234      11,513
       Deferred income taxes..........................................     22,318          --
       Tax benefit from employee stock plans..........................      1,251          --
       (Gain)/Loss on disposal of equipment, furniture and fixtures...        114         (35)
       Adjustment on equity method investment.........................         --          71
       Gain on sale of equity investments.............................       (649)         --
       Minority interest..............................................         --          42
    Changes in operating assets and liabilities, net of acquisition:
       Trade accounts receivable-unrelated parties....................      2,304     (10,593)
       Trade accounts receivable-related parties......................    (10,317)      7,215
       Inventories....................................................     27,907     (97,444)
       Other current and non-current assets...........................     17,609      (3,780)
       Trade accounts payable-unrelated parties.......................     (4,127)     16,257
       Trade accounts payable-related parties.........................        327       7,397
       Accrued expenses and other liabilities.........................     29,094       5,530
       Deferred revenue...............................................      3,370        (297)
                                                                        ----------  ----------
           Net cash provided by/(used in) operating activities........     26,746      (4,491)
                                                                        ----------  ----------
Cash flows from investing activities:
    Acquisitions of Emosyn, net of cash received......................         --     (15,963)
    Investment in equity securities...................................         --     (38,351)
    Purchase of equipment, furniture and fixtures.....................     (1,082)     (6,114)
    Sale of fixed assets..............................................         --          35
    Purchases of available-for-sale investments.......................    (35,087)    (56,925)
    Sales and maturities of available-for-sale and equity investments.     31,362      95,221
                                                                        ----------  ----------
           Net cash used in investing activities......................     (4,807)    (22,097)
                                                                        ----------  ----------
Cash flows from financing activities:
    Notes payable repayments, net.....................................       (261)       (291)
    Issuance of shares of common stock................................      3,668       5,163
    Repurchase of common stock........................................         --     (14,853)
    Minority interest: capital contribution in cash...................         --         820
                                                                        ----------  ----------
           Net cash provided by/(used in) financing activities........      3,407      (9,161)
                                                                        ----------  ----------
Net increase in cash and cash equivalents.............................     25,346     (35,749)
Cash and cash equivalents at beginning of period......................    103,751     124,625
                                                                        ----------  ----------
Cash and cash equivalents at end of period............................ $  129,097  $   88,876
                                                                        ==========  ==========

The accompanying notes are an integral part of these unaudited condensed
                       consolidated financial statements.

5

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SILICON STORAGE TECHNOLOGY, INC. AND
SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AT SEPTEMBER 30, 2004
(UNAUDITED):

1. Basis of Presentation
2. Computation of Net Income (Loss) Per Share
3. Investments
4. Selected Balance Sheet Detail
5. Commitments
6. Contingencies
7. Line of Credit
8. Stock Repurchase Program
9. Acquisition of Emosyn
10. Segment Reporting
11. Comprehensive Income (Loss)
12. Related Party Transactions and Balances
13. Income Taxes
14. Subsequent Events

On October 18, 2004, we announced the signing of a definitive agreement
to acquire substantially all of the assets of a privately held company, G-Plus,
Inc.  G-Plus is a Santa Monica, California-based fabless semiconductor
manufacturer specializing in the design of radio frequency integrated circuits
for wireless multimedia and broadband networking system applications.  We
believe the acquisition of G-Plus is expected to allow us to accelerate the
proliferation of SuperFlash technology in the wireless market, which has been a
long-term strategy of SST. We also believe that this acquisition will help G-
Plus leverage our foundry relationships and manufacturing operation
infrastructure in order to meet the rising demand for G-plus wireless products.
The transaction was closed on November 5, 2004.  We paid approximately $25.5
million in consideration consisting of $4.6 million in cash and approximately
3,030,000 shares of our common stock.





18

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Item 2.  Management's Discussion and Analysis of Financial Condition and
Results of Operations.

The following discussion may be understood more fully by reference to the
consolidated financial statements, notes to the consolidated financial
statements, and management's discussion and analysis of financial condition and
results of operations contained in our Annual Report on Form 10-K for the year
ended December 31, 2003, as filed with the Securities and Exchange
Commission.

The following discussion contains forward-looking statements, which involve
risk and uncertainties.  All forward-looking statements included in this
document are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements.  Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors which are difficult to forecast and
can materially affect our quarterly or annual operating results. Fluctuations in
revenues and operating results may cause volatility in our stock price.   Please
refer to the section below entitled "Business Risks."

Overview

We are a leading supplier of flash memory semiconductor devices for the
digital consumer, networking, wireless communication and Internet computing
markets.

The semiconductor industry has historically been cyclical, characterized by
periodic changes in business conditions caused by product supply and demand
imbalance.  When the industry experiences downturns, they often occur in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions.  These downturns are characterized by weak product
demand, excessive inventory and accelerated decline of selling prices.  In some
cases, downturns, such as the one we experienced from late 2000 through 2002,
lasted for more than a year.  We began to experience a slow recovery during 2002
through the first half of 2003. During the second half of 2003 and the first
half of 2004, demand for our products increased sharply and we began to see
improvements in the average selling prices of our products. However, we
experienced a decrease in the average selling prices of our products as a result
of the slow-down in the demand for some of our products in the third quarter of
2004 and our business could be harmed again by industry-wide downturns in the
future.

Our product sales are made primarily using short-term cancelable purchase
orders. The quantities actually purchased by the customer, as well as shipment
schedules are frequently revised to reflect changes in the customer's needs and
in our supply of product.  Accordingly, our backlog of open purchase orders at
any given time is not a meaningful indicator of future sales.  Changes in the
amount of our backlog do not necessarily reflect a corresponding change in the
level of actual or potential sales.

We derived 88.5%, 90.0% and 86.6% of our net product revenues during 2002,
2003 and the nine months ended September 30, 2004, respectively, from product
shipments to Asia. Additionally, substantially all of our wafer suppliers and
packaging and testing subcontractors are located in Asia.

Our top ten end customers, which excludes transactions through stocking
representatives and distributors, accounted for 36.8%, 37.7% and 32.3% of our
net product revenues in 2002, 2003 and the nine months ended September 30, 2004,
respectively.

No single end customer, which we define as original equipment manufacturers,
or OEMs, original design manufacturers, or ODMs, contract electronic
manufacturers, or CEMs, or end users, represented 10% or more of our net product
revenues during 2002, 2003 or the nine months ended September 30, 2004.

Since March 2001, we have been increasing our out-sourcing activities for our
customer service logistics to support our customers.  Currently, Silicon
Professional Technology Ltd., or SPT, supports our customers in Taiwan, China
and other Southeast Asia countries.  SPT provides planning, warehousing,
delivery, billing, collection and other logistic functions for us in these
regions.  SPT is a wholly-owned subsidiary of one of our stocking
representatives in Taiwan, Professional Computer Technology Limited, or PCT.
Please see a description of our relationship with PCT under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Related Party Transactions" in our Annual Report on Form 10-K for
the year ended December 31, 2003. Products shipped to SPT are accounted for as
consigned inventory, and revenue is recognized when the products have been
delivered and are considered as a sale to our end customers by SPT. For the year
ended December 31, 2002, 2003 and the nine months ended September 30, 2004, SPT
serviced end customer sales accounting for 57.4%, 64.2% and 54.5% of our net
product revenues recognized. As of December 31, 2003 and September 30, 2004, SPT
represented 73.4% and 52.5% of our net accounts receivable, respectively.

19

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We ship products to, and have accounts receivable from, OEMs, ODMs, CEMs,
stocking representatives, distributors, and our logistics center. Our stocking
representatives, distributors and logistics center reship our products to our
end customers, including OEMs, ODMs, CEMs and end users.  Shipments, by us or
our logistic center, to our top three stocking representatives for reshipment
accounted for 16.9%, 29.9% and 35.6% of our product shipments in 2002, 2003 and
the nine months ended September 30, 2004, respectively.  In addition, the same
three stocking representatives solicited sales, for which they received a
commission, for 41.3%, 32.8% and 27.2% of our shipments to end users in 2002,
2003 and the nine months ended September 30, 2004, respectively.

Critical Accounting Estimates

For information related to our revenue recognition and other critical
accounting estimates, please refer to the "Critical Accounting Estimates"
section of "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in our Annual Report on Form 10-K for the year
ended December 31, 2003.

Results of Operations: Quarter and Nine Months Ended September 30,
2004

Net Revenues

Net revenues were $112.2 million for the third quarter of 2004 as
compared to $128.5 million in the second quarter of 2004 and $73.9 million for
the third quarter of 2003.  Revenues for the third quarter of 2004 decreased
compared to the prior quarter primarily due to the decrease in both average
selling prices and unit shipments of our products as well as decreased revenues
from technology licensing.  Revenues increased compared to the third quarter of
last year due to the increase in both average selling prices and unit shipments
of our products as well as increased revenues from technology licensing.  Our
quarterly results are not indicative of annual results.  Average selling prices
and unit shipments fluctuate due to a number of factors including the overall
supply and demand for our products in the marketplace, maturing product cycles
and general economic conditions.  Net revenues were $345.1 million for the nine
months ended September 30, 2004 as compared to $199.8 million for the comparable
period in 2003.  The increase from year to year was due to improved market
conditions which increased average selling prices and unit shipments of our
products as well as revenues from technology licensing.

Product Revenues.  Product revenues were $101.3 million in the
third quarter of 2004 as compared to $115.6 million in the second quarter of
2004 and $65.4 million for the third quarter of 2003.  Product revenues
decreased compared to the second quarter of 2004 primarily due to decreased
average selling prices for our products by 7.6% and decreased unit shipments by
7.4%.  Product revenues increased compared to the third quarter of last year due
to increased average selling prices for our products by 25.4% and increased unit
shipments by 19.0%.  Product revenues increased to $308.2 million for the nine
months ended September 30, 2004 from $174.2 million for the comparable period in
2003 due to increased average selling prices for our products by 27.1% and
increased unit shipments by 36.9%.

Technology Licensing Revenues.Revenues from royalties and license
fees were $10.9 million in the third quarter of 2004, as compared to $13.0
million in the second quarter of 2004 and $8.5 million in the third quarter of
2003.  The decrease in technology licensing revenues from the second quarter of
2004 to the third quarter of 2004 is primarily due to a decrease of $1.6 million
in license fees recognized.  The increase in technology
licensing revenues from the third quarter of 2003 to the third quarter of 2004
is primarily due to increased license fees of $2.2 million recognized. Revenues
from technology licensing increased to $36.9 million for the nine months ended
September 30, 2004 from $25.6 million for the comparable period in 2003. The
period to period increase in technology licensing revenues is primarily due to
increased license fees of $10.6 million recognized from new licensees.  We
anticipate that revenues from technology licensing may fluctuate materially in
the future.

20

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Gross Profit

Gross profit was $39.6 million, or 35.3% of net revenues, in the third
quarter of 2004 as compared to gross profit of $48.8 million, or 37.9% of net
revenues, in the second quarter of 2004 and $18.3 million, or 24.8% of net
revenues, in the third quarter of 2003.  The decrease in gross profit from the
second quarter of 2004 to the third quarter of 2004 is due to decreased unit
shipments and average selling price of our products by 7.4% and 7.6%,
respectively. The increase in gross profit in the third quarter of 2004 when
compared to the third quarter of 2003 is due primarily to improved manufacturing
costs, increases in average selling prices and unit shipments by 25.4% and
19.0%, respectively, as well as increased revenues from technology licensing by
$2.4 million.  For the nine months ended September 30, 2004, gross profit was
$126.5 million, or 36.6% of net revenues, compared to $43.8 million, or 21.9% of
net revenues, for the comparable period in 2003.  Product gross margin was 29.1%
for the third quarter of 2004, compared to 31.0% for the second quarter of 2004
and 15.0% for the third quarter of 2003.  The decrease in product gross margin
from the second quarter of 2004 to the third quarter of 2004 is due to decreased
average selling prices, unit shipments, and the net increase in provision
of inventory write down which also attributed to the decrease in gross margin.
The increase in product gross margin
from the third quarter of 2003 to the third quarter of 2004 relates to improve
manufacturing costs, the increase of average selling prices and shipment volume
of our products by 25.4% and 19.0%, respectively.  Product gross margin for the nine months
ended September 30, 2004 increased to 29.1% from 10.4% for the comparable period
in 2003.  The period to period increase was primarily due to improved
manufacturing costs, increased average selling prices and shipment volume by
27.1% and 36.9%, respectively.  For
other factors affecting our gross profit, please also see "Business Risks - We
incurred material inventory valuation adjustments in 2002 and 2003 and the first
nine months of 2004, and we may incur additional material inventory valuation
adjustments in the future."

Operating Expenses

Our operating expenses consist of research and development, sales and
marketing, general and administrative expenses and other operating charges.
Operating expenses were $24.8 million, or 22.1% of net revenues, in the third
quarter of 2004, compared to $25.4 million, or 19.7% of net revenues, in the
second quarter of 2004, and $55.7 million, or 75.4% of net revenues, in the
third quarter of 2003.  The decrease from the second quarter of 2004 was
primarily due to the lack of an impairment charge of $1.5 million related to
operating leases for two unoccupied buildings incurred in the second quarter of
2004, decreased profit sharing expenses of $1.2 million, and decreased
commissions and logistic center fees of $608,000, offset by increased outside
service fees of $271,000, evaluation parts of $236,000, and salary expenses of
$562,000. The decrease from the third quarter of 2003 was primarily due to the
lack of Atmel related settlement fee of $36.5 million incurred in the third
quarter of 2003 and depreciation expenses of $493,000, offset by the increase of
profit sharing expenses of $1.3 million, outside service fees of $676,000,
commission expenses and logistic center fees of $557,000 and personnel and
related expenses of $1.1 million. Operating expenses decreased to $72.9 million
for the nine months ended September 30, 2004 from $96.0 million for the
comparable period in 2003.  The period to period decrease was due to the
decrease of Atmel related settlement fees of $36.5 million and depreciation
expense of $1.5 million, offset by the increase in profit sharing of $5.5
million, commission expense and logistic center fees of $2.6 million,
engineering wafers and masks of $1.6 million, lease impairment charges of $1.5
million and outside services of $1.0 million. We anticipate that we will
continue to devote substantial resources to research and development, sales and
marketing and general and administrative functions, and that these expenses may
increase in future periods.

Research and development. Research and development expenses include
costs associated with the development of new technologies, enhancements to
existing technologies, the development of new products, enhancements to existing
products, quality assurance activities and occupancy costs.  These costs consist
primarily of employee salaries and benefits and the cost of materials such as
wafers and masks.  Research and development expenses were $13.3 million, or
11.9% of net revenues, during the third quarter of 2004, as compared to $12.0
million, or 9.4% of net revenues, during the second quarter of 2004 and $10.7
million, or 14.5% of net revenues, during the third quarter of 2003.  Research
and development expenses increased by 10.5% from the second quarter of 2004 to
the third quarter of 2004, primarily due to the acquired in-process research and
development, or IP R&D, expenses of $1.7 million related to the acquisition
of Emosyn, offset by the decrease in profit sharing expenses of $620,000.
Research and development expenses increased by 23.9% from the third quarter of
2003 due primarily to the IP R&D expenses of $1.7 million related to the
acquisition of Emosyn, increased profit sharing expenses of $649,000 and
engineering wafers and evaluation part expenses of $507,000, offset by decreased
expenses in engineering masks and depreciation expenses of $240,000 and
$325,000, respectively.  For the nine months ended September 30, 2004, research
and development expenses increased to $37.2 million from $32.8 million for the
comparable period in 2003.  The period to period increase was primarily due to
the increase of IP R&D expenses of $1.7 million related to the acquisition
of Emosyn, increased engineering mask, wafer and evaluation part expenses of
$1.7 million, increased of profit sharing expenses of $2.7 million, offset by
decreased personnel and related expenses of $879,000 million and decreased
depreciation expense of $970,000.  We expect research and development expenses
may increase in dollars in future periods.

21

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Sales and marketing. Sales and marketing expenses consist of
commissions, headcount and related costs, as well as travel, entertainment and
promotional expenses.  Sales and marketing expenses were $7.3 million, or 6.5%
of net revenues, in the third quarter of 2004, as compared to $7.3 million, or
5.7% of net revenues, in the second quarter of 2004 and $5.3 million, or 7.2% of
net revenues, during the third quarter of 2003.  The sales and marketing
expenses in the third quarter of 2004 stayed flat as compared to the second
quarter of 2004. Increased personnel related expenses of $476,000 and increased
patent fees of $147,000 were, offset by decreased commissions expenses and
logistic fees of $608,000 as a result of decreased product revenues and
decreased profit sharing expenses of $238,000. The increase in sales and
marketing expenses by 37.0% from the third quarter of 2003 to the third quarter
of 2004 was primarily attributable to increased commissions expenses and
logistic fees of $557,000, increased personnel related expenses of $429,000, and
increased profit sharing expenses of $236,000.  Sales and marketing expenses for
the nine months ended September 30, 2004 were $21.5 million as compared to $16.4
million for the same period in 2003.  The period to period increase was
primarily due to increased commissions expenses and logistic fees of $2.6
million, increased profit sharing expenses of $1.0 million, increased samples
and related expenses of $344,000 and increased personnel related expenses of
$484,000.  We expect sales and marketing expenses may increase in future
periods.  In addition, fluctuations in revenues will cause fluctuations in sales
and marketing expenses due to our commission expenses.

General and administrative.  General and administrative expenses
consist of salaries and related costs for administrative, executive and finance
personnel, recruiting costs, professional services and legal fees and allowances
for doubtful accounts.  General and administrative expenses were $4.3 million,
or 3.8% of net revenues, in the third quarter of 2004, as compared to $4.6
million, or 3.6% of net revenues, in the second quarter of 2004 and $3.2
million, or 4.3% of net revenues, during the third quarter of 2003.  General and
administrative expenses in the third quarter of 2004 decreased slightly from the
second quarter of 2004 due to decreases in legal and settlement fees of
$301,000, profit sharing expenses of $257,000, rent expenses of $261,000, offset
by an increase of outside services of $282,000 and personnel and related
expenses of $83,000.  The increase in general and administrative expenses by
32.8% from the third quarter of 2003 to the third quarter of 2004 was primarily
due to increased outside service fees of $518,000 and profit sharing expenses of
$266,000, offset by a decrease in depreciation expense. General and
administrative expenses for the nine months ended September 30, 2004 were $12.8
million as compared to $10.3 million for the same period in 2003.  The period to
period increase was due primarily to increases in profit sharing of $1.1
million, outside services of $792,000, and legal fees of $403,000, offset by
decreased depreciation expense of  $439,000.  We anticipate that general and
administrative expenses may increase in dollars as we scale our facilities,
infrastructure and headcount to support our overall expected growth.  We may
also incur additional expenses in connection with the Atmel litigation.  For
further information on this litigation see "Legal Proceedings."

Other operating charges.  During the third quarter of 2004, we did
not incur any other operating charges.  The other operating expense of $1.5
million for the nine months ended September 30, 2004 relates to an impairment
loss on operating lease for two unoccupied buildings.  This charge represents
the fair value of the liability which was determined based on the remaining
lease commitment reduced by the estimated sublease income relating to these two
buildings.  The liability may be adjusted subsequently depending on the actual
sublease income we receive.

Interest and other income. Interest and other income was $684,000,
or 0.6% of net revenues, during the third quarter of 2004, as compared to
$324,000, or 0.3% of net revenues, during the second quarter of 2004 and $1.3
million or 1.8% of net revenues, during the third quarter of 2003. Interest and
other income increased from the second quarter of 2004 to the third quarter of
2004 primarily due to an increase of dividend income from our investments,
offset by decreased interest income as a result of a decrease in average cash,
cash equivalents and available-for-sale investments.  Interest income decreased
from the third quarter of 2003 to the third quarter of 2004, primarily due to
the decrease in average cash, cash equivalents and available-for-sale
investments.  Interest and other income decreased to $1.4 million for the nine
months ended September 30, 2004 from $2.4 million for the comparable period in
2003.  The decrease from period to period was due to no sales of equity
investments in 2004 and decreasing interest rates on invested cash as well as a
decrease in average cash, cash equivalents and available-for-sale
investments.

22

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Interest and other expense.  Interest and other expense was $22,000
for the third quarter of 2004 as compared to $119,000 for the second quarter of
2004 and $30,000 for the third quarter of 2003.  Interest and other expense
increased to $185,000 for the nine months ended September 30, 2004 from $109,000
for the comparable period in 2003.  The decrease of interest and other expense
for the third quarter of 2004 as compared to the second quarter of 2004 is
primarily due to a loss on equity investment of $71,000 in the second quarter of
2004. Interest expense relates to interest to our notes payable.

Provision for Income Taxes

In the third quarter of 2003, we recorded a valuation allowance against our
deferred tax assets of $45.3 million and associated adjustments to income tax
payable, resulting in a tax expense of $22.9 million.  We maintained a full
valuation allowance on our net deferred tax assets as of September 30, 2004. The
valuation allowance was determined in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, or SFAS No. 109,
"Accounting for Income Taxes," which requires an assessment of both
positive and negative evidence when determining whether it is more likely than
not that deferred tax assets are recoverable; such assessment is required on a
jurisdiction by jurisdiction basis. Cumulative losses incurred in the U.S. in
recent years represented sufficient negative evidence under SFAS No. 109 and
accordingly, a full valuation allowance was recorded against U.S. deferred tax
assets. We intend to maintain a full valuation allowance on the U.S. deferred
tax assets until sufficient positive evidence exists to support reversal of the
valuation allowance.

Our tax provision for the third quarter and the first nine months of 2004 is
related to foreign withholding taxes and alternative minimum tax.  For the three
quarters of 2004, our income tax provision was $3.9 million on pre-tax income of
$54.8 million mainly consisting of foreign withholding taxes.

Segment Reporting

We manage our business in five reportable segments: SMPG, ASPG, SPG,
Emosyn and Technology Licensing.  Refer to Note 10 of the Notes to the Unaudited
Condensed Consolidated Financial Statements for revenue and gross profit
information by reportable segment.

SMPG includes our three standard flash memory product families: the MPF
family, the MPF+ family and the MTP family. Effective January 1, 2003, we
transferred certain MTP products from SMPG to SPG. Effective July 1, 2003, we
transferred the SSF family from SMPG to SPG.  Effective January 1, 2004, we
transferred the last MTP series of products from SMPG to SPG. Accordingly, our
segment revenues and gross margin information have been reclassified for
presentation purposes as if the transfer occurred as of January 1, 2003.  SMPG
revenues were $65.9 million for the third quarter of 2004, as compared to $87.6
million in the second quarter of 2004 and $43.0 million in the third quarter of
2003.  The decrease in revenues from the second quarter of 2004 was primarily
due to lower average selling prices by 13.2% and decreased unit shipments by
13.0%. The increase in revenues from the third quarter of 2003 was primarily due
to higher average selling prices by 28.8% and increased unit shipments by 19.5%.
Gross margin decreased from 31.4% in the second quarter of 2004 to 27.8% in the
third quarter of 2004 primarily decreases in average selling prices and decrease
in the unit shipments of our products by 13.0% offset by improved manufacturing
costs as well as changes in product mix and.  Gross margin increased from 11.8%
in the third quarter of 2003 to 27.8% in the third quarter of 2004 primarily due
to improved manufacturing costs, higher average selling prices and changes in
product mix. For the nine months ended September 30, 2004, gross margin was
28.7%, as compared to 7.2% for the comparable period in 2003. The period to
period increase in gross margin was primarily due to improved manufacturing
costs, increased unit shipments of our products by 40.6% and increased averaged
selling price by 39.1%.

23

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ASPG includes Concurrent SuperFlash, Serial Flash, Firmware Hub, or FWH, and
Low Pin Count, or LPC, flash products.  ASPG also includes flash embedded
controllers such as the ATA controller. Effective January 1, 2003, we
transferred FlashFlex51 microcontroller products from ASPG to SPG. Accordingly,
our segment revenues and gross margin information have been reclassified for
presentation purposes as if the transfer occurred as of January 1, 2003. ASPG
revenues were $20.3 million for the third quarter of 2004, as compared to $15.7
million in the second quarter of 2004 and $15.0 million in the third quarter of
2003.  The increase in revenues from both the second quarter of 2004 and third
quarter of 2003 was primarily due to increased unit shipments by 26.2% and
33.5%, respectively, as well as increased average selling price by 6.7% and
4.2%, respectively.  For the nine months ended September 30, 2004, ASPG revenues
were $54.1 million, as compared to $41.5 million for the comparable period in
2003.  The period to period increase in revenues was primarily due to increased
unit shipments by 43.3% offset by decreased average selling prices by 9.6%.
Gross margin decreased from 32.4% in the second quarter of 2004 to 28.7% in the
third quarter of 2004 primarily due to changes in product mix.  Gross margin
increased from 18.9% in the third quarter of 2003 to 28.7% in the third quarter
of 2004 primarily due to increased unit shipments by 33.5% and higher average
selling prices by 4.2%.  For the nine months ended September 30, 2004, gross
margin was 30.2%, as compared to 16.8% for the comparable period in 2003.  The
period to period increase in gross margin was primarily due to changes in
product mix, increased unit shipments and increased average selling prices.

SPG includes ComboMemory, ROM/RAM Combos, SSF, MTP, FlashFlex51
microcontrollers and other special flash products. Effective January 1, 2003, we
transferred certain MTP products from SMPG to SPG and FlashFlex51
microcontroller products from ASPG to SPG.  Effective July 1, 2003, we
transferred the SSF family from SMPG to SPG. Effective January 1, 2004, we
transferred the last MTP series of products from SMPG to SPG.  Accordingly, our
segment revenues and gross margin information have been reclassified for
presentation purposes as if the transfer occurred as of January 1, 2003. SPG
revenues were $11.6 million for the third quarter of 2004, as compared to $12.3
million in the second quarter of 2004 and $7.5 million in the third quarter of
2003.  The decrease in revenues from the second quarter of 2004 was primarily
due to the decrease of unit shipments by 20.6% offset by the increase of average
selling prices by 19.4%.  The increase from the third quarter of 2003 was
primarily due to higher average selling prices by 29.0% and increased unit
shipments by 37.5%.  For the nine months ended September 30, 2004, SPG revenues
were $32.9 million, as compared to $21.0 million for the comparable period in
2003.  The period to period increase in revenues was primarily due to increased
average selling prices by 36.7% and increased unit shipments by 10.3%.  Gross
margin increased from 26.3% in the second quarter of 2004 to 36.3% in the third
quarter of 2004 primarily due to changes in product mix.  Gross margin increased
from 25.8% in the third quarter of 2003 to 36.3% in the third quarter of 2004
primarily due to increased unit shipments by 53.5% offset by decreased average
selling prices by 5.9%.  For the nine months ended September 30, 2004, gross
margin was 31.7%, as compared to 14.7% for the comparable period in 2003.  The
period to period increase in gross margin was primarily due to increased average
selling prices by 36.7% and units shipments by 10.3% as well as changes in
product mix.

Emosyn includes flash memory based microprocessor chips.  The Theseus
Platinum product family specifically targets the smart card market through the
sales of the TP-40, TP-62, TP-100 and TP-130 products.  These products are used
primarily in cell phone applications, and include such benefits of use as lower
power consumption, long term data retention and high endurance of data access.
We acquired a majority ownership of Emosyn on September 10, 2004.  The segment
data is reflected from this date through the end of the quarter.  Emosyn revenue
were $3.5 million with a gross margin 8.3% for the 20 days ended September 30,
2004.

Revenue and gross profit related to Technology Licensing was $10.9 million
for the third quarter of 2004, $13.0 million for the second quarter of 2004 and
$8.5 million for the third quarter of 2003.  The decrease in technology
licensing revenues from the second quarter of 2004 to the third quarter of 2004
is due to decreased both license fees and royalty revenue from existing
licensees.  The increase in technology licensing revenues from the third quarter
of 2003 to the third quarter of 2004 is due to increased royalty from existing
licensees offset by the decrease in license fees recognized.  For the nine
months ended September 30, 2004, revenue and gross profit related to Technology
Licensing was $36.9 million, as compared to $25.6 million for the comparable
period in 2003.  The period to period increase in technology licensing revenues
is primarily due to increased license fees recognized.  Revenues from technology
licensing fluctuate upon the timing of the delivery of engineering milestones.
We anticipate that revenues from technology licensing may fluctuate
significantly in the future.

Related Party Transactions and Balances

The following table is a summary of our related party revenues and
purchases for the quarters ended September 30, 2003 and 2004, and our related
party accounts receivable and accounts payable and accruals as of December 31,
2003 and September 30, 2004 (in thousands).  For a description of our
relationship with these parties please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Related Party
Transactions" in our Annual Report on Form 10-K for the year ended December
31, 2003.

24

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`Three Months Ended            Three Months Ended
                                                  September 30, 2003            September 30, 2004
                                              -------------------------     -------------------------
                                               Revenues      Purchases       Revenues      Purchases
                                              -----------  ------------     -----------  ------------
Silicon Technology Co., Ltd................. $     1,024  $         --     $     1,843  $         --
Apacer Technology, Inc......................         514           721             469            --
Professional Computer Technology Limited....          --            --              --            --
Silicon Professional Technology Ltd.........      42,790            --          46,108            --
Grace Semiconductor Manufacturing Corp......          --            --              --         4,246
King Yuan Electronics Company, Limited......          --         4,722              --        10,741
Powertech Technology, Incorporated..........          --         2,251              --         4,346
                                              -----------  ------------     -----------  ------------
                                             $    44,328  $      7,694     $    48,420  $     19,333
                                              ===========  ============     ===========  ============

                                                  Nine Months Ended             Nine Months Ended
                                                  September 30, 2003            September 30, 2004
                                              -------------------------     -------------------------
                                               Revenues      Purchases       Revenues      Purchases
                                              -----------  ------------     -----------  ------------
Silicon Technology Co., Ltd................. $     2,889  $         --     $     6,181  $         --
Apacer Technology, Inc......................       1,380         1,567           1,818           707
Silicon Professional Technology Ltd.........     110,959            --         168,027            --
Grace Semiconductor Manufacturing Corp......          --            --              --        27,606
King Yuan Electronics Company, Limited......          --        13,039              --        28,342
Powertech Technology, Incorporated..........          --         6,447              --        11,423
                                              -----------  ------------     -----------  ------------
                                             $   115,228  $     21,053     $   176,026  $     68,078
                                              ===========  ============     ===========  ============

                                                  December 31, 2003             September 30, 2004
                                              -------------------------     -------------------------
                                                              Trade                         Trade
                                                 Trade       Accounts          Trade       Accounts
                                               Accounts    Payable and       Accounts    Payable and
                                              Receivable     Accruals       Receivable     Accruals
                                              -----------  ------------     -----------  ------------ 
Silicon Technology Co., Ltd................. $       232  $         --     $       667  $         --
Ambit Microsystems Corp.....................          --             4              --            --
Apacer Technology, Inc......................         400           736             285            --
Professional Computer Technology Limited....          --            15              --            67
Silicon Professional Technology Ltd.........      40,588           550          33,083           530
Grace Semiconductor Manufacturing Corp......          --            --              --         3,037
King Yuan Electronics Company, Limited......          --         6,896              --        11,622
Powertech Technology, Incorporated..........          --         2,533              --         3,816
                                              -----------  ------------     -----------  ------------
                                             $    41,220  $     10,734     $    34,035  $     19,072
                                              ===========  ============     ===========  ============`

PCT earns commissions for point-of-sales to its customers.  PCT's commissions
are paid at the same rate as all of our other stocking representatives in Asia.
In addition, we pay SPT a fee for providing logistics center functions.  This
fee is based on a percentage of revenue for each product shipped through SPT to
our end customers. The fee paid to SPT covers the costs of warehousing and
insuring inventory and accounts receivable, the personnel costs required to
maintain logistics and information technology functions and the costs to perform
billing and collection of accounts receivable.

25

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Liquidity and Capital Resources

Operating activities.  Our operating activities used cash of
$4.5 million for the nine months ended September 30, 2004 as compared to
providing cash of $26.7 million for the nine months ended September 30, 2003.
For the nine months ended September 30, 2004, our primary usage of operating
cash flow were the increased purchases of inventory and increased accounts
receivable from unrelated parties offset by the increase of accounts payable to
both related and unrelated parties, increase of provision for write-down of
inventory and decrease of accounts receivable from related parties. In addition
to management's intention to build inventory to meet the expected increased
demand of our products, the inventory increase during the first nine months of
2004 is also due to the slower than expected sales of certain products in the
third quarter of 2004.  The increase of accounts receivable from unrelated
parties is due to the increase of sales during the period.  We measure the
effectiveness of our collection efforts by an analysis of average days of sales
outstanding.  Days of sales outstanding were 50 days for the nine months ended
September 30, 2004 as compared to 61 days for the comparable period in 2003. The
decrease of days of sales outstanding from period to period is primarily due to
the decrease of sales to SPT in the third quarter of 2004 which is at net 70
days terms.  Collections of accounts receivable and related days sales
outstanding will fluctuate in future periods due to the timing and amount of our
future revenues, customer payment terms and the effectiveness of our collection
efforts.

Investing activities.  Our investing activities used cash of $22.1
million for the nine months ended September 30, 2004 as
compared to $4.8 million for the nine months ended September 30, 2003.
Investing activities in the nine months ended September 30, 2004 were primarily
related to our additional investments in Grace Semiconductor Manufacturing
Corporation of $33.2 million, a new equity investment in ACET and PTI of $4.0
million and $723,000, respectively, our acquisition of Emosyn of $16.0 million,
and capital expenditure of $6.1 million, offset by the net sales and maturities
of available-for-sale investments of $38.3 million. Investing activities in
the nine months ended September 30, 2003 were primarily related to capital
expenditures of $1.1 million and net purchases of available-for-sale investments
of $3.7 million.

Financing activities.  Our financing activities used cash of  $9.2
million for the nine months ended September 30, 2004 as compared to $3.4 million
cash provided by financing activities for the nine months ended September 30,
2003. Cash used in financing activities primarily related to the repurchase of
$14.9 million of common stock, offset by minority cash contribution in
connection with the acquisition of Emosyn, and the issuance of common stock
under the employee stock purchase plan and the exercise of employee stock
options totaling $5.2 million.  Cash provided by financing activities during the
nine months ended September 30, 2003 consisted primarily of cash received
through the issuance of common stock under our employee stock option plans.

Principal sources of liquidity at September 30, 2004 consisted of $121.4
million of cash, cash equivalents, and short-term and long-term available-for-
sale investments.

Purchase Commitments. As of September 30, 2004, we had outstanding
purchase commitments with our foundry vendors of  $98.8 million for delivery in
2004.  We have recorded a liability of $2.9 million for adverse purchase
commitments.

Lease Commitments. We have long-term, non-
cancelable building lease commitments.  We are currently seeking subtenants for
our unused office space. During second quarter of 2004, we recorded a charge to
other operating expense of $1.5 million relating to an operating lease for two
unoccupied buildings. These charges represent the fair value of the liability
which is determined by reducing the remaining lease commitment by the estimated
sublease income relating to these two buildings. The liability may be adjusted
subsequently depending on the actual sublease income we may receive from
subleases for the buildings and the actual sublease income is significantly
different from the estimate. We may be unable to secure subtenants for such
space due to the decrease in demand for commercial rental space in Silicon
Valley. If we are not successful in subleasing our unused office space, we may
be required to take an additional period charge for the balance of the future
lease cost.  At September 30, 2004, payments made have reduced the recorded
liability to $1.4 million.

Future payments due under building lease, purchase commitments and other
contractual obligations as of September 30, 2004 (in thousands):

26

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`Less than                        More than
Contractual obligations          Total     1 year    2-3 years  4-5 years   5 years
-----------------------------  ---------  ---------  ---------  ---------  ---------
Notes payable................ $     580  $     427  $     153  $      --  $      --
Operating leases.............    15,030      3,233      5,020      5,282      1,495
Purchase commitments.........    98,811     98,811         --         --         --
Other long-term liability....       518        518         --         --         --
                               ---------  ---------  ---------  ---------  ---------
Total........................ $ 114,939  $ 102,989  $   5,173  $   5,282  $   1,495
                               =========  =========  =========  =========  =========`

Operating Capital Requirements.  We believe that our cash
balances, together with the funds we expect to generate from operations, will be
sufficient to meet our projected working capital and other cash requirements
through at least the next twelve months.  However, there can be no assurance
that future events will not require us to seek additional borrowings or capital
and, if so required, that such borrowing or capital will be available on
acceptable terms. Factors that could affect our short-term and long-term cash
used or generated from operations and as a result, our need to seek additional
borrowings or capital include:



- the average selling prices of our products;
- customer demand for our products;
- the need to secure future wafer production capacity from our suppliers;
- the timing of significant orders and of license and royalty revenue;
and
- unanticipated research and development expenses associated with new product
introductions

Please also see "Business Risks - Our operating results fluctuate
significantly, and an unanticipated decline in revenues may disappoint
securities analysts or investors and result in a decline in our stock
price."

On May 7, 2002, a judgment was entered against us regarding the infringement
of two U.S. patents in the amount of $36.5 million.  We appealed the judgment on
July 16, 2002.  On September 12, 2003 the Court of Appeals upheld the jury's
verdict.  On November 18, 2003 the Court of Appeals denied our request for a
rehearing and in December 2003 we paid Atmel $37.8 million to satisfy the
judgment including statutory interest accrued during the appeals for the patent
'811 and 829'.  In addition, on June 28, 2004 we paid $247,000 of legal related
expenses incurred by Atmel pursuant to the court order. The other patent
remaining in the case, the '903 patent, is originally scheduled for settlement
conference before a magistrate judge on April 14, 2004 and subsequently
rescheduled for September 7, 2004.  No conclusion was reached during the
settlement conference on September 7, 2004. For more information, please also
see "Business Risks - If we are accused of infringing the intellectual
property rights of other parties we may become subject to time-consuming and
costly litigation.  If we lose, we could suffer a significant impact on our
business and be forced to pay damages."

From time to time, we are also involved in other legal
actions arising in the ordinary course of business.  We have accrued certain
costs associated with defending these matters.  There can be no assurance the
Atmel complaint or other third party assertions will be resolved without costly
litigation, in a manner that is not adverse to our financial position, results
of operations or cash flows or without requiring royalty payments in the future
which may adversely impact gross margins. No estimate can be made of the
possible loss or possible range of loss associated with the resolution of these
contingencies.  As a result, no losses have been accrued in our financial
statements as of September 30, 2004.

Recent Accounting Pronouncements

In January 2003, FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51."  FIN No. 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties.  FIN No. 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. In
December 2003, the FASB issued a revision of FIN No. 46 that delays the
implementation date for certain interests created or acquired prior to January
31, 2003 until the first interim or annual period ending after March 15, 2004.
We have reviewed our equity investments and associated relationships to
determine if they are variable interest entities as defined by FIN No. 46 as of
March 31, 2004.  We concluded that we are not the primary beneficiary of or hold
an interest in a variable interest entity.

27

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In March 2004, the Emerging Issues Task Force, or EITF, reached a consensus
on Issue No. 03-1, "the Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments."  EITF 03-1 provides guidance on other-than-
temporary impairment models for marketable debt and equity securities accounted
for under Statement of Financial Accounting Standard, or SFAS, N0. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and SFAS No.
124, "Accounting for Certain Investments Held by Not-for-Profit Organizations,"
and non-marketable equity securities accounted for under the cost method.  The
EITF developed a basic three-step model to evaluate whether an investment is
other-than-temporarily impaired. In September 2004, FASB delayed the accounting
provisions of EITF No. 03-01; however, the disclosure requirements are effective
for the third quarter of 2004 and will be applied prospectively to all current
and future investments.  The adoption of EITF 03-1 did not have a material
effect on our financial position or results of operations.

In October 2004, the Financial Accounting Standards Board, or FASB, approved
EITF Issue 04-1 "Accounting for Preexisting Relationships between the Parties to
a Business Combinations".  The consensuses in this Issue should be applied to
business combinations consummated and goodwill impairment tests performed in
reporting periods beginning December 31, 2004.  Early application of the
consensuses is permitted in periods for which financial statements have not been
issued.  We adopted EITF Issue 04-1 during the quarter ended September 30, 2004.
The adoption of EITF Issue 04-1 did not have a significant impact on our
financial position or results of operations.

In October 2004, the FASB approved EITF Issue 04-10 "Determining Whether to
Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds" which
addresses an issue in the application of paragraph 19 of FASB statement No. 131,
Disclosures about Segments of an Enterprise and related information.  The
consensus in this Issue should be applied for fiscal years ending after October
13, 2004. We are currently assessing the impact of the disclosure requirements
of EITF Issue 04-10 on our consolidated financial statements.

28

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Business Risks



Risks Related to Our Business



Our operating results fluctuate materially, and an unanticipated decline in
revenues may disappoint securities analysts or investors and result in a decline
in our stock price.

Although we were profitable for the fourth quarter of 2003 and the first
three quarters of 2004, we incurred net losses for 2001, 2002 and in the first
nine months of 2003. Our operating results have fluctuated significantly and our
past financial performance should not be used to predict future operating
results. Our recent quarterly and annual operating results have fluctuated, and
may continue to fluctuate, due to the following factors, all of which are
difficult to forecast and many of which are out of our control:

- the availability, timely delivery and cost of wafers or other manufacturing
and assembly services from our suppliers;
- competitive pricing pressures and related changes in selling prices;
- fluctuations in manufacturing yields and significant yield losses;
- new product announcements and introductions of competing products by us or
our competitors;
- product obsolescence;
- lower of cost or market, obsolescence or other inventory adjustments;
- changes in demand for, or in the mix of, our products;
- the gain or loss of significant customers;
- market acceptance of products utilizing our SuperFlashâtechnology;
- changes in the channels through which our products are distributed and the
timeliness of receipt of distributor resale information;
- exchange rate fluctuations;
- general economic, political and environmental-related conditions, such as
natural disasters;
- increases in allowance for doubtful accounts;
- valuation allowances on deferred tax assets based on changes in estimated
future taxable income;
- difficulties in forecasting, planning and management of inventory levels;
- unanticipated research and development expenses associated with new product
introductions; and
- the timing of significant orders and of license and royalty revenue.

As recent experience confirms, a downturn in the market for products such as
personal computers and cellular telephones that incorporate our products can
also harm our operating results.

Our operating expenses are relatively fixed, and we order materials in
advance of anticipated customer demand. Therefore, we have limited ability to
reduce expenses quickly in response to any revenue shortfalls.

Our operating expenses are relatively fixed, and we therefore have
limited ability to reduce expenses quickly in response to any revenue
shortfalls. Consequently, our operating results will be harmed if our revenues
do not meet our projections. We may experience revenue shortfalls for the
following reasons:

- sudden drops in consumer demand which may cause customers to cancel backlog,
push out shipment schedules, or reduce new orders, possibly due to a slowing
economy or inventory corrections among our customers;
- significant declines in selling prices that occur because of competitive
price pressure during an over-supply market environment;
- sudden shortages of raw materials for fabrication, test or assembly capacity
constraints that lead our suppliers to allocate available supplies or capacity
to other customers which, in turn, harm our ability to meet our sales
obligations; and
- the reduction, rescheduling or cancellation of customer orders.

In addition, political or economic events beyond our control can suddenly
result in increased operating costs.  For example, the terrorist attacks of
September 11, 2001 have resulted in a substantial increase to our business
insurance costs.  In addition, under a current proposed accounting standard, we
would be required to record compensation expense on stock option grants and on
shares purchased under our employee stock purchase program, which would
substantially increase our operating costs and impact our earnings (loss) per
share.

29

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We incurred significant inventory valuation adjustments in
2002, 2003 and the first nine months of 2004, and we may incur additional
significant inventory valuation adjustments in the future.

We typically plan our production and inventory levels based on internal
forecasts of customer demand, which are highly unpredictable and can fluctuate
materially. The value of our inventory is dependent on our estimate of future
average selling prices, and, if our projected average selling prices are over
estimated, we may be required to adjust our inventory value to reflect the lower
of cost or market.  As of September 30, 2004, we had $138.4 million of inventory
on hand, an increase of $92.3 million, or 200.1%, from December 31, 2003.  Total
valuation adjustments to inventory were $9.2 million in 2002, $6.7 million in
2003 and $9.1 million in the nine months ended September 30, 2004.  Due to the
large number of units in our inventory, even a small change in average selling
prices could result in a significant adjustment and could harm our financial
results.  Some of our customers have requested that we ship them product that
has a finished goods date of manufacture that is less than one year old.  As of
September 30, 2004, our allowance for excess and obsolete inventories includes
an allowance for our on hand finished goods inventory with a date of manufacture
of greater than two years old and for certain products with a date of
manufacture of greater than one year old.  In the event that this becomes a
common requirement, it may be necessary for us to provide for an additional
allowance for our on hand finished goods inventory with a date of manufacture of
greater than one year old, which could result in a significant adjustment and
could harm our financial results.

Cancellations or rescheduling of backlog may result in lower future revenue
and harm our business.

Due to possible customer changes in delivery schedules and cancellations
of orders, our backlog at any particular date is not necessarily indicative of
actual sales for any succeeding period.  A reduction of backlog during any
particular period, or the failure of our backlog to result in future revenue,
could harm our business in the future.  We experienced a sharp downturn in
several of our markets late in the fourth quarter of 2000 through 2002, as our
customers reacted to weakening demand for their products. We began to experience
a slow recovery during 2002 through the first half of 2003. During the second
half of 2003 and the first half of 2004, demand for our products increased
sharply and we had improvements in the average selling prices of our products.
However, during the third quarter of 2004, we experienced a demand slow-down for
our products.  Our business could be harmed by industry-wide fluctuations in the
future.

Our business may suffer due to risks associated with international sales
and operations.

During 2002, 2003 and the nine months ended September 30, 2004, our export
product and licensing revenues accounted for 92.0%, 92.9% and 92.4% of our net
revenues, respectively.  Our international business activities are subject to a
number of risks, each of which could impose unexpected costs on us that would
harm our operating results. These risks include:

- difficulties in complying with regulatory requirements and standards;
- tariffs and other trade barriers;
- costs and risks of localizing products for foreign countries;
- reliance on third parties to distribute our products;
- extended accounts receivable payment cycles;
- potentially adverse tax consequences;
- limits on repatriation of earnings; and
- burdens of complying with a wide variety of foreign laws.

In addition, we have made equity investments in companies with operations in
China, Japan and Taiwan.  The value of our investments is subject to the
economic and political conditions particular to their industry, their countries
and to foreign exchange rates and to the global economy.  If we determine that a
change in the recorded value of an investment is other than temporary, we will
adjust the value of the investment.  Such an expense could have a negative
impact on our operating results.

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We derived 88.5%, 90.0% and 86.6% of our net product revenues from Asia
during 2002, 2003 and the nine months ended September 30, 2004, respectively.
Additionally, substantially all of our wafer suppliers and packaging and testing
subcontractors are located in Asia.  Any kind of economic, political or
environmental instability in this region of the world can have a severe negative
impact on our operating results due to the large concentration of our production
and sales activities in this region.  For example, during 1997 and 1998, several
Asian countries where we do business, such as Japan, Taiwan and Korea,
experienced severe currency fluctuation and economic deflation, which negatively
impacted our revenues and our ability to collect payments from customers.
During this period, the lack of capital in the financial sectors of these
countries made it difficult for our customers to open letters of credit or other
financial instruments that are guaranteed by foreign banks.  Finally, the
economic situation during this period exacerbated a decline in selling prices
for our products as our competitors reduced product prices to generate needed
cash. It should also be noted that we are greatly impacted by the political,
economic and military conditions in Taiwan. Taiwan and China are continuously
engaged in political disputes and both countries have continued to conduct
military exercises in or near the other's territorial waters and airspace.  Such
disputes may continue and even escalate, resulting in an economic embargo, a
disruption in shipping or even military hostilities.  Any of these events could
delay production or shipment of our products.  Any kind of activity of this
nature or even rumors of such activity could harm our operations, revenues,
operating results and stock price.

Terrorist attacks and threats, and government responses thereto, could harm
our business.

Terrorist attacks in the United States or abroad against American interests
or citizens, U.S. retaliation for these attacks, threats of additional terrorist
activity and the war in Iraq have caused our customer base to become more
cautious.  Any escalation in these events or similar future events may disrupt
our operations or those of our customers, distributors and suppliers, affect the
availability of materials needed to manufacture our products, or affect the
means to transport those materials to manufacturing facilities and finished
products to customers.  In addition, these events have had and may continue to
have an adverse impact on the U.S. and world economy in general and consumer
spending in particular, which could harm our business.

We do not typically enter into long-term contracts with our customers, and
the loss of a major customer could harm our business.

We do not typically enter into long-term contracts with our customers.  In
addition, we cannot be certain as to future order levels from our customers.  In
the past, when we have entered into a long-term contract, the contract has
generally been terminable at the convenience of the customer.

We depend on stocking representatives and distributors to generate a majority
of our revenues.

We rely on stocking representatives and distributors to establish and
maintain customer relationships and to sell our products. These stocking
representatives and distributors could discontinue their relationship with us or
discontinue selling our products at any time. The majority of our stocking
representatives are located in Asia.  The loss of our relationship with any
stocking representative or distributor could harm our operating results by
impairing our ability to sell our products to our end customers.

We depend on SPT, our logistics center, to support many of our customers in
Asia.

Since March 2001, we have been increasing our out-sourcing activities with
our customer service logistics to support our customers.  Currently SPT supports
our customers in Taiwan, China and other Southeast Asia countries.  SPT provides
planning, warehousing, delivery, billing, collection and other logistic
functions for us in these regions.  SPT is a wholly owned subsidiary of one of
our stocking representatives in Taiwan, PCT.  During 2002, 2003 and the nine
months ended September 30, 2004, SPT serviced end customer shipments accounted
for 57.4%, 64.2% and 54.5% of our net product revenues recognized, respectively.
As of December 31, 2003 and September 30, 2004, the accounts receivable from SPT
accounted for 73.4% and 52.5%, respectively, of our net accounts receivable.
For further description of our relationships with PCT and SPT, please refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Related Party Transactions" in our Annual Report on Form 10-K for
the year ended December 31, 2003.

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We do not have any long-term contracts with SPT or PCT, and SPT or PCT may
cease providing services to us at any time.  If SPT or PCT were to terminate
their relationship with us we would experience a delay in reestablishing
warehousing, logistics and distribution functions, which could harm our
business.

We do not have business insurance to cover our accounts receivable. If SPT
were in financial difficulties and not able to pay us, it would harm our cash
position and our business.

We depend on a limited number of foreign foundries to manufacture our
products, and these foundries may not be able to satisfy our manufacturing
requirements, which could cause our revenues to decline.

We outsource substantially all of our manufacturing and testing activities.
We currently buy all of our wafers and sorted die from a limited number of
suppliers.  Substantially all of our products are manufactured by six foundries:
TSMC in Taiwan, Sanyo, Seiko-Epson and Yasu in Japan, Grace in China, and
Samsung in Korea. In March 2001, we invested $50.0 million in GSMC, a Cayman
Islands company, which owns a wafer foundry subsidiary, Grace, in Shanghai,
China.  In March 2004, we made an additional $33.2 million investment in GSMC.
Grace began manufacturing some of our products early in the fourth quarter of
2003.  We anticipate that these foundries, together with Shanghai Hua Hong NEC
Electronic Company Limited, or HHNEC and Vanguard in Taiwan will manufacture
substantially all of our products in 2004.  If these suppliers fail to satisfy
our requirements on a timely basis at competitive prices we could suffer
manufacturing delays, a possible loss of revenues or higher than anticipated
costs of revenues, any of which could harm our operating results.

Our revenues may be impacted by our ability to obtain adequate wafer supplies
from our foundries.  The foundries with which we currently have arrangements,
together with any additional foundry at which capacity might be obtained, may
not be willing or able to satisfy all of our manufacturing requirements on a
timely basis at favorable prices.  In addition, we have encountered delays in
qualifying new products and in ramping-up new product production and we could
experience these delays in the future. We are also subject to the risks of
service disruptions, raw material shortages and priceincreases by our
foundries.  Such disruptions, shortages and price increases could harm our
operating results.

Manufacturing capacity has in the past been difficult to secure and if
capacity constraints arise in the future our revenues may decline.

In order to grow, we need to increase our present manufacturing capacity.  We
currently believe that the existing capacity plus additional future capacity
from Grace, HHNEC and Vanguard available to us will be sufficient through 2004.
However, events that we have not foreseen could arise which would limit our
capacity.  Similar to our aggregate $83.2 million investment in GSMC, we may
determine that it is necessary to invest substantial capital in order to secure
appropriate production capacity commitments.  If we cannot secure additional
manufacturing capacity on acceptable terms, our ability to grow will be impaired
and our operating results will be harmed.

Our cost of revenues may increase if we are required to purchase
manufacturing capacity in the future.

To obtain additional manufacturing capacity, we may be required to make
deposits, equipment purchases, loans, joint ventures, equity investments or
technology licenses in or with wafer fabrication companies. These transactions
could involve a commitment of substantial amounts of our capital and technology
licenses in return for production capacity.  We may be required to seek
additional debt or equity financing if we need substantial capital in order to
secure this capacity and we cannot assure you that we will be able to obtain
such financing.

If our foundries fail to achieve acceptable wafer manufacturing yields, we
will experience higher costs of revenues and reduced product availability.

The fabrication of our products requires wafers to be produced in a highly
controlled and ultra-clean environment. Semiconductor companies that supply our
wafers have, from time to time, experienced problems achieving acceptable wafer
manufacturing yields.  Semiconductor manufacturing yields are a function of both
our design technology and the foundry's manufacturing process technology.  Low
yields may result from marginal design or manufacturing process drift.  Yield
problems may not be identified until the wafers are well into the production
process, which often makes them difficult, time consuming and costly to correct.
Furthermore, we rely on independent foundries for our wafers which increases the
effort and time required to identify, communicate and resolve manufacturing
yield problems.  If our foundries fail to achieve acceptable manufacturing
yields, we will experience higher costs of revenues and reduced product
availability, which could harm our operating results.

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If our foundries discontinue the manufacturing processes needed to meet our
demands, or failto upgrade the technologies needed to manufacture our
products, we may face production delays and lower revenues.

Our wafer and product requirements typically represent a small portion of
the total production of the foundries that manufacture our products.  As a
result, we are subject to the risk that a foundry will cease production on an
older or lower-volume manufacturing process that it uses to produce our parts.
Additionally, we cannot be certain our foundries will continue to devote
resources to advance the process technologies on which the manufacturing of our
products is based.  Either one of these events could increase our costs and harm
our ability to deliver our products on time.

Our dependence on third-party subcontractors to assemble and test our
products subjects us to a number of risks, including an inadequate supply of
products and higher costs of materials.

We depend on independent subcontractors to assemble and test our products.
Our reliance on these subcontractors involves the following significant
risks:

- reduced control over delivery schedules and quality;
- the potential lack of adequate capacity during periods of strong demand;
- difficulties selecting and integrating new subcontractors;
- limited warranties on products supplied to us;
- potential increases in prices due to capacity shortages and other factors;
and
- potential misappropriation of our intellectual property.

These risks may lead to increased costs, delayed product delivery or loss of
competitive advantage, which would harm our profitability and customer
relationships.

Because our flash memory products typically have lengthy sales cycles, we may
experience substantial delays between incurring expenses related to research and
development and the generation of revenues.

Due to the flash memory product cycle we usually require more than nine
months to realize volume shipments after we first contact a customer. We first
work with customers to achieve a design win,which may take three months
or longer.  Our customers then complete the design, testing and evaluation
process and begin to ramp up production, a period which typically lasts an
additional six months or longer.  As a result, a significant period of time may
elapse between our research and development efforts and our realization of
revenue, if any, from volume purchasing of our products by our customers.

We face intense competition from companies with significantly greater
financial, technical and marketing resources that could harm sales of our
products.

We compete with major domestic and international semiconductor companies,
many of which have substantially greater financial, technical, marketing,
distribution, and other resources than we do.  Many of our competitors have
their own facilities for the production of semiconductor memory components and
have recently added significant capacity for such production.  Our memory
products, which presently account for substantially all of our revenues, compete
principally against products offered by AMD, Atmel, Intel, Macronix, Sanyo,
STMicroelectronics and Winbond.  If we are successful in developing our high-
density products, these products will compete principally with products offered
by AMD, Atmel, Fujitsu, Hitachi, Intel, Mitsubishi, Samsung, SanDisk, Sharp
Electronics, STMicroelectronics and Toshiba, as well as any new entrants to the
market.

In addition, we may in the future experience direct competition from our
foundry partners.  We have licensed to our foundry partners the right to
fabricate products based on our technology and circuit design, and to sell such
products worldwide, subject to our receipt of royalty payments.

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Competition may also come from alternative technologies such as ferroelectric
random access memory devices, or FRAM, or other developing technologies.

Our markets are subject to rapid technological change and, therefore, our
success depends on our ability to develop and introduce new products.

The markets for our products are characterized by:

- rapidly changing technologies;
- evolving and competing industry standards;
- changing customer needs;
- frequent new product introductions and enhancements;
- increased integration with other functions; and
- rapid product obsolescence.

To develop new products for our target markets, we must develop, gain access
to and use leading technologies in a cost-effective and timely manner and
continue to expand our technical and design expertise.  In addition, we must
have our products designed into our customers' future products and maintain
close working relationships with key customers in order to develop new products
that meet their changing needs.

In addition, products for communications applications are based on
continually evolving industry standards.  Our ability to compete will depend on
our ability to identify and ensure compliance with these industry standards.  As
a result, we could be required to invest significant time and effort and incur
significant expense to redesign our products and ensure compliance with relevant
standards.  We believe that products for these applications will encounter
intense competition and be highly price sensitive.  While we are currently
developing and introducing new products for these applications, we cannot assure
you that these products will reach the market on time, will satisfactorily
address customer needs, will be sold in high volume, or will be sold at
profitable margins.

We cannot assure you that we will be able to identify new product
opportunities successfully, develop and bring to market new products, achieve
design wins or respond effectively to new technological changes or product
announcements by our competitors.  In addition, we may not be successful in
developing or using new technologies or in developing new products or product
enhancements that achieve market acceptance.  Our pursuit of necessary
technological advances may require substantial time and expense.  Failure in any
of these areas could harm our operating results.

Our future success depends in part on the continued service of our key design
engineering, sales, marketing and executive personnel and our ability to
identify, recruit and retain additional personnel.

We are highly dependent on Bing Yeh, our President, Chief Executive Officer
and Chairman of the Board of Directors, as well as the other principal members
of our management team and engineering staff.  There is intense competition for
qualified personnel in the semiconductor industry, in particular the highly
skilled design, applications and test engineers involved in the development of
flash memory technology.  Competition is especially intense in Silicon Valley,
where our corporate headquarters is located.  We may not be able to continue to
attract and retain engineers or other qualified personnel necessary for the
development of our business or to replace engineers or other qualified personnel
who may leave our employ in the future.  Our anticipated growth is expected to
place increased demands on our resources and will likely require the addition of
new management and engineering personnel and the development of additional
expertise by existing management personnel.  The failure to recruit and retain
key design engineers or other technical and management personnel could harm our
business.

Our ability to compete successfully depends, in part, on our ability to
protect our intellectual property rights.

We rely on a combination of patent, trade secrets, copyrights, mask work
rights, nondisclosure agreements and other contractual provisions and technical
measures to protect our intellectual property rights.  Policing unauthorized use
of our products, however, is difficult, especially in foreign countries.
Litigation may continue to be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity.  Litigation could result in substantial
costs and diversion of resources and could harm our business, operating results
and financial condition regardless of the outcome of the litigation.  We own 108
patents in the United States relating to our products and processes, with
expiration dates ranging from 2010 to 2023, and have filed for several more.  In
addition, we hold several patents in Europe and Canada, and have filed several
foreign patent applications in Europe, Japan, Korea, Taiwan and Canada.  We
cannot assure you that any pending patent application will be granted.  Our
operating results could be harmed by the failure to protect our intellectual
property.

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If we are accused of infringing the intellectual property rights of other
parties we may become subject to time-consuming and costly litigation.  If we
lose, we could suffer a significant impact on our business and be forced to pay
damages.

Third parties may assert that our products infringe their proprietary rights,
or may assert claims for indemnification resulting from infringement claims
against us.  Any such claims may cause us to delay or cancel shipment of our
products or pay damages that could harm our business, financial condition and
results of operations. In addition, irrespective of the validity or the
successful assertion of such claims, we could incur significant costs in
defending against such claims.

In the past we were sued both by Atmel Corporation and Intel Corporation
regarding patent infringement issues and sued Winbond Electronics Corporation
regarding our contractual relationship with them.  Significant management time
and financial resources have been devoted to defending these lawsuits.  We
settled with Intel in May 1999, with Winbond in October 2000, and the Atmel
litigation is ongoing.

In addition to the Atmel, Intel and Winbond actions, we receive from time to
time, letters or communications from other companies stating that such companies
have patent rights that involve our products.  Since the design of all of our
products is based on SuperFlash technology, any legal finding that the use of
our SuperFlash technology infringes the patent of another company would have a
significantly negative effect on our entire product line and operating results.
Furthermore, if such a finding were made, there can be no assurance that we
could license the other company's technology on commercially reasonable terms or
that we could successfully operate without such technology.  Moreover, if we are
found to infringe, we could be required to pay damages to the owner of the
protected technology and could be prohibited from making, using, selling, or
importing into the United States any products that infringe the protected
technology.  In addition, the management attention consumed by and legal cost
associated with any litigation could harm our operating results.

Public announcements may hurt our stock price. During the course of
lawsuits there may be public announcements of the results of hearings, motions,
and other interim proceedings or developments in the litigation.  If securities
analysts or investors perceive these results to be negative, it could harm the
market price of our stock.

Our litigation may be expensive, may be protracted and confidential
information may be compromised. On April 8, 2002, a jury found that we
willfully infringed Atmel's '811 and '829 patents, and awarded Atmel $20.0
million in actual damages.  On May 7, 2002, the court entered judgment in the
total amount of $36.5 million, which includes the original $20.0 million.  The
'811 and '829 patents expired in February 2002.  Therefore, we are not precluded
from selling any of our products. On December 12, 2003, we paid Atmel $37.8
million to satisfy the judgement plus statutory interest accrued during the
appeal.  In addition, on June 28, 2004 we paid $247,000 of legal related
expenses incurred by Atmel pursuant to the court order.  The `903 patent case
still remains open.  The court found that we infringed the `903 patent but the
jury was unable to unanimously decide whether the `903 is valid and a mistrial
was declared.  A settlement conference was originally scheduled for April 14,
2004 and subsequently rescheduled for September 7, 2004.  No conclusion was
reached during the settlement conference on September 7, 2004.  If we are not
able to reach a settlement agreement, the court may set a date for a new trial.
If we are not successful in reaching a settlement, litigation may continue to
consume substantial amounts of our financial and managerial resources.  We have
incurred certain costs associated with defending this matter, and at any time
Atmel may file additional claims against us, which could increase the risk,
expense and duration of the litigation.  Further, because of the substantial
amount of discovery required in connection with this type of litigation, there
is a risk that some of our confidential information could be compromised by
disclosure.  For more information with respect to our litigation, please also
see "Part II, Item 1- Legal Proceedings."

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If an earthquake or other natural disaster strikes our manufacturing facility
or those of our suppliers, we would be unable to manufacture our products for a
substantial amount of time and we would experience lost revenues.

Our corporate headquarters are located in California near major
earthquake faults.  In addition, some of our suppliers are located near fault
lines.  In the event of a major earthquake or other natural disaster near our
headquarters, our operations could be harmed.  Similarly, a major earthquake or
other natural disaster such as typhoon near one or more of our major suppliers,
like the earthquakes in September 1999 and March 2002 or the typhoon in
September 2001 that occurred in Taiwan, could potentially disrupt the operations
of those suppliers, which could then limit the supply of our products and harm
our business.

A virus or viral outbreak in Asia could harm our business.

We derive substantially all of our revenues from Asia and our logistics
center is located in Taiwan.  A virus or viral outbreak in Asia, such as the
SARS outbreak in early 2003, could harm the operations of our suppliers,
distributors, logistics center and those of our end customer, which could harm
our business.

Prolonged electrical power outages, energy shortages, or increased costs
of energy could harm our business.

Our design and process research and development facilities and our corporate
offices are located in California, which is susceptible to power outages and
shortages as well as increased energy costs.  To limit this exposure, all
corporate computer systems at our main California facilities are on battery
back-up.  **In addition, all of our engineering and back-up servers and
selected corporate servers are on generator back-up**.  While the
majority of our production facilities are not located in California, more
extensive power shortages in the state could delay our design and process
research and development as well as increase our operating costs.

Our growth has in the past placed a significant strain on our management
systems and resources and if we fail to manage our growth, our ability to market
or sell our products or develop new products may be harmed.

Our business has in the past experienced rapid growth which strained our
internal systems and future growth will require us to continuously develop
sophisticated information management systems in order to manage our business
effectively.  We recently implemented a supply-chain management system and a
vendor electronic data interface system.  There is no guarantee that these
measures, in themselves, will be adequate to address any growth, or that we will
be able to foresee in a timely manner other infrastructure needs before they
arise.  Our success depends on the ability of our executive officers to
effectively manage our growth.  If we are unable to manage our growth
effectively, our results of operations will be harmed.  If we fail to
successfully implement new management information systems, our business may
suffer severe inefficiencies that may harm the results of our operations.

Future changes in financial accounting standards or practices or existing
taxation rules or practices may cause adverse unexpected revenue fluctuations
and affect our reported results of operations.

A change in accounting standards or practices or a change in existing
taxation rules or practices can have a significant effect on our reported
results and may even affect reporting of transactions completed before the
change is effective. New accounting pronouncements and taxation rules and
varying interpretations of accounting pronouncements and taxation practice have
occurred and may occur in the future. Changes to existing rules or the
questioning of current practices may adversely affect our reported financial
results or the way we conduct our business.

For example, any changes requiring that we record compensation expense in the
statement of operations for stock options using the fair value method or changes
in existing taxation rules related to stock options could have a significant
negative effect on our reported results. Several agencies and entities are
considering, and the FASB has announced, proposals to change generally accepted
accounting principles in the United States that, if implemented, would require
us to record charges to earnings for the stock options we grant.

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Evolving regulation of corporate governance and public disclosure may
result in additional expenses and continuing uncertainty

Changing laws, regulations and standard relating to corporate governance
and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC
regulations and Nasdaq National Market rules are creating uncertainty for public
companies.  We continually evaluate and monitor developments with respect to new
and proposed rules and cannot predict or estimate the amount of the additional
costs we may incur or the timing of such costs.  These new or changed laws,
regulations and standards are subject to varying interpretations, in many cases
due to their lack of specificity, and as a result, their application in practice
may evolve over time as new guidance is provided by regulatory and governing
bodies.  This could result in continuing uncertainty regarding compliance
matters and higher costs necessitated by ongoing revisions to disclosure and
governance practices.  We are committed to maintaining high standards of
corporate governance and public disclosure.  As a result, we have invested
resources to comply with evolving laws, regulations and standards, and this
investment may result in increased general and administrative expenses and a
diversion of management time and attention from revenue-generating activities to
compliance activities.  If our efforts to comply with new or changed laws,
regulations and standards differ from the activities intended by regulatory or
governing bodies due to ambiguities related to practice, regulatory authorities
may initiate legal proceedings against us and we may be harmed.

Failure to achieve and maintain effective internal controls could have a
material adverse effect on our business, operating results and stock price.

Section 404 of the Sarbanes-Oxley Act of 2002, the Act, requires us to
include an internal control report from management in our Annual Report on Form
10-K for the year ended December 31, 2004 and in subsequent Annual Reports
thereafter.  The internal control report must include the following: (1) a
statement of management's responsibility for establishing and maintaining
adequate internal controls over financial reporting, (2) a statement identifying
the framework used by management to conduct the required evaluation of the
effectiveness of our internal controls over financial reporting, (3)
management's assessment of the effectiveness of our internal controls over
financial reporting as of December 31, 2004, including a statement as to whether
or not internal controls over financial reporting is effective, and (4) a
statement that our independent registered accounting firm has issued an
attestation report on management's assessment of internal controls over
financial reporting.

We are in the process of documenting and testing our internal control
procedures in order to satisfy the requirements of Section 404 of the Sarbanes-
Oxley Act, which requires annual management assessments of the effectiveness of
our internal controls over financial reporting and a report by our independent
registered accounting firm addressing these assessments.  During the course of
our testing we may identify deficiencies which we may not be able to remediate
in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance
with the requirements of Section 404.  In addition, if we fail to achieve and
maintain the adequacy of our internal controls, as such standards are modified,
supplemented or amended from time to time, we may not be able to ensure that we
can conclude on an ongoing basis that we have effective internal controls over
financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. If
we are unable to assert that our internal control over financial reporting is
effective as of December 31, 2004, investors could lose confidence in our
financial reporting process and the trading price of our stock could drop
significantly.

Acquisitions could result in operating difficulties, dilution and other
harmful consequences.



In September 2004 we acquired majority ownership in Emosyn LLC and in
November 2004, we acquired G-Plus. We expect to continue to evaluate and
consider a wide array of potential strategic transactions, including business
combinations, acquisitions and dispositions of businesses, technologies,
services, products and other assets, including interests in our existing
subsidiaries and joint ventures. At any given time we may be engaged in
discussions or negotiations with respect to one or more of such transactions.
Any of such transactions could be material to our financial condition and
results of operations. There is no assurance that any such discussions or
negotiations will result in the consummation of any transaction. The process of
integrating any acquired business may create unforeseen operating difficulties
and expenditures and is itself risky. The areas where we may face difficulties
include:

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- diversion of management time, as well as a shift of focus from operating the
businesses to issues of integration and future products;
- declining employee morale and retention issues resulting from changes in
compensation, reporting relationships, future prospects, or the direction of the
business;
- the need to integrate each company's accounting, management information,
human resource and other administrative systems to permit effective management,
and the lack of control if such integration is delayed or not implemented;
- the need to implement controls, procedures and policies appropriate for a
public company at companies that prior to acquisition had lacked such controls,
procedures and policies; and in some cases, the need to transition operations
onto our platforms.



International acquisitions involve additional risks, including those related
to integration of operations across different cultures and languages, currency
risks, and the particular economic, political, and regulatory risks associated
with specific countries. Moreover, we may not realize the anticipated benefits
of any or all of our acquisitions. As a result of future acquisitions or
mergers, we might need to issue additional equity securities, spend our cash, or
incur debt, contingent liabilities, or amortization expenses related to
intangible assets, any of which could reduce our profitability and harm our
business.

Risks Related to Our Industry

Our success is dependent on the growth and strength of the flash memory
market.

All of our products, as well as all new products currently under design, are
stand-alone flash memory devices or devices embedded with flash memory.  A
memory technology other than SuperFlash may be adopted as an industry standard.
Our competitors are generally in a better financial and marketing position than
we are from which to influence industry acceptance of a particular memory
technology.  In particular, a primary source of competition may come from
alternative technologies such as FRAM devices if such technology is
commercialized for higher density applications.  To the extent our competitors
are able to promote a technology other than SuperFlash as an industry standard,
our business will be seriously harmed.

The selling prices for our products are extremely volatile and have
historically declined during periods of over capacity or industry downturns.

The semiconductor industry has historically been cyclical, characterized by
periodic changes in business conditions caused by product supply and demand
imbalance.  When the industry experiences downturns, they often occur in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions.  These downturns are characterized by weak product
demand, excessive inventory and accelerated decline of average selling prices.
In some cases, downturns, such as the one we experienced from late 2000 through
2002, have lasted for more than a year. We began to experience a slow recovery
during 2002 through the first half of 2003. During the second half of 2003 and
the first half of 2004, demand for our products increased sharply and we began
to see improvements in the average selling prices of our products. However, we
experienced a decrease in the average selling prices of our products as a result
of the slow-down in the demand for some of our products in the third quarter of
2004 and our business could be harmed again by industry-wide prolonged downturns
in the future.

There is seasonality in our business and if we fail to continue to introduce
new products this seasonality may become more pronounced.

Sales of our products in the consumer electronics applications market are
subject to seasonality.  As a result, sales of these products are impacted by
seasonal purchasing patterns with higher sales generally occurring in the second
half of each year.  In the past we have been able to mitigate such seasonality
with the introduction of new products throughout the year.  If we fail to
continue to introduce new products, our business may suffer and the seasonality
of a portion of our sales may become more pronounced.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to risks associated with foreign exchange rate fluctuations
due to our international manufacturing and sales activities. These exposures may
change over time as business practices evolve and could negatively impact our
operating results and financial condition. All of our sales are denominated in
U.S. dollars. An increase in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive and therefore reduce the
demand for our products. Such a decline in the demand could reduce revenues
and/or result in operating losses. In addition, a downturn in the economies of
China, Japan or Taiwan could impair the value of our equity investments in
companies with operations in these countries.  If we consider the value of these
companies to be impaired, we will write down, or expense, some or all of our
investments. In the third quarter of 2002, we wrote down our investment in
Apacer, a privately held memory module manufacturer located in Taiwan, by $7.8
million due to an other than temporary decline in its value.  As of September
30, 2004, the recorded value of our Apacer investment was  $4.4 million.  In the
third quarter of 2004, we wrote down our investment in Insyde Software, a public
BIOS specialty software company traded on the Taiwan Stock Exchange, by $479,000
due to an other than temporary decline in its value. As of September 30, 2004,
the recorded value of the investment in Insyde was $467,000.   We have equity
investments in companies with operations in China, Japan, Taiwan and United
States with recorded values at September 30, 2004 of  $83.2 million, $900,000,
$16.7 million and $600,000, respectively.

At any time, fluctuations in interest rates could affect interest earnings on
our cash, cash equivalents and available-for-sale investments, or the fair value
of our investment portfolio. We believe that the effect, if any, of reasonably
possible near term changes in interest rates on our financial position, results
of operations, and cash flows would not be material. Currently, we do not hedge
these interest rate exposures.  As of September 30, 2004,
the carrying value of our available-for-sale investments approximated fair
value.  The table below presents the carrying value and related weighted average
interest rates for our unrestricted and restricted cash and cash equivalents and
available-for-sale investments as of September 30, 2004 (in thousands):

`Carrying  Interest
                                                                               Value     Rate
                                                                             --------- --------

  Cash and cash equivalents - variable rate................................ $  88,876      0.6%
  Short-term available-for-sale investments - fixed rate...................    32,558      1.4%
  Long-term available-for-sale investments (1 to 2 years) - fixed rate.....        --       --
                                                                             ---------
                                                                            $ 121,434      0.9%
                                                                             =========`

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on their evaluation as of September 30, 2004, our chief executive
officer and chief financial officer, have concluded that our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) were sufficiently effective to ensure that the
information required to be disclosed by us in this quarterly report on Form 10-Q
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and Form 10-Q.

Changes in Internal Controls

There have been no significant changes in our internal controls over
financial reporting during the most recent fiscal quarter that materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.

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Our management, including our chief executive officer and chief financial
officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.

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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

In January 1996, Atmel Corporation filed suit against the SST alleging
that we infringed six U.S. patents.  We successfully moved for summary judgment
on two of the six asserted patents in September 1997.  In January 2001, Atmel
withdrew its allegation that we infringed another patent.  On May 7, 2002, a
judgment was entered against us in the amount of $36.5 million.  We appealed the
judgment on July 16, 2002.  On September 12, 2003 the Court of Appeals upheld
the jury's verdict.  On November 18, 2003 the Court of Appeals denied our
request for a rehearing, and in December 2003 we paid Atmel $37.8 million to
satisfy the judgment plus statutory interest accrued during the appeals.  The
payment was recorded as other operating expense in the year ending December 31,
2003.  In addition, on June 28, 2004 we paid $247,000 of legal related expenses
incurred by Atmel pursuant to the court order.

The other patent remaining in the case, the `903 patent, expired in September
2001.  The trial court has held that, if it is found to be valid, certain of our
products infringed that patent. A trial to determine whether the `903 patent is
invalid began on July 29, 2002.  On August 5, 2002 the jury announced that it
was unable to reach a verdict on our invalidity defense, and a mistrial was
declared.  Atmel requested a new trial, but the Court stayed the matter until
after our appeal of the earlier judgment is resolved.  At Atmel's request, the
Court has directed the parties to conduct a settlement conference before a
Magistrate Judge.  That settlement conference was scheduled for April 14, 2004
and was subsequently rescheduled for September 7, 2004.  No conclusion was
reached during the settlement conference on September 7, 2004.  If the parties
are unable to reach a settlement agreement, the Court may set a date for a new
trial.  The impact related to the outcome of the remaining patent is
undeterminable at this time.

From time to time, we are also involved in other legal actions arising in the
ordinary course of business. We have incurred certain costs while defending
these matters.  There can be no assurance the remaining Atmel complaint or other
third party assertions will be resolved without costly litigation, in a manner
that is not adverse to our financial position, results of operations or cash
flows or without requiring royalty payments in the future which may adversely
impact gross margins. No estimate can be made of the possible loss or possible
range of loss associated with the resolution of these contingencies.  As a result, no losses have been accrued in our financial
statements as of September 30, 2004.

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

(c)

|Period                                 | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly
Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares that
May Yet Be Purchased Under the Plans or Programs (1)
|-------------------------------------- | ------------------------------------ | -------------------------------- | ------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------
|July 1 through July 31, 2004           | --                                   | --                               | --                                                                                   | $15,000,000                                                                                                         
|August 1 through August 31, 2004       | 2,229,773                            | $5.77                            | 2,229,773                                                                            | $2,134,210                                                                                                          
|September 1 through September 30, 2004 | 344,700                              | $5.79                            | 344,700                                                                              | $138,397                                                                                                            
|Total                                  | 2,574,473                            | $5.77(2)                         | 2,574,473                                                                            |                                                                                                                     



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Item 6.  Exhibits.

(a)	Exhibits.

We incorporate by reference all exhibits filed in connection with our Annual
Report on Form 10-K for the year ended December 31, 2003.







|10.1.1 | Form of Nonstatutory Stock Option Grant Agreement and Incentive
Stock Option Grant Agreement.                                                                                                                         
|------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1   | Certification of President and Chief Executive Officer required
by Rule 13a- 14(a) of the Securities Exchange Act of 1934, as
amended.                                                                                
|31.2   | Certification of Vice President Finance & Administration,
Chief Financial Officer and Secretary required by Rule 13a- 14(a) of the
Securities Exchange Act of 1934, as amended.                                       
|32.1   | Certification of President and Chief Executive Officer, as
required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code (18 U.S.C. 1350).*                                         
|32.2   | Certification of Vice President Finance & Administration,
Chief Financial Officer and Secretary, as required by Rule 13a-14(b) and Section
1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
1350).*

* The certifications attached as Exhibit 32.1 and Exhibit 32.2
accompany the Quarterly Report on Form 10-Q, are not deemed filed with the
Securities and Exchange Commission and are not to be incorporated by reference
into any filing of the Company under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended (whether made before or after
the date of the Form 10-Q), irrespective of any general incorporation language
contained in such filing.

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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sunnyvale, County of
Santa Clara, State of California, on the 15th day of November, 2004.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | SILICON STORAGE TECHNOLOGY, INC.
By:
                           /s/ BING YEH

                                    Bing Yeh

                                       President and Chief Executive Officer(Principal Executive Officer)
/s/ JACK K. LAI

                                    Jack K. Lai

                                       Vice President Finance & Administration,
                                    Chief Financial Officer and Secretary(Principal Financial and Accounting Officer)

43

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