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

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FORM 10-Q

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Commission File Number 0-26944

SILICON STORAGE TECHNOLOGY, INC.



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

1171 Sonora Court
                        Sunnyvale, California     94086

(408) 735-9110

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

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

Number of shares outstanding of our Common Stock, no par value, as of the latest
practicable date, April 30, 2004:   95,958,303.

1









Silicon Storage Technology, Inc.
              FORM 10-Q: QUARTER ENDED MARCH 31, 2004
                                TABLE OF CONTENTS



|PART I.   FINANCIAL INFORMATION                                                                                       | Page No.
|--------------------------------------------------------------------------------------------------------------------- | --------
|                                                                                                                      |         
|Item 1.   Condensed Consolidated Financial Statements:                                                                |         
|                                                                                                                      |         
|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 | 15      
|                                                                                                                      |         
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                  | 31      
|                                                                                                                      |         
|Item 4.   Controls and Procedures                                                                                     | 32      
|                                                                                                                      |         
|PART II.  OTHER INFORMATION                                                                                           |         
|                                                                                                                      |         
|Item 1.  Legal Proceedings                                                                                            | 33      
|                                                                                                                      |         
|                                                                                                                      |         
|Item 6.   Exhibits and Reports on Form 8-K                                                                            | 33      
|                                                                                                                      |         
|Signatures                                                                                                            | 35      





2

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PART I. FINANCIAL INFORMATION



Item 1.	Condensed Consolidated Financial Statements

SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                      (in thousands, except per share data)
Three Months Ended
                                                                      March 31,
                                                              ------------------------
                                                                 2003         2004
                                                              -----------  -----------
                                                              (unaudited)  (unaudited)

Net revenues:
     Product revenues - unrelated parties................... $    18,116  $    32,811
     Product revenues - related parties.....................      35,805       58,559
     Technology licensing...................................       7,788       13,063
                                                              -----------  -----------
          Total net revenues................................      61,709      104,433
Cost of revenues:
     Cost of revenues - unrelated parties...................      17,928       22,266
     Cost of revenues - related parties.....................      34,573       44,016
                                                              -----------  -----------
          Total cost of revenues............................      52,501       66,282
                                                              -----------  -----------
Gross profit................................................       9,208       38,151
                                                              -----------  -----------
Operating expenses:
     Research and development...............................      10,755       11,803
     Sales and marketing....................................       5,953        6,928
     General and administrative.............................       3,583        3,999
                                                              -----------  -----------
          Total operating expenses..........................      20,291       22,730
                                                              -----------  -----------
Income (loss) from operations...............................     (11,083)      15,421
Interest and other income...................................         456          384
Interest expense............................................         (38)         (44)
                                                              -----------  -----------
Income (loss) before provision for income taxes.............     (10,665)      15,761
Provision for income taxes..................................          --        1,528
                                                              -----------  -----------
Net income (loss)........................................... $   (10,665) $    14,233
                                                              ===========  ===========

Net income (loss) per share - basic......................... $     (0.11) $      0.15
                                                              ===========  ===========

Shares used in per share calculation - basic................      94,186       95,821
                                                              ===========  ===========

Net income (loss) per share - diluted....................... $     (0.11) $      0.14
                                                              ===========  ===========

Shares used in per share calculation - diluted..............      94,186      100,258
                                                              ===========  ===========

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


3

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                 (in thousands)
December 31,   March 31,
                                                                       2003          2004
                                                                   ------------  ------------
                                                                   (unaudited)   (unaudited)
                             ASSETS

Current assets:
    Cash and cash equivalents.................................... $    124,625  $     65,453
    Short-term available-for-sale investments....................       60,569        87,561
    Trade accounts receivable-unrelated parties, net of allowance
      for doubtful accounts of $1,118 at December 31, 2003 and
      $1,146 at March 31, 2004...................................       14,110        19,666
    Trade accounts receivable-related parties....................       41,220        48,169
    Inventories..................................................       46,120        69,926
    Other current assets.........................................       13,232        15,289
                                                                   ------------  ------------
         Total current assets....................................      299,876       306,064
Equipment, furniture and fixtures, net...........................       11,325        11,453
Equity investments, GSMC ..........................................     50,000        83,150
Equity investments, others.........................................      8,077         8,278
Long-term available-for-sale investments.........................       24,969        25,393
Other assets.....................................................        2,114           735
                                                                   ------------  ------------
         Total assets............................................ $    396,361  $    435,073
                                                                   ============  ============
LIABILITIES

Current liabilities:
    Notes payable, current portion............................... $        393  $        404
    Trade accounts payable-unrelated parties.....................       37,342        43,097
    Trade accounts payable-related parties.......................       10,165        17,542
    Accrued expenses and other liabilities.......................       11,911        15,871
    Deferred revenue.............................................        3,630         3,423
                                                                   ------------  ------------
         Total current liabilities...............................       63,441        80,337
Other liabilities................................................        1,423         1,949
                                                                   ------------  ------------
         Total liabilities.......................................       64,864        82,286
                                                                   ------------  ------------
Commitments (Note 5) and Contingencies (Note 6)
SHAREHOLDERS' EQUITY

Common stock, no par value:
    Authorized: 250,000 shares
    Issued and outstanding: 95,328 shares at December 31, 2003
    and 95,917 shares at March 31, 2004..........................      345,384       347,516
Accumulated other comprehensive income...........................        9,178        14,103
Accumulated deficit..............................................      (23,065)       (8,832)
                                                                   ------------  ------------
         Total shareholders' equity..............................      331,497       352,787
                                                                   ------------  ------------
         Total liabilities and shareholders' equity.............. $    396,361  $    435,073
                                                                   ============  ============

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


4

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)
Three Months Ended
                                                                               March 31,
                                                                        ----------------------
                                                                           2003        2004
                                                                        ----------  ----------
                                                                        (unaudited) (unaudited)
Cash flows from operating activities:
    Net income (loss)................................................. $  (10,665) $   14,233
    Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
       Depreciation and amortization..................................      2,113       1,633
       Provision (Credits) for doubtful accounts receivable...........        (31)         82
       Provision (Credits) for sales returns..........................       (175)         76
       Provision for excess and obsolete inventories, write-down of
         inventories and adverse purchase commitments.................      2,436         684
       Deferred income taxes..........................................     (3,114)         --
       (Gain)/Loss on disposal of equipment...........................        139         (25)
       Gain on sale of equity investments.............................        (37)         --
    Changes in operating assets and liabilities:
       Trade accounts receivable-unrelated parties....................      2,371      (5,744)
       Trade accounts receivable-related parties......................      2,541      (6,919)
       Inventories....................................................     11,990     (24,490)
       Other current and non-current assets...........................     15,223        (678)
       Trade accounts payable-unrelated parties.......................     (6,507)      5,755
       Trade accounts payable-related parties.........................       (405)      7,377
       Accrued expenses and other liabilities.........................       (574)      4,591
       Deferred revenue...............................................       (203)       (207)
                                                                        ----------  ----------
           Net cash provided (used in) by operating activities........     15,102      (3,632)
                                                                        ----------  ----------
Cash flows from investing activities:
    Investment in equity securities.....................................       --     (33,283)
    Acquisition of equipment, furniture and fixtures..................       (513)     (1,761)
    Proceeds from sale of equipment, furniture and fixtures...........         --          25
    Purchases of available-for-sale investments.......................    (14,250)    (26,508)
    Sales and maturities of available-for-sale and equity investments.      7,006       3,949
                                                                        ----------  ----------
           Net cash used in investing activities......................     (7,757)    (57,578)
                                                                        ----------  ----------
Cash flows from financing activities:
    Debt repayments...................................................        (84)        (94)
    Issuance of shares of common stock................................      1,847       2,132
                                                                        ----------  ----------
           Net cash provided by financing activities..................      1,763       2,038
                                                                        ----------  ----------
Net increase (decrease) in cash and cash equivalents..................      9,108     (59,172)
Cash and cash equivalents at beginning of period......................    103,751     124,625
                                                                        ----------  ----------
Cash and cash equivalents at end of period............................ $  112,859  $   65,453
                                                                        ==========  ==========

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


5

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AT MARCH 31, 2004
(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
consolidated financial statements in our Annual Report on Form 10-K for the year
ended December 31, 2003 and the Quarterly Report on Form 10Q for the three
months ended March 31, 2003.

The year-end balance sheet at December 31, 2003 was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.  Please refer to the audited financial
statements in our Annual Report on Form 10-K for the year ended December 31,
2003.

Reclassifications:

Certain amounts in our prior years consolidated financial statements have
been reclassified to conform to the current year presentation.  These
reclassifications have no impact on our previously reported results of
operations or stockholders' equity.

Recent Accounting Pronouncements

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

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity."  SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.  SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances).  Many of those
instruments were previously classified as equity.  SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first fiscal period beginning after June
15, 2003.  SFAS No. 150 is to be implemented by reporting the cumulative effect
of a change in an accounting principle for financial instruments created before
the issuance date of SFAS No. 150 and still existing at the beginning of the
interim period of adoption.  Restatements are not permitted under SFAS No. 150.
The adoption of SFAS No. 150 did not have a significant impact on our
consolidated financial statements.

6

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In March 2004, the FASB approved EITF Issue 03-6 "Participating Securities
and the Two-Class Method under SFAS 128".  EITF Issue 03-6 supersedes the
guidance in Topic No. D-95, "Effect of Participating Convertible Securities on
the Computation of Basic Earnings per Share", and requires the use of the two-
class method of participating securities.  The two-class method is an earnings
allocation formula that determines earnings per share for each class of common
stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings.  In addition,
EITF Issue 03-6 addresses other forms of participating securities, including
options, warrants, forwards and other contracts to issue an entity's common
stock, with the exception of stock-based compensation (unvested options and
restricted stock) subject to the provisions of APB No. 25 and SFAS No. 123.
EITF Issue 03-6 is effective for reporting periods beginning after March 31,
2004 and should be applied by restating previously reported EPS.  As of March
31, 2004, we do not have any securities issued and outstanding subject to this
pronouncement.  Therefore, the adoption of EITF Issue 03-6 will not have any
impact on the disclosure of EPS.

2.  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
                                                                      March 31,
                                                              ------------------------
                                                                 2003         2004
                                                              -----------  -----------
Numerator - basic
  Net income (loss)......................................... $   (10,665) $    14,233
                                                              ===========  ===========
Denominator - basic
  Weighted average common stock outstanding.................      94,186       95,821
                                                              ===========  ===========

Basic net income (loss) per share........................... $     (0.11) $      0.15
                                                              ===========  ===========

Numerator - diluted
  Net income (loss)......................................... $   (10,665) $    14,233
                                                              ===========  ===========
Denominator - diluted

  Weighted average common stock outstanding.................      94,186       95,821
  Dilutive potential of common stock equivalents:
      Options...............................................          --        4,437
                                                              -----------  -----------
                                                                  94,186      100,258
                                                              ===========  ===========

Diluted net income (loss) per share......................... $     (0.11) $      0.14
                                                              ===========  ===========`



Stock options to purchase 10,215,000 shares of common stock were outstanding
as of March 31, 2003 with a weighted average exercise price of $7.59.  These
stock options were not included in the computation of diluted net loss per share
for the three months ended March 31, 2003 because we had a net loss for this
period. Anti-dilutive stock options to purchase 1,715,000 shares of common stock
with weighted average exercise price of  $12.12 were excluded from the
computation of diluted net income per share for the three months ended March 31,
2004 because the exercise price of these options exceeded the average fair
market value of our common stock for the three months ended March 31, 2004.

Stock Compensation:

We account for stock-based compensation using the intrinsic value method.  No
compensation cost has been recognized for the stock option plans or the employee
stock purchase plan.  Had compensation cost for these plans been determined
based on the fair value at the grant date for the awards, our net income (loss)
and net income (loss) per share for the three months ended March 31, 2003 and
2004 would have been as follows, respectively:

7

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`Three Months Ended
                                                                    March 31,
                                                              --------------------
                                                                2003       2004
                                                              ---------  ---------
Net income (loss), as reported.............................. $ (10,665) $  14,233
Deduct: total stock-based employee compensation
   expense determined under fair value based method,
   net of tax...............................................    (1,821)    (1,952)
                                                              ---------  ---------
Pro forma net income (loss)................................. $ (12,486) $  12,281
                                                              =========  =========
Pro forma net income (loss) per share - basic............... $   (0.13) $    0.13
                                                              =========  =========
Pro forma net income (loss) per share - diluted..............$   (0.13) $    0.12
                                                              =========  =========`



3.  Investments



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 corporate debt 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
three months ended March 31, 2004 were not material.

King Yuan Electronics Company Limited, or KYE, Insyde Software Corporation,
or Insyde, Powertech Technology, Incorporated, or PTI, and Professional Computer
Technology Limited, or PCT, are Taiwanese companies that are listed on the
Taiwan Stock Exchange.  Investments in these companies have been included in
"Long-term available-for-sale investments."  The investment not available for
resale due to local securities regulations within one year at the balance sheet
date is recorded at the investment cost.  The investment available for resale
within one year at the balance sheet date is recorded at fair market value, with
unrealized gains and losses, net of tax, reported in shareholders' equity as
other comprehensive income. If a loss is other than temporary, it is reported as
an "Impairment of equity investments."  Dividends and other
distributions of earnings from the investees, if any, are included in other
income when declared.

The fair value of available-for-sale investments as of March 31, 2004
were as follows (in thousands):

8

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`Amortized   Unrealized     Unrealized        Fair
                                                 Cost         Gain           Loss           Value
                                              -----------  -----------    -----------    -----------
Corporate bonds and notes................... $        32  $        --   $         --   $         32
Government bonds and notes..................     103,922           23             (3)       103,942
Foreign listed equity securities............       5,412       14,083             --         19,495
                                              -----------  -----------    -----------    -----------
Total bonds, notes and equity securities.... $   109,366  $    14,106   $         (3)       123,469
                                              ===========  ===========    ===========
Less amounts classified as cash equivalents...........................                      (10,515)
                                                                                         -----------
      Total short and long-term available-for-sale investments........                 $    112,954
                                                                                         ===========
Contractual maturity dates for investments in bonds and notes:
      Less than 1 year................................................                 $     87,561
      1 to 5 year.....................................................                        5,898
                                                                                         -----------
                                                                                       $     93,459
                                                                                         ===========`

The net unrealized gains as of March 31, 2004 are recorded in accumulated
other comprehensive income, net of tax.

The fair value of available-for-sale investments as of December 31, 2003 were
as follows (in thousands):

`Amortized   Unrealized     Unrealized        Fair
                                                 Cost         Gain           Loss           Value
                                              -----------  -----------    -----------    -----------
Corporate bonds and notes................... $       184  $        --   $         --   $        184
Government bonds and notes..................     158,382           14             --        158,396
Foreign listed equity securities............       3,759        9,265           (101)        12,923
                                              -----------  -----------    -----------    -----------
Total bonds, notes and equity securities.... $   162,325  $     9,279   $       (101)       171,503
                                              ===========  ===========    ===========
Less amounts classified as cash equivalents...........................                      (85,965)
                                                                                         -----------
      Total short and long-term available-for-sale investments........                 $     85,538
                                                                                         ===========
Contractual maturity dates for investments in bonds and notes:
      Less than 1 year................................................                 $     60,569
      1 to 5 year.....................................................                       12,046
                                                                                         -----------
                                                                                       $     72,615
                                                                                         ===========`

The unrealized gains as of December 31, 2003 are recorded in accumulated
other comprehensive income, net of tax.

At March 31, 2004, we have an investment in GSMC of $83.2 million
representing an 11.0% of interest of GSMC.  GSMC operates a wafer fabrication
facility and is privately held.  We use the cost method of accounting for this
investment.

4.  Selected Balance Sheet Detail

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

Inventories comprise:

`December 31,    March 31,
                                                              2003           2004
                                                           -----------    -----------
Raw materials............................................ $    20,735   $     32,975
Work in process..........................................      11,265         15,406
Finished goods...........................................       9,579         15,053
Inventories held at logistics center.....................       4,541          6,492
                                                           -----------    -----------
                                                          $    46,120   $     69,926
                                                           ===========    ===========`

9

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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. Due to the
large number of units in our inventory, even a small change in average selling
prices could result in a significant adjustment and have a material impact on
our financial position and results of operations.  Our inventories include high
technology parts and components that are specialized in nature or subject to
rapid technological obsolescence. Some of our customers have requested that we
ship them product that has a finished goods date of manufacture that is less
than one year old.  In the event that this becomes a common requirement, it may
be necessary for us to provide for an additional allowance for our on hand
finished goods inventory with a date of manufacture of greater than one year
old, which could result in a material adjustment and could harm our financial
results.  As of March 31, 2004, our allowance for excess and obsolete
inventories includes an allowance for our on hand finished goods inventory with
a date of manufacture of greater than two years old and for certain products
with a date of manufacture of greater than one year old.  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 estimates could have a material impact on our financial position and
results of operations.

Accrued expenses and other liabilities comprise:

`December 31,    March 31,
                                                              2003           2004
                                                           -----------    -----------
Accrued compensation and related items................... $     4,911   $      6,550
Accrued income tax payable...............................         659             --
Accrued liabilities-related parties......................         569            694
Accrued warranty.........................................         187            120
Other accrued liabilities................................       5,585          8,507
                                                           -----------    -----------
                                                          $    11,911   $     15,871
                                                           ===========    ===========`



Changes in the warranty reserves during the first fiscal quarter of 2003 and
2004 were as follows (in thousands):

`Three Months    Three Months
                                                              Ended          Ended
                                                         March 31, 2003   March 31, 2004
                                                           -----------     -----------
Beginning balance........................................ $       492   $        187
Provisions for warranty..................................         207             74
Comsumption of reserves..................................        (210)          (141)
                                                           -----------    -----------
Ending balance........................................... $       489   $        120
                                                           ===========    ===========`



Our products are generally subject to warranty and we provide for the
estimated future costs of repair, replacement or customer accommodation upon
shipment of the product in the accompanying statements of operations. Our
warranty accrual is estimated based on historical claims compared to historical
revenues and assumes that we have to replace products subject to a claim. For
new products, we use our historical percentage for the appropriate class of
product.

10

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5.  Commitments

As of March 31, 2004, we had outstanding purchase commitments with our
foundry vendors of $92.0 million for delivery in 2004. We have recorded a
liability of $684,000 for adverse purchase commitments.

During the third quarter of 2001, we recorded a period charge to other
operating expense of $756,000 relating to an operating lease for an abandoned
building. This charge represented the estimated difference between the total
non-discounted future sublease income and our non-discounted lease commitments
relating to this building. The charge was an estimate 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 decrease in demand for commercial rental space in
Silicon Valley. If we are not successful in subleasing our unused office space,
we may be required to take an additional period charge for the balance of the
future lease cost.  At December 31, 2003 and March 31, 2004, payments made have
reduced the recorded liability to $270,000 and $218,000, respectively.

Our technology license agreements generally include an indemnification clause
that indemnifies the licensee against liability, damages and legal defense costs
arising from any claims of patent, copyright, trademark or trade secret
infringement by our proprietary technology.  The terms of these guarantees
approximate the terms of the technology license agreements, which typically
range from five to ten years, with an automatic renewal provision.  Our current
license agreements expire from 2003 through 2014.  The maximum possible amount
of future payments we could be required to make, if such indemnifications were
required on all of these agreements, is $37.7 million.  We have not recorded any
liabilities as of March 31, 2004 related to these indemnities.

During our normal course of business, we have made certain indemnities,
commitments and guarantees under which we may be required to make payments in
relation to certain transactions.  These include indemnities to various lessors
in connection with facility leases for certain claims arising from such facility
or lease, and indemnities to our directors and officers to the maximum extent
permitted under the laws of California.  In addition, we have contractual
commitments to some customers, which could require us to incur costs to repair
an epidemic defect with respect to our products outside the normal warranty
period if such defect were to occur.  The duration of these indemnities,
commitments and guarantees varies.  The majority of these indemnities,
commitments and guarantees do not provide for any limitation of the maximum
potential future payments that we could be obligated to make.  We have not
recorded any liability for these indemnities, commitments and guarantees in the
accompanying condensed consolidated balance sheets. We do, however, accrue for
losses for any known contingent liability, including those that may arise from
indemnification provisions, when future payment is probable.

6.  Contingencies

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

The other patent remaining in the case, the `903 patent, expired in September
2001.  The trial court has held that, if it is found to be valid, certain of our
products infringed that patent. The trial to determine whether the `903 patent
is invalid began on July 29, 2002.  On August 5, 2002 the jury announced that it
was unable to reach a verdict on our invalidity defense, and a mistrial was
declared.  Atmel requested a new trial, but the Court stayed the matter until
after our appeal of the earlier judgment is resolved.  At Atmel's request, the
Court has directed the parties to conduct a settlement conference before a
Magistrate Judge.  That settlement conference was originally scheduled for April
14, 2004 and subsequently rescheduled for May 27, 2004.  If the parties are
unable to reach a settlement agreement, the Court may set a date for a new
trial.  The impact related to the outcome of the remaining patent is
undeterminable at this time.

11

---

From time to time, we are also involved in other legal actions arising in the
ordinary course of business.  We have accrued certain costs associated with
defending these matters.  There can be no assurance the remaining Atmel
complaint or other third party assertions will be resolved without costly
litigation, in a manner that is not adverse to our financial position, results
of operations or cash flows or without requiring royalty payments in the future
which may adversely impact gross margins. No estimate can be made of the
possible loss or possible range of loss associated with the resolution of these
contingencies.  As a result, no losses have been accrued in our financial
statements as of March 31, 2004.

7.  Segment Reporting

Our operations involve the design, development, manufacturing, marketing
and technical support of our nonvolatile memory technology and 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.

We manage our business in four reportable segments: the Standard Memory
Product Group, or SMPG, the Application Specific Product Group, or ASPG, the
Special Product Group, or SPG, and Technology Licensing.  We do not allocate
operating expenses, interest and other income, interest expense, impairment of
equity investments and provision for or benefit from income taxes to any of
these segments for internal reporting purposes, as we do not believe that
allocating these expenses are material in evaluating a business unit's
performance.

SMPG includes our three standard flash memory product families: the
 Multi-Purpose Flash, or MPF, family,  the Multi-Purpose Flash Plus, or MPF+, family
and the Many-Time Programmable, or MTP, family. These product families allow us
to produce products optimized for cost and functionality to support a broad
range of mainstream applications that use nonvolatile memory products.
Effective January 1, 2003, we transferred certain MTP products from SMPG to SPG.
Effective July 1, 2003, we transferred the Small Sector Flash, or SSF, family
from SMPG to SPG.  Effective January 1, 2004, we transferred the last MTP series
of products from SMPG to SPG. Accordingly, our segment revenues and gross margin
information have been reclassified for presentation purposes as if the transfer
occurred as of January 1, 2003.

ASPG includes Concurrent SuperFlash, Serial Flash, Firmware Hub, or FWH, and
Low Pin Count, or LPC, flash products. These products are designed to address
specific applications such as cellular phones, hard disk drives and PCs. ASPG
also includes flash embedded controllers such the ATA flash disk controller to
consumer, industrial and mass data storage applications.  Effective January 1,
2003, we transferred FlashFlex51 microcontroller products from ASPG to SPG.
Accordingly, our segment revenues and gross margin information have been
reclassified for presentation purposes as if the transfer occurred as of January
1, 2003.

SPG includes ComboMemory, ROM/RAM Combos, the Small Sector Flash, or SSF,
family, Multi-Time Programmable, or MTP, family, FlashFlex51 microcontrollers
and other special flash products. These products are used in applications
requiring low power and a small form factor such as cellular phones, wireless
moderns, MP3 players, pagers and digital organizers. Effective January 1, 2003,
we transferred certain MTP products from SMPG to SPG and FlashFlex51
microcontroller products from ASPG to SPG.  Effective July 1, 2003, we
transferred the SSF family from SMPG to SPG. Effective January 1, 2004, we
transferred the last MTP series of products from SMPG to SPG.  Accordingly, our
segment revenues and gross margin information have been reclassified for
presentation purposes as if the transfer occurred as of January 1, 2003.

Technology Licensing includes both license fees and royalties.

12

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

`Three Months Ended            Three Months Ended
                                                    March 31, 2003                March 31, 2004
                                              -------------------------     -------------------------
                                                              Gross                         Gross
                                               Revenues    Profit (Loss)     Revenues       Profit
                                              -----------  ------------     -----------  ------------
SMPG........................................ $    33,225  $     (1,649)    $    64,333  $     16,727
ASPG........................................      13,797         2,515          18,075         5,406
SPG.........................................       6,899           554           8,962         2,955
Technology Licensing........................       7,788         7,788          13,063        13,063
                                              -----------  ------------     -----------  ------------
                                             $    61,709  $      9,208     $   104,433  $     38,151
                                              ===========  ============     ===========  ============`



8.  Comprehensive Income (Loss)

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

`Three Months Ended
                                                                      March 31,
                                                              ------------------------
                                                                 2003         2004
                                                              -----------  -----------
Net income (loss)........................................... $   (10,665) $    14,233

Other comprehensive income:
   Change in net unrealized gains
      on investments, net of tax............................        (144)       4,925
                                                              -----------  -----------
Total comprehensive income (loss)........................... $   (10,809) $    19,158
                                                              ===========  ===========`



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

`December 31,    March 31,
                                                           2003          2004
                                                       ------------  ------------
Net unrealized gains on investments, net of tax...... $      9,178  $     14,103
                                                       ============  ============`





9.  Related Party Transactions and Balances

The following table is a summary of our related party revenues and
purchases for the three months ended March 31, 2003 and 2004, and our related
party accounts receivable and accounts payable and accruals as of December 31,
2003 and March 31, 2004 (in thousands):

13

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`Three Months Ended             Three Months Ended
                                                    March 31, 2003                March 31, 2004
                                              -------------------------     -------------------------
                                               Revenues      Purchases       Revenues      Purchases
                                              -----------  ------------ -----------  ------------
Silicon Technology Co., Ltd................. $       387  $         --     $     1,596  $         --
Ambit Microsystems Corp.......................        --            --              --            --
Apacer Technology, Inc. & related entities..         386           133             595           707
Professional Computer Technology Limited......        --            --              --            --
Silicon Professional Technology Ltd.........      35,032            --          56,368            --
Grace Semiconductor Manufacturing Corp........        --            --              --         6,949
King Yuan Electronics Company, Limited......          --         3,896              --         8,185
Powertech Technology, Incorporated..........          --         2,260              --         3,196
                                              -----------  ------------     -----------  ------------
                                             $    35,805  $      6,289     $    58,559  $     19,037
                                              ===========  ============     ===========  ============


                                                   December 31, 2003              March 31, 2004
                                              -------------------------     -------------------------
                                                              Trade                         Trade
                                                 Trade       Accounts          Trade       Accounts
                                               Accounts    Payable and       Accounts    Payable and
                                              Receivable     Accruals       Receivable     Accruals  
                                              -----------  ------------     -----------  ------------
Silicon Technology Co., Ltd................. $       232  $         --     $       758  $         --
Ambit Microsystems Corp.......................        --             4              --            12
Apacer Technology, Inc. & related entities..         400           736             380           405
Professional Computer Technology Limited....          --            15              --            --
Silicon Professional Technology Ltd.........      40,588           550          47,031           682
Grace Semiconductor Manufacturing Corp........        --            --              --         5,624
King Yuan Electronics Company, Limited......          --         6,896              --         8,281
Powertech Technology, Incorporated..........          --         2,533              --         2,538
                                              -----------  ------------     -----------  ------------
                                             $    41,220  $     10,734     $    48,169  $     17,542
                                              ===========  ============     ===========  ============`



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

Income Taxes

We determined that based upon our historical losses and other available
objective evidence that there is sufficient uncertainty regarding the
realizability of our deferred tax assets such that a full valuation allowance
was required.  Accordingly, we maintain a valuation allowance against our
deferred tax assets of $27.4 million at March 31, 2004.

14

---



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

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

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

Overview

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

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

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

We derived 88.5%, 90.0% and 86.8% of our net product revenues during 2002,
2003 and the three months ended March 31, 2004, respectively, from product
shipments to Asia. Additionally, substantially all of our wafer suppliers and
packaging and testing subcontractors are located in Asia.

Our top ten end customers, which excludes transactions through stocking
representatives and distributors, accounted for 36.8%, 37.7% and 43.5% of our
net product revenues in 2002, 2003 and the three months ended March 31, 2004,
respectively.

No single end customer, which we define as original equipment manufacturers,
or OEMs, original design manufacturers, or ODMs, contract electronic
manufacturers, or CEMs, or end users, represented 10.0% or more of our net
product revenues during 2002, 2003 or the three months ended March 31, 2004.

Since March 2001, we have been increasing our out-sourcing activities for our
customer service logistics to support our customers.  Currently Silicon
Professional Technology Ltd., or SPT, supports our customers in Taiwan, China
and other Southeast Asia countries.  SPT provides planning, warehousing,
delivery, billing, collection and other logistic functions for us in these
regions.  SPT is a wholly-owned subsidiary of one of our stocking
representatives in Taiwan, Professional Computer Technology Limited, or PCT.
Please see a description of our relationship with PCT under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Related Party Transactions" in our Annual Report on Form 10-K for
the year ended December 31, 2003. Products shipped to SPT are accounted for as
consigned inventory, and revenue is recognized when the products have been
delivered and are considered as a sale to our end customers by SPT. For the year
ended December 31, 2003 and the three months ended March 31, 2004, SPT serviced
end customer sales accounting for 64.2% and 61.7% of our net product revenues
recognized. As of December 31, 2003 and March 31, 2004, SPT represented 73.4%
and 69.3% of our net accounts receivable, respectively.

15

---

We ship products to, and have accounts receivable from, OEMs, ODMs, CEMs,
stocking representatives, distributors, and our logistics center. Our stocking
representatives, distributors and logistics center reship our products to our
end customers, including OEMs, ODMs, CEMs and end users.  Shipments, by us or
our logistic center, to our top three stocking representatives for reshipment
accounted for 16.9%, 29.9% and 38.2% of our product shipments in 2001, 2002 and
the three months ended March 31, 2004, respectively.  In addition, the same
three stocking representatives solicited sales, for which they received a
commission, for 41.3%, 32.8% and 26.8% of our shipments to end users in 2002,
2003 and the three months ended March 31, 2004, respectively.

Critical Accounting Estimates

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

Results of Operations: Quarter Ended March 31, 2004

Net Revenues

Net revenues were $104.4 million for the first quarter of 2004 as
compared to $95.2 million in the fourth quarter of 2003 and $61.7 million for
the first quarter of 2003.  Net revenues increased compared to the fourth
quarter of 2003 and the first quarter of 2003 due to increased average selling
prices for our products across all densities and increased shipment of higher
density products.

Product Revenues.  Product revenues were $91.4 million in the first
quarter of 2004 as compared to $82.4 million in the fourth quarter of 2003 and
$53.9 million in the first quarter of 2003.  Product revenues increased compared
to the fourth quarter of 2003 due to increased average selling prices for our
products of 16.1% and increased units shipment of our higher density products of
28.7%. Product revenues increased compared to the first quarter of 2003 due to
increased average selling prices for our products of 23.6% and increased units
shipment of our products of 36.5%. Unit shipments fluctuate due to overall
industry supply and demand.

Technology Licensing Revenues.  Revenues from license fees and
royalties were $13.1 million in the first quarter of 2004, as compared to $12.9
million in the fourth quarter of 2003 and $7.8 million in the first quarter of
2003.   Revenues from license fees and royalties are recognized upon the
licensees's acceptance of the delivery of our engineering milestones.  Revenues
from technology licensing fluctuate upon the timing of the delivery of
engineering milestones.  We anticipate that revenues from technology licensing
may fluctuate significantly in the future.

Gross Profit

Gross profit was $38.2 million, or 36.5% of net revenues, in the first
quarter of 2004 as compared to gross profit of $32.5 million, or 34.1% of net
revenues, in the fourth quarter of 2003 and $9.2 million, or 14.9% of net
revenues, in the first quarter of 2003.  The increase in gross profit from the
fourth quarter of 2003 to the first quarter of 2004 is primarily due to
increased average selling prices of our products of 16.1%, increased unit
shipments of our higher density products, lower average unit costs and increased
license revenues of $197,000 The increase in gross profit in the first quarter
of 2004 when compared to the first quarter of 2003 is due primarily to increases
in average selling prices and unit shipments.  Product gross margin was 27.5%
for the first quarter of 2004, compared to 23.8% for the fourth quarter of 2003
and 2.6% for the first quarter of 2003.  The increase in product gross margin
from the fourth quarter of 2003 to the first quarter of 2004 primarily relates
to the improvement of overall manufacturing costs. The increase in product gross
margin from the first quarter of 2003 to the first quarter of 2004 relates to
increased average selling prices of our products by 23.6%.  For other factors
affecting our gross profit, please also see "Business Risks - We incurred
significant inventory valuation adjustments in 2001, 2002 and 2003 and we may
incur additional significant inventory valuation adjustments in the future."

16

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Operating Expenses

Our operating expenses consist of research and development, sales and
marketing, and general and administrative expenses.  Operating expenses were
$22.7 million, or 21.8% of net revenues, in the first quarter of 2004, compared
to $21.7 million, or 22.7% of net revenues, in the fourth quarter of 2003, and
$20.3 million, or 32.9% of net revenues, in the first quarter of 2003. The
increase of $1.0 million and $2.4 million from the fourth quarter of 2003 and
the first quarter of 2003, respectively, were primarily due to employee profit
sharing expenses of $1.7 million in the first quarter of 2004 and payroll
related expenses as a result of employee salary adjustments in March 2004 offset
by a decrease in legal expenses of $664,000 and bad debt expenses of $203,000.
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 may increase in dollars.

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 and benefits and the cost of
materials such as masks, wafers and evaluation parts.  Research and development
expenses were $11.8 million, or 11.3% of net revenues, during the first quarter
of 2004, as compared to $10.3 million, or 10.9% of net revenues, during the
fourth quarter of 2003 and $10.8 million, or 17.4% of net revenues, during the
first quarter of 2003.  Research and development expenses increased by 14.2%
from the fourth quarter of 2003 due primarily to an increase of  $827,000  in
employee profit sharing and $602,000 in payroll related expenses offset by a
decrease of expenses in engineering wafers, software license support and design
expenses of $252,000. Research and development expenses increased by 9.7% from
the first quarter of 2003 due primarily to an increase of  $827,000 in employee
profit sharing, $183,000 in payroll related expenses, and $903,000 in masks
offset by a decrease of expenses in depreciation of $321,000, outside services
of $113,000 and software license and support of $93,000. We expect that research
and development expenses may increase in dollars.

Sales and marketing.  Sales and marketing expenses consist of
commissions, headcount and related costs, as well as travel, entertainment and
promotional expenses.  Sales and marketing expenses were $6.9 million, or 6.6%
of net revenues, in the first quarter of 2004, as compared to $5.8 million, or
6.1% of net revenues, in the fourth quarter of 2003 and $6.0 million, or 9.6% of
net revenues, during the first quarter of 2003.  The increase in sales and
marketing expenses by 18.6% from the fourth quarter of 2003 to the first quarter
of 2004 was primarily attributable to an increase of $477,000 in commission and
$325,000 in employee profit sharing expenses,$142,000 in payroll related
expenses and $56,000 in patent fees.  The increase in sales and marketing
expenses by 16.4% from the first quarter of 2003 to the first quarter of 2004
was primarily attributable to an increase of $409,000 in commission, $319,000 in
logistic center fees, $325,000 in employee profit sharing and $72,000 in payroll
related expenses. Fluctuations in revenues will cause fluctuations in sales and
marketing expenses as it impacts our commission expenses.  In future periods, we
expect sales and marketing expenses will increase in dollars as we continue to
expand our sales and marketing efforts.

General and administrative.  General and administrative expenses
consist of salaries and related costs for administrative, executive and finance
personnel, recruiting costs, professional services and legal fees and allowances
for doubtful accounts.  General and administrative expenses were $4.0 million,
or 3.8% of net revenues, in the first quarter of 2004, as compared to $4.1
million, or 4.3% of net revenues, in the fourth quarter of 2003 and $3.6
million, or 5.8% of net revenues, during the first quarter of 2003.  Expenses
decreased from the fourth quarter of 2003 primarily due to a decrease of legal
fee and bad debt expenses of $867,000 offset by the increased employee profit
sharing and payroll related expenses of $506,000.  The increase in general and
administrative expenses of 11.6% from the first quarter of 2003 was primarily
due to increased employee profit sharing expenses of $350,000, bad debt expenses
of $113,000 and accounting fees of $84,000 offset by decreased payroll related
expenses of $171,000. We anticipate that general and administrative expenses may
increase in dollars as we scale our facilities, infrastructure, and headcount to
support our overall expected growth.  We may also incur additional expenses in
connection with the Atmel litigation.  For further information on this
litigation see "Legal Proceedings."

Interest and other income. Interest and other income was $384,000,
or 0.4% of net revenues, during the first quarter of 2004, as compared to
$420,000, or 0.4% of net revenues, during the fourth quarter of 2003 and
$456,000, or 0.7% of net revenues, during the first quarter of 2003. Interest
income decreased both from the fourth and first quarters of 2003 to the first
quarter of 2004 due to decreasing invested cash.

17

---

Interest expense.  Interest expense was $44,000 for the first
quarter of 2004 as compared to $29,000 for the fourth quarter of 2003 and
$38,000 for the first quarter of 2003.  Interest expense relates to interest to
our notes payable.

Provision for Income Taxes

Our provision for taxes reflects a full valuation allowance.  During the
first quarter of 2004, we maintained a full valuation allowance on our net
deferred tax assets. The valuation allowance was determined in accordance with
the provisions of Statement of Financial Accounting Standards No. 109
("SFAS No. 109"), "Accounting for Income Taxes," which
requires an assessment of both positive and negative evidence when determining
whether it is more likely than not that deferred tax assets are recoverable;
such assessment is required on a jurisdiction by jurisdiction basis. Cumulative
losses incurred in the U.S. in recent years represented sufficient negative
evidence under SFAS No. 109 and accordingly, a full valuation allowance was
recorded against U.S. deferred tax assets. We intend to maintain a full
valuation allowance on the U.S. deferred tax assets until sufficient positive
evidence exists to support reversal of the valuation allowance. In 2003, we
implemented an international tax structure, which in conjunction with the full
valuation allowance, will mean that going forward we will record a tax provision
as a result of foreign tax withholding and alternative minimum tax until such
time that the valuation allowance against the deferred tax asset is no longer
required.  For the first quarter of 2004, our income tax provision was $1.5
million on pre-tax income of $15.8 million mainly consisting of foreign
withholding taxes.

Segment Reporting

We manage our business in four reportable segments: SMPG, ASPG, SPG and
Technology Licensing.  Refer to Note 7 of the Notes to the Condensed
Consolidated Financial Statements for revenue and gross profit information by
reportable segment.

SMPG includes our three standard flash memory product families: the MPF
family, the MPF+ family and the MTP family. Effective January 1, 2003, we
transferred certain MTP products from SMPG to SPG. Effective July 1, 2003, we
transferred the Small Sector Flash, or SSF, family from SMPG to SPG.  Effective
January 1, 2004, we transferred the last MTP series of products from SMPG to
SPG. Accordingly, our segment revenues and gross margin information have been
reclassified for presentation purposes as if the transfer occurred as of January
1, 2003.  SMPG revenues were $64.3 million for the first quarter of 2004, as
compared to $55.2 million in the fourth quarter of 2003 and $33.2 million in the
first quarter of 2003.  The increase in revenues, both from the fourth and first
quarters of 2003, was primarily due to higher average selling prices by 21.8%
and 39.0%, respectively, offset by decreased unit shipments by 0.9% in the
fourth quarter of 2003 and increased unit shipment by 30.6% in the first quarter
of 2003.  Gross margin increased from 24.2% in the fourth quarter of 2003 to
26.0% in the first quarter of 2004 primarily due to changes in product mix and
increases in average selling prices.  Gross margin increased from negative 5.0%
in the first quarter of 2003 to 26.0% in the first quarter of 2004 primarily due
to higher average selling prices and changes in product mix.

ASPG includes Concurrent SuperFlash, Serial Flash, Firmware Hub, or FWH, and
Low Pin Count, or LPC, flash products.  ASPG also includes flash embedded
controllers such as the ATA controller. Effective January 1, 2003, we
transferred FlashFlex51 microcontroller products from ASPG to SPG. Accordingly,
our segment revenues and gross margin information have been reclassified for
presentation purposes as if the transfer occurred as of January 1, 2003.  ASPG
revenues were $18.1 million for the first quarter of 2004, as compared to $19.0
million in the fourth quarter of 2003 and $13.8 million in the first quarter of
2003.  The decrease in revenues from the fourth quarter of 2003 was primarily
due to lower average selling prices by 2.8% and lower unit shipments by 4.2%.
The increase in revenues from the first quarter of 2003 was primarily due to
higher unit shipments by 63.6%.  Gross margin increased from 24.1% in the fourth
quarter of 2003 to 29.9% in the first quarter of 2004 primarily due to decreased
average unit costs.  Gross margin increased from 18.2% in the first quarter of
2003 to 29.9% in the first quarter of 2004 primarily due to increase in average
selling prices and product mix.

SPG includes ComboMemory, ROM/RAM Combos, SSF, MTP, FlashFlex51
microcontrollers and other special flash products. Effective January 1, 2003, we
transferred certain MTP products from SMPG to SPG and FlashFlex51
microcontroller products from ASPG to SPG.  Effective July 1, 2003, we
transferred the SSF family from SMPG to SPG. Effective January 1, 2004, we
transferred the last MTP series of products from SMPG to SPG.  Accordingly, our

18

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Revenue and gross profit related to technology licensing was $13.1 million in
the first quarter of 2004, as compared to $12.9 million in the fourth quarter of
2003 and $7.8 million in the first quarter of 2003.   Revenues from license fees
and royalties are recognized upon the licensees's acceptance of the delivery of
our engineering milestones.  Revenues from technology licensing fluctuate upon
the timing of the delivery of engineering milestones.  We anticipate that
revenues from technology licensing may fluctuate significantly in the
future.

Related Party Transactions and Balances

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

`Three Months Ended             Three Months Ended
                                                   March 31, 2003                 March 31, 2004
                                              -------------------------     -------------------------
                                               Revenues      Purchases       Revenues      Purchases
                                              -----------  ------------ -----------  ------------
Silicon Technology Co., Ltd................. $       387  $         --     $     1,596  $         --
Ambit Microsystems Corp.......................        --            --              --            --
Apacer Technology, Inc. & related entities..         386           133             595           707
Professional Computer Technology Limited......        --            --              --            --
Silicon Professional Technology Ltd.........      35,032            --          56,368            --
Grace Semiconductor Manufacturing Corp........        --            --              --         6,949
King Yuan Electronics Company, Limited......          --         3,896              --         8,185
Powertech Technology, Incorporated..........          --         2,260              --         3,196
                                              -----------  ------------     -----------  ------------
                                             $    35,805  $      6,289     $    58,559  $     19,037
                                              ===========  ============     ===========  ============


                                                   December 31, 2003              March 31, 2004
                                              -------------------------     -------------------------
                                                              Trade                         Trade
                                                 Trade       Accounts          Trade       Accounts
                                               Accounts    Payable and       Accounts    Payable and
                                              Receivable     Accruals       Receivable     Accruals  
                                              -----------  ------------     -----------  ------------
Silicon Technology Co., Ltd................. $       232  $         --     $       758  $         --
Ambit Microsystems Corp.......................        --             4              --            12
Apacer Technology, Inc. & related entities..         400           736             380           405
Professional Computer Technology Limited....          --            15              --            --
Silicon Professional Technology Ltd.........      40,588           550          47,031           682
Grace Semiconductor Manufacturing Corp........        --            --              --         5,624
King Yuan Electronics Company, Limited......          --         6,896              --         8,281
Powertech Technology, Incorporated..........          --         2,533              --         2,538
                                              -----------  ------------     -----------  ------------
                                             $    41,220  $     10,734     $    48,169  $     17,542
                                              ===========  ============     ===========  ============
19`





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

Liquidity and Capital Resources

Operating activities.  Our operating activities used cash of
$3.6 million for the three months ended March 31, 2004 as compared to generated
cash of $15.1 million for the three months ended March 31, 2003.  For the three
months ended March 31, 2004, our primary usage of operating cash flow were the
increased purchases of inventory and increased accounts receivable from both
related and unrelated parties offset by the increase of accounts payable to
unrelated parties. The increase of accounts receivable from both related and
unrelated parties is due to the increase of sales in the quarter.  We measure
the effectiveness of our collection efforts by an analysis of average days sales
outstanding.  Days sales outstanding were 59 days in the first quarter of 2004
as compared to 46 days in the first quarter of 2003. Collections of accounts
receivable and related days sales outstanding will fluctuate in future periods
due to the timing and amount of our future revenues, customer payment terms and
the effectiveness of our collection efforts.

Investing activities.  Our investing activities used cash of $57.6
million for the first quarter of 2004 as compared to $7.8
million for the first quarter of 2003.  Investing activities in the first
quarter of 2004 were primarily related to our additional investments in Grace
Semiconductor Manufacturing Corporation of $33.2 million and net purchases of
available-for-sale investments of $23.5 million.  Additional uses of cash
included capital expenditures of  $1.8 million.  Investing activities in the
first quarter of 2003 were primarily related to net purchases of available-for-
sale investments and equity investments of $7.2 million and capital expenditures
of  $513,000.

Financing activities.  Our financing activities provided cash of
$2.0 million and $1.8 million during the first quarter of 2004 and 2003,
respectively.  Cash generated from financing activities primarily related to
issuance of common stock under the employee stock purchase plan and the exercise
of employee stock options totaling $2.1 million and $1.8 million in the first
quarters of 2004 and 2003, respectively.

Principal sources of liquidity at March 31, 2004 consisted of $153.0
million of cash, cash equivalents, and short-term and long-term available-for-
sale investments.

Purchase Commitments. As of March 31, 2004, we had outstanding
purchase commitments with our foundry vendors of  $92.0 million for delivery in
2004.  We have recorded a liability of $684,000 for adverse purchase
commitments.

Lease Commitments. We have long-term,
non-cancelable building lease commitments.  We are currently seeking subtenants for
our unused office space.  During the third quarter of 2001, we recorded a period
charge to other operating expense of  $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 was an estimate 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 this space due to the recent decrease in demand for commercial
rental space in Silicon Valley. At December 31, 2003 and March 31, 2004,
payments made have reduced the recorded liability to $270,000 and $218,000,
respectively.   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."

Future payments due under building lease, purchase commitments and other
contractual obligations as of March 31, 2004 (in thousands):

20

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`Less than                        More than
Contractual obligations          Total     1 year    1-3 years  3-5 years   5 years
-----------------------------  ---------  ---------  ---------  ---------  ---------
Notes payable................ $     776  $     404  $     372  $      --  $      --
Operating leases.............    18,875      5,262      5,573      5,205      2,835
Purchase commitments.........    91,970     91,970         --         --         --
Other long-term liability....       860         --        860         --         --
                               ---------  ---------  ---------  ---------  ---------
Total........................ $ 112,481  $  97,636  $   6,805  $   5,205  $   2,835
                               =========  =========  =========  =========  =========`



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



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

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

On May 7, 2002, a judgment was entered against us regarding the infringement
of two U.S. patents in the amount of $36.5 million.  We appealed the judgment on
July 16, 2002.  On September 12, 2003 the Court of Appeals upheld the jury's
verdict.  On November 18, 2003 the Court of Appeals denied our request for a
rehearing and in December 2003 we paid Atmel $37.8 million to satisfy the
judgment including statutory interest accrued during the appeals for the patent
'811 and 829'.  The other patent remaining in the case, the '903 patent, is
scheduled for settlement conference before a magistrate judge on May 27, 2004.
In the event of unfavorable outcome of the settlement conference, we may have to
make an additional payment. For more information, please also see "Business
Risks - If we are accused of infringing the intellectual property rights of
other parties we may become subject to time-consuming and costly litigation.  If
we lose, we could suffer a significant impact on our business and be forced to
pay damages."

From time to time, we are also involved in other legal
actions arising in the ordinary course of business.  We have accrued certain
costs associated with defending these matters.  There can be no assurance the
Atmel complaint or other third party assertions will be resolved without costly
litigation, in a manner that is not adverse to our financial position, results
of operations or cash flows or without requiring royalty payments in the future
which may adversely impact gross margins. No estimate can be made of the
possible loss or possible range of loss associated with the resolution of these
contingencies.  As a result, no losses have been accrued in our financial
statements as of March 31, 2004.



Critical Accounting Policies

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

Recent Accounting Pronouncements



In January 2003, the Financial Accounting Standard Board, or FASB, issued FIN
No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB

21

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In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity."  SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.  SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances).  Many of those
instruments were previously classified as equity.  SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first fiscal period beginning after June
15, 2003.  SFAS No. 150 is to be implemented by reporting the cumulative effect
of a change in an accounting principle for financial instruments created before
the issuance date of SFAS No. 150 and still existing at the beginning of the
interim period of adoption.  Restatements are not permitted under SFAS No. 150.
The adoption of SFAS No. 150 did not have a significant impact on our
consolidated financial statements.

In March 2004, the FASB approved EITF Issue 03-6 "Participating Securities
and the Two-Class Method under FAS 128".  EITF Issue 03-6 supersedes the
guidance in Topic No. D-95, "Effect of Participating Convertible Securities on
the Computation of Basic Earnings per Share", and requires the use of the two-
class method of participating securities.  The two-class method is an earnings
allocation formula that determines earnings per share for each class of common
stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings.  In addition,
EITF Issue 03-6 addresses other forms of participating securities, including
options, warrants, forwards and other contracts to issue an entity's common
stock, with the exception of stock-based compensation (unvested options and
restricted stock) subject to the provisions of APB No. 25 and SFAS No.123.  EITF
Issue 03-6 is effective for reporting periods beginning after March 31, 2004 and
should be applied by restating previously reported EPS.  As of March 31, 2004,
we do not have any securities issued and outstanding subject to this
pronouncement.  Therefore, the adoption of EITF Issue 03-6 will not have any
impact on the disclosure of EPS.

22

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Business Risks



Risks Related to Our Business



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

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

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

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

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

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

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

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

23

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

We typically plan our production and inventory levels based on internal
forecasts of customer demand, which are highly unpredictable and can fluctuate
materially. The value of our inventory is dependent on our estimate of future
average selling prices, and, if our projected average selling prices are over
estimated, we may be required to adjust our inventory value to reflect the lower
of cost or market.  As of March 31, 2004, we had $69.9 million of inventory on
hand, an increase of $23.8 million, or 51.6%, from December 31, 2003.  Total
valuation adjustments to inventory were $9.2 million in 2002, $6.7 million in
2003 and $2.1 million in the first quarter of 2004.  Due to the large number of
units in our inventory, even a small change in average selling prices could
result in a significant adjustment and could harm our financial results.  Some
of our customers have requested that we ship them product that has a finished
goods date of manufacture that is less than one year old.  As of March 31, 2004,
our allowance for excess and obsolete inventories includes an allowance for our
on hand finished goods inventory with a date of manufacture of greater than two
years old and for certain products with a date of manufacture of greater than
one year old.  In the event that this becomes a common requirement, it may be
necessary for us to provide for an additional allowance for our on hand finished
goods inventory with a date of manufacture of greater than one year old, which
could result in a significant adjustment and could harm our financial results.

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

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

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

During 2002, 2003 and the three months ended March 31, 2004, our export
product and licensing revenues accounted for 92.0%, 92.9% and 86.8% of our net
revenues, respectively.  Our international business activities are subject to a
number of risks, each of which could impose unexpected costs on us that would
harm our operating results. These risks include:

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

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

24

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We derived 88.5%, 90.0% and 86.8% of our net product revenues from Asia
during 2002, 2003 and the three months ended March 31, 2004, respectively.
Additionally, substantially all of our wafer suppliers and packaging and testing
subcontractors are located in Asia.  Any kind of economic, political or
environmental instability in this region of the world can have a severe negative
impact on our operating results due to the large concentration of our production
and sales activities in this region.  For example, during 1997 and 1998, several
Asian countries where we do business, such as Japan, Taiwan and Korea,
experienced severe currency fluctuation and economic deflation, which negatively
impacted our revenues and also negatively impacted our ability to collect
payments from customers.  During this period, the lack of capital in the
financial sectors of these countries made it difficult for our customers to open
letters of credit or other financial instruments that are guaranteed by foreign
banks.  Finally, the economic situation during this period exacerbated a decline
in selling prices for our products as our competitors reduced product prices to
generate needed cash. It should also be noted that we are greatly impacted by
the political, economic and military conditions in Taiwan. Taiwan and China are
continuously engaged in political disputes and both countries have continued to
conduct military exercises in or near the other's territorial waters and
airspace.  Such disputes may continue and even escalate, resulting in an
economic embargo, a disruption in shipping or even military hostilities.  Any of
these events could delay production or shipment of our products.  Any kind of
activity of this nature or even rumors of such activity could harm our
operations, revenues, operating results, and stock price.

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

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

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

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

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

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

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

Since March 2001, we have been increasing our out-sourcing activities with
our customer service logistics to support our customers.  Currently SPT supports
our customers in Taiwan, China and other Southeast Asia countries.  SPT provides
planning, warehousing, delivery, billing, collection and other logistic
functions for us in these regions.  SPT is a wholly owned subsidiary of one of
our stocking representatives in Taiwan, PCT.  During 2002, 2003 and the three
months ended March 31, 2004, SPT serviced end customer shipments accounted for
57.4%, 64.2% and 61.7% of our net product revenues recognized, respectively.  As
of December 31, 2003 and March 31, 2004, the accounts receivable from SPT
accounted for 73.4% and 69.3%, respectively, of our net accounts receivable.
For further description of our relationships with PCT and SPT, please refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Related Party Transactions" in our Annual Report on Form 10-K for
the year ended December 31, 2003.

25

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

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

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

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

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

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

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

If we are not successful in subleasing our unused office space, we may be
required to take additional period charges 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 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 $756 thousand
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 was an estimate 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 balance of the 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.

26

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

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

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

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

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

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

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

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

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

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

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

27

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

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

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

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

The markets for our products are characterized by:

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

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

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

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

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

We are highly dependent on Bing Yeh, our President, Chief Executive Officer
and Chairman of the Board of Directors, as well as the other principal members
of our management team and engineering staff.  There is intense competition for
qualified personnel in the semiconductor industry, in particular the highly
skilled design, applications and test engineers involved in the development of

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

We rely on a combination of patent, trade secrets, copyrights, mask work
rights, nondisclosure agreements and other contractual provisions and technical
measures to protect our intellectual property rights.  Policing unauthorized use
of our products, however, is difficult, especially in foreign countries.
Litigation may continue to be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity.  Litigation could result in substantial
costs and diversion of resources and could harm our business, operating results
and financial condition regardless of the outcome of the litigation.  We own 78
patents in the United States relating to our products and processes, with
expiration dates ranging from 2010 to 2023, and have filed for several more.  In
addition, we hold several patents in Europe and Canada, and have filed several
foreign patent applications in Europe, Japan, Korea, Taiwan and Canada.  We
cannot assure you that any pending patent application will be granted.  Our
operating results could be harmed by the failure to protect our intellectual
property.

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

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

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

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

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

Our litigation may be expensive, may be protracted and confidential
information may be compromised. On April 8, 2002, a jury found that we
willfully infringed Atmel's '811 and '829 patents, and awarded Atmel $20.0
million in actual damages.  On May 7, 2002, the court entered judgment in the
total amount of $36.5 million, which includes the original $20.0 million.  The
'811 and '829 patents expired in February 2002.  Therefore, we are not precluded

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

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

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

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

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

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

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

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

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

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

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

Risks Related to Our Industry

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

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

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

The semiconductor industry has historically been cyclical, characterized by
periodic changes in business conditions caused by product supply and demand
imbalance.  When the industry experiences downturns, they often occur in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions.  These downturns are characterized by weak product
demand, excessive inventory and accelerated decline of average selling prices.
In some cases, downturns, such as the one we experienced from late 2000 through
2002, have lasted for more than a year.  Our business could be further harmed by
industry-wide prolonged downturns 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 2001, 2002 and 2003, which
resulted in greater than normal declines in our markets, which unfavorably
impacted our revenues, gross margins and profitability.  While these conditions
began to improve during the third quarter of 2003, deteriorating market
conditions at the end of 2000 through the first part 2003 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 the past we have been able to mitigate such seasonality
with the introduction of new products throughout the year.  If we fail to
continue to introduce new products, our business may suffer and the seasonality
of a portion of our sales may become more pronounced.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to risks associated with foreign exchange rate fluctuations
due to our international manufacturing and sales activities. These exposures may
change over time as business practices evolve and could negatively impact our
operating results and financial condition. All of our sales are denominated in
U.S. dollars. An increase in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive and therefore reduce the
demand for our products. Such a decline in the demand could reduce revenues
and/or result in operating losses. In addition, a downturn in the economies of
China, Japan or Taiwan could impair the value of our equity investments in
companies with operations in these countries.  If we consider the value of these
companies to be impaired, we will write down, or expense, some or all of our

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At any time, fluctuations in interest rates could affect interest earnings on
our cash, cash equivalents and available-for-sale investments, or the fair value
of our investment portfolio. We believe that the effect, if any, of reasonably
possible near term changes in interest rates on our financial position, results
of operations, and cash flows would not be material. Currently, we do not hedge
these interest rate exposures.  As of March 31, 2004, the
carrying value of our available-for-sale investments approximated fair value.
The table below presents the carrying value and related weighted average
interest rates for our unrestricted and restricted cash and cash equivalents and
available-for-sale investments as of March 31, 2004 (in thousands):

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

  Cash and cash equivalents - variable rate................................ $  65,453      0.2%
  Short-term available-for-sale investments - fixed rate...................    87,561      1.1%
  Long-term available-for-sale investments (1 to 2 years) - fixed rate.....     5,898      1.6%
                                                                             ---------
                                                                            $ 158,912      0.7%
                                                                             =========`





Item 4.  Controls and Procedures

Based on their evaluation as of March 31, 2004, our chief executive
officer and chief financial officer, have concluded that our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) were sufficiently effective to ensure that the
information required to be disclosed by us in this quarterly report on Form 10-Q
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and Form 10-Q. There
were no changes in our internal control over financial reporting during the
quarter ended March 31, 2004 that have materially affected, or are reasonably
likely to materially affect our internal control over financial reporting.

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

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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

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

The other patent remaining in the case, the `903 patent, expired in September
2001.  The trial court has held that, if it is found to be valid, certain of our
products infringed that patent. Trial to determine whether the `903 patent is
invalid began on July 29, 2002.  On August 5, 2002 the jury announced that it
was unable to reach a verdict on our invalidity defense, and a mistrial was
declared.  Atmel requested a new trial, but the Court stayed the matter until
after our appeal of the earlier judgment is resolved.  At Atmel's request, the
Court has directed the parties to conduct a settlement conference before a
Magistrate Judge.  That settlement conference was scheduled for April 14, 2004
and was subsequently rescheduled for May 27, 2004.  If the parties are unable to
reach a settlement agreement, the Court may set a date for a new trial.  The
impact related to the outcome of the remaining patent is undeterminable at this
time.

From time to time, we are also involved in other legal actions arising in the
ordinary course of business. We have incurred certain costs while defending
these matters.  There can be no assurance the remaining Atmel complaint or other
third party assertions will be resolved without costly litigation, in a manner
that is not adverse to our financial position, results of operations or cash
flows or without requiring royalty payments in the future which may adversely
impact gross margins. No estimate can be made of the possible loss or possible
range of loss associated with the resolution of these contingencies.  As a result, no losses have been accrued in our financial
statements as of March 31, 2004.

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 for the year ended December 31, 2003.







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

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

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1. Reports on Form 8-K filed during the quarter ended March 31, 2004:

On January 21, 2004, we filed a current report on Form 8-K dated January 21,
2004 in connection with the issuance of a press release dated January 21, 2004
announcing our financial results for the fourth quarter and fiscal year 2003.
The press release was furnished under Item 9.



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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 6th day of May, 2004.



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

                                    Bing Yeh

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

                                    Jack K. Lai

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

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