---

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


FORM 10-Q


(Mark One)[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.For the quarterly period ended September 30,
1999.


OR


[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. For the transition period from ________ to
_________.


Commission File
Number 0-26944



SILICON STORAGE TECHNOLOGY, INC. (Exact name of
Company as specified in its charter)
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|California
(State or other jurisdiction of  Incorporation or organization)
|--------------------------------------------------------------------------
|77-0225590
     (I.R.S. Employer
Identification No.)                      

|1171 Sonora Court, Sunnyvale, CA
(Address of principal executive offices)
|-------------------------------------------------------------------------
|94086
   (Zip code)                                                      

|Companys telephone number, including area code:
|------------------------------------------------
|(408) 735-9110                                  

|Indicate by check mark whether the Company (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
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes_X_  No___.


Number of shares outstanding of the Companys Common Stock, no
par value, as of the latest practicable date, October 31, 1999: 24,724,103.
Total number of pages in document: 21. Index to Exhibits is on page 20.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|SILICON STORAGE TECHNOLOGY, INC.


FORM 10-Q: QUARTER ENDED SEPTEMBER 30, 1999 TABLE
OF CONTENTS
|------------------------------------------------------------------------------------------------

`Part I - FINANCIAL INFORMATION

    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 ............................. 10


    Item 3.  Quantitative and Qualitative Disclosures About Market Risk ...... 17




Part II - OTHER INFORMATION


    Item 1.  Legal Proceedings ...............................................  18

    Item 4.  Submission of Matters to a Vote of Security Holders .............  18

    Item 6.  Exhibits and Reports on Form 8-K ................................  19`

---

|PART I


Item 1. Condensed Consolidated Financial Statements



SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share
data)
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                | Three months ended September 30, | Nine months ended September 30,
|----------------------------------------------- | -------------------------------- | -------------------------------
|
|
|Net revenues:                                   |                                  |                                
|Product revenues                                |                                  | $32,508                        
|License revenues                                |                                  | 2,639                          
|                                               
|Total net revenues                              |                                  | 35,147                         
|                                               
|Costs and expenses:                             |                                 
|Cost of revenues                                |                                  | 25,941                         
|Research and development                        |                                  | 4,581                          
|Sales and marketing                             |                                  | 2,574                          
|General and administrative                      |                                  | 1,278                          
|Other non-recurring charges                     |                                  |                               
|                                               
|                                                |                                  | 34,374                         
|                                               
|Income (loss) from operations                   |                                  | 773                            
|Interest and other income (expense), net        |                                  | 146                            
|                                               
|Income (loss) before provision for              |                                 
|(benefit from) income taxes                     |                                  | 919                            
|Provision for (benefit from) income taxes       |                                  | 471                            
|                                               
|Net income (loss)                               |                                  | $     448                      
|                                               
|Net income (loss) per share - basic and diluted |                                  | $    0.02                      
|                                               
|Shares used in per share calculations           |                                 
|Basic                                           |                                  | 24,565                         
|                                               
|Diluted                                         |                                  | 27,163                         
|                                               

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

---

|SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
|----------------------------------------------------------------------------------------------------

|                                               | September 30,1999 | December 31,1998
|---------------------------------------------- | ----------------- | ----------------
|
|ASSETS                                         |                   |                 
|Current assets:                                |                   |                 
|Cash and cash equivalents                      |                   | $   4,271       
|Short-term investments                         |                   | --              
|Accounts receivable, net                       |                   | 24,045          
|Accounts receivable from related parties       |                   | 2,897           
|Inventories, net                               |                   | 23,406          
|Other current assets                           |                   | 2,527           
|                                              
|Total current assets                           |                   | 57,146          
|Furniture, fixtures, and equipment, net        |                   | 10,543          
|Other assets                                   |                   | 5,250           
|                                              
|Total assets                                   |                   | $ 72,939        
|                                              
|LIABILITIES                                    |                  
|Current liabilities:                           |                  
|Trade accounts payable                         |                   | $ 28,014        
|Accrued expenses and other current liabilities |                   | 5,312           
|Deferred revenue                               |                   | 4,239           
|                                              
|Total current liabilities                      |                   | 37,565          
|Other liabilities                              |                   | 486             
|                                              
|Total liabilities                              |                   | 38,051          
|                                              
|SHAREHOLDERS' EQUITY                           |                  
|Common stock and deferred stock compensation   |                   | 60,186          
|Retained earnings (accumulated deficit)        |                   | (25,298         
|                                              
|Total shareholders' equity                     |                   | 34,888          
|                                              
|Total liabilities and shareholders' equity     |                   | $ 72,939        
|                                              

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

---

|SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
|--------------------------------------------------------------------------------------------------------------

|                                                                         | Nine months ended September 30,
|------------------------------------------------------------------------ | -------------------------------
|
|
|Cash flows from operating activities:                                    |                                
|Net income (loss)                                                        |                                
|Adjustments to reconcile net income (loss) to net cash                   |                                
|provided by (used in) operating activities:                              |                                
|Depreciation /amortization                                               |                                
|Provision for doubtful accounts receivable                               |                                
|Provision for excess and obsolete inventories                            |                                
|Deferred income taxes                                                    |                                
|(Gain) loss on sale of equipment                                         |                                
|Purchased in-process research and development                            |                                
|Changes in operating assets and liabilities                              |                                
|(in 1999 net of effects of acquisition):                                 |                                
|Accounts receivable                                                      |                                
|Accounts receivable from related parties                                 |                                
|Inventories                                                              |                                
|Other current and noncurrent assets                                      |                                
|Trade accounts payable                                                   |                                
|Accrued expenses and other current liabilities                           |                                
|Deferred revenue                                                         |                                
|                                                                        
|Net cash provided by (used in) operating activities                      |                                
|                                                                        
|Cash flows from investing activities:                                    |                                
|Acquisition of furniture, fixtures and equipment                         |                                
|Purchases of available-for-sale investments                              |                                
|Sales and maturities of available-for-sale investments                   |                                
|Cash acquired in acquisition                                             |                                
|Other                                                                    |                                
|                                                                        
|Net cash provided by (used in) investing activities                      |                                
|                                                                        
|Cash flows from financing activities:                                    |                                
|Payments on intellectual properties                                      |                                
|Issuance of shares of common stock                                       |                                
|Repurchase of common stock                                               |                                
|                                                                        
|Net cash provided by (used in) financing activities                      |                                
|                                                                        
|Net increase (decrease) in cash and cash equivalents                     |                                
|Cash and cash equivalents at beginning of period                         |                                
|                                                                        
|Cash and cash equivalents at end of period                               |                                
|                                                                        
|Supplemental Disclosure of Cash Flow Information:                        |                                
|Common stock issued on acquisition of Linvex Technology Corp.            |                                
|Common stock issued on conversion of Linvex Technology Corp. liabilities |                                

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

---

|SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AT SEPTEMBER 30, 1999 (UNAUDITED)


1. Basis of Presentation


In the course of normal day to day activities we are commonly
referred to by our initials SST. Throughout this document we will refer to
Silicon Storage Technology, Inc. as SST.


In the opinion of management, the accompanying unaudited
condensed interim consolidated financial statements contain all adjustments
(all of which are normal and recurring in nature) necessary to fairly present
our financial position, results of operations and cash flows. The results of
operations for the interim periods presented are not necessarily indicative of
the results that may be expected for any future interim periods or for the full
fiscal year. These interim financial statements should be read in conjunction
with the financial statements in our Annual Report on Form 10-K for the year
ended December 31, 1998.


The year-end balance sheet at December 31, 1998 was derived
from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles.


Direct sales to customers are recognized upon shipment of
product net of an allowance for estimated returns. Sales to distributors are
made primarily under arrangements allowing price protection and the right of
stock rotation on merchandise unsold to distributors. Because of the
uncertainty associated with pricing concessions and future returns, SST defers
recognition of such revenues, related costs of revenues and related gross
profit until the merchandise is sold by the distributor to the end user.


Revenue from license or other technology arrangements is
recognized upon the delivery of all specified technology documentation and/or
products if the fee is fixed and determinable, collection of the fee is
probable, and there are no remaining obligations of SST. For license and other
arrangements under which we are obligated to provide unspecified upgrades,
revenue is recognized over the remaining estimated economic life of the
technology beginning upon delivery of all specified technology documentation or
products. During the quarter ended June 30, 1999, we examined the useful life
of technologies relating to our license agreements and determined that we no
longer maintain or update certain, older technologies for our licensees,
resulting in a change in estimate of the remaining economic life of these
technologies. As a result of the change in estimate, $125,000 of previously
deferred up front license fee payments was recognized as license revenue in the
financial statements for the nine month period ending September 30, 1999.


Recent Accounting Pronouncements


In June, 1998, the Financial Accounting Standards Boards issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133 established a new
model for accounting for derivative and hedging activities. In July, 1999, the
Financial Accounting Standard Boards issued SFAS No. 137 Accounting for
Derivative Instruments and Hedging Activities  Deferral of the Effective Date
of FASB Statement No. 133 (SFAS 137). SFAS 137 deferred the effective date of
SFAS 133 until the first fiscal quarter beginning after June 15, 2000. The
impact of the implementation of SFAS 133 on the consolidated financial
statements of SST has not yet been determined.


SST adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income (SFAS 130). SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. There was no difference
between SSTs net income (loss) and its total comprehensive income (loss) for
the periods reported on in these financial statements.


2. Computation of Net Income (Loss) Per Share


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 income (loss) per share is as follows (in thousands, except per
share amounts):
|----------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | Three months ended September 30, | Nine months ended September 30,
|----------------------------------------- | -------------------------------- | -------------------------------
|
|Numerator - basic and dilutive:           |                                  |                                
|Net income (loss)                         |                                  | $  448                         
|                                         
|Denominator - Basic:                      |                                 
|Weighted average common stock outstanding |                                  | 24,565                         
|                                         
|Net income (loss) per share  basic       |                                  | $ 0.02                         
|                                         
|Denominator - diluted:                    |                                 
|Weighted average common and dilutive      |                                 
|stock options                             |                                  | 27,163                         
|                                         
|Diluted net income (loss) per share       |                                  | $ 0.02                         
|                                         

|Stock options to purchase 3,270,000 shares of common stock were
outstanding as of September 30, 1999 and 1,214,000 shares of common stock were
outstanding as of September 30, 1998. These stock options were not included in
the computation of diluted net loss per share for the three months ended
September 30, 1998 and the nine months ended September 30, 1999 and September
30, 1998 because we had net losses for these periods.


3. Inventories(in thousands):


Inventories are stated at the lower of cost (first-in,
first-out) or market (estimated net realizable value). Inventories at September
30, 1999 and December 31, 1998 are as follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                | September 30, | December 31,
|--------------- | ------------- | ------------
|
|Raw Material    |               | $  7,100    
|Work in process |               | 12,689      
|Finished goods  |               | 3,617       
|               
|                |               | $23,406     
|               

|4. Acquisition


On June 4, 1999, we purchased all of the outstanding capital
stock of Linvex Technology, Corp. (Linvex), a privately held, memory design
company located in Sunnyvale, California, in exchange for 789,370 shares of SST
common stock with a fair market value of $4.7 million. The purchase price of
$4.8 million, which includes acquisition costs of $0.1 million, was accounted
for using the purchase method of accounting, which means that the purchase
price was allocated to the assets acquired and liabilities assumed based on the
estimated fair values at the date of the acquisition. The results of operations
of Linvex have been included with those of SST since June 4, 1999, the date
that the acquisition was consummated.


The fair value of the assets of Linvex, which was determined
through established valuation techniques used by an independent appraiser, and
a summary of the consideration exchanged for these assets is as follows (in
thousands):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                            | 
|--------------------------------------------------------------------------- | 
|Total purchase price                                                        | 
|Assets acquired:                                                            | 
|Tangible assets, primarily cash, accounts receivable, and computer software | 
|Core technology                                                             | 
|Completed products                                                          | 
|Workforce                                                                   | 
|Purchased in-process research and development                               | 
|Liabilities assumed                                                         | 
|                                                                           
|                                                                            | 
|                                                                           

---

|The amount allocated to the core technology, the completed
products, for which technological feasibility had been established at the
acquisition date, and the workforce is amortized on a straight line basis over
three years. At September 30, 1999 accumulated amortization related to these
items was $362,000. The amount of the purchase price allocated to purchased
in-process research and development, which had no alternative future use and
relates to a product for which technological feasibility had not been
established, was expensed at the acquisition date.


In addition, after the purchase, notes and deferred salary
payable to shareholders and employees of $476,000 were converted into an
additional 106,436 shares of SSTs common stock.


Summarized below are the unaudited pro forma results of SST as
though Linvex had been acquired at the beginning of January 1, 1998.
Adjustments have been made for the estimated increases in amortization related
to the purchased of core technology, completed products and workforce, and
other appropriate pro forma adjustments.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                            | December 31, | September 30,
|--------------------------- | ------------ | -------------
|
|Revenue                     |              | $ 70,515     
|Net income (loss)           |              | $(19,495     
|Net income (loss) per share |              | $  (0.82     

|The above amounts are based upon certain assumptions and
estimates which we believe are reasonable and do not reflect any benefit from
economies which might be achieved from combined operations. The pro forma
financial information presented above is not necessarily indicative of either
the results of operations that would have occurred had the acquisition taken
place at the beginning of fiscal 1998 or of future results of operations of the
combined companies. The charge for purchased in process research and
development has not been included in the pro forma results above because it is
nonrecurring and directly related to the acquisition.


5. Contingencies


On January 3, 1996, Atmel Corporation (Atmel) sued us in the
U.S. District Court for the Northern District of California. Atmels complaint
alleges that by making, using and selling devices, we are willfully infringing
on five U.S. patents owned by or exclusively licensed to Atmel. Atmel later
amended its complaint to allege infringement of a sixth patent. Regarding each
of these six patents, Atmel seeks a judgment that the we (1) have infringed the
patent, (2) an injunction prohibiting future infringement and (3) treble the
amount of damages caused by the alleged infringement and attorneys fees, costs
and expenses. On four of the six patents, the District court has granted in our
favor a judgement that we did not infringe. Atmel has appealed the decisions.
The trial on the remaining issues has been postponed until Atmels appeal is
heard.


On February 17, 1997, Atmel filed an action with the
International Trade Commission (ITC) against two suppliers of our parts. The
action involves certain of the patents that Atmel has alleged we are
infringing. We intervened as a party to that investigation. Pursuant to
indemnification agreements with these suppliers, we have agreed to indemnify
both to the extent that it is required to do so under the agreements. On July
9, 1998, the ITC entered its opinion of finding no violation by us. Atmel has
appealed the decision. The Federal Circuit has ordered the ITC to reconsider
its decision on one of the patents. No schedule has been set for the new
hearing.


On September 14, 1998, Intel sued us in the U.S. District Court
for the Northern District of California, San Jose Division. Intels complaint
alleged that, by making, using and selling devices, we were willfully
infringing four U.S. patents owned by Intel. Regarding each of these four
patents, Intel sought (1) a judgment that we infringed on the patent, (2) an
injunction prohibiting further infringement, and (3) an accounting of all
damages caused by the alleged infringement, treble the amount of damages caused
by the alleged infringement and attorneys fees, costs and expenses. The
Company denied infringement of any of the Intel patents and counter-claimed for
invalidity and non-infringement of the Intel patents. Through a neutral
mediation, a settlement of the pending litigation was reached on May 13, 1999.
The settlement was immaterial to the Companys financial statements.


On July 31, 1998, we filed suit against Winbond Electronics of
Taiwan (Winbond) in the U.S. District Court for the Northern District of
California, San Jose Division. We are suing for (1) breach of contract, (2)
breach of covenant of good faith and fair dealing, (3) misappropriation of
trade secrets and (4) common law unfair competition. We are seeking (1) damages
and an injunction prohibiting Winbond from using any of the technology we
licensed to them and (2) a return of technical material transferred to them
under the original license agreement. Winbond has answered the complaint and
has counter-claimed (1) for a declaration that it is not in material breach of
the agreement, (2) that the Company has breached the agreement, (3) that the
Company has breached the covenant of good faith and fair dealing, (4) that the
Company has interfered with prospective economic advantage, (5) that the
Company has engaged in unlawful business practice in violation of the
California Business and Profession Code, (6) that the Company has committed
acts of common law unfair competition and (7) that it is not obligated to pay
us under the agreement and/or they own or jointly own the technology embodied
in their products. Winbond also seeks restitution of the payments made. We have
replied by denying these charges. We believe that the substantive allegations
in the Winbond counter-claim are without merit and intend to vigorously defend
ourselves against the action.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|From time to time, we are also involved in other legal actions
arising in the ordinary course of business. While we have accrued certain
amounts for the estimated legal costs associated with defending these matters,
there can be no assurance the Atmel complaint, the Winbond complaint or other
third party assertions will be resolved without costly litigation, in a manner
that is not adverse to the Companys 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.


6. Share Purchase Rights Plan


In May 1999, SST adopted a Share Purchase Rights Plan in which
preferred stock rights were distributed as a rights dividend at a rate of one
right for each share of common stock held as of the close of business on May
27, 1999. The effect will be to discourage acquisitions of more than 15 percent
of SSTs common stock without negotiations with the Board of Directors. The
rights expire May 3, 2009.


7. Line of Credit


On September 30, 1999, we signed an agreement with Foothill
Capital Corporation to increase our line of credit. The new agreement allows
us to borrow up to $35 million immediately, increasing to $50 million from
January 1, 2000 through March 30, 2000, dropping back down to $40 million from
April 1, 2000 through May 31, 2000, thereafter returning to $25 million until
September, 2002. Borrowing is limited to 80% of eligible world-wide accounts
receivable. The funds in excess of $25 million are available only if certain
profitability covenants are met. We must pay an unused line fee at the annual
rate of one quarter of one percent on the unused portion. As of September 30,
1999, there were no borrowings against this line.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

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


The following discussion may be understood more fully by
reference to the condensed consolidated financial statements, notes to the
condensed consolidated financial statements, and managements discussion and
analysis of financial condition and results of operations contained in SSTs
Annual Report on Form 10-K for the year ended December 31, 1998, as filed with
the Securities and Exchange Commission.


The following discussion contains forward-looking statements,
which involve risk and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors. Factors that could cause or contribute to such
differences include, but are limited to:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| |  | the availability, timely delivery and
cost of wafers from our suppliers;
| | - | ------------------------------------------------------------------------

| |  | competitive pricing pressures and
related changes in average selling prices;
| | - | ----------------------------------------------------------------------------

| |  | fluctuations in manufacturing yields;
| | - | -------------------------------------

| |  | new product announcements and
introductions of competing products by us or our competitors;
| | - | -------------------------------------------------------------------------------------------

| |  | changes in demand for, or in the mix
of, our products;
| | - | ------------------------------------------------------

| |  | the gain or loss of significant
customers;
| | - | ------------------------------------------

| |  | competitive payment terms extended to
customers;
| | - | ------------------------------------------------

| |  | market acceptance of products utilizing
our SuperFlash® technology;
| | - | -------------------------------------------------------------------

| |  | changes in the channels through which
our products are distributed;
| | - | -------------------------------------------------------------------

| |  | currency exchange rate fluctuations;
| | - | ------------------------------------

| |  | economic changes in the Far East;
| | - | ---------------------------------

| |  | unanticipated research and development
expenses associated with new product introductions;
| | - | ------------------------------------------------------------------------------------------

| |  | the timing of significant orders;
| | - | ---------------------------------

| |  | general economic conditions;
| | - | ----------------------------

| |  | acts of God such as earthquake or
other natural disasters in or close to manufacturing, customer, or other
geographic locations, and
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| |  | a downturn in the market for products
which incorporate our products.
| | - | ---------------------------------------------------------------------

|All of these factors, and other factors, are difficult to
forecast and can materially affect SSTs quarterly or annual operating results.
Fluctuations in revenues and operating results may cause volatility in SSTs
stock price. Please refer to the section entitled Risk Factors in our Form
10-K for the year ended December 31, 1998 for additional discussion.


Results of Operations: Quarter and Nine Months Ended September
30, 1999


Overview. We were incorporated in California in 1989 and we
design, manufacture, and sell flash memory devices that address high volume
applications such as personal computers, or PCs, disk drives, modems, pagers
and cellular phones. Flash memory devices are semiconductor chips that store
program code or data and are electronically erasable and re-programmable in the
system. In-system programmable, or ISP, devices are more cost effective for
manufacturers to use than earlier technologies because ISP devices allow
manufacturers to make changes to program codes while the device is inside the
product, rather than having to remove the device from the system in order to
perform the reprogramming. ISPs can therefore simplify a system manufacturers
inventory management and manufacturing process by allowing the manufacturer to
respond faster to product cycles and changing market specifications.




Currently, we offer small sector, low and medium density
devices that target a broad range of existing and emerging applications in the
personal computer motherboards, PC peripheral, communications, consumer and
industrial markets. In addition, we design and are beginning to market a
variety of high density flash devices, 8 and 16 Megabit, and 8-bit flash
microcontrollers, all of which incorporate and are manufactured using our
proprietary SuperFlash technology. These higher density memory products address
broader markets such as networking systems, digital cellular phones,
telecommunications, set-top boxes, personal digital assistants (PDAs), pagers
and printer font storage. Our memory products are differentiated based upon
certain attributes, such as density, voltage, access speed, packaging and
predicted reliability.


In addition, we manufacture and sell CompactFlash Cards which
leverage SSTs patented ATA controller technology and flash memory design
expertise to offer favorable data transfer rates, which results in better speed
for users for applications such as digital cameras, voice recorders, personal
organizers and PDAs. Following our acquisition of Linvex Technology Corporation
in June, 1999 we also sell ROM/RAM Combo products for use in communications and
consumer electronics devices such as pagers and cellular telephones.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|In addition to designing, manufacturing and selling flash
memory devices, we license our technology to wafer foundries and other
semiconductor companies to manufacturer products for non-competing applications
and receive license fees and royalty payments from such arrangements.


The average selling prices for our products are extremely
volatile. The semiconductor memory industry is very competitive and has in
recent years experienced severe product price erosion, rapid technological
change and product obsolescence. Historically, the selling prices for
semiconductor memory products fluctuate significantly with changes in the
supply and demand for these products. During 1998, industry overcapacity
resulted in greater than normal price declines in our markets, which
unfavorably impacted our revenues, gross margins, and profitability. Growth in
world-wide supply outpaced growth in demand during 1998. To respond to these
pressures during 1999, we are attempting to accelerate our cost reduction
efforts. We are also developing new products to expand and diversify our
application and geographic base. However, we cannot assure you that these cost
reduction and new product development activities will be implemented quickly
enough to take advantage of industry shortages as they present themselves.


We only have limited internal capability to manufacture our
products and we rely on third parties to perform substantially all of our
manufacturing. In addition, we only have very limited internal capacity to test
all of our products. We currently buy all of our wafers, an integral component
of our products, from a limited number of suppliers. During 1998, substantially
all of our wafers and sorted die were supplied by two foundries, Sanyo Electric
Co., Ltd. (Sanyo) in Japan and Taiwan Semiconductor Manufacturing Company
(TSMC) in Taiwan. If these suppliers fail to satisfy our requirements on a
timely basis and at competitive prices we could suffer manufacturing delays, a
possible loss of revenues or higher than anticipated cost of revenues, which
would affect operating results adversely. During the third quarter of 1999,
some of our suppliers in Taiwan experienced interruptions in their production
as a result of an earthquake in September. We expect that the interruption to
production in Taiwan as a result of the earthquake will have some impact,
although minor, on our financial performance for the fourth quarter. Our
assessment indicates that the impact to fourth quarter revenues is expected to
be approximately 10% of our production plan for the quarter. This assessment is
based on our most current information. We cannot guarantee you that the impact
will not exceed our expectations or that future interruptions will not occur
that could affect operating results adversely.


As recently as September, 1999 we were unable to meet all of
the demand for our products, and have failed to meet scheduled shipment dates,
due to our inability to obtain a sufficient supply of wafers and sorted die
from our foundries. Our current contract foundries, together with any
additional foundry at which capacity might be obtained, may not be willing or
able to satisfy all of our purchase and/or delivery requirements on a timely
basis at favorable prices. In addition, we have encountered delays at our
subcontractors in the process of qualifying new products and in the process of
ramping new product production. New product qualification and production
ramp-up times at any additional foundry, assuming an additional foundry could
be found at all, could take longer than anticipated. We are also subject to the
risks of service disruptions, raw material shortages and price increases by the
foundries. Such disruptions, shortages and price increases could have a
material adverse effect on our operating results.


Net Revenues. Net revenues were $76.5 million for the nine
months ended September 30, 1999 as compared to $51.3 million for the nine
months ended September 30, 1998. Net revenues of $35.1 million in the third
quarter of 1999 represented a 94% increase from $18.1 million in the third
quarter of 1998.


Product revenues were $70.7 million in the first nine months of
1999 compared to $49.5 million for the same period of 1998. Product revenues
increased to $32.5 million in the third quarter of 1999 from $17.3 million in
the third quarter of 1998. Approximately 39% of product revenues in the second
quarter of 1999 were from shipments of the 29 new products introduced since the
second quarter of 1998. The weighted average selling price across all products
increased 2% between the third quarter of 1998 to the third quarter of 1999.
The slight increase in net weighted average selling price is a combination of
both shipments of new products and stabilization of weighted average selling
prices for the older products as a result of increased demand in the market.
Net unit shipments increased 41% from the prior quarter of 1999 and
approximately 85% from the same period of 1998.


License, royalty and development revenues were $5.7 million in
the first nine months of 1999 compared to $1.8 million for the same period if
1998. During the third quarter 1999, license, royalty and development revenues
were $2.6 million, as compared to $806,000 in the third quarter of 1998.
Current quarter license revenues included $2.4 million in revenue from the
recognition of new and existing license agreements and $249,000 in royalty
payments for the use of our technology. Such license agreements or royalty
payments may or may not recur in future quarters. Most of our license
agreements require the payment of a one-time up-front license fee that
generally does not recur in the future.
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|International sales comprised approximately 90% of product
revenues for the nine months ended September 30, 1999 as compared to 94% for
the nine months ended September 30, 1998. Although international sales
decreased as a percentage of total product revenues, actual product revenues
for international sales increased 37% for the nine month period ended September
30, 1999 as compared to the same nine month period of 1998. North American
product revenues more than doubled for the nine month period ended September
30, 1999 as compared to the same nine month period of 1998, resulting in a
decrease in percent of international sales to total product revenues as total
product revenues have increased.


For the nine months ended September 30, 1999, 30% of product
revenues were from Taiwan, 14% from Japan and 24% from China. Although
international sales increased 70% from the third quarter of 1998 to the third
quarter of 1999, international sales accounted for approximately 87% of
world-wide product revenues during the third quarter of 1999, a decrease from
97% during the third quarter of 1998. Product revenues in Taiwan accounted for
27% of world-wide product revenues in the third quarter of 1999 as compared to
32% in the third quarter of 1998. Product revenues in Japan accounted for 10%
of world-wide product revenues in the third quarter of 1999 as compared to 17%
in the third quarter of 1998. Product revenues in China accounted for 28% of
world-wide product revenues in the third quarter of 1999 as compared to 20% in
the second quarter of 1998. We anticipate that international sales will account
for substantially all of our product revenues for the foreseeable future,
although percentages may vary.


For the third quarter of 1999, product revenues for PC
peripheral applications accounted for 31% of total product revenues as compared
to 32% for the third quarter of 1998. Product revenues for PC BIOS applications
during the third quarter of 1999 increased 36% from the comparable quarter of
1998 but only accounted for approximately 24% of total product revenues as
compared to 33% in the third quarter of 1998. The reason for the decrease in
the percentage of total product revenues, even though product revenues
increased for PC BIOS applications, was the result of a change in the product
mix. For the third quarter of 1999, product revenues for communication
products, such as modems and cordless phones, increased 214% from the third
quarter of 1998, accounting for 14% of total product revenues, as compared to
8% during the third quarter of 1998. Product revenues in the third quarter of
1999 for consumer products, such as toys, video games and electronic
organizers, increased 91% from the third quarter of 1998, accounting for 20% of
total product revenues in both periods. While we intend to continue to
diversify both the product applications and customer base, we cannot assure you
that such diversification will be successful.


Gross Profit / Margin. Gross profit was $15.5 million, or a
gross margin of 20% of net revenues, for the nine months ended September 30,
1999 as compared to $7.3 million, or 14% of net revenues, for the nine months
ended September 30, 1998. Gross profit increased to $9.2 million, or 26% gross
margin, in the third quarter of 1999 from $1.9 million, or 10% gross margin,
for the comparable quarter of the prior year. The increase in gross profit
between the two quarters is primarily a combination of the 85% increase in net
units shipped and the license revenues recognized in the current quarter.


Research and development. Research and development expenses
were $13.8 million, or 18% of net revenues, for the nine months ended September
30, 1999 as compared to $10.8 million, or 21% of net revenues, for the nine
months ended September 30, 1998. Research and development expenses were $4.6
million, or 13% of net revenues, during the third quarter of 1999 as compared
to $4.3 million, or 24% of net revenues, during the comparable quarter of the
prior year. The dollar increase in research and development expenses since last
year is primarily a result of hiring additional personnel, depreciation related
to purchases of additional engineering test equipment, increased prototyping,
new product development and product qualification costs and process and
development efforts related to new and future product introductions. As noted
above, we have shipped 29 new products since the end of the second quarter of
1998. Although absolute dollars for research and development expenses have
increased, research and development expenses as a percent of revenue have
decreased as a result of higher unit shipments, more stable average selling
prices and higher revenues in the third quarter of 1999. Research and
development expenses are expected to increase in absolute dollars but not
necessarily as a percentage of revenues over time.


Sales and marketing.Sales and marketing expenses were $7.0
million, or 9% of net revenues for the nine months ended September 30, 1999 as
compared to $5.2 million, or 10% of net revenues, for the nine months ended
September 30, 1998. Sales and marketing expenses were $2.6 million, or 7% of
net revenues during the third quarter of 1999 as compared to $1.9 million, or
10% of net revenues, during the third quarter of 1998. Sales and marketing
expenses consist primarily of sales commissions to manufacturers
representatives, salaries of our sales and marketing personnel and advertising
and product literature expenses. The increase in expense in absolute dollars
from the comparable period of 1998 relates primarily to increases in personnel
costs and commission expense as a result of higher revenues. Sales and
marketing expense may fluctuate over time primarily because commission expense is a
function of product revenues.
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|General and administrative. General and administrative expenses
were $2.5 million, or 3% of net revenues, for the nine months ended September
30, 1999 as compared to $4.0 million, or 8% of net revenues, for the nine
months ended September 30, 1998. General and administrative expenses were $1.3
million or 4% of net revenues during the third quarter of 1999 as compared to
$1.1 million or 6% of net revenues for comparable quarter of the prior year. In
the second quarter of 1999, we reversed $1.2 million of legal accrual following
the settlement of the Intel lawsuit and re-evaluation of the status of other
legal matters. In the second quarter of 1998, we recorded a charge of $500,000
in connection with the termination of a land purchase agreement. Without these
non-recurring events, general and administrative expenses would have been $3.7
million for the nine months ended September 30, 1999 and $3.5 million for the
nine months ended September 30, 1998. General and administrative expense
primarily consists of personnel, legal and information technology costs.


Amortization of intangibles. As part of the June 1999
acquisition of Linvex, we recorded $3.3 million of intangible assets. The
intangible assets will be amortized over 3 years.


Other non-recurring charges. Also as part of the acquisition of
Linvex, we recorded a non-recurring charge of $2.0 million for in-process
research and development. Refer also to Note 4 of Notes To Consolidated
Financial Statements.


The fair value of Linvex core technology, existing
products, as well as the technology currently under development was determined
by an independent appraiser using the income approach, which discounts expected
future cash flows to present value. The discount rates used in the present
value calculations were derived from a weighted average cost of capital
analysis, adjusted upward by a premium of 5% to reflect additional risks
inherent in the development life cycle. SST expects that the pricing model
related to this acquisition will be considered standard within the
high-technology industry. SST does not expect to achieve a material amount of
expense reductions or synergies as a result of integrating the acquired
in-process technology. Therefore the valuation assumptions do not include
anticipated cost savings. In process research and development valued at $2.0
million consisted of a single project to combine flash and SRAM memory on a
single chip (the Combo Memory chip). At the time of the acquisition the
estimated cost to complete the Combo Memory chip was $1.1 million and the chip
was approximately 42% complete. The risk adjusted discount rate relating to
in-process technology was 40%. SST expects that the Combo Memory chip will be
completed and begin to generate cash flows within 6 to 9 months. However,
development of the Combo Memory chip remains a significant risk to SST due to
the remaining effort to achieve technical viability, rapidly changing customer
markets, uncertain standards for new products and significant competitive
threats from numerous companies. The nature of the efforts to develop the Combo
Memory chip into a commercially viable product consists principally of
planning, designing and testing activities necessary to determine that the
Combo Memory chip can meet market expectations, including functionality and
technical requirements. Failure to bring the Combo Memory chip to market in a
timely manner could result in a lost opportunity to capitalize on emerging
markets. Failure to achieve the expected levels of revenues and net income from
the Combo Memory chip will negatively impact the return on investment expected
at the time of the acquisition and potentially result in impairment of other
assets related to the development activities.


Recent actions and comments from the Securities and Exchange
Commission have indicated that they are reviewing the current valuation
methodology of purchased in-process research and development relating to
acquisitions. The Commission is concerned that some companies are writing off
more of the value of an acquisition than is appropriate. We believe that we are
in compliance with all of the rules and related guidance as they currently
exist. However,  the Commission may seek to
reduce the amount of purchased in-process research and development previously
expensed by SST. This would result in the restatement of previously filed
financial statements of SST and could have a material negative impact on the
financial results for the period subsequent to the acquisition.


Interest and other income (expense), net. Interest and other
income was $623,000, or 1% of net revenues, for the nine ended September 30,
1999 as compared to $1.3 million, or 3% of net revenues, for the nine months
ended September 30, 1998. Interest and other income was $146,000, or less than
1% of net revenues during the third quarter of 1999 as compared to $289,000, or
2% of net revenues during the third quarter of 1998. The decrease in interest
and other income from 1998 to 1999 is primarily due to lower cash, cash
equivalent and short term investment balances during the period.
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|Provision for (benefit from) income taxes. The provision for
income taxes was $536,000 for the nine months ended September 30, 1999 as
compared to a benefit of $613,000 for the nine months ended September 30, 1998.
The provision for income taxes was $471,000 during the third quarter of 1999 as
compared to a $2.2 million for the third quarter of 1998. During 1998, we
determined that our cumulative net operating losses incurred exceeded the
amount of tax carry back available. For this reason, we recorded a full
valuation allowance against the deferred tax asset in the third quarter of
1998. The tax effect of the net operating loss incurred during the nine months
ended September 30, 1999 was recorded as a deferred tax asset, offset by a
valuation allowance. The current quarters provision relates to foreign
tax expense on license and royalty revenue.


Net income (loss) per share. Our net loss per share for the
nine months ended September 30, 1999 was ($0.41) as compared to a net loss of
per share of ($0.47) for the nine months ended September 30, 1998. Our net
income per share, both basic and diluted, was $0.02 in the third quarter of
1999 as compared to a net loss of ($0.32) in the third quarter of 1998. The
decrease in net loss for current nine month period and the net income in the
current three month period is largely due to the introduction of new products
and increased shipments on the existing products.


Liquidity and Capital Resources


Principal sources of liquidity at September 30, 1999 consisted
of $4.3 million of cash and cash equivalents. On September 30, 1999, we signed
an agreement with Foothill Capital Corporation to increase our line of credit.
The new agreement allows us to borrow up to $35 million immediately,
increasing to $50 million from January 1, 2000 through March 30, 2000, dropping
back down to $40 million from April 1, 2000 through May 31, 2000, thereafter
returning to $25 million until September, 2002. Borrowing is limited to 80% of
eligible world-wide accounts receivable, which as of September 30, 1999 equaled
$17.8 million. The amended agreement secures sufficient working capital to
finance growth in operations and new product development efforts. As of September
30, 1999, there were no borrowings against this line.


Operating activities.Our operating activities used cash of
$14.0 million for the nine month period ended September 30, 1999 compared to
$20.0 million for the nine month period ended September 30, 1998. The decrease
in cash from operating activities for the nine month period ended September 30,
1999 consisted of our net loss of $9.8 million and net changes in operating
assets and liabilities of $9.8 million, partially offset by net non-cash
adjustments of $5.6 million. The decrease in cash from operating activities for
the nine months end September 30, 1998 consisted of our net loss of $10.8
million and net changes in operating assets and liabilities of $19.3 million,
partially offset by net non-cash adjustments of $10.1 million. For the nine
month period ended September 30, 1999, non-cash adjustments consisted primarily
of depreciation and amortization expense of $3.4 million and a non-recurring,
in-process research and development charge of $2.0 million. For the nine month
period ended September 30, 1998, non-cash adjustments consisted primarily of
depreciation and amortization expense of $3.4 million, an increase in
provisions for excess or obsolete inventory of $3.3 million and a decrease in
the net deferred tax asset of $3.7 million, resulting from the full valuation
of the asset due to our continuing loss. Accounts receivable and accounts
receivable from related parties increased $14.6 million for the nine month
period ended September 30, 1999, compared to an increase of $2.4 million for
the same period of 1998. The higher increase in accounts receivable is
primarily a result of an 88% increase in product revenues in the current
quarter from the comparable quarter of 1998. Inventories increased $15.1
million for the nine month period ended September 30, 1999, compared to an
increase of $7.5 million for the nine month period ended September 30, 1998.
The increase in inventory for the nine month period ended September 30, 1999 is
largely a result of our efforts to build inventory of our newer products in
order to meet increasing customer demands. Accounts payable increased $17.2
million for the nine month period ended September 30, 1999, compared to a $8.9
million decrease for the nine month period ended September 30, 1998. The large
increase in accounts payable activity related primarily to inventory purchases,
increased research and development expenses and the purchase of capital
equipment associated with the development and introduction of new products. The
increase in working capital generated by the increased accounts payable at
September 30, 1999 is required to support the ramping of production on new
products as the number of products offered by SST has increased from 13
revenue-generating products at December 31, 1998 to 34 revenue-generating
products at September 30, 1999. We anticipate that additional new product
introductions in 1999 will require additional working capital. Deferred revenue
increased $2.3 million for the nine month period ended September 30, 1999,
compared to an increase of $878,000 for the nine month period ended September
30, 1998. The increase in deferred revenue for the nine month period ended
September 30, 1999 is related to new license agreements and to increased sales
to distributors in the second and third quarters of 1999.
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|Investing activities. Our investing activities used cash of
$6.1 million for the nine month period ended September 30, 1999. For the nine
month period ended September 30, 1998, investing activities provided cash of
$11.5 million. Capital expenditures were $6.5 million for the current nine
month period, compared to $4.3 million for the same period of 1998. The
increase in capital expenditures related primarily to the purchase of design
and engineering tools and production equipment associated with the development
and introduction of new and future products. We are currently in the process of
implementing a new ERP system. We anticipate an additional $1.0 million in
capital expenditures relating to this project before the end of 1999. For the
nine month period ended September 30, 1999, the net sale or maturity of
short-term investments provided cash of approximately $851,000, compared to
$16.3 million for the nine month period ended September 30, 1998. Cash proceeds
from the net sale of short term investments were significantly lower in the
current period as compared to the prior period because all of our short term
investments were converted to cash upon maturity in order to meet our cash
requirement needs.


Financing activities. Our financing activities provided cash of
approximately $1.3 million during the nine month period ended September 30,
1999. The cash provided was primarily from the proceeds of the employee stock
purchase plan and the exercise of employee stock options. For the nine month
period ended September 30, 1998, our financing activities used cash of
approximately $1.0 million. We used $1.6 million to repurchase our common
stock. These cash outflows were partially offset by $591,000 from the proceeds
of the employee stock purchase plan and employee stock options.


Readiness For Year 2000


Many existing computer systems and applications, and other
control devices, use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. These
systems, applications, or devices could fail or produce incorrect data unless
fixed so that they can process data related to the year 2000. We rely on
primary management information and accounting systems (such as an integrated
general ledger, accounts receivable, accounts payable, sales order entry and
purchasing modules), ancillary information systems (such as payroll, human
resource and fixed asset tracking software), customer services infrastructure,
embedded computer chips, networks and telecommunications equipment,
manufacturing test equipment, reliability equipment, research and development
software tools and end products, electronic security systems and other systems
that may provide erroneous data as a result of the year 2000. We also rely on
the systems of other enterprises such as those of customers, suppliers,
creditors, financial institutions and organizations, and of governments, both
domestically and globally, directly and indirectly, for the accurate exchange
of data and other business-critical resources. A failure in any one of these
systems can negatively impact SST.


To the best of our knowledge and belief, at the time of
shipment, SSTs current and previously sold products do not contain date
sensitive data or real time clocks. Thus, they are neither affected by nor will
they directly cause Year 2000 problems.


We define Year 2000 compliant as meaning that the technology
(including but not limited to hardware, software, firmware, microchips, or
other electronic components, equipment, processes, or systems) shall provide
the following functions in a correct and consistent manner: (1) handle date
information, before, during, and after the 1st of January 2000, including but
not limited to: accepting date input, providing date output, and performing
calculations on dates, or portions of dates; (2) performance and functionality
are not affected by dates prior to, during, and after the 1st of January 2000;
(3) respond to two-digit year date input in a way that resolves the ambiguity
of which century in a disclosed, defined, and predetermined manner, i.e., a
date ending in 00 must return 2000; (4) store and provide output of
date information in ways that are unambiguous as to which century; and (5) Year
2000 is recognized as a leap year.


The Year 2000 Project. Our Year 2000 Project informally began
in 1997 within the information technology (IT) department. The department began
to upgrade our management information systems and personal computer hardware
and software to be Year 2000 compliant. The Projects mission and strategy
became formalized in August 1998. Currently, we are dedicating the equivalent
of two full-time resources to the Project through the year 2000. The Project
consists of an eight step approach; (1) awareness that no system is safe from
Year 2000 problems, (2) categorize and classify our internal and external
resources and activities with potential Year 2000 issues, (3) assessment of
every item in the inventory for Year 2000 compliance to determine where the
problems lie, (4) plan a strategy for fixing the problems encountered,
focussing first on the most business-critical functions, (5) remediation of
business-critical processes followed by other processes, (6) testing of
remedied processes, (7) integration back into other functions within and
outside of SST, and (8) contingency planning to keep SST functional in case
Year 2000 compliance failures occur.
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|Awareness. The awareness stage is 100% complete as it relates
to both our IT supported functions and to all other internal and external
operations of SST. The Project has full executive and Board-level sponsorship
and support at the appropriate levels of SST. Funding for the Project was
reviewed and incorporated into the 1999 planning and budgeting process. An
internal cross-functional Task Force was been established. This Task Force
meets approximately three times per month and develops strategies to assess the
Year 2000 compliance of customers, vendors, and other significant corporate
partners as well as to categorize, classify, and to assess compliance of the
systems and equipment within SST. The awareness stage has been completed.


Categorization, Classification, and Assessment. We have
categorized and classified our fixed assets, production equipment, computer
hardware, software, design hardware and software, reliability equipment, and
other internal resources and assessed Year 2000 compliance of these resources.
This assessment was completed as of the end of the second quarter of 1999,
which was on schedule. The assessment process will continue throughout the year
as SST purchases new assets, equipment, hardware and software and has also
included assets purchased in connection with the acquisition of Linvex.


We also are conducting surveys of systems supported by third
party providers (significant vendors and suppliers), such as our wafer
fabrication, package assembly, and test subcontractors, and we are surveying
our active customers with sales activity over $1 million in the past eighteen
months, significant vendors and other trading partners to assess Year 2000
compliance. All significant vendors have been asked to complete a survey
questionnaire and to certify Year 2000 compliance. All of SSTs
significant vendors prior to the acquisition of Linvex have been contacted thus
far and SST has received responses from approximately 80% of all of its vendors
and suppliers. Responses were received from 100% of significant (i.e.
mission critical) suppliers. Follow-up telephone calls and letters are
currently being sent to the non-respondents. The survey responses received were
reviewed and evaluated during the second quarter of 1999. Linvex-specific
suppliers were contacted during the third quarter of 1999 in order to assess
their Year 2000 compliance. Many of SSTs significant vendors, including
all of SSTs overseas production subcontractors, were not 100% compliant
as of the date of their survey response, although in many cases certain
processes at the supplier were compliant while other processes were not yet
fully compliant.


Planning and Remediation. Remediation decisions are made on a
case by case basis, and approximately 70% of the problems can be fixed by the
replacement or purchase of additional parts or software upgrades. The remaining
30% of the problems require replacement of the entire system. Because SST does
not use many proprietary systems, much of the cost of upgrading our systems to
ensure Year 2000 compliance is a part of our practice of routinely upgrading
our systems as new versions are released by vendors and is considered to be a
normal cost of doing business. In this respect, we have already upgraded all of
our personal computer hardware and operating systems, network switches, and
primary management information and accounting systems to Year 2000 compliant
versions. The cost incurred for this effort was approximately $250,000. We
continually receive hardware upgrade recommendations and software patches from
our vendors for new Year 2000 fixes discovered by those vendors and we
implement those patches throughout the company within the quarter that the
patch is received. All such IT-related upgrades and patches have been
completed. Therefore, the planning and remediation stages are considered to be
virtually complete as they relate to IT supported functions.


For research and development software and hardware functions,
called design technology services, 98% of workstation hardware was Year 2000
compliant as of July 31, 1999. The remaining hardware and software is scheduled
to be Year 2000 compliant by the end of November 1999.


For production equipment functions, upgrades to overseas
production test equipment have been scheduled with the vendors on a
semi-monthly basis through November 1999. Therefore, the planning and
remediation stage is expected to complete by the end of the fourth quarter of
1999 for production equipment. In-house production equipment has already been
upgraded. Other facilities functions are considered to be Year 2000 compliant
at the present time.


Testing and Integration. The testing and integration stages are
virtually completed for items related to IT supported functions, 95% complete
for design technology services, and 65% complete for production related
functions. Testing of vendor supplied survey data may include follow-up
discussions of survey data, site visits, and review of Year 2000 compliance
project timelines. These stages are expected to be completed by the end of
November 1999.
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|Based upon the information available at this time, the future
costs related to Year 2000 compliance are not expected to exceed $750,000. The
cost estimate is based on our current assessment of the projects identified and
is subject to change as the projects progress. The estimate does not include
potential costs related to any customer or other claims.


Contingency Planning. The contingency planning stage will be
performed in conjunction with the planning and remediation stages and the
testing and integration stages. For each mission critical vendor or trading
partner that has not responded on Year 2000 compliance to our satisfaction a
contingency plan which includes an alternative vendor source is being
developed. If, during follow-up contacts with the vendor, it appears that
compliance is behind schedule or problematic, the contingency plan will be
implemented and an alternative vendor will be qualified to provide service from
late 1999 through the early part of year 2000. This stage is expected to be
complete by the end of November 1999.


Despite our efforts to address the Year 2000 impact on our
internal systems, we are not sure that we have fully identified all possible
scenarios and that we can resolve all such scenarios without disruption of our
business and without incurring significant expense. In addition, even if our
internal systems are not materially affected by the Year 2000 issue, we could
be materially affected through disruption in the operation of the enterprises,
financial institutions, or governmental entities with which we interact. A
failure to identify and or correct a material Year 2000 problem could result in
an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect our results of
operations, liquidity and financial condition. Specifically, if we do not
adequately identify and correct Year 2000 problems in our information systems
we could experience interruptions in its operations, including manufacturing,
order processing, receivables collections and accounting, such that there would
be delays in product shipments, lost data and a consequential impact on
revenues, expenditures and financial reporting. If we do not adequately
identify and correct Year 2000 problems in our design technology systems we
could lose valuable product design information and records. If we do not
adequately identify and correct Year 2000 problems in our production area we
could experience interruptions in its manufacturing and related operations,
such that there would be delays in product shipments and a consequential impact
on revenues. If we do not adequately identify and correct Year 2000 problems
with significant third parties, we could experience interruptions in the supply
of key components or services from those parties, such that there would be
delays in product shipments or services and a consequential impact on revenues.
In addition, given the inherent complexity of the Year 2000 problem, there can
be no assurance that actual costs will not be higher than currently anticipated
or that corrective actions will not take longer than currently anticipated to
complete. There is also a risk that our plans for achieving Year 2000
compliance may not be completed on time.


Item 3. Quantitative and Qualitative Disclosures About Market
Risk


We are exposed to risks associated with foreign exchange rate
fluctuations due to our international sales and manufacturing. These exposures
may change over time as business practices evolve and could have a material
adverse effect on 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,
reducing the demand for our products. A decline in the demand for our products
could have a material adverse effect on our operating results and financial
position. In addition, a downturn in the Japanese economy could impair the
value of our investment in our Japanese affiliate.


At any time, fluctuations in interest rates could effect
interest earnings on our cash and cash equivalents. Currently, we do not hedge
these interest rate exposures.
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|PART II


Item 1. Legal Proceedings


On January 3, 1996, Atmel Corporation (Atmel) sued us in the
U.S. District Court for the Northern District of California. Atmels
complaint alleges that by making, using and selling devices, we are willfully
infringing on five U.S. patents owned by or exclusively licensed to Atmel.
Atmel later amended its complaint to allege infringement of a sixth patent.
Regarding each of these six patents, Atmel seeks a judgment that the we (1)
have infringed the patent, (2) an injunction prohibiting future infringement
and (3) treble the amount of damages caused by the alleged infringement and
attorneys fees, costs and expenses. On four of the six patents, the
District court has granted in our favor a judgement that we did not infringe.
Atmel has appealed the decisions. The trial on the remaining issues has been
postponed until Atmels appeal is heard.


On February 17, 1997, Atmel filed an action with the
International Trade Commission (ITC) against two suppliers of our parts. The
action involves certain of the patents that Atmel has alleged we are
infringing. We intervened as a party to that investigation. Pursuant to
indemnification agreements with these suppliers, we have agreed to indemnify
both to the extent that it is required to do so under the agreements. On July
9, 1998, the ITC entered its opinion of finding no violation by us. Atmel has
appealed the decision. The Federal Circuit has ordered the ITC to reconsider
its decision on one of the patents. No schedule has been set for the new
hearing.


On September 14, 1998, Intel sued us in the U.S. District Court
for the Northern District of California, San Jose Division. Intels
complaint alleged that, by making, using and selling devices, we were willfully
infringing four U.S. patents owned by Intel. Regarding each of these four
patents, Intel sought (1) a judgment that we infringed on the patent, (2) an
injunction prohibiting further infringement, and (3) an accounting of all
damages caused by the alleged infringement, treble the amount of damages caused
by the alleged infringement and attorneys fees, costs and expenses. The
Company denied infringement of any of the Intel patents and counter-claimed for
invalidity and non-infringement of the Intel patents. Through a neutral
mediation, a settlement of the pending litigation was reached on May 13, 1999.
The settlement was immaterial to the Companys financial statements.


On July 31, 1998, we filed suit against Winbond Electronics of
Taiwan (Winbond) in the U.S. District Court for the Northern District of
California, San Jose Division. We are suing for (1) breach of contract, (2)
breach of covenant of good faith and fair dealing, (3) misappropriation of
trade secrets and (4) common law unfair competition. We are seeking (1) damages
and an injunction prohibiting Winbond from using any of the technology we
licensed to them and (2) a return of technical material transferred to them
under the original license agreement. Winbond has answered the complaint and
has counter-claimed (1) for a declaration that it is not in material breach of
the agreement, (2) that the Company has breached the agreement, (3) that the
Company has breached the covenant of good faith and fair dealing, (4) that the
Company has interfered with prospective economic advantage, (5) that the
Company has engaged in unlawful business practice in violation of the
California Business and Profession Code, (6) that the Company has committed
acts of common law unfair competition and (7) that it is not obligated to pay
us under the agreement and/or they own or jointly own the technology embodied
in their products. Winbond also seeks restitution of the payments made. We have
replied by denying these charges. We believe that the substantive allegations
in the Winbond counter-claim are without merit and intend to vigorously defend
ourselves against the action.


From time to time, we are also involved in other legal actions
arising in the ordinary course of business. While we have accrued certain
amounts for the estimated legal costs associated with defending these matters,
there can be no assurance the Atmel complaint, the Winbond complaint or other
third party assertions will be resolved without costly litigation, in a manner
that is not adverse to the Companys financial position, results of
operations or cash flows or without requiring royalty payments in the future
which may adversely impact gross margins. No estimate can be made of the
possible loss or possible range of loss associated with the resolution of these
contingencies.


Item 4. Submission of Matters to a Vote of Security Holders


Our Annual Meeting of Shareholders was held on July 30,
1999. At the annual meeting, the shareholders:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(1) | elected the persons listed below to
serve as a director of the company for the following year and until his
successor is elected,
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(2) | approved the 1995 Equity Incentive
Plan, as amended,
|--- | ----------------------------------------------------

|(3) | approved the 1995 Employee Stock
Purchase Plan, as amended,
|--- | -----------------------------------------------------------

|(4) | approved the 1995 Non-Employee Directors Stock
Option Plan, as amended, and
|--- | ----------------------------------------------------------------------------

|(5) | ratified the selection of
PricewaterhouseCoopers LLP as our Independent Accountants for the fiscal year
ending December 31, 1999.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

---

|On June 1, 1999, the record date of the Annual Meeting, we had
23,372,423 shares of Common Stock outstanding. At the Annual Meeting, holders
of 21,367,972 shares of Common Stock were present in person or represented by
proxy. The following sets forth information regarding the results of the voting
at the Annual Meeting.


Proposal 1 - Election of Director
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Director          | Votes in Favor | Votes Against | Abstentions
|----------------- | -------------- | ------------- | -----------
|Bing Yeh          |                | 20,621,526    |            
|Yaw Wen Hu        |                | 20,621,626    |            
|Tsuyoshi Taira    |                | 20,621,626    |            
|Yasushi Chikagami |                | 20,621,626    |            
|Ronald Chwang     |                | 20,621,626    |            

|Proposal 2 - Approval of the 1995 Equity Incentive Plan, as
Amended
|-------------------------------------------------------------------

|               | 
|-------------- | 
|Votes in Favor | 
|Votes Against  | 
|Abstentions    | 

|Proposal 3 - Approval of the 1995 Employee Stock Purchase Plan,
as Amended
|--------------------------------------------------------------------------

|               | 
|-------------- | 
|Votes in Favor | 
|Votes Against  | 
|Abstentions    | 

|Proposal 4 - Approval of the 1995 Non-Employee Directors Stock
Option Plan, as Amended
|---------------------------------------------------------------------------------------

|               | 
|-------------- | 
|Votes in Favor | 
|Votes Against  | 
|Abstentions    | 

|Proposal 5 - Ratification of Selection of Independent Accountant
|----------------------------------------------------------------

|               | 
|-------------- | 
|Votes in Favor | 
|Votes Against  | 
|Abstentions    | 

|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, 1998.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|Exhibit Number           Description
|------------------------------------

|10.22 | Loan and Security Agreement amendment
between Silicon Storage Technology, Inc. and Foothill Capital Corporation
dated September 30, 1999.
|----- | -----------------------------------------------------------------------------------------------------------------------------------------

|27 | Financial Data Schedule
|-- | -----------------------

|(b) | Reports on Form 8-K filed during the
quarter ended September 30, 1999: None.
|--- | ----------------------------------------------------------------------------

---

|SIGNATURES


Pursuant to the
requirements of the Securities Act of 1934, the Company has caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Sunnyvale, County of Santa Clara, State of California, on the 15th
day of November, 1999.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | By:
| | ---

| | /s/ BING YEH Bing Yeh President, Chief Executive Officer and Director (Principal
Executive Officer)
| | ---------------------------------------------------------------------------------------------------

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