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

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FORM 10-Q

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[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2001

OR

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

For the transition period from ________to _________

Commission file number 0-26944

Silicon Storage Technology, Inc.(Exact name of Registrant as Specified in its Charter)



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

1171 Sonora CourtSunnyvale, California     94086(Address of Principal Executive Offices including Zip Code)

(408) 735-9110(Registrant's Telephone Number, Including Area Code)







Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [   ]

Number of shares outstanding of our Common Stock, no par value, as of the latest
practicable date, October 31, 2001:   91,371,956









Silicon Storage Technology, Inc.
                                    FORM 10-Q
                                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 Condensed Consolidated Financial Statements                                                                  | 6       
|                                                                                                                      |         
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations | 13      
|                                                                                                                      |         
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                  | 26      
|                                                                                                                      |         
|PART II.  OTHER INFORMATION                                                                                           |         
|                                                                                                                      |         
|Item 1:  Legal Proceedings                                                                                            | 27      
|                                                                                                                      |         
|Item 6.   Exhibits and Reports on Form 8-K                                                                            | 28      
|                                                                                                                      |         
|Signature                                                                                                             | 29      

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Part I -- FINANCIAL INFORMATION



ITEM 1.	FINANCIAL STATEMENTS

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                      (in thousands, except per share data)
Three Months Ended         Nine Months Ended
                                                                        September 30,             September 30,
                                                                   ------------------------  ------------------------
                                                                      2000         2001         2000         2001
                                                                   -----------  -----------  -----------  -----------
                                                                   (unaudited)  (unaudited)  (unaudited)  (unaudited)

Net revenues:
     Product revenues - unrelated parties                         $   146,478  $    39,368  $   294,454      139,290
     Product revenues - related parties                                15,887       25,795       31,800       58,699
     License revenues                                                   1,356        9,034        2,967       25,221
                                                                   -----------  -----------  -----------  -----------
          Total net revenues                                          163,721       74,197      329,221      223,210
Cost of revenues                                                       90,086       92,239      183,645      187,634
                                                                   -----------  -----------  -----------  -----------
Gross profit (loss)                                                    73,635      (18,042)     145,576       35,576
                                                                   -----------  -----------  -----------  -----------
Operating expenses:
     Research and development                                          11,989       13,588       29,246       38,299
     Sales and marketing                                                8,558        7,098       19,061       19,621
     General and administrative                                         3,866        4,548       10,185       14,993
     Other                                                                --           756          --           756
                                                                   -----------  -----------  -----------  -----------
          Total operating expenses                                     24,413       25,990       58,492       73,669
                                                                   -----------  -----------  -----------  -----------
Income (loss) from operations                                          49,222      (44,032)      87,084      (38,093)
Interest and other income                                               3,197        1,398        6,297        6,244
Interest expense                                                          (66)         (79)        (611)        (265)
                                                                   -----------  -----------  -----------  -----------
Income (loss) before provision for (benefit from) income taxes         52,353      (42,713)      92,770      (32,114)
Provision for (benefit from) income taxes                              16,087      (16,231)      24,324      (12,203)
                                                                   -----------  -----------  -----------  -----------
Net income (loss)                                                      36,266  $   (26,482) $    68,446  $   (19,911)
                                                                   ===========  ===========  ===========  ===========

Net income (loss) per share - basic                                      0.41  $     (0.29) $      0.81  $     (0.22)
                                                                   ===========  ===========  ===========  ===========

Shares used in per share calculation                                   89,471       91,208       84,843       90,954
                                                                   ===========  ===========  ===========  ===========

Net income (loss) per share - diluted                                    0.37  $     (0.29) $      0.74  $     (0.22)
                                                                   ===========  ===========  ===========  ===========

Shares used in per share calculation                                   97,563       91,208       92,818       90,954
                                                                   ===========  ===========  ===========  ===========

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

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                 (in thousands)
December 31, September 30,
                                                              2000          2001
                                                          ------------  ------------
                                                          (unaudited)   (unaudited)
                         ASSETS

Current assets:
    Cash and cash equivalents                            $    109,086  $     55,643
    Short-term available-for-sale investments                 139,963        76,206
    Trade accounts receivable-unrelated parties, net          106,258        30,259
    Trade accounts receivable-related parties, net             20,000        28,981
    Inventories                                                73,290       136,217
    Deferred tax asset                                          9,491        23,755
    Other current assets                                       14,835        16,271
                                                          ------------  ------------
         Total current assets                                 472,923       367,332
Equipment, furniture and fixtures, net                         16,874        23,290
Equity investments                                             19,369        71,427
Other assets                                                    3,424         4,972
                                                          ------------  ------------
         Total assets                                    $    512,590  $    467,021
                                                          ============  ============
LIABILITIES

Current liabilities:
    Notes payable, current portion
    Trade accounts payable-unrelated parties             $     39,184  $     27,136
    Trade accounts payable-related parties                      7,339         4,862
    Accrued expenses and other liabilities                     33,879        18,671
    Deferred revenue-unrelated parties                         15,274         6,969
    Deferred revenue-related parties                               --         6,766
                                                          ------------  ------------
         Total current liabilities                             95,676        64,404
Other liabilities                                                 279         1,970
                                                          ------------  ------------
         Total liabilities                                     95,955        66,374
                                                          ------------  ------------
SHAREHOLDERS' EQUITY

Common stock                                                  330,310       333,756
Accumulated other comprehensive income                            132           302
Retained earnings                                              86,193        66,282
                                                          ------------  ------------
         Total shareholders' equity                           416,635       400,340
                                                          ------------  ------------
         Total liabilities and shareholders' equity      $    512,590  $    466,714
                                                          ============  ============

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

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)

                                                                   --
Nine Months Ended
                                                                           September 30,
                                                                        ----------------------
                                                                           2000         2001
                                                                        ----------  ----------
                                                                        (unaudited) (unaudited)
Cash flows from operating activities:
    Net income (loss)                                                  $   68,446  $  (19,911)
    Adjustments to reconcile net income (net loss) to net cash
      provided by (used in) operating activities:
       Depreciation/amortization                                            4,556       7,156
       Provision for doubtful accounts receivable                             326       2,692
       Provision for excess and obsolete inventories and
         lower of cost or market                                            4,261      56,281
       Other operating expenses                                                --         756
       Deferred income taxes                                               (2,293)    (14,264)
       Tax benefit from employee stock plans                               10,954          --
       (Gain) loss on sale of equipment                                       (62)         29
    Changes in operating assets and liabilities:
       Accounts receivable-unrelated parties                              (78,016)     73,489
       Accounts receivable-related parties                                 (4,665)     (9,163)
       Inventories                                                        (31,592)   (119,208)
       Other current and noncurrent assets                                 (5,170)     (1,017)
       Trade accounts payable-unrelated parties                            19,577     (12,048)
       Trade accounts payable-related parties                               4,724      (2,477)
       Accrued expenses and other current liabilities                      24,030     (15,443)
       Deferred revenue-unrelated parties                                   8,391      (8,305)
       Deferred revenue-related parties                                        --       6,766
                                                                        ----------  ----------
           Net cash provided by (used in) operating activities             23,467     (54,667)
                                                                        ----------  ----------
Cash flows from investing activities:
    Restricted cash                                                            --     (12,490)
    Repayment of restricted cash                                               --      12,490
    Investment in equity securities                                       (17,089)    (52,058)
    Acquisition of equipment, furniture and fixtures                       (7,008)    (12,568)
    Proceeds from sale of property and equipment                               62          --
    Purchases of available-for-sale investments                          (133,461)    (57,359)
    Sales and maturities of available-for-sale investments                  2,546     118,286
                                                                        ----------  ----------
           Net cash used in investing activities                         (154,950)     (3,699)
                                                                        ----------  ----------
Cash flows from financing activities:
    Borrowings                                                             39,750       1,800
    Repayments                                                            (59,037)       (187)
    Issuance of shares of common stock                                    257,136       3,446
    Other                                                                    (124)       (136)
                                                                        ----------  ----------
           Net cash provided by financing activities                      237,725       4,923
                                                                        ----------  ----------
Net increase (decrease) in cash and cash equivalents                      106,242     (53,443)
Cash and cash equivalents at beginning of period                            1,223     109,086
                                                                        ----------  ----------
Cash and cash equivalents at end of period                             $  107,465  $   55,643
                                                                        ==========  ==========
Supplemental Disclosure of Cash Flow Information:
Cash received during the period for interest                           $    2,728  $    7,750
Cash paid during the period for interest                               $      611  $      283
Cash paid during the period for income taxes                           $    2,413  $   13,412

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

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AT SEPTEMBER 30, 2001
(UNAUDITED):

1. Basis of Presentation

In the opinion of management, the accompanying unaudited condensed
interim consolidated financial statements contain all adjustments (all of which
are normal and recurring in nature) necessary to fairly present our financial
position, results of operations and cash flows. The results of operations for
the interim periods presented are not necessarily indicative of the results that
may be expected for any future interim periods or for the full fiscal year.
These interim financial statements should be read in conjunction with the
financial statements in our Annual Report on Form 10-K, as amended, for the year
ended December 31, 2000 and the Quarterly Report on Form 10-Q for the three
months ended March 31, 2001 and the three and six months ended June 30,
2001.

The year-end balance sheet at December 31, 2000 was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivatives and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In July
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133,"
which deferred the effective date until the first fiscal year beginning after
June 15, 2000. In June 2000, the FASB issued SFAS Statement No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities-an Amendment
of SFAS No. 133." SFAS No. 138 amends certain terms and conditions of SFAS No.
133. SFAS No. 133 requires that all derivative instruments be recognized at fair
value as either assets or liabilities in the statement of financial position.
The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and further, on the type of hedging relationship.
We adopted SFAS No. 133, as amended, in our quarter ending March 31, 2001. The
adoption of SFAS No. 133 did not have a material impact on our financial
statements.

In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method. We
believe the adoption of SFAS No. 141 will not have a significant impact on our
financial statements.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which is effective for fiscal years beginning after December 15, 2001.
SFAS No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. We are
currently assessing but have not yet determined the impact of SFAS No. 142 on
our financial position and results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." SFAS No. 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Division of a Business." SFAS No. 144 develops one accounting
model for long-lived assets that are to be disposed of by sale and requires the
measurement to be at the lower of book value or fair value less cost to sell.
Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. We believe the
adoption of SFAS No. 144 will not have a significant impact on our financial
statements.



2. Other Operating Expense

During the third quarter of 2001, we recorded a period charge to other
operating expense of approximately $756,000 relating to an operating lease for
an abandoned building. This charge represents the estimated difference between
the total non-discounted future sublease income and our non-discounted lease
commitments relating to this building. The charge is an estimate as of September
30, 2001 and may be adjusted if we obtain a sublease for the building and the
actual sublease income is significantly different from the estimate.

3. Computation of Net Income (Loss) Per Share

We have computed and presented net income (loss) per share under two
methods, basic and diluted. Basic net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted net income (loss) per share is computed by
dividing net income (loss) by the sum of the weighted average number of common
shares outstanding and potential common shares (when dilutive). A reconciliation
of the numerator and the denominator of basic and diluted net income (loss) per
share is as follows (in thousands, except per share amounts):

`Three Months Ended         Nine Months Ended
                                                                        September 30,             September 30,
                                                                   ------------------------  ------------------------
                                                                      2000         2001         2000         2001
                                                                   -----------  -----------  -----------  -----------
Numerator - Basic
  Net income (loss)                                               $    36,266  $   (26,482) $    68,446  $   (19,911)
                                                                   ===========  ===========  ===========  ===========
Denominator - Basic
  Weighted average common stock outstanding                            89,471       91,208       84,843       90,954
                                                                   ===========  ===========  ===========  ===========

Basic net income (loss) per share                                 $      0.41  $     (0.29) $      0.81  $     (0.22)
                                                                   ===========  ===========  ===========  ===========

Numerator - Diluted
  Net income (loss)                                               $    36,266  $   (26,482) $    68,446  $   (19,911)
                                                                   ===========  ===========  ===========  ===========
Denominator - Diluted
  Weighted average common stock outstanding                            89,471       91,208       84,843       90,954
  Dilutive potential of common stock equivalents:
      Options                                                           8,092          --         7,975          --
                                                                   -----------  -----------  -----------  -----------
                                                                       97,563       91,208       92,818       90,954
                                                                   ===========  ===========  ===========  ===========

Diluted net income (loss) per share                               $      0.37  $     (0.29) $      0.74  $     (0.22)
                                                                   ===========  ===========  ===========  ===========`

Anti-dilutive stock options to purchase approximately 86,000 shares of common
stock were excluded from the computation of diluted net income per share for the
nine months ended September 30, 2000 because the exercise price of these options
exceeded the average fair market value of our common stock for the nine months
ended September 30, 2000. Stock options to purchase approximately 10,309,000
shares of common stock were outstanding as of September 30, 2001. These stock
options were not included in the computation of diluted net loss per share for
the three and nine months ended September 30, 2001 because we had a net loss for
these periods.

4. Marketable Securities

We consider cash and all highly liquid investments purchased with an
original or remaining maturity of less than three months at the date of purchase
to be cash equivalents. Substantially all of our cash and cash equivalents are
in the custody of two major financial institutions.

Our investments comprise federal, state, and municipal government obligations
and foreign and public securities. Investments with maturities of less than one
year at the balance sheet date are considered short term and investments with
maturities greater than one year at the balance sheet date are considered long
term. All these investments are classified as available-for-sale and carried at
fair value, based on quoted market prices, with the unrealized gains or losses,
net of tax, reported in shareholders' equity as other comprehensive income. The
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity, both of which are included in interest income.
Realized gains and losses are recorded on the specific identification method.
Realized gains and realized losses for the nine months ended September 30, 2001
were not material.



The fair value of marketable securities as of September 30, 2001 were as
follows (in thousands):

`Amortized   Unrealized       Fair
                                                  Cost         Gain          Value
                                               -----------  -----------   -----------
Corporate bonds and notes                     $    62,507  $       139   $    62,646
Government bonds and notes                         59,818          348        60,166
                                               -----------  -----------   -----------
Total bonds and notes                         $   122,325  $       487       122,812
                                               ===========  ===========
Less amounts classified as cash equivalents                                  (46,606)
                                                                          -----------
              Total short-term marketable securities                     $    76,206
                                                                          ===========`

The fair value of marketable securities as of December 31, 2000 were as
follows (in thousands):

`Unrealized
                                                Amortized      Gain          Fair
                                                  Cost        (Loss)         Value
                                               -----------  -----------   -----------
Corporate bonds and notes                     $    69,155  $       (20)  $    69,135
Government bonds and notes                        141,523          152       141,675
                                               -----------  -----------   -----------
Total bonds and notes                         $   210,678  $       132       210,810
                                               ===========  ===========
Less amounts classified as cash equivalents                                  (70,847)
                                                                          -----------
              Total short-term marketable securities                     $   139,963
                                                                          ===========`

5. Balance Sheet Detail

Details of selected balance sheet accounts are as follows (in
thousands):

`December 31, September 30,
                                                                2000          2001
                                                            -----------   -----------
Trade accounts receivable-unrelated parties                $   107,041   $    33,552
Less allowance for doubtful accounts-unrelated  parties           (783)       (3,293)
Trade accounts receivable-related parties                       20,000        29,163
Less allowance for doubtful accounts-related parties                --          (182)
                                                            -----------   -----------
                                                           $   126,258   $    59,240
                                                            ===========   ===========


                                                             December 31, September 30,
                                                                2000          2001
                                                            -----------   -----------
Raw materials                                              $    29,025   $    98,395
Work in process                                                 17,631         8,227
Finished goods                                                  26,634        29,595
                                                            -----------   -----------
                                                           $    73,290   $   136,217
                                                            ===========   ===========`

Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value. We typically plan our production and inventory
levels based on internal forecasts of customer demand, which are highly
unpredictable and can fluctuate substantially. 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. Our
inventories include high technology parts and components that are specialized in
nature or subject to rapid technological obsolescence. While we have programs to
minimize the required inventories on hand and we consider technological
obsolescence when estimating allowances for potentially excess and obsolete
inventories and those required to reduce recorded amounts to market values, it
is reasonably possible that such estimates could change in the near term. Such
changes in estimate could have a significant impact on our financial position
and results of operations.

In the third quarter of 2001, we incurred a $42.7 million inventory valuation
adjustment to cost of sales comprised of $17.6 million relating to lower of cost
or market and replacement valuation adjustments and $25.1 million relating to
potential obsolescence allowances. For the nine months ended September 30, 2001,
inventory valuation adjustments to cost of sales amounted to $54.5 million.

`December 31, September 30,
                                                                2000          2001
                                                            -----------   -----------
Equipment                                                  $    13,389   $    14,778
Design hardware                                                  4,234         6,695
Software                                                         5,781         7,302
Furniture and fixtures                                           2,269         9,918
                                                            -----------   -----------
                                                                25,673        38,693
Less accumulated depreciation                                    9,906        15,905
                                                            -----------   -----------
                                                                15,767        22,788
Construction in progress                                         1,107           502
                                                            -----------   -----------
                                                           $    16,874   $    23,290
                                                            ===========   ===========


                                                             December 31, September 30,
                                                                2000          2001
                                                            -----------   -----------
Accrued compensation and related items                     $    14,509   $     4,050
Accrued income tax payable                                      11,292            --
Accrued liabilities-related parties                                356         1,858
Accrued warranty                                                   357         3,503
Other accrued liabilities                                        7,365         9,260
                                                            -----------   -----------
                                                           $    33,879   $    18,671
                                                            ===========   ===========`

6. Shareholders' Equity

In September 2001, our board of directors authorized the purchase of an
aggregate of up to $15.0 million of our common stock. The purchases may be made
in the open market at prevailing market prices or in negotiated transactions off
the market, subject to compliance with applicable provisions of the California
Corporation Code and in accordance with applicable federal and state securities
laws and regulations. The stock purchase program will continue until September
30, 2002 unless earlier revoked by the board of directors. As of September 30,
2001, no shares had been purchased under this program.

7. Commitments

In December 2000, we committed, subject to certain business conditions,
to prepay $50.0 million to a vendor in 2001 to secure increased wafer capacity
in 2002 and 2003. In the second quarter of 2001, in response to weakening
product demand and economic conditions, we renegotiated the commitment to extend
the payment to 2002. As of September 30, 2001, we had prepaid a total of $5.0
million towards this commitment. At September 30, 2001, the amount was included
in other current assets on the balance sheet.

8. Contingencies

On January 3, 1996, Atmel Corporation sued us in the U.S. District Court
for the Northern District of California. Atmel's complaint alleged that we
willfully infringe five U.S. patents owned by or exclusively licensed to Atmel.
Atmel later amended its complaint to allege infringement of a sixth patent.
Regarding each of these six patents, Atmel sought a judgment that we infringe
the patent, an injunction prohibiting future infringement, and treble damages,
as well as attorney's fees and expenses.

On two of the six patents, the District Court ruled by summary judgment that
we did not infringe. Two of the other patents were invalidated by another U.S.
District Court in a proceeding to which we were not a party, but this decision
was later reversed by the Federal Circuit Court of Appeals. Thus, four patents
remain at issue in Atmel's District Court case against us.

On February 17, 1997, Atmel filed an action with the International Trade
Commission, or ITC, against two suppliers of our

parts, involving four of the six patents that Atmel alleged that we infringed
in the District Court case above. We intervened as a party to that
investigation. Pursuant to indemnification agreements with these suppliers, we
were obligated to indemnify both to the extent provided in those agreements. As
more fully described below, the settlement with Winbond terminated our indemnity
obligations to that company.

As to one of these four patents, Atmel's claims were withdrawn because of the
summary judgment granted by the District Court, as described above. The
administrative law judge, or ALJ, who makes recommended determinations to the
ITC, ruled that we did not infringe the remaining three patents. As to one of
these patents, U.S. Patent No. 4,451,903 ("the `903 patent," also known as
"Silicon Signature"), the ALJ ruled on May 17, 2000 that it is invalid and
unenforceable because the patent did not name the proper inventors and because
Atmel intentionally misled the U.S. Patent Office. On October 16, 2000, the ITC
overturned the ALJ's recommendation on the `903 patent and ruled that we could
not import into the United States certain products that use this circuit. We
appealed the ITC ruling and in January 2001 the Federal Circuit Court issued an
order upholding the ITC's decision. A final decision affirming the Limited
Exclusion Order was issued in August 2001. The ITC also ruled that we do not
infringe the two other patents at issue ("the `811 and `829" patents). Atmel
appealed that determination but dropped the appeal. On May 8, 2001, we filed a
motion with the Commission to terminate the Limited Exclusion Order based on
newly discovered evidence. The Commission did not act on our motion and it
became moot when the Limited Exclusion Order expired on September 14, 2001.

In April 2001, Atmel filed motions for summary judgment on
the `811 and `829 patents as well as the `903 patent. On May 11, 2001 we filed
our opposition papers with the court and filed motions for summary judgment that
the `903 patent is invalid. The trial court denied Atmel's motion for summary
judgment and our motion for summary judgment. After the decision of the Federal
Circuit was rendered, we renoticed our motion for Summary Judgment that the '903
patent was invalid. We also filed two motions for sanctions for alleged
discovery abuse. The trial court granted one of our sanctions motions and denied
the other. Our motion for Summary Judgment to invalidate the '903 has been
submitted and no decision has been reached. Atmel has filed a counter motion for
summary Judgment that the '903 patent is valid. We anticipate that the court
will issue a ruling on both motions by the end of December 2001. The trial court
set the trial date on all issues for January 22, 2002.

On October 1, 2000, we announced a settlement in our lawsuit
with Winbond Electronics of Taiwan. We filed a lawsuit against Winbond in July
1998 in the U.S. District Court in San Jose, California pursuant to the
termination of our SuperFlash technology licensing agreement with Winbond. As
part of the settlement, Winbond agreed to a consent judgment and will not
contest the validity and appropriateness of SST's termination of the licensing
agreement in June 1998. This settlement concludes all litigation between us and
Winbond. We received $10.4 million and $15.0 million in license fees during 2000
and for the nine months ended September 30, 2001, respectively, as part of this
settlement.

From time to time, we are also involved in other legal actions arising in the
ordinary course of business. While we have accrued certain amounts for the
estimated legal 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.



9. Line of Credit

As of September 30, 2001, we had no borrowings on our line of credit. As
of September 30, 2001, our line of credit was for $35.0 million. This agreement
expires in September 2002. Borrowing is limited to 80.0% of eligible worldwide
accounts receivable and is also reduced by any letters of credit issued under a
$35.0 million sub-agreement to this line. As of September 30, 2001, there was
approximately $6.5 million outstanding in letters of credit and $3.1 million
available under this line. The line bears interest at a rate of the bank's
reference rate plus 0.5% (6.5% at September 30, 2001). There is a minimum
interest rate of 6.0%. We are required to maintain specified levels of tangible
net worth. Under the agreement we are not permitted to pay a dividend. We must
also pay an unused line fee at the annual rate of one quarter of one percent on
the unused portion. As of September 30, 2001, we were in compliance with the
covenants of this agreement.



10. Segment Information

Our operations involve the design, development, manufacturing, marketing
and technical support of our nonvolatile memory products. We offer low and
medium density devices that target a broad range of existing and emerging

applications in the digital consumer, networking, wireless communications and
Internet computing markets. Our products are differentiated based upon
attributes such as density, voltage, access speed, package and predicted
endurance. We also license our technology for use in non-competing
applications.

Previously we managed our business in two reportable segments: Flash products
and Technology Licensing. In January 2001, we introduced further granularity
into our management information systems, which now allow us to segregate the
Flash products segment into three separate business units. These business units
are considered reportable segments. The new segments which comprise the former
Flash products segment are: the Standard Memory Product Group, or SMPG, the
Application Specific Product Group, or ASPG, and the Special Product Group, or
SPG. We make financial decisions and allocate resources based on the information
that we receive from this internal management system. We do not allocate
operating expenses, interest income or expense, other income, net or the
provision for income taxes to any of these segments for internal reporting
purposes, as we do not believe that allocating the expense is material in
evaluating a business unit's performance. Information for the prior period has
been restated to conform to the new presentation.

The following table shows our product revenues and gross profit at standard
margins for each segment (in thousands):

`Three Months Ended         Nine Months Ended
                                 September 30, 2001        September 30, 2001
                             ------------------------  ------------------------
                                            Gross                     Gross
                              Revenues   Profit (Loss)  Revenues   Profit (Loss)
                             ----------  ------------  ----------  ------------
SMPG                        $   36,164  $    (35,989) $  115,908  $    (27,630)
ASPG                            25,945         9,655      75,483        37,054
SPG                              3,054          (742)      6,598           931
Technology Licensing             9,034         9,034      25,221        25,221
                             ----------  ------------  ----------  ------------
                            $   74,197  $    (18,042) $  223,210  $     35,576
                             ==========  ============  ==========  ============



                              Three Months Ended         Nine Months Ended
                                 September 30, 2000        September 30, 2000
                             ------------------------  ------------------------
                                            Gross                     Gross
                              Revenues      Profit      Revenues      Profit
                             ----------  ------------  ----------  ------------
SMPG                        $  136,337  $     60,246  $  292,123  $    127,426
ASPG                            18,177         9,933      22,747        11,418
SPG                              7,851         2,100      11,384         3,765
Technology Licensing             1,356         1,356       2,967         2,967
                             ----------  ------------  ----------  ------------
                            $  163,721  $     73,635  $  329,221  $    145,576
                             ==========  ============  ==========  ============`

SMPG includes our three standard flash memory product families: the Small-Sector Flash, or
SSF, family, the Multi-Purpose Flash, or MPF, family, and the
Many-Time Programmable, or MTP, family and certain custom products based on
these standard flash memory families. These product families allow us to produce
products optimized for cost, quality and functionality to support the broad
range of applications that use nonvolatile memory products.

ASPG includes FlashBank, Concurrent SuperFlash, Serial Flash, Firmware Hub,
or FWH, and LPC flash products. These products are designed to address specific
applications such as cellular phones, pagers, PDAs, set-top boxes, hard disk
drives and PC BIOS applications. This business unit also includes our flash
embedded controllers and mass storage products such as the FlashFlex51, ADC,
ADM, and CompactFlash Card product families, to address the markets for digital
cameras, Internet appliances, PDAs, MP3 players, Set-top boxes and other types
of mass data storage applications.

SPG includes ComboMemory, ROM/RAM Combos, SRAM-related and other special
flash products.

Technology Licensing includes both up front license fees and royalties, which
are recognized in accordance with our revenue recognition policy.

11. Comprehensive Income

The components of comprehensive income, net of tax, are as follows (in
thousands):

`Three Months Ended         Nine Months Ended
                                                                        September 30,             September 30,
                                                                   ------------------------  ------------------------
                                                                      2000         2001         2000         2001
                                                                   -----------  -----------  -----------  -----------
Net income (loss)                                                 $    36,266  $   (26,482) $    68,446  $   (19,911)

Other comprehensive income:
   Change in net unrealized gains
      on investments, net of tax                                           56           85           56          170
                                                                   -----------  -----------  -----------  -----------
Total comprehensive income (loss)                                 $    36,322  $   (26,397) $    68,502  $   (19,741)
                                                                   ===========  ===========  ===========  ===========`

The components of accumulated other comprehensive income are as follows
(in thousands):

`December 31, September 30,
                                                           2000         2001
                                                       -----------  -----------
Net unrealized gains on investments, net of tax       $       132  $       302
                                                       ===========  ===========`

12. Equity Investment

On March 6, 2001 we invested $50.0 million in Grace Semiconductor
Manufacturing Corporation (GSMC), a Cayman Islands company. The investment is
for a wafer foundry project located in Shanghai, P.R.C. As a result, we acquired
5% of the outstanding equity of GSMC. This investment is carried at cost.

On June 20, 2001, we invested an additional $2.1 million in a memory module
manufacturer. This recent investment increased our ownership to 10.3%. This
investment is carried at cost.



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 condensed consolidated financial statements, notes to the condensed
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, as amended, for the year ended December 31, 2000, as filed with the
Securities and Exchange Commission.

The following discussion contains forward-looking statements, which involve
risk and uncertainties. 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 communications and Internet computing
markets.

The semiconductor industry has historically been cyclical, characterized
by wide fluctuations in product supply and demand. From time to time, the
industry has also experienced significant downturns, often in connection with,
or in anticipation of, declines in general economic conditions. Downturns of
this type occurred in 1996, 1997, 1998 and we are currently experiencing such a
downturn. These downturns have been characterized by weakening product demand,
production over-capacity and accelerated decline of selling prices, and in some
cases have lasted for more than a year. We began to experience a sharp downturn
in several of our markets late in the fourth quarter of 2000, as our customers
reacted to weakening demand for their products. During the first half of 2001,
market conditions generally had not improved and our customers continued to
return product, cancel backlog and/or push out shipments. In the third quarter
of 2001 the rate of product returns from customers slowed and we began to see a
positive change in order activities in our products for DVD players, CD-RW
drives, PDAs and video games, as well as the continued strong shipment from the
second quarter in our products for desktop PCs and graphics cards. The
networking and wireless communications market segments continue to be very weak.
Our business could be harmed by industry wide fluctuations in the future.

We derived 80.1% and 79.6% of our net product revenues during the nine months
ended September 30, 2000 and 2001, respectively, from product shipments to Asia.
Additionally, all of our major wafer suppliers and packaging and testing
subcontractors are located in Asia.

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.

Sales to direct customers and foreign stocking representatives are recognized
upon shipment, net of an allowance for estimated returns. Sales to distributors
are made primarily under arrangements allowing price protection and the right of
stock rotation on merchandise unsold to customers. Because of the uncertainty
associated with pricing concessions and future returns, we defer recognition of
such revenues, related costs of revenues and related gross margin until we are
notified by the distributor that the merchandise is sold by the distributor. In
March 2001, one of our stocking representatives, Professional Computer
Technology Limited ("PCT"), established a separate company, Silicon Professional
Technology Ltd. ("SPT"), to provide warehousing, logistics and distribution
services for us in Taiwan. SPT now services substantially all of our customers
in Taiwan. For revenue recognition purposes we treat SPT as a distributor and we
defer recognition of the revenue and cost of products shipped to SPT until it
has been sold to the end customer. For the nine months ended September 30, 2001,
PCT and SPT accounted for 26.0% of net product revenues recognized during this
period.

Most of our technology licenses provide for the payment of up-front license
fees and continuing royalties based on product sales. For license and other
arrangements for technology that we are continuing to enhance and refine and
under which we are obligated to provide unspecified enhancements, revenue is
recognized over the lesser of the estimated period we have historically enhanced
and developed refinements to the technology, generally three years, the upgrade
period, or the remaining portion of the upgrade period from the date of
delivery, provided all specified technology and documentation has been
delivered, the fee is fixed or determinable and collection of the fee is
reasonably assured. From time to time, we reexamine the estimated upgrade period
relating to licensed technology to determine if a change in the estimated update
period is needed. Revenues from license or other technology arrangements where
we are not continuing to enhance and refine the technology or are not obligated
to provide unspecified enhancements is recognized upon delivery, if the fee is
fixed or determinable and collection of the fee is reasonably assured.

We recognize royalties received under these arrangements during the upgrade
period as revenue based on the ratio of the elapsed portion of the upgrade
period to the estimated upgrade period. We recognize the remaining portion of
the royalties ratably over the remaining portion of the upgrade period. We
recognize royalties received after the upgrade period has elapsed when reported
to us, which generally coincides with the receipt of payment.

Results of Operations: Quarter Ended September 30, 2001

Net Revenues

Net revenues were $74.2 million for the third quarter of 2001 as compared
to $62.7 million in the second quarter of 2001 and $163.7 million for the third
quarter of 2000. Revenues decreased compared to the third quarter of last year
due to decreased shipment volume of our products and due to decreased average
selling prices. Revenues for the third quarter of 2001 increased compared to the
prior quarter due to an increase in volume of units shipped as a result of
improvement in order activities beginning in the middle of the quarter. Our
quarterly results are not indicative of annual results. Average selling prices
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 $223.2 million for the nine months ended September
30, 2001 as compared to $329.2 million for the comparable period in 2000. The
decrease from year to year was due to decreased shipment volume of our products
and decreased average selling prices.

Product Revenues. Product revenues were $65.2 million in the third
quarter of 2001 as compared to $52.9 million in the second quarter of 2001 and
$162.4 million for the third quarter of 2000. Product revenues decreased
compared to the third quarter of last year due to decreased shipment volume of
our products and due to decreased average selling prices. Product revenues
increased compared to the second quarter due to the higher volume of units
shipped in the third quarter of 2001. Product revenues decreased to $198.0
million in the first nine months of 2001 from $326.3 million in the first nine
months of 2000 due to decreased shipment volume and decreased average selling
prices of our products from period to period. We anticipate shipping volumes to
continue to fluctuate due to overall industry supply and demand.

License Revenues. Revenues from license fees and royalties were $9.0
million in the third quarter of 2001, as compared to $9.8 million in the second
quarter of 2001 and $1.4 million in the third quarter of 2000. The increase from
the third quarter of 2000 to the third quarter of 2001 was primarily due to $5.0
million in license fees received as part of our legal settlement with Winbond.
The decrease from the second quarter of 2001 to the third quarter of 2001 was
primarily due to fluctuation in royalty payments received from our licensees. We
anticipate an additional $5.0 million to be paid under the Winbond settlement in
the fourth quarter of 2001. Revenues from license fees and royalties increased
to $25.2 million for the nine months ended September 30, 2001 from $3.0 million
for the comparable period in 2000. The period to period increase was primarily
due to $15.0 million in license fees received as part of our legal settlement
with Winbond and increases in royalty payments from our licensees. We anticipate
that license revenues may fluctuate significantly in the future.

Gross Profit (Loss)

Gross loss was $18.0 million, or 24.3% of net revenues, in the third
quarter of 2001 as compared to gross profit of $24.7 million, or 39.3% of net
revenues, in the second quarter of 2001 and $73.6 million, or 45.0% of net
revenues, in the third quarter of 2000. The significant decrease to gross loss
in the third quarter of 2001 from gross profit when compared to the third
quarter of 2000 and the second quarter of 2001 was due primarily to inventory
valuation adjustments, decreases in average selling prices and increases in
anticipated warranty costs. We incurred a $42.7 million inventory valuation
adjustment to cost of sales in the third quarter of 2001, comprised of $17.6
million relating to lower of cost or market and replacement valuation
adjustments and $25.1 million relating to potential obsolescence allowances. For
the nine months ended September 30, 2001, inventory valuation adjustments to
cost of sales amounted to $54.5 million. Product gross margin was negative 41.6%
for the third quarter 2001, compared to positive 28.1% for the second quarter of
2001 and 44.5% for the third quarter of 2000. For the nine months ended
September 30, 2001, gross profit was $35.6 million, or 15.9% of net revenues,
compared to $145.6 million, or 44.2% of net revenues, for the comparable period
in 2000. Product gross margin for the nine months ended September 30, 2001
decreased to 5.2% from 43.7% for the same period in 2000. The period to period
decrease was primarily due to decreased unit shipments, decreased average
selling prices and adjustments and allowances for products in inventory.

Operating Expenses

Our operating expenses consist of research and development, sales and
marketing, and general and administrative expenses. Operating expenses were
$26.0 million, or 35.0% of net revenues, in the third quarter of 2001, compared
to $24.2 million, or 38.7% of net revenues, in the second quarter of 2001, and
$24.4 million, or 14.9% of net revenues, in the third quarter of 2000. The
increase from the comparable quarter last year was due primarily to hiring
additional personnel, the development of new products and improvements in our
infrastructure, offset by the lack of profit sharing expense in the third
quarter of 2001. The increase from the second quarter 2001 was due primarily to
an increase in non-production engineering material expense, an increase in
commissions expenses due to increases in revenues and bonus accruals for design
win activity and a period charge relating to our building lease, offset by a
decrease in the expense related to our doubtful accounts. Operating expenses
increased to $73.7 million for the nine months ended September 30, 2001 from
$58.5 million for the comparable period in 2000. The period to period increase
was due to hiring additional personnel, development of new products,
improvements in our infrastructure, an increase in our allowance for doubtful
accounts, and an increase in legal accruals in connection with the Atmel
litigation, offset by the lack of profit sharing expense. We anticipate that we
will continue to devote substantial resources to research and development, sales
and marketing and to general and administrative, and that these expenses will
continue to increase in absolute dollar amounts.

Research and development. Research and development expenses include
costs associated with the development of new products, enhancements to existing
products, quality assurance activities and occupancy costs. These costs consist
primarily of employee salaries, benefits, mask tooling and the cost of outside
resources that supplement the internal development team. Research and
development expenses were $13.6 million, or 18.3% of net revenues, during the
third quarter of 2001, as compared to $12.4 million, or 19.8% of net revenues,
during the second quarter of 2001 and $12.0 million, or 7.3% of net revenues,
during the third quarter of 2000. Research and development expenses increased by
9.4% from the second quarter of 2001and by13.3% from the third quarter of 2000
due primarily to an increase in non-production engineering material expense of
$1.8 million and increased expenses related to engineering evaluation and mask
costs, depreciation related to purchases of new engineering equipment,
engineering headcount and occupancy costs, offset by a decrease in profit
sharing expense. For the nine months ended September 30, 2001, research and
development expenses increased to $38.3 million from $29.2 million for the
comparable period in 2000. The period to period increase was primarily due to an
increase in non-production engineering material expense of $1.8 million and
increased expenses related to engineering and mask costs, depreciation related
to purchases of new engineering equipment, and engineering headcount and
occupancy costs, offset by a decrease in profit sharing expense. We expect
research and development expenses to continue to increase in absolute dollars as
we continue to invest in new product offerings, drive to new deep sub-micron
technologies and cost reduce our existing products.

Sales and marketing. Sales and marketing expenses consist of personnel
costs, commissions to stocking representatives, travel and entertainment and
promotional expenses. Sales and marketing expenses were $7.1 million, or 9.6% of
net revenues, in the third quarter of 2001 as compared to $6.2 million, or 9.9%
of net revenues, in the second quarter of 2001 and $8.6 million, or 5.2% of net
revenues, during the third quarter of 2000. The increase in sales and marketing
expenses from the second quarter of 2001 to the third quarter of 2001 was
primarily attributable to increased commissions expenses due to increases in
revenues and bonus accruals relating to design win activity. Compared to the
third quarter of 2000, sales and marketing expenses decreased by $1.5 million,
or 17.1%, primarily due to decreased commissions expenses due to lower product
revenues for the third quarter of 2001. Sales and marketing expenses for the
nine months ended September 30, 2001 were $19.6 million as compared to $19.1
million for the same period in 2000. The period to period increase was primarily
due to increased headcount and occupancy cost and increased marketing costs,
offset by a decrease in commissions and profit sharing expenses. We expect sales
and marketing expenses to increase in absolute dollars as we continue to expand
our sales and marketing efforts.

General and administrative. General and administrative expenses
consist of salaries for administrative, executive and finance personnel,
recruiting costs, professional services and legal fees and allowances for
doubtful accounts. General and administrative expenses were $4.5 million, or
6.1% of net revenues, in the third quarter of 2001, as compared to $5.6 million,
or 9.0% of net revenues, in the second quarter of 2001 and $3.9 million, or 2.4%
of net revenues, during the third quarter of 2000. Expenses increased from the
third quarter of 2000 due to increased occupancy and headcount related costs, as
well as depreciation expense associated with new leasehold improvements on
additional leased office space. The decrease in general and administrative
expenses from the second quarter of 2001 was primarily due to a decrease in our
bad debt expense of $2.1 million, offset by an increase in our legal expense
related to the Atmel litigation of approximately $873,000. General and
administrative expenses for the nine months ended September 30, 2001 were $15.0
million as compared to $10.2 million for the same period in 2000. The period to
period increase was due primarily to increased expenses related to our allowance
for doubtful accounts and legal expense, offset by a decrease in profit sharing
expenses. We anticipate that general and administrative expenses will continue
to increase in absolute dollar amount as we scale our facilities,
infrastructure, and head count 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. During the third quarter of 2001, we recorded a period charge
to other operating expense of approximately $756,000 relating to an operating
lease for an abandoned building. This charge represents the estimated difference
between the total non-discounted future sublease income and our non-discounted
lease commitments relating to this building. The charge is an estimate as of
September 30, 2001 and may be adjusted if we obtain a sublease for the building
and the actual sublease income is significantly different from the estimate.

Interest and other income. Interest and other income was approximately
$1.4 million, or 1.9% of net revenues, during the third quarter of 2001, as
compared to $1.5 million, or 2.3% of net revenues, during the second quarter of
2001 and $3.2 million, or 2.0% of net revenues, during the third quarter of
2000. Interest income decreased from the third quarter of 2000 to the third
quarter of 2001 and from the second quarter of 2001 to the third quarter of 2001
due to a decrease in cash, cash equivalents and available-for-sale investments
balances. Interest and other income decreased to $6.2 million for the first nine
months of 2001 from $6.3 million in the comparable period of 2000.

Interest Expense. Interest expense was approximately $79,000 for the
third quarter of 2001 as compared to $87,000 for the second quarter of 2001 and
$66,000 for the third quarter of 2000. Interest expense decreased to $265,000
for the first nine months of 2001 from $611,000 in the first nine months of
2000. Interest expense relates to interest and fees under our line of credit.
Fees will continue and will fluctuate depending on our use of the line of credit
facility.

Provision for (Benefit from) Income Taxes

Our income tax benefit of $16.2 million in the third
quarter of 2001 consists of a 38.0% tax rate on loss before taxes. This compares
with a tax provision of $692,000 in the second quarter of 2001 which was a 38.0%
tax rate on income before taxes and a tax provision of $16.1 million in the
third quarter of 2000 which was a 30.7% tax rate on income before taxes. For the
first nine months of 2001, we recorded a benefit from income taxes of $12.2
million, or a 38.0% tax rate on loss before taxes, as compared to $24.3 million,
or 26.2% tax rate on income before taxes, for the same period in 2000. All of
our prior year net operating losses were fully utilized by the end of the second
quarter of 2000. We expect our effective tax rate to be 38.0% for the remainder
of 2001. Our tax rate may change depending on our profitability and the timing
of the implementation of certain tax planning strategies which are being
designed to decrease the effective rate in future years.

Segment Reporting

Our operations involve the design, development, manufacturing, marketing
and technical support of our nonvolatile memory products. We offer low and
medium density devices that target a broad range of existing and emerging
applications in the digital consumer, networking, wireless communications and
Internet computing markets. Our products are differentiated based upon
attributes such as density, voltage, access speed, package and predicted
endurance. We also license our technology for use in non-competing applications.
Our reportable segments are: the Standard Memory Product Group, or SMPG, the
Application Specific Product Group, or ASPG, and the Special Product Group, or
SPG. Refer to Note 10 to the Condensed Consolidated Financial Statements for
revenue and gross profit information by reportable segment. Note that during
2000 we had different reportable segments, and therefore the prior period
information has been restated to conform to the new presentation. Our analysis
of the changes for each segment is discussed below.

SMPG includes our three standard flash memory product families: the Small-Sector Flash, or
SSF, family, the Multi-Purpose Flash, or MPF, family, and the
Many-Time Programmable, or MTP, family and certain custom products based on
these standard flash memory families. These families allow us to produce
products optimized for cost and functionality to support the broad range of
applications that use nonvolatile memory products. Gross margin decreased from
44.2% in the third quarter of 2000 to 5.8% in the second quarter of 2001 and to
negative 99.5% in the third quarter of 2001 for this segment due to the
inventory valuation adjustments to cost of sales during the each of the first
three quarters of 2001.

ASPG includes FlashBank, Concurrent SuperFlash, Serial Flash, Firmware Hub,
or FWH, and LPC flash products. These products are designed to address specific
applications such as cellular phones, pagers, PDAs, set-top boxes, hard disk
drives and PC BIOS applications. It also includes flash embedded controllers and
our mass storage products such as the FlashFlex51, ADC, ADM, and CompactFlash
Card product families, address digital cameras, Internet appliances, PDAs, MP3
players, Set-top boxes and other types of mass data storage applications. Gross
margin decreased from 55.7% in the second quarter of 2001, and from 54.7% in the
third quarter of 2000, to 37.2% in the third quarter of 2001 due to decreased
average selling prices and inventory valuation adjustments to cost of sales in
the third quarter of 2001.

SPG includes ComboMemory, ROM/RAM Combos, SRAM-related and other special
flash products. Gross margin decreased from 26.8% in the third quarter of 2000,
and from 59.6% in the second quarter of 2001, to negative 24.3% in the third
quarter of 2001 for this segment due to changes in the mix of the types of
products sold between the reporting periods and inventory valuation adjustments
to cost of sales in the third quarter of 2001.

Revenue and gross profit related to Technology Licensing was $1.4 million for
the third quarter of 2000, $9.8 million for the second quarter of 2001 and $9.0
million for the third quarter of 2001.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivatives and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In July
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133,"
which deferred the effective date until the first fiscal year beginning after
June 15, 2000. In June 2000, the FASB issued SFAS Statement No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities-an Amendment
of SFAS No. 133." SFAS No. 138 amends certain terms and conditions of SFAS No.
133. SFAS No. 133 requires that all derivative instruments be recognized at fair
value as either assets or liabilities in the statement of financial position.
The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and further, on the type of hedging relationship.
We adopted SFAS No. 133, as amended, in our quarter ending March 31, 2001. The
adoption of SFAS No. 133 did not have a material impact on our financial
statements.

In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method. We
believe the adoption of SFAS No. 141 will not have a significant impact on our
financial statements.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which is effective for fiscal years beginning after December 15, 2001.
SFAS No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. We are
currently assessing but have not yet determined the impact of SFAS No. 142 on
our financial position and results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." SFAS No. 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Division of a Business." SFAS No. 144 develops one accounting
model for long-lived assets that are to be disposed of by sale and requires the
measurement to be at the lower of book value or fair value less cost to sell.
Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. We believe the
adoption of SFAS No. 144 will not have a significant impact on our financial
statements.



Liquidity and Capital Resources

Operating activities. Our operating activities used cash of $54.7
million for the nine months ended September 30, 2001 as compared to generating
cash of $23.5 million for the nine months ended September 30, 2000. The cash
used by operating activities for the nine months ended September 30, 2001
related primarily to net loss of $19.9 million, increases in inventory of $119.2
million, accounts receivable-related parties of $9.2 million, deferred income
taxes of $14.3 million and other assets of $1.0 million and decreases in trade
accounts payable from related and unrelated parties of $14.5 million, accrued
expenses of $15.4 million and deferred revenue-unrelated parties of $8.3
million. Cash used in operating activities was reduced by a decrease of $73.5
million in trade accounts receivable-unrelated parties, an increase of $6.8
million in deferred revenue-related parties and non-cash adjustments of $66.9
million, primarily relating to inventory valuation adjustments of $56.3 million,
depreciation and amortization, increased provisions for doubtful accounts
receivable and other operating expenses. Decreased accounts receivable-unrelated
parties relates to decreased shipment volume and decreased average selling
prices. Increased accounts receivable-related parties and increased deferred
revenue-related parties relate to a new distribution relationship with a company
owned by one of the companies in which we have an equity investment. The cash
provided by operating activities for the nine months ended September 30, 2000
related primarily to net income of $68.5 million, tax benefits from employee
stock plans of $11.0 million, non-cash adjustments of $9.2 million and increases
in trade accounts payable from related and unrelated parties of $24.3 million,
accrued expenses and deferred revenue of $32.4 million. Increases in trade
accounts receivable from related and unrelated parties of $82.7 million,
increases in inventory of $31.6 million and increases in other assets of $5.2
million mostly offset the cash provided from operating activities.

Investing activities. Our investing activities used cash of $3.7
million for the nine months ended September 30, 2001, as compared to using cash
of $155.0 million for the first nine months of 2000. In the first quarter of
2001, we made a $50.0 million equity investment in Grace Semiconductor
Manufacturing Corporation, a Cayman Islands company with operations in China, as
a part of multi-phased strategic plan to expand our market presence into China.
In the second quarter of 2001, we invested an additional $2.1 million in a
production subcontractor. In comparison, for the nine months ended September 30,
2000, we made strategic equity investments in our subcontractors totaling $17.1
million. Capital expenditures were $12.6 million for the current nine month
period as compared to $7.0 million in capital expenditures for the same period
of 2000. The expenditures for the nine months ended September 30, 2001 include
$6.0 million of leasehold improvements on new building leases signed in 2000.
Cash used in investing activities was reduced by the excess of sales and
maturities of available-for-sale investments over the purchases of such
investments by $60.9 million in the nine months ended September 30, 2001. For
the comparable period in 2000, we used a net of $130.9 million to purchase
available-for-sale investments.

Financing activities. Our financing activities provided cash of
approximately $4.9 million during the nine months ended September 30, 2001 as
compared to $237.7 million for the nine months ended September 30, 2000. For the
current nine month period, the cash provided was from $3.4 million of common
stock issued under the employee stock purchase plan and the exercise of employee
stock options and $1.8 million related to a leasehold improvement loan as
stipulated by the lease agreement, offset by $323,000 in loan repayments and
other. The cash provided for the nine months ended September 30, 2000 was
primarily from the issuance of common stock for $257.1 million and primarily
related to net proceeds from a follow-on public offering in which we issued and
sold 12.1 million shares of common stock, a private placement in which we issued
and sold 504,000 shares of common stock, offset by the repayment of our entire
line of credit at the end of March, 2000.

Principal sources of liquidity at September 30, 2001 consisted of $131.8
million of cash, cash equivalents and short-term available-for-sale investments
and the line of credit. As of September 30, 2001 we had no borrowings on our
line of credit. As of September 30, 2001, our line of credit was for $35.0
million. This agreement expires in September 2002. Borrowing is limited to 80.0%
of eligible worldwide accounts receivable and is also reduced by any letters of
credit issued under a $35.0 million sub-agreement to this line. As of September
30, 2001 there was approximately $6.5 million outstanding in letters of credit
and $3.1 million available under this line. The line bears interest at a rate of
the bank's reference rate plus 0.5% (6.5% at September 30, 2001). There is a
minimum interest rate of 6.0%. We are required to maintain specified levels of
tangible net worth. Under the agreement we are not permitted to pay a dividend.
We must also pay an unused line fee at the annual rate of one quarter of one
percent on the unused portion. As of September 30, 2001 we were in compliance
with the covenants of this agreement.

Purchase Commitments. In December 2000, we committed, subject to
certain business conditions, to prepay $50.0 million to a vendor in 2001 to
secure increased wafer capacity in 2002 and 2003. In the second quarter of 2001,
in response to weakening product demand and economic conditions, we renegotiated
the commitment to extend the payment to 2002. As of September 30, 2001, we had
prepaid a total of $5.0 million towards this commitment. At September 30, 2001,
the amount was included in other current assets on the balance sheet.

Lease Commitments. We have long-term, non-cancelable building lease
commitments. We are currently seeking subtenants for our unused office space.
During the third quarter of 2001, we recorded a period charge to other operating
expense of approximately $756,000 relating to an operating lease for an
abandoned building. This charge represents the estimated difference between the
total non-discounted future sublease income and our non-discounted lease
commitments relating to this building. The charge is an estimate as of September
30, 2001 and may be adjusted if we obtain a sublease for the building and the
actual sublease income is significantly different from the estimate. We may be
unable to secure subtenants for such space due to the recent decrease in demand
for commercial rental space in Silicon Valley. See also "Business Risks - If we
are not successful in subleasing our unused office space, we may be required to
take a period charge for the difference between the total future sublease income
and our lease cost."

Stock Purchase Plan. In September 2001, our board of directors
authorized the purchase of an aggregate of up to $15.0 million of our common
stock. The purchases may be made in the open market at prevailing market prices
or in negotiated transactions off the market, subject to compliance with
applicable provisions of the California Corporation Code and in accordance with
applicable federal and state securities laws and regulations. The stock purchase
program will continue until September 30, 2002 unless earlier revoked by the
board of directors. As of September 30, 2001, no shares had been purchased under
this program.

We believe that our cash balances, together with funds expected to be
generated from operations and the line of credit availability, 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.



Business Risks

Risks Related to Our Business

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.

Although we were profitable in 2000, we incurred net losses for the nine
months ended September 30, 2001, and in fiscal 1997, 1998 and 1999. 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 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 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 SuperFlash

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 revenue projections. We may experience revenue shortfalls for
the following reasons:

- sudden drops in consumer demand which causes 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 or 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.

During 2001 we have incurred inventory valuation adjustments of $54.5
million and we may incur additional significant inventory valuation adjustments
in future periods.

We typically plan our production and inventory levels based on internal
forecasts of customer demand, which are highly unpredictable and can fluctuate
substantially. 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, 2001, we had $136.2 million of inventory
on hand, a sequential decrease of $43.0 million, or 24.0% from June 30, 2001.
During the first half of 2001, we had incurred a total valuation adjustment of
$11.8 million to our inventory, and in the third quarter of 2001 we incurred
further inventory valuation adjustments of $42.7 million. Due to the large
amount of our inventory, even a small change in average selling prices could
result in a significant adjustment and have a significant impact on our
financial position and results of operations.

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. We experienced a sharp downturn in
several of our markets late in the fourth quarter of 2000, as our customers
reacted to weakening demand for their products. Although we had improvements in
both total units shipped and revenues in the third quarter of 2001, it continued
to be a difficult quarter for us due to the excess inventory situation. 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 1999, 2000 and the nine months ended September 30, 2001, our
export product and licensing revenues accounted for approximately 89.1%, 84.3%,
and 90.2% 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;
- longer 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 several companies with
operations in Japan, Taiwan and China. The value of our investments is subject
to the economic and political conditions particular to their industry, their
countries 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.

We derived 80.8%, 77.6%, and 79.6% of our net product revenues from Asia
during 1999, 2000, and the nine months ended September 30, 2001, respectively.
Additionally, our major wafer suppliers and assembly and packaging
subcontractors are all 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 total revenues and also negatively impacted our ability to collect
payments from these 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 in 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. Additionally, we believe
the economic uncertainty fueled by the September 11, 2001 terrorist attack in
the United States has caused our customer base to become more cautious. 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.

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,
and we cannot be certain as to future order levels from our customers. When we
do enter into a long-term contract, the contract is generally terminable at the
convenience of the customer. An early termination by one of our major customers
would harm our financial results as it is unlikely that we would be able to
rapidly replace that revenue source.

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, at times, to sell our products. These
stocking representatives and distributors could discontinue their relationship
with us or discontinue selling our products at any time. Prior to 2001, two of
our stocking representatives were responsible for relationships with customers
which accounted for substantially all of our product sales in Taiwan, which were
28.3% and 25.5% of our net product revenues during 1999 and 2000. In March 2001,
one of our stocking representatives, Professional Computer Technology Limited
("PCT"), established a separate company, Silicon Professional Technology Ltd.
("SPT"), to provide warehousing, logistics and distribution services for us in
Taiwan. SPT now services substantially all of our customers in Taiwan. For
revenue recognition purposes we treat SPT as a distributor and we defer
recognition of the revenue and cost of products shipped to SPT until it has been
sold to the end customer. In the first nine months of 2001, PCT and SPT
accounted for 26.0% of net product revenues recognized during this period. For
the nine months ended September 30, 2001, product sales in Taiwan, which were
serviced by four stocking representatives, were 34.7% of our net product
revenues. One stocking representative was responsible for relationships with
customers which accounted for substantially all of our sales in China, including
Hong Kong, during 1999 and 2000, which accounted for 24.3%, 19.1%, and 16.3% of
our total net product revenues during 1999, 2000 and the nine months ended
September 30, 2001, respectively.

Product sales to our top 10 accounts, which comprise OEM end customers,
stocking representatives and distributors, represented approximately 53.6%,
43.0%, and 62.8% of our net product revenues for 1999, 2000 and the nine months
ended September 30, 2001, respectively. During 2000, 7 of our top 10 accounts
were stocking representatives, two were domestic distributors and one was an
OEM. No single customer account represented 10.0% or more of product revenues
during 2000. In 1999 one customer account represented 12.4% of product sales.

The loss of our relationship with any of these stocking representatives or
distributor, or any other significant stocking representative or distributor
could harm our operating results by impairing our ability to sell our products
to these customers.

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 all of our manufacturing with the exception
of limited 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 four foundries, Taiwan Semiconductor Manufacturing Co., Ltd., in
Taiwan, Sanyo Electric Co., Ltd., in Japan, Seiko-Epson Corp. in Japan, and
Samsung Electronics Ltd. in Korea. We anticipate that these foundries, together
with National Semiconductor Corporation in the United States, Nanya Technology
Corporation and Vanguard International Semiconductor Corporation in Taiwan and
OKI Electric Industry Co. in Japan, will manufacture the majority of our
products in the second half of 2001 and into 2002. On March 6, 2001, we invested
$50.0 million in Grace Semiconductor Manufacturing Corporation (GSMC), a Cayman
Islands company, for a wafer foundry project located in Shanghai, P.R.C. If
these suppliers fail to satisfy our requirements on a timely basis and 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 new product
production and could experience these delays in the future. We are also subject
to the risks of service disruptions, raw material shortages and priceincreases by the foundries. Such disruptions, shortages and price increases
could harm our operating results.

If we are unable to increase our manufacturing capacity, our revenues may
decline.

In order to grow, we need to increase our present manufacturing capacity.
Events that we have not foreseen could arise which would limit our capacity. We
have a remaining commitment to prepay a total of $45.0 million in 2001and 2002,
subject to certain economic and business conditions, to secure increased wafer
capacity in 2002 and 2003. We are continually engaged in attempting to secure
additional manufacturing capacity to support our long-term growth. Similar to
our $50.0 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.

If we are not successful in subleasing our unused office space, we may be
required to take a period charge for the difference between the total future
sublease income and our lease cost.

We have long-term, non-cancelable building lease commitments. We are
currently in the process of locating subtenants for our unused office space. We
may be unable to secure subtenants for this space due to the recent decrease in
demand for commercial rental space in Silicon Valley. During the third quarter
of 2001, we recorded a period charge to other operating expense of approximately
$756,000 relating to an operating lease for an abandoned building. This charge
represents the estimated difference between the total non-discounted future
sublease income and our non-discounted lease commitments relating to this
building. The charge is an estimate as of September 30, 2001 and may be adjusted
if we obtain a sublease for the building and the actual sublease income is
significantly different from the estimate. If we are unable to secure
subtenants, we may be required to take additional period charges for the total
future lease cost, and this will harm our operating results.

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 sometimes have 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 foreign 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 would harm our operating results.

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. Each 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 Intel, Advanced Micro Devices, Atmel,
STMicroelectronics, Sanyo, Winbond Electronics and Macronix. If we are
successful in developing our high density products, these products will compete
principally with products offered by Intel, Advanced Micro Devices, Fujitsu,
Hitachi, Sharp, Samsung Semiconductor, SanDisk 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.

Competition may also come from alternative technologies such as ferroelectric
random access memory, 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 and Chief Executive
Officer, 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 will depend, 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 42
patents in the United States relating to our products and processes, 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.

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.

Over the past three years 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. Whether or not we are successful in our
lawsuit with Atmel, we expect this litigation to consume substantial amounts of
our financial and managerial resources. 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.

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 earthquake in September 1999 or the typhoon in September 2001 that
occurred in Taiwan, which did not impact us, could potentially disrupt the
operations of those suppliers, which could then limit the supply of our products
and harm our business.

Prolonged electrical power outages or 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 currently susceptible to
power outages and shortages as well as increased energy costs. To limit this
exposure, we are in the process of securing back-up generators and power
supplies to our main California facilities. 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 continues to place a significant strain on our management
systems and resources and if we fail to manage our growth, our ability to market
and sell our products and develop new products may he harmed.

Our business is experiencing rapid growth which has strained our internal
systems and will require us to continuously develop sophisticated information
management systems in order to manage the business effectively. We are currently
implementing a supply-chain management system and a vendor electronic data
interface system. There is no guarantee that we will be able to implement these
new systems in a timely fashion, that in themselves they will be adequate to
address our expected 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.

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 wide fluctuations in product supply and demand. From time to time, the
industry has also experienced significant downturns, often in connection with,
or in anticipation of, maturing product cycles and declines in general economic
conditions. Downturns of this type occurred in 1997 and 1998, and we are
currently experiencing such a downturn. These downturns are characterized by
diminished product demand, production over-capacity and accelerated decline of
average selling prices, and in some cases have lasted for more than a year. Our
business could be harmed by industry-wide fluctuations in the future. The flash
memory products portion of the semiconductor industry, from which we derive
substantially all of our revenues suffered from excess capacity in 1996, 1997,
and 1998, which resulted in greater than normal declines in our markets, which
unfavorably impacted our revenues, gross margins and profitability. While these
conditions improved in 1999 and 2000, deteriorating market conditions at the end
of 2000 and the first three quarters of 2001 have resulted in the decline of our
selling prices and harmed our operating results.

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 1999 and the first half of 2000, this seasonality was
partially offset by the introduction of new products as we continued to
diversify our product offerings. However, in the first quarter of 2001, this
seasonality again became pronounced as it was combined with deteriorating market
conditions, which together resulted in sequential quarter to quarter declines in
product revenues from the fourth quarter of 2000 through the second quarter of
2001. 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.

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 Japan, Taiwan or China 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 would write off, or expense, some or
all of our investments. As of September 30, 2001, the cost of our equity
investments in companies with operations in Japan, Taiwan and China was
approximately $0.9 million, $20.5 million, and $50.0 million, respectively.

At any time, fluctuations in interest rates could effect interest
earnings on our cash, cash equivalents and short-term investments, any interest
expense owed on the line of credit facility, 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, 2001, the carrying value of our marketable
securities approximated fair value. The table below presents the carrying value
and related weighted average interest rates for our cash, cash equivalents and
available-for-sale investments as of September 30, 2001 (in thousands).

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

  Short-term investments - fixed rate                         $  76,206      4.0%
  Cash and cash equivalents - variable rate                      55,643      2.9%
                                                               ---------
                                                              $ 131,849      3.5%
                                                               =========`

PART II

Item 1. Legal Proceedings

On January 3, 1996, Atmel Corporation sued us in the U.S. District Court
for the Northern District of California. Atmel's complaint alleged that we
willfully infringe five U.S. patents owned by or exclusively licensed to Atmel.
Atmel later amended its complaint to allege infringement of a sixth patent.
Regarding each of these six patents, Atmel sought a judgment that we infringe
the patent, an injunction prohibiting future infringement, and treble damages,
as well as attorney's fees and expenses.

On two of the six patents, the District Court ruled by summary judgment that
we did not infringe. Two of the other patents were invalidated by another U.S.
District Court in a proceeding to which we were not a party, but this decision
was later reversed by the Federal Circuit Court of Appeals. Thus, four patents
remain at issue in Atmel's District Court case against us.

On February 17, 1997, Atmel filed an action with the International Trade
Commission, or ITC, against two suppliers of our parts, involving four of the
six patents that Atmel alleged that we infringed in the District Court case
above. We intervened as a party to that investigation. Pursuant to
indemnification agreements with these suppliers, we were obligated to indemnify
both to the extent provided in those agreements. As more fully described below,
the settlement with Winbond terminated our indemnity obligations to that
company.

As to one of these four patents, Atmel's claims were withdrawn because of the
summary judgment granted by the District Court, as described above. The
administrative law judge, or ALJ, who makes recommended determinations to the
ITC, ruled that we did not infringe the remaining three patents. As to one of
these patents, U.S. Patent No. 4,451,903 ("the `903 patent," also known as
"Silicon Signature"), the ALJ ruled on May 17, 2000 that it is invalid and
unenforceable because the patent did not name the proper inventors and because
Atmel intentionally misled the U.S. Patent Office. On October 16, 2000, the ITC
overturned the ALJ's recommendation on the `903 patent and ruled that we could
not import into the United States certain products that use this circuit. We
appealed the ITC ruling and in January 2001 the Federal Circuit Court issued an
order upholding the ITC's decision. A final decision affirming the Limited
Exclusion Order was issued in August 2001. The ITC also ruled that we do not
infringe the two other patents at issue ("the `811 and `829" patents). Atmel
appealed that determination but dropped the appeal. On May 8, 2001, we filed a
motion with the Commission to terminate the Limited Exclusion Order based on
newly discovered evidence. The Commission did not act on our motion and it
became moot when the Limited Exclusion Order expired on September 14, 2001.

In April, 2001, Atmel filed motions for summary judgment on the `811 and `829
patents as well as the `903 patent. On May 11, 2001 we filed our opposition
papers with the court and filed motions for summary judgment that the `903
patent is invalid. The trial court denied Atmel's motion for summary judgment
and our motion for summary judgment. After the decision of the Federal Circuit
was rendered, we renoticed our motion for Summary Judgment that the '903 patent
was invalid. We also filed two motions for sanctions for alleged discovery
abuse. The trial court granted one of our sanctions motions and denied the
other. Our motion for Summary Judgment to invalidate the '903 has been submitted
and no decision has been reached. Atmel has filed a counter motion for summary
Judgment that the '903 patent is valid. We anticipate that the court will issue
a ruling on both motions by the end of December 2001. The trial court set the
trial date on all issues for January 22, 2002.

On October 1, 2000, we announced a settlement in our lawsuit
with Winbond Electronics of Taiwan. We filed a lawsuit against Winbond in July
1998 in the U.S. District Court in San Jose, California pursuant to the
termination of our SuperFlash technology licensing agreement with Winbond. As
part of the settlement, Winbond agreed to a consent judgment and will not
contest the validity and appropriateness of SST's termination of the licensing
agreement in June 1998. This settlement concludes all litigation between us and
Winbond. We received $10.4 million and $15.0 million in license fees during 2000
and for the nine months ended September 30, 2001, respectively, as part of this
settlement.

From time to time, we are also involved in other legal actions arising in the
ordinary course of business. While we have accrued certain amounts for the
estimated legal 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.

Item 6. Exhibits and Reports on Form 8-K.

(a)	Exhibits. We incorporate by reference all exhibits filed in
connection with our annual report on Form 10-K, as amended, for the year ended
December 31, 2000.





|Exhibit Number: |  | Description:                                                                
|--------------- |  | ----------------------------------------------------------------------------
|10.32           |  | Amendment Number Seven to Loan and Security
Agreement, dated August 6, 2001.

(b) Reports on Form 8-K filed during the quarter ended September 30, 2001:
None.

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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 13th day of November, 2001.



| |                                 
| | --------------------------------
| | SILICON STORAGE TECHNOLOGY, INC.

| |             
| | ------------
| | (Registrant)



| |     |             
| | --- | ------------
| | By: | /s/ BING YEH

| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| |                                                                                                        
| | Bing Yeh                                                                                               
| | President and Chief Executive Officer
                                    (Principal Executive Officer)



| |     |                     
| | --- | --------------------
| | By: | /s/ JEFFREY L. GARON

| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                    
| | Jeffrey L. Garon                                                                                                                                                                                   
| | Vice President Finance & Administration,
                                    Chief Financial Officer and Secretary
                                    (Principal Financial and Accounting Officer)

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