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

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FORM 10-Q

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

For the quarterly period ended June 30, 2003

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.



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

1171 Sonora CourtSunnyvale, California     94086

(408) 735-9110

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

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

Number of shares outstanding of our Common Stock, no par value, as of the latest
practicable date, July 31, 2003:   94,912,358.

1









Silicon Storage Technology, Inc.
              FORM 10-Q: QUARTER ENDED JUNE 30, 2003
                                TABLE OF CONTENTS



|PART I.   FINANCIAL INFORMATION                                                                                       | Page No.
|--------------------------------------------------------------------------------------------------------------------- | --------
|                                                                                                                      |         
|Item 1.   Condensed Consolidated Financial Statements:                                                                |         
|                                                                                                                      |         
|Condensed Consolidated Statements of Operations                                                                       | 3       
|                                                                                                                      |         
|Condensed Consolidated Balance Sheets                                                                                 | 4       
|                                                                                                                      |         
|Condensed Consolidated Statements of Cash Flows                                                                       | 5       
|                                                                                                                      |         
|Notes to Condensed Consolidated Financial Statements                                                                  | 6       
|                                                                                                                      |         
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations | 16      
|                                                                                                                      |         
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                  | 33      
|                                                                                                                      |         
|Item 4.   Controls and Procedures                                                                                     | 33      
|                                                                                                                      |         
|PART II.  OTHER INFORMATION                                                                                           |         
|                                                                                                                      |         
|Item 1.  Legal Proceedings                                                                                            | 34      
|                                                                                                                      |         
|Item 4.  Submission of Matters to a Vote of Security Holders                                                          | 35      
|                                                                                                                      |         
|Item 6.   Exhibits and Reports on Form 8-K                                                                            | 36      
|                                                                                                                      |         
|Signatures                                                                                                            | 36      

2

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Part I.



Item 1.	Condensed Consolidated Financial Statements

SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                      (in thousands, except per share data)
Three Months Ended           Six Months Ended
                                                                June 30,                    June 30,
                                                        ------------------------    ------------------------
                                                           2002         2003           2002         2003
                                                        -----------  -----------    -----------  -----------
                                                        (unaudited)  (unaudited)    (unaudited)  (unaudited)

Net revenues:
     Product revenues - unrelated parties............. $    29,006  $    19,765    $    59,875  $    37,881
     Product revenues - related parties...............      32,474       35,095         67,900       70,900
     Technology licensing.............................       7,997        9,320         16,284       17,108
                                                        -----------  -----------    -----------  -----------
          Total net revenues..........................      69,477       64,180        144,059      125,889

Cost of revenues:
     Cost of revenues - unrelated parties.............      23,733       17,419         46,860       35,347
     Cost of revenues - related parties...............      26,502       30,514         53,877       65,087
                                                        -----------  -----------    -----------  -----------
          Total cost of revenues......................      50,235       47,933        100,737      100,434
                                                        -----------  -----------    -----------  -----------
Gross profit..........................................      19,242       16,247         43,322       25,455
                                                        -----------  -----------    -----------  -----------
Operating expenses:
     Research and development.........................      11,919       11,309         23,791       22,064
     Sales and marketing..............................       6,519        5,179         14,023       11,132
     General and administrative.......................       7,854        3,498         11,171        7,081
                                                        -----------  -----------    -----------  -----------
          Total operating expenses....................      26,292       19,986         48,985       40,277
                                                        -----------  -----------    -----------  -----------
Loss from operations..................................      (7,050)      (3,739)        (5,663)     (14,822)
Interest and other income.............................         907          578          1,875        1,034
Interest expense......................................         (66)         (41)          (130)         (79)
                                                        -----------  -----------    -----------  -----------
Loss before provision for (benefit from) income taxes.      (6,209)      (3,202)        (3,918)     (13,867)
Provision for (benefit from) income taxes.............      (1,987)       1,387         (1,254)       1,387
                                                        -----------  -----------    -----------  -----------
Net loss.............................................. $    (4,222) $    (4,589)   $    (2,664) $   (15,254)
                                                        ===========  ===========    ===========  ===========

Net loss per share - basic and diluted................ $     (0.05) $     (0.05)   $     (0.03) $     (0.16)
                                                        ===========  ===========    ===========  ===========

Shares used in per share calculation - basic and
   diluted............................................      92,406       94,472         92,220       94,329
                                                        ===========  ===========    ===========  ===========

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

3

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                 (in thousands)
December 31,   June 30,
                                                                       2002          2003
                                                                   ------------  ------------
                                                                   (unaudited)   (unaudited)
                             ASSETS

Current assets:
    Cash and cash equivalents.................................... $    103,751  $    125,156
    Short-term available-for-sale investments....................       41,252        38,053
    Trade accounts receivable-unrelated parties, net of allowance
      for doubtful accounts of $4,420 at December 31, 2002 and
      $4,383 at June 30, 2003....................................       10,723        11,259
    Trade accounts receivable-related parties....................       25,248        24,319
    Inventories..................................................       83,040        62,111
    Deferred tax assets..........................................       17,154        29,350
    Other current assets.........................................       29,671         7,153
                                                                   ------------  ------------
         Total current assets....................................      310,839       297,401
Equipment, furniture and fixtures, net...........................       16,989        13,791
Long-term available-for-sale investments.........................        5,862        15,603
Restricted cash and cash equivalents.............................       11,976        16,505
Restricted available-for-sale investments........................       24,873        20,597
Equity investments...............................................       60,910        57,413
Other assets.....................................................        9,157         8,081
                                                                   ------------  ------------
         Total assets............................................ $    440,606  $    429,391
                                                                   ============  ============
LIABILITIES

Current liabilities:
    Notes payable, current portion............................... $        352  $        372
    Trade accounts payable-unrelated parties.....................       28,408        24,780
    Trade accounts payable-related parties.......................        6,689         7,098
    Accrued expenses and other liabilities.......................       18,783        20,516
    Deferred revenue.............................................        2,650         3,940
                                                                   ------------  ------------
         Total current liabilities...............................       56,882        56,706
Other liabilities................................................        1,873         1,820
                                                                   ------------  ------------
         Total liabilities.......................................       58,755        58,526
                                                                   ------------  ------------
Commitments (Note 6) and Contingencies (Note 7)
SHAREHOLDERS' EQUITY

Common stock, no par value:
    Authorized: 250,000 shares
    Issued and outstanding: 93,295 shares at December 31, 2002
    and 94,536 shares at June 30, 2003...........................      339,598       341,674
Accumulated other comprehensive income...........................          151         2,343
Retained earnings................................................       42,102        26,848
                                                                   ------------  ------------
         Total shareholders' equity..............................      381,851       370,865
                                                                   ------------  ------------
         Total liabilities and shareholders' equity.............. $    440,606  $    429,391
                                                                   ============  ============

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

4

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)
Six Months Ended
                                                                               June 30,
                                                                        ----------------------
                                                                            2002       2003
                                                                        ----------  ----------
                                                                        (unaudited) (unaudited)
Cash flows from operating activities:
    Net loss.......................................................... $   (2,664) $  (15,254)
    Adjustments to reconcile net loss to net cash
      provided by operating activities:
       Depreciation and amortization..................................      5,060       4,142
       Provision (credit) for doubtful accounts receivable............      3,996         (37)
       Provision (credit) for sales returns...........................        206        (349)
       Provision for excess and obsolete inventories, write-down of
         inventories and adverse purchase commitments.................      3,427       4,860
       Deferred income taxes..........................................       (412)    (12,196)
       Net (gain) loss on disposal of equipment.......................        (28)        114
       Gain on sale of equity investments.............................         --         (37)
    Changes in operating assets and liabilities:
       Trade accounts receivable-unrelated parties....................     (4,539)       (150)
       Trade accounts receivable-related parties......................       (529)        929
       Inventories....................................................     10,017      17,738
       Other current and non-current assets...........................       (375)     23,594
       Trade accounts payable-unrelated parties.......................      7,857      (3,628)
       Trade accounts payable-related parties.........................      3,363         409
       Accrued expenses and other liabilities.........................     (4,234)     (1,518)
       Deferred revenue...............................................     (1,158)      1,290
                                                                        ----------  ----------
           Net cash provided by operating activities..................     19,987      19,907
                                                                        ----------  ----------
Cash flows from investing activities:
    Investment in equity securities...................................       (188)         --
    Acquisition of equipment, furniture and fixtures..................     (2,862)       (680)
    Purchases of available-for-sale investments and restricted cash
       and cash equivalents...........................................    (47,971)    (19,114)
    Sales and maturities of available-for-sale and equity investments.     45,554      19,387
                                                                        ----------  ----------
           Net cash used in investing activities......................     (5,467)       (407)
                                                                        ----------  ----------
Cash flows from financing activities:
    Debt repayments...................................................       (154)       (171)
    Issuance of shares of common stock................................      2,257       2,076
    Other.............................................................        (97)         --
                                                                        ----------  ----------
           Net cash provided by financing activities..................      2,006       1,905
                                                                        ----------  ----------
Net increase in cash and cash equivalents.............................     16,526      21,405
Cash and cash equivalents at beginning of period......................     93,598     103,751
                                                                        ----------  ----------
Cash and cash equivalents at end of period............................ $  110,124  $  125,156
                                                                        ==========  ==========

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


5

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2003
(UNAUDITED):1.  Basis of Presentation

In the opinion of management, the accompanying unaudited condensed
interim consolidated financial statements contain all adjustments, all of which
are normal and recurring in nature, necessary to fairly present our financial
position, results of operations and cash flows.  The results of operations for
the interim periods presented are not necessarily indicative of the results that
may be expected for any future interim periods or for the full fiscal year.
These interim financial statements should be read in conjunction with the
financial statements in our Annual Report on Form 10-K for the year ended
December 31, 2002 and the Quarterly Report on Form 10-Q for the three months
ended March 31, 2003.

The year-end balance sheet at December 31, 2002 was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.  Please refer to the audited financial
statements in our Annual Report on Form 10-K for the year ended December 31,
2002.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 143, "Accounting for
Asset Retirement Obligations," which addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs.  SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. We adopted SFAS No. 143 during the quarter ended
March 31, 2003.  The adoption of SFAS No. 143 has not had a material impact on
our consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities."  SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for under Emerging Issues Task Force, or EITF, No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)."  The scope of
SFAS No. 146 also includes costs related to terminating a contract that is
not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract.  SFAS No. 146 will be effective for exit or
disposal activities that are initiated after December 31, 2002.  We adopted
SFAS No. 146 during the quarter ended March 31, 2003. The adoption of SFAS
No. 146 did not have a material impact on our consolidated financial statements.
The effect on adoption of SFAS No. 146 will change on a prospective basis the
timing of when restructuring charges are recorded from a commitment date
approach to when the liability is incurred.

In November 2002, the FASB issued FASB Interpretation, or FIN, No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee.  In addition, FIN No. 45 requires disclosures about the guarantees
that an entity has issued, including a reconciliation of changes in the entity's
product warranty liabilities.  The initial recognition and initial measurement
provisions of FIN No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the guarantor's
fiscal year-end.  The disclosure requirements of FIN No. 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002.  We adopted the disclosure provision of FIN No. 45 for the year ended
December 31, 2002 and since December 31, 2002 the recognition and measurement
provisions of FIN No. 45 has not had a material impact on our consolidated
financial statements.

In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF Issue No.
00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. We
are currently assessing the impact of EITF Issue No. 00-21 on our consolidated
financial statements.

6

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In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123."  SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation.
SFAS No. 148 also requires that disclosures of the pro forma effect of using the
fair value method of accounting for stock-based employee compensation be
displayed more prominently and in a tabular format. Additionally, SFAS No. 148
requires disclosure of the pro forma effect in interim financial statements. The
transition and annual disclosure requirements of SFAS No. 148 are effective for
fiscal years ended after December 15, 2002.  The interim disclosure requirements
are effective for interim periods beginning after December 15, 2002.  We have
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in APB Opinion No. 25 and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the estimate of the market value of our stock at the date of the
grant over the amount an employee must pay to acquire our stock.  We adopted the
interim disclosure provisions for our financial reports beginning for the
quarter ended March 31, 2003. As the adoption of this standard involves
disclosures only, the adoption of SFAS No. 148 did not have a material impact on
our consolidated financial statements.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51."  FIN No. 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties.  FIN No. 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003.  For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN No. 46 must be applied for the first
interim or annual period beginning after June 15, 2003.  We are currently
reviewing our equity investments and associated relationships to determine if
they are variable interest entities as defined by FIN No. 46.  It is reasonably
possible that we are the primary beneficiary of or hold a significant variable
interest in a variable interest entity.  The nature, purpose and activities of
the potential variable interest entities is outlined in Note 13 of our Notes to
the Consolidated Financial Statements filed in our Annual Report on Form 10-K
for the year ended December 31, 2002.  Our maximum exposure to loss as a result
of our involvement with the potential variable interest entities is our
investment in each such entity as we are not obligated to provide any additional
financing.

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

2. Computation of Net Loss Per Share

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

7

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`Three Months Ended           Six Months Ended
                                                                June 30,                    June 30,
                                                        ------------------------    ------------------------
                                                           2002         2003           2002         2003
                                                        -----------  -----------    -----------  -----------
Numerator - basic and diluted
  Net loss............................................ $    (4,222) $    (4,589)   $    (2,664) $   (15,254)
                                                        ===========  ===========    ===========  ===========
Denominator - basic and diluted
  Weighted average common stock outstanding...........      92,406       94,472         92,220       94,329
                                                        ===========  ===========    ===========  ===========

Basic and diluted net loss per share.................. $     (0.05) $     (0.05)   $     (0.03) $     (0.16)
                                                        ===========  ===========    ===========  ===========`

Stock options to purchase 10,269,000 and 9,876,000 shares of common stock
were outstanding as of June 30, 2002 and 2003, respectively, with weighted
average exercise prices of $7.52 and $7.65, respectively.  These stock options
were not included in the computation of diluted net loss per share for the three
and six months ended June 30, 2002 and 2003 because we had net losses for these
periods.

Stock Compensation:

No compensation cost has been recognized for our 1995 Equity Incentive Plan,
our 1995 Non-Employee Directors' Stock Option Plan or our 1995 Employee Purchase
Plan.  Had compensation cost for these plans been determined based on the fair
value at the grant date for the awards, our net loss and net loss per share for
the three and six months ended June 30, 2002 and 2003 would have been increased
as indicated below (in thousands, except per share amounts):

`Three Months Ended      Six Months Ended
                                                                    June 30,              June 30,
                                                              --------------------  --------------------
                                                                2002       2003       2002       2003
                                                              ---------  ---------  ---------  ---------
Net loss, as reported....................................... $  (4,222) $  (4,589) $  (2,664) $ (15,254)
Deduct: total stock-based employee compensation
   expense determined under fair value based method
   for all awards, net of related tax effects...............    (3,318)    (1,635)    (6,380)    (3,456)
                                                              ---------  ---------  ---------  ---------
Pro forma net loss.......................................... $  (7,540) $  (6,224) $  (9,044) $ (18,710)
                                                              =========  =========  =========  =========
Pro forma net loss per share - basic and diluted............ $   (0.08) $   (0.07) $   (0.10) $   (0.20)
                                                              =========  =========  =========  =========`

3. Restricted Cash and Cash Equivalents and Restricted Available-for-Sale Investments

In July 2002, in connection with our Atmel litigation (see Note 7 of
these Notes to the Condensed Consolidated Financial Statements), we posted a
bond in the amount of $36.5 million pending our appeal.  In connection with the
bond, we have pledged cash, cash equivalents and available-for-sale investments
in the amount of $36.5 million under the custody of one financial institution,
and classified these amounts as restricted cash and cash equivalents and
restricted available-for-sale investments.  As of June 30, 2003, total
restricted cash and cash equivalents and restricted available-for-sale
investments was $37.1 million, which consisted of the bond in the amount of
$36.5 million and cumulative interest earned in the amount of  $602,000.

8

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4.  Available-for-Sale Investments

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

Our investments comprise federal, state, and municipal government obligations
and foreign and public corporate debt securities. Investments with maturities of
less than one year at the balance sheet date are considered short-term and
investments with maturities greater than one year at the balance sheet date are
considered long-term.  All these investments are classified as available-for-sale
and carried at fair value based on quoted market prices, with the
unrealized gains or losses, net of tax, reported in shareholders' equity as
other comprehensive income.  The cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity, both of which
are included in interest income.
Realized gains and losses are recorded on the specific identification method.
Realized gains and realized losses for the three and six months ended June 30,
2003 were not material.

King Yuan Electronics Company Limited, or KYE, Insyde Software Corporation,
or Insyde, and Powertech Technology, Incorporated, or PTI, are Taiwanese
companies that are listed on the Taiwan Stock Exchange.  Investments in these
companies have been included in "Long-term available-for-sale investments," and
we have recorded the investment at fair value, with unrealized gains and losses,
net of tax, reported in shareholders' equity as accumulated other comprehensive
income.  If a loss is other than temporary, it is reported as an "Impairment of
equity investments."  Dividends and other distributions of earnings from the
investees, if any, are included in other income when declared.

The fair value of available-for-sale investments, including restricted
available-for-sale investments, as of June 30, 2003 were as follows (in
thousands):

`Amortized   Unrealized       Fair
                                                 Cost         Gain          Value
                                              -----------  -----------   -----------
Corporate bonds and notes................... $        76  $        --   $        76
Government bonds and notes..................     159,994           65       160,059
Foreign listed equity securities............       4,585        3,714         8,299
                                              -----------  -----------   -----------
Total bonds, notes and equity securities.... $   164,655  $     3,779       168,434
                                              ===========  ===========
Less amounts classified as cash equivalents...........................      (94,181)
                                                                         -----------
      Total short and long-term available-for-sale investments........  $    74,253
                                                                         ===========
Contractual maturity dates for investments in bonds and notes:
      Less than 1 year................................................  $    38,053
      Less than 1 year - restricted...................................       20,059
      1 to 5 year.....................................................        7,304
      1 to 5 year - restricted........................................          538
                                                                         -----------
                                                                        $    65,954
                                                                         ===========`

The unrealized gains as of June 30, 2003 are recorded in accumulated other
comprehensive income, net of tax of $1,436,000.

9

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The fair value of available-for-sale investments as of December 31, 2002 were
as follows (in thousands):

`Amortized   Unrealized       Fair
                                                 Cost         Gain          Value
                                              -----------  -----------   -----------
Corporate bonds and notes................... $       359  $        --   $       359
Government bonds and notes..................     123,763          107       123,870
Foreign listed equity securities............       1,299          138         1,437
                                              -----------  -----------   -----------
Total bonds, notes and equity securities.... $   125,421  $       245       125,666
                                              ===========  ===========
Less amounts classified as cash equivalents...........................      (53,679)
                                                                         -----------
      Total short and long-term available-for-sale investments........  $    71,987
                                                                         ===========
Contractual maturity dates for investments in bonds and notes:
      Less than 1 year................................................  $    41,252
      Less than 1 year - restricted...................................       24,873
      1 to 5 year.....................................................        4,425
                                                                         -----------
                                                                        $    70,550
                                                                         ===========`

The unrealized gains as of December 31, 2002 are recorded in accumulated
other comprehensive income, net of tax of $94,000.

5. Selected Balance Sheet Detail

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

Inventories comprise:

`December 31,   June 30,
                                                              2002          2003
                                                           -----------   -----------
Raw materials............................................ $    40,036   $    29,667
Work in process..........................................       8,923         7,618
Finished goods...........................................      28,608        19,978
Inventories held at logistics center.....................       5,473         4,848
                                                           -----------   -----------
                                                          $    83,040   $    62,111
                                                           ===========   ===========`

Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market value.  We typically plan our production and inventory
levels based on internal forecasts of customer demand, which are highly
unpredictable and can fluctuate materially. The value of our inventory is
dependent on our estimate of future average selling prices, and, if our future
average selling prices are over estimated, we may be required to adjust our
inventory value to reflect the lower of cost or market. Due to the large number
of units in our inventory, even a small change in average selling prices could
result in a material adjustment and have a material impact on our financial
position and results of operations.  Our inventories include high technology
parts and components that are specialized in nature or subject to rapid
technological obsolescence. Some of our customers have requested that we ship
them product that has a finished goods date of manufacture that is less than one
year old.  In the event that this becomes a common requirement, it may be
necessary for us to provide for an additional allowance for our on hand finished
goods inventory with a date of manufacture of greater than one year old, which
could result in a material adjustment and could harm our financial results.  As
of June 30, 2003, our allowance for excess and obsolete inventories includes an
allowance for our on hand finished goods inventory with a date of manufacture of
greater than two years old and for certain products with a date of manufacture
of greater than one year old.  While we have programs to minimize the required
inventories on hand and we consider technological obsolescence when estimating
allowances for potentially excess and obsolete inventories and those required to
reduce recorded amounts to market values, it is reasonably possible that such
estimates could change in the near term.  Such changes in estimates could have a
material impact on our financial position and results of operations.

10

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Other current assets comprise:

`December 31,   June 30,
                                                              2002          2003
                                                           -----------   -----------
Refundable income tax.................................... $    22,744   $        --
Other current assets.....................................       6,927         7,153
                                                           -----------   -----------
                                                          $    29,671   $     7,153
                                                           ===========   ===========`

Accrued expenses and other liabilities comprise:

`December 31,   June 30,
                                                              2002          2003
                                                           -----------   -----------
Accrued compensation and related items................... $     5,070   $     4,876
Accrued income tax payable...............................       6,782         9,438
Accrued liabilities-related parties......................         473           465
Accrued warranty.........................................         492           300
Other accrued liabilities................................       5,966         5,437
                                                           -----------   -----------
                                                          $    18,783   $    20,516
                                                           ===========   ===========`

Accrued warranty:

`Balance at December 31, 2002............................. $       492
Accruals for warranties issued during the period.........         181
Settlements made during the period.......................        (373)
                                                           -----------
Balance at June 30, 2003................................. $       300
                                                           ===========`

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

Our technology license agreements generally include an indemnification clause
that indemnifies the licensee against liability, damages and legal defense costs
arising from any claims of patent, copyright, trademark or trade secret
infringement by our proprietary technology.  The terms of these guarantees
approximate the terms of the technology license agreements, which typically
range from five to ten years.  Our current license agreements expire from 2003
through 2014.  The maximum possible amount of future payments we could be
required to make, if such indemnifications were required on all of these
agreements, is $34.5 million.  We have not recorded any liabilities as of June
30, 2003 related to these indemnities.

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

6. Commitments

As of June 30, 2003, we had outstanding purchase commitments with our
foundry vendors of $24.6 million for delivery in 2003.  We have recorded a
liability of $318,000 for adverse purchase commitments.

11

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During the third quarter of 2001, we recorded a period charge to other
operating expense of $756,000 relating to an operating lease for an abandoned
building. This charge represented the estimated difference between the total
non-discounted future sublease income and our non-discounted lease commitments
relating to this building. The charge was an estimate and may be adjusted if we
obtain a sublease for the building and the actual sublease income is
significantly different from the estimate. We may be unable to secure subtenants
for such space due to the decrease in demand for commercial rental space in
Silicon Valley. If we are not successful in subleasing our unused office space,
we may be required to take an additional period charge for the balance of the
future lease cost.  At December 31, 2002 and June 30, 2003, payments made have
reduced the recorded liability to $473,000 and $373,000 respectively.

7. Contingencies

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

On two of the six patents, the District Court ruled by summary judgment that
we did not infringe.  Two of the other patents were invalidated by another U.S.
District Court in a proceeding to which we were not a party, but this decision
was later reversed by the Federal Circuit Court of Appeals.  As discussed below,
as the result of a ruling in another case, Atmel has withdrawn its allegations
as to another patent ("the '747 patent").  At this point, three patents remain
at issue in Atmel's District Court case against us ("the '811, '829 and '903
patents").  All of these patents have expired, so Atmel cannot obtain an
injunction against the sale of our products.

On February 17, 1997, Atmel filed an action with the International Trade
Commission, or ITC, against two suppliers of our
parts, involving four of the six patents that Atmel alleged that we infringe
in the District Court case above.  We intervened as a party to that
investigation.

On October 16, 2000, the ITC found the '903 patent valid
and infringed, and issued a Limited Exclusion Order, which ruled that
we could not import into the United States certain
products that use the claimed circuit made by one of our suppliers. The ITC also
ruled that we do not infringe the '811 and '829 patents.  The '903 patent and
the ITC's Limited Exclusion Order expired on September 14, 2001.

On January 14, 2002, the court in Atmel Corp. v. Macronix America,
Inc. denied Atmel's motion to correct the '747 patent.  As a result of the
Court's decision, Atmel withdrew its claims against us based on the '747
patent.

A jury trial on the '811 and '829 patents began on April 8, 2002.  The jury
found that we willfully infringed those patents, and awarded Atmel $20.0 million
in actual damages.  On May 7, 2002, the Court entered judgment in the total
amount of $36.5 million, which includes the original $20.0 million.  The '811
and '829 patents expired in February 2002.  Therefore, we are not precluded from
selling any of our products.  We believe that there were significant errors in
both the infringement and the damages verdicts, and filed a Notice of Appeal on
July 16, 2002. On October 7, 2002, we filed our opening brief in that appeal.
Our final reply brief was filed on January 16, 2003.  Atmel filed its final
brief on January 30, 2003.  On May 8, 2003, the Court of Appeals for the Federal
Circuit heard oral arguments on our appeal of the judgment finding that we
infringed the '811 and '829 patents.  We are awaiting the Court of Appeals'
decision.  Atmel has agreed to stay its enforcement of this judgment pending our
appeal.  In July 2002, we posted a bond in the amount of $36.5 million pending
the appeal.  In connection with the bond, we have pledged cash, cash equivalents
and available-for-sale investments in the amount of $36.5 million.  As of June
30, 2003, this amount is included in restricted cash, cash equivalents and
available-for-sale investments in our balance sheet (see Note 3 of these Notes
to the Condensed Consolidated Financial Statements).

Trial on the '903 patent was severed and heard before a jury beginning on
July 29, 2002.  The Court ruled that we infringed that patent, so the jury was
asked to decide whether the patent is valid and, if so, assess what, if any,
damages are due Atmel.  The jury was unable to unanimously decide whether the
'903 patent is valid, and a mistrial was declared.  The Court denied Atmel's
request to schedule a retrial until the appeals of the verdict regarding the
'811 and '829 patents are decided.

From time to time, we are also involved in other legal actions arising in the
ordinary course of business.  We have incurred certain costs while defending
these matters.  There can be no assurance the Atmel complaint or other third
party assertions will be resolved without costly litigation, in a manner that is
not adverse to our financial position, results of operations or cash

12

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8. Segment Reporting

Our operations involve the design, development, manufacturing, marketing
and technical support of our nonvolatile memory technology and products.  We
offer low and medium density devices that target a broad range of existing and
emerging applications in the digital consumer, networking, wireless
communications and Internet computing markets. Our products are differentiated
based upon attributes such as density, voltage, access speed, package and
predicted endurance.  We also license our technology for use in non-competing
applications.

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

SMPG includes our three standard flash memory product families: the
Small-Sector Flash, or SSF, family, the Multi-Purpose Flash, or MPF, family, and the
Many-Time Programmable, or MTP, family. These product families allow us to
produce products optimized for cost and functionality to support a broad range
of mainstream applications that use nonvolatile memory products.  Effective
January 1, 2003, we transferred certain MTP products from SMPG to SPG.
Accordingly, our 2002 segment revenues and gross profit information have been
reclassified for presentation purposes as if the transfer occurred as of January
1, 2002.

ASPG includes Concurrent SuperFlash, Serial Flash, Firmware Hub, or FWH, and
Low Pin Count, or LPC, flash products.  ASPG also includes flash embedded
controllers such as the ATA controller.  Effective January 1, 2003, we
transferred certain flash microcontroller products from ASPG to SPG.
Accordingly, our 2002 segment revenues and gross profit information have been
reclassified for presentation purposes as if the transfer occurred as of January
1, 2002.

SPG includes ComboMemory, ROM/RAM Combos, MTP, flash microcontroller and
other special flash products.  Effective January 1, 2003, we transferred certain
MTP products from SMPG to SPG and certain flash microcontroller products from
ASPG to SPG.  Accordingly, our 2002 segment revenues and gross profit
information have been reclassified for presentation purposes as if the transfer
occurred as of January 1, 2002.

Technology Licensing includes both license fees and royalties.

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

13

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`Three Months Ended            Three Months Ended
                                                    June 30, 2002                 June 30, 2003
                                              -------------------------     -------------------------
                                                              Gross                         Gross
                                               Revenues       Profit         Revenues       Profit
                                              -----------  ------------     -----------  ------------
SMPG........................................ $    41,473  $      3,723     $    39,104  $      4,768
ASPG........................................      16,292         6,617          12,748         1,853
SPG.........................................       3,715           905           3,008           306
Technology Licensing........................       7,997         7,997           9,320         9,320
                                              -----------  ------------     -----------  ------------
                                             $    69,477  $     19,242     $    64,180  $     16,247
                                              ===========  ============     ===========  ============



                                                Six Months Ended              Six Months Ended
                                                    June 30, 2002                 June 30, 2003
                                              -------------------------     -------------------------
                                                              Gross                         Gross
                                               Revenues       Profit         Revenues       Profit
                                              -----------  ------------     -----------  ------------
SMPG........................................ $    83,623  $     12,009     $    75,150  $      3,057
ASPG........................................      36,682        12,148          26,523         4,754
SPG.........................................       7,470         2,881           7,108           536
Technology Licensing........................      16,284        16,284          17,108        17,108
                                              -----------  ------------     -----------  ------------
                                             $   144,059  $     43,322     $   125,889  $     25,455
                                              ===========  ============     ===========  ============`

9. Comprehensive Loss

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

`Three Months Ended           Six Months Ended
                                                                June 30,                    June 30,
                                                        ------------------------    ------------------------
                                                           2002         2003           2002         2003
                                                        -----------  -----------    -----------  -----------
Net loss.............................................. $    (4,222) $    (4,589)   $    (2,664) $   (15,254)

Other comprehensive income (loss):
   Change in net unrealized gains
      on investments, net of tax......................        (860)       2,336            (39)       2,192
                                                        -----------  -----------    -----------  -----------
Total comprehensive loss.............................. $    (5,082) $    (2,253)   $    (2,703) $   (13,062)
                                                        ===========  ===========    ===========  ===========`

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

`December 31,   June 30,
                                                           2002          2003
                                                       ------------  ------------
Net unrealized gains on investments, net of tax...... $        151  $      2,343
                                                       ============  ============`

10. Related Party Transactions and Balances

The following table is a summary of our related party revenues and
purchases for the three and six months ended June 30, 2002 and 2003, and our
related party accounts receivable and accounts payable and accruals as of
December 31, 2002 and June 30, 2003 (in thousands):

14

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`Three Months Ended            Three Months Ended
                                                     June 30, 2002                June 30, 2003
                                              -------------------------     -------------------------
                                               Revenues      Purchases       Revenues      Purchases
                                              -----------  ------------     -----------  ------------
Silicon Technology Co., Ltd................. $       483  $         --     $     1,478  $         --
Ambit Microsystems Corp.....................          95            --              --            --
Apacer Technology, Inc......................         233            96             480           713
Silicon Professional Technology Ltd.........      31,663            --          33,137            --
King Yuan Electronics Company, Limited......          --         5,958              --         4,421
Powertech Technology, Incorporated..........          --         2,152              --         1,936
                                              -----------  ------------     -----------  ------------
                                             $    32,474  $      8,206     $    35,095  $      7,070
                                              ===========  ============     ===========  ============

                                                  Six Months Ended              Six Months Ended
                                                    June 30, 2002                 June 30, 2003
                                              -------------------------     -------------------------
                                               Revenues      Purchases       Revenues      Purchases
                                              -----------  ------------     -----------  ------------
Silicon Technology Co., Ltd................. $       956  $         --     $     1,865  $         --
Ambit Microsystems Corp.....................         224            --              --            --
Apacer Technology, Inc......................         427           146             866           846
Professional Computer Technology Limited....         141            --              --            --
Silicon Professional Technology Ltd.........      66,152            --          68,169            --
King Yuan Electronics Company, Limited......          --         9,566              --         8,317
Powertech Technology, Incorporated..........          --         4,752              --         4,196
                                              -----------  ------------     -----------  ------------
                                             $    67,900  $     14,464     $    70,900  $     13,359
                                              ===========  ============     ===========  ============

                                                  December 31, 2002              June 30, 2003
                                              -------------------------     -------------------------
                                                              Trade                         Trade
                                                 Trade       Accounts          Trade       Accounts
                                               Accounts    Payable and       Accounts    Payable and
                                              Receivable     Accruals       Receivable     Accruals  
                                              -----------  ------------     -----------  ------------
Silicon Technology Co., Ltd................. $       459  $         --     $       805  $         --
Apacer Technology, Inc......................         141           119             877           710
Professional Computer Technology Limited....          --            73              --           137
Silicon Professional Technology Ltd.........      24,648           432          22,637           345
King Yuan Electronics Company, Limited......          --         4,285              --         4,350
Powertech Technology, Incorporated..........          --         2,253              --         2,021
                                              -----------  ------------     -----------  ------------
                                             $    25,248  $      7,162     $    24,319  $      7,563
                                              ===========  ============     ===========  ============`

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

15

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

The following discussion may be understood more fully by reference to the
consolidated financial statements, notes to the consolidated financial
statements, and management's discussion and analysis of financial condition and
results of operations contained in our Annual Report on Form 10-K for the year
ended December 31, 2002, as filed with the Securities and Exchange
Commission.

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

Overview

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

The semiconductor industry has historically been
cyclical, characterized by periodic changes in business conditions caused by
product supply and demand imbalance. When the industry experiences downturns,
they often occur in connection with, or in anticipation of, maturing product
cycles and declines in general economic conditions. These downturns are
characterized by weak product demand, excessive inventory and accelerated
declines of selling prices.  In some cases, downturns, such as the one we have
experienced since late 2000, have lasted for more than a year.  Despite the
continued difficult market environment, the downward trend of average selling
prices for many of our products we believe appears to have stabilized during the
second quarter of 2003.  We believe the pace of the semiconductor industry
recovery has improved recently and that the pricing environment may continue to
gradually improve.

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

We derived 80.7%, 88.5% and 89.2% of our product revenues during 2001, 2002
and the six months ended June 30, 2003, respectively, from product shipments to
Asia. Additionally, substantially all of our wafer suppliers and packaging and
testing subcontractors are located in Asia.

Our top ten end customers, which excludes transactions through stocking
representatives and distributors, accounted for 31.5%, 36.8% and 38.1% of our
net product revenues in 2001, 2002 and the six months ended June 30, 2003,
respectively.

No single end customer, which we define as original equipment manufacturers,
or OEMs, original design manufacturers, or ODMs, contract electronic
manufacturers, or CEMs, or end users, represented 10.0% or more of our net
product revenues during 2001, 2002 or the six months ended June 30, 2003.

Since March 2001, we have been increasing our out-sourcing activities with
our customer service logistics to support our customers.  Currently, Silicon
Professional Technology Ltd., or SPT, supports our customers in Taiwan, China
and other Southeast Asia countries.  SPT provides planning, warehousing,
delivery, billing, collection and other logistic functions for us in these
regions.  SPT is a wholly owned subsidiary of one of our stocking
representatives in Taiwan, Professional Computer Technology Limited, or PCT.
Please see a description of our relationship with PCT under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Related Party Transactions" in our Annual Report on Form 10-K for the year ended
December 31, 2002.  Products shipped to SPT are accounted for as our inventory
held at our logistics center, and revenue is recognized when the products have
been delivered and are considered as a sale to our end customers by SPT.  For
the year ended December 31, 2002 and the six months ended June 30, 2003, SPT
serviced end customer sales accounted for 57.4% and 62.7% of our net product
revenues recognized, respectively.  As of December 31, 2002 and June 30, 2003,
SPT represented 68.5% and 63.6% of our net accounts receivable,
respectively.

16

---

We ship products to, and have accounts receivable from, OEMs, ODMs, CEMs,
stocking representatives, distributors, and our logistics center.  Our stocking
representatives, distributors and logistics center reship our products to our
end customers, including OEMs, ODMs, CEMs and end users. No stocking
representative or distributor serviced more than 10.0% of our end customer sales
in 2001, 2002 or the six months ended June 30, 2003.

Critical Accounting Estimates

For information related to our revenue recognition and other critical
accounting estimates, please refer to the "Critical Accounting Estimates"
section of "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in our Annual Report on Form 10-K for the year
ended December 31, 2002.

Results of Operations: Quarter and Six Months Ended June 30, 2003

Net Revenues

Net revenues were $64.2 million for the second quarter of 2003 as
compared to $61.7 million in the first quarter of 2003 and $69.5 million for the
second quarter of 2002.  Revenues for the second quarter of 2003 increased
compared to the prior quarter primarily due to increased revenues from
technology licensing and increased average selling prices for our products,
offset by a decrease in unit shipments.  Revenues decreased compared to the
second quarter of last year due to decreased average selling prices, offset by
increased unit shipments of our products and increased revenues from technology
licensing.  Our quarterly results are not indicative of annual results.  Average
selling prices and unit shipments fluctuate due to a number of factors including
the overall supply and demand for our products in the marketplace, maturing
product cycles and general economic conditions.  Net revenues were $125.9
million for the six months ended June 30, 2003 as compared to $144.1 million for
the comparable period in 2002.  The decrease from year to year was due to
decreased average selling prices, offset by increased unit shipments of our
products.

Product Revenues.  Product revenues were $54.9 million in the
second quarter of 2003 as compared to $53.9 million in the first quarter of 2003
and $61.5 million for the second quarter of 2002.  Product revenues increased
compared to the first quarter of 2003 primarily due to increased average selling
prices for our products by 2.5%, offset by decreased unit shipments by 1.4%.
Product revenues decreased compared to the second quarter of last year due to
decreased average selling prices for our products by 20.8%, offset by increased
unit shipments by 9.2%.  Product revenues decreased to $108.8 million in the
first half of 2003 from $127.8 million in the first half of 2002 due to
decreased average selling prices for our products by 19.6%, offset by increased
unit shipments by 5.1%.

Technology Licensing Revenues.  Revenues from royalties and license
fees were $9.3 million in the second quarter of 2003, as compared to $7.8
million in the first quarter of 2003 and $8.0 million in the second quarter of
2002.  The increase in technology licensing revenues from the first quarter of
2003 to the second quarter of 2003 is due to increased royalty and license fees
recognizedfrom existing licensees.  The increase in
technology licensing revenues from the second quarter of 2002 to the second
quarter of 2003 is due to increased royalty from existing licensees, offset by
decreased license fees recognized. Revenues from technology licensing increased
to $17.1 million for the six months ended June 30, 2003 from $16.3 million for
the comparable period in 2002. The period to period increase in technology
licensing revenues is due to increased royalty from existing licensees, offset
by decreased license fees recognized.  We anticipate that revenues from
technology licensing may fluctuate materially in the future.

Gross Profit

Gross profit was $16.2 million, or 25.3% of net revenues, in the second
quarter of 2003 as compared to gross profit of $9.2 million, or 14.9% of net
revenues, in the first quarter of 2003 and $19.2 million, or 27.7% of net
revenues, in the second quarter of 2002.  The increase in gross profit from the
first quarter of 2003 to the second quarter of 2003 is due to increased revenues
from technology licensing by $1.5 million and increased average selling prices
of our products by 2.5%, offset by decreased unit shipments by 1.4%.  The
decrease in gross profit in the second quarter of 2003 when compared to the
second quarter of 2002 is due primarily to decreases in average selling prices
by 20.8%, offset by increased unit shipments by 9.2% and increased revenues from
technology licensing by $1.3 million.  For the six months ended June 30, 2003,
gross profit was $25.5 million, or 20.2% of net revenues, compared to $43.3
million, or 30.1% of net revenues, for the comparable period in 2002.  Product
gross margin was 12.6% for the second quarter of 2003, compared to 2.6% for the
first quarter of 2003 and 18.3% for the second quarter of 2002.  The increase in
product gross margin from the first quarter of 2003 to the second quarter of
2003 is due to increased average selling prices, offset by lower unit shipments.
The decrease in product gross margin from the second quarter of 2002 to the
second quarter of 2003 relates to decreased

17

---

Operating Expenses

Our operating expenses consist of research and development, sales and
marketing, and general and administrative expenses.  Operating expenses were
$20.0 million, or 31.1% of net revenues, in the second quarter of 2003, compared
to $20.3 million, or 32.9% of net revenues, in the first quarter of 2003, and
$26.3 million, or 37.8% of net revenues, in the second quarter of 2002.  The
decrease from the first quarter of 2003 was primarily due to decreased
commissions expenses of $308,000 and decreased headcount and related costs of
$351,000, offset by increased engineering mask costs of $290,000. The decrease
from the second quarter of 2002 was primarily due to decreases in bad debt
expenses of $4.1 million, legal expenses of $983,000 in connection with the
Atmel litigation, commissions expenses of $717,000 and engineering mask, wafer
and evaluation part expenses of $696,000, offset by increased headcount and
related costs of $494,000.  Operating expenses decreased to $40.3 million for
the six months ended June 30, 2003 from $49.0 million for the comparable period
in 2002.  The period to period decrease was due to decreases in bad debt
expenses of $4.0 million, legal expenses of $1.4 million, commissions expenses
of $1.6 million and engineering mask, wafer and evaluation part expenses of $1.7
million, offset by increased headcount and related costs of $1.1 million.  We
anticipate that we will continue to devote substantial resources to research and
development, sales and marketing and to general and administrative functions,
and that these expenses may increase.

Research and development.  Research and development expenses
include costs associated with the development of new technologies, enhancements
to existing technologies, the development of new products, enhancements to
existing products, quality assurance activities and occupancy costs.  These
costs consist primarily of employee salaries and benefits and the cost of
materials such as wafers and masks.  Research and development expenses were
$11.3 million, or 17.6% of net revenues, during the second quarter of 2003, as
compared to $10.8 million, or 17.4% of net revenues, during the first quarter of
2003 and $11.9 million, or 17.2% of net revenues, during the second quarter of
2002.  Research and development expenses increased by 5.1% from the first
quarter of 2003 to the second quarter of 2003, primarily due to increases in engineering mask costs of $290,000 and headcount and
related costs of $285,000.  Research and development expenses decreased by 5.1%
from the second quarter of 2002 due primarily to decreased engineering mask,
wafer and evaluation part expenses of $696,000, offset by increased engineering
headcount and related costs of $254,000.  For the six months ended June 30,
2003, research and development expenses decreased to $22.1 million from $23.8
million for the comparable period in 2002.  The period to period decrease was
primarily due to decreased engineering mask, wafer and evaluation part expenses
of $1.7 million and decreased outside service costs of $308,000, offset by
increased engineering headcount and related costs of $383,000.  We expect
research and development expenses may increase in dollars.

Sales and marketing.  Sales and marketing expenses consist of
commissions, headcount and related costs, as well as travel, entertainment and
promotional expenses.  Sales and marketing expenses were $5.2 million, or 8.1%
of net revenues, in the second quarter of 2003, as compared to $6.0 million, or
9.6% of net revenues, in the first quarter of 2003 and $6.5 million, or 9.4% of
net revenues, during the second quarter of 2002.  The decrease in sales and
marketing expenses by 13.0% from the first quarter of 2003 to the second quarter
of 2003 was primarily attributable to decreased commissions expenses of $308,000
due to decreased product revenues in the second quarter of 2003 and decreased
headcount and related costs of $381,000.  The decrease in sales and marketing
expenses by 20.6% from the second quarter of 2002 to the second quarter of 2003
was primarily attributable to decreased commissions expenses of $717,000 and
decreased headcount and related costs of $350,000.  Sales and marketing expenses
for the six months ended June 30, 2003 were $11.1 million as compared to $14.0
million for the same period in 2002.  The period to period decrease was
primarily due to decreases related to commissions expenses of $1.6 million,
headcount and related costs of $776,000 and patent and intellectual property
support of $272,000, offset by increased logistics center fees of $352,000.  We
expect sales and marketing expenses may increase in dollars.  In addition,
fluctuations in revenues will cause fluctuations in sales and marketing expenses
as it impacts our commission expenses.

General and administrative.  General and administrative expenses
consist of salaries and related costs for administrative, executive and finance
personnel, recruiting costs, professional services and legal fees and allowances
for doubtful accounts.  General and administrative expenses were $3.5 million,
or 5.5% of net revenues, in the second quarter of 2003, as compared to $3.6
million, or 5.8% of net revenues, in the first quarter of 2003 and $7.9 million,
or 11.3% of net revenues, during the second quarter of 2002.  General and
administrative expenses in the second quarter of 2003 remained consistent

17

---

Interest and other income. Interest and other income was $578,000,
or 0.9% of net revenues, during the second quarter of 2003, as compared to
$456,000, or 0.7% of net revenues, during the first quarter of 2003 and
$907,000, or 1.3% of net revenues, during the second quarter of 2002. Interest
income increased from the first quarter of 2003 to the second quarter of 2003
primarily due to the increase in average cash, cash equivalents and
available-for-sale investments.  Interest income decreased from the second quarter of 2002
to the second quarter of 2003, primarily due to decreasing interest rates on
invested cash.  Interest and other income decreased to $1.0 million for the six
months ended June 30, 2003 from $1.9 million for the comparable period in 2002.
The decrease from period to period was due to decreasing interest rates on
invested cash.

Interest Expense.  Interest expense was $41,000 for the second
quarter of 2003 as compared to $38,000 for the first quarter of 2003 and $66,000
for the second quarter of 2002. Interest expense decreased to $79,000 for the
six months ended June 30, 2003 from $130,000 for the comparable period in 2002.
Interest expense relates to interest and fees under our line of credit and our
notes payable.  We terminated our line of credit in July 2002.

Provision for (Benefit from) Income Taxes

We recorded an income tax expense of $1.4 million in the second quarter of
2003 as compared to zero tax expense in the first quarter of 2003.  This was
primarily due to the lower than expected loss for the second quarter of 2003
that resulted in a lower than expected tax benefit from federal and state income
taxes.  This compares with a tax benefit of $2.0 million in the second quarter
of 2002, which was based on a 32.0% tax rate on loss before taxes.  We plan to
implement our international tax structure during the second half of 2003 and
expect our tax rate to be negative 10%, resulting in a corresponding tax expense
for the remainder of 2003.  Our tax rate may change depending on our
profitability and the timing of the implementation of certain tax planning
strategies.  As of June 30, 2003, we have total short-term and long-term
deferred tax assets of $34.5 million.  If we continue to incur net losses in the
future and the realization of the deferred tax assets through future taxable
income becomes uncertain, we may be required to provide a valuation allowance
for our deferred tax assets.

Segment Reporting

Our operations involve the design, development, manufacturing,
marketing and technical support of our nonvolatile memory technology and
products.  We offer low and medium density devices that target a broad range of
existing and emerging applications in the digital consumer, networking, wireless
communications and Internet computing markets.  Our products are differentiated
based upon attributes such as density, voltage, access speed, package and
predicted endurance.  We also license our technology for use in non-competing
applications.  Our reportable segments are: the Standard Memory Product Group,
or SMPG, the Application Specific Product Group, or ASPG, the Special Product
Group, or SPG, and Technology Licensing.  Refer to Note 8 to the Condensed
Consolidated Financial Statements for revenue and gross profit information by
reportable segment.  Our analysis of the changes for each segment is discussed
below.

SMPG includes our three standard flash memory product families: the
Small-Sector Flash, or SSF, family, the Multi-Purpose Flash, or MPF, family, and the
Many-Time Programmable, or MTP, family.  Effective January 1, 2003, we
transferred certain MTP products from SMPG to SPG.  Accordingly, our 2002
segment revenues and gross profit information have been reclassified for
presentation purposes as if the transfer occurred as of January 1, 2002.  SMPG
revenues were $39.1 million for the second quarter of 2003, as compared to $36.0
million in the first quarter of 2003 and $41.5 million in the second quarter of
2002.  The increase in revenues from the first quarter of 2003 was primarily due
to increases in unit shipments of our products by 0.7% and average selling
prices by 4.6%.  The decrease in revenues from the second quarter of 2002 was
primarily due to decreased average selling prices by 16.3%, offset by increased
unit shipments by 7.0%.  For the six months ended June 30, 2003, SMPG revenues
were $75.2 million, as compared to $83.6 million for the comparable period in
2002.  The period to period decrease in revenues was primarily due to decreased
average selling
19

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ASPG includes Concurrent SuperFlash, Serial Flash, Firmware Hub, or FWH, and
Low Pin Count, or LPC, flash products. ASPG also includes flash embedded
controllers such as the ATA controller.  Effective January 1, 2003, we
transferred certain flash microcontroller products from ASPG to SPG.
Accordingly, our 2002 segment revenues and gross profit information have been
reclassified for presentation purposes as if the transfer occurred as of January
1, 2002.  ASPG revenues were $12.7 million for the second quarter of 2003, as
compared to $13.8 million in the first quarter of 2003 and $16.3 million in the
second quarter of 2002.  The decrease in revenues from both the first quarter of
2003 and second quarter of 2002 was primarily due to decreased average selling
prices by 5.6% and 33.8%, respectively, offset by increased unit shipments by
3.2% and 20.4%, respectively.  For the six months ended June 30, 2003, ASPG
revenues were $26.5 million, as compared to $36.7 million for the comparable
period in 2002.  The period to period decrease in revenues was primarily due to
decreased average selling prices by 30.0%, offset by increased unit shipments by
4.9%.  Gross margin decreased from 21.1% in the first quarter of 2003 to 14.5%
in the second quarter of 2003 primarily due to decreased average selling prices.
Gross margin decreased from 40.6% in the second quarter of 2002 to 14.5% in the
second quarter of 2003 primarily due to lower average selling prices.  For the
six months ended June 30, 2003, gross margin was 17.9%, as compared to 33.1% for
the comparable period in 2002.  The period to period decrease in gross margin
was primarily due to changes in product mix and decreased average selling
prices.

SPG includes ComboMemory, ROM/RAM Combos, MTP, flash microcontroller and
other special flash products.  Effective January 1, 2003, we transferred certain
MTP products from SMPG to SPG and certain flash microcontroller products from
ASPG to SPG.  Accordingly, our 2002 segment revenues and gross profit
information have been reclassified for presentation purposes as if the transfer
occurred as of January 1, 2002.  SPG revenues were $3.0 million for the second
quarter of 2003, as compared to $4.1 million in the first quarter of 2003 and
$3.7 million in the second quarter of 2002.  The decrease in revenues from the
first quarter of 2003 was primarily due to a decrease in unit shipments by
29.5%, offset by an increase in average selling prices by 6.1%.  The decrease
from the second quarter of 2002 was primarily due to lower average selling
prices by 21.3%, offset by increased unit shipments by 4.7%.  For the six months
ended June 30, 2003, SPG revenues were $7.1 million, as compared to $7.5 million
for the comparable period in 2002.  The period to period decrease in revenues
was primarily due to decreased average selling prices by 9.0%, offset by
increased unit shipments by 5.0% .  Gross margin increased from 5.6% in the
first quarter of 2003 to 10.2% in the second quarter of 2003 primarily due to
increased average selling prices and changes in product mix.  Gross margin
decreased from 24.4% in the second quarter of 2002 to 10.2% in the second
quarter of 2003 primarily due to decreased average selling prices.  For the six
months ended June 30, 2003, gross margin was 7.5%, as compared to 38.6% for the
comparable period in 2002.  The period to period decrease in gross margin was
primarily due to decreased average selling prices and changes in product
mix.

Revenue and gross profit related to Technology Licensing was $9.3 million for
the second quarter of 2003, $7.8 million for the first quarter of 2003 and $8.0
million for the second quarter of 2002.  The increase in technology licensing
revenues from the first quarter of 2003 to the second quarter of 2003 is due to
increased royalty and license fees recognized from existing licensees.  The
increase in technology licensing revenues from the second quarter of 2002 to the
second quarter of 2003 is due to increased royalty from existing licensees,
offset by decreased license fees recognized.  For the six months ended June 30,
2003, revenue and gross profit related to Technology Licensing was $17.1
million, as compared to $16.3 million for the comparable period in 2002.  The
period to period increase in technology licensing revenues is due to increased
royalty from existing licensees, offset by decreased license fees
recognized.

Related Party Transactions

The following table is a summary of our related party revenues and
purchases for the quarters and six months ended June 30, 2002 and 2003, and our
related party accounts receivable and accounts payable and accruals as of
December 31, 2002 and June 30, 2003 (in thousands).  For a description of our
relationship with these parties please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Related Party
Transactions" in our Annual Report on Form 10-K for the year ended December
31, 2002.

20

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`Three Months Ended            Three Months Ended
                                                     June 30, 2002                June 30, 2003
                                              -------------------------     -------------------------
                                               Revenues      Purchases       Revenues      Purchases
                                              -----------  ------------     -----------  ------------
Silicon Technology Co., Ltd................. $       483  $         --     $     1,478  $         --
Ambit Microsystems Corp.....................          95            --              --            --
Apacer Technology, Inc......................         233            96             480           713
Silicon Professional Technology Ltd.........      31,663            --          33,137            --
King Yuan Electronics Company, Limited......          --         5,958              --         4,421
Powertech Technology, Incorporated..........          --         2,152              --         1,936
                                              -----------  ------------     -----------  ------------
                                             $    32,474  $      8,206     $    35,095  $      7,070
                                              ===========  ============     ===========  ============

                                                  Six Months Ended              Six Months Ended
                                                    June 30, 2002                 June 30, 2003
                                              -------------------------     -------------------------
                                               Revenues      Purchases       Revenues      Purchases
                                              -----------  ------------     -----------  ------------
Silicon Technology Co., Ltd................. $       956  $         --     $     1,865  $         --
Ambit Microsystems Corp.....................         224            --              --            --
Apacer Technology, Inc......................         427           146             866           846
Professional Computer Technology Limited....         141            --              --            --
Silicon Professional Technology Ltd.........      66,152            --          68,169            --
King Yuan Electronics Company, Limited......          --         9,566              --         8,317
Powertech Technology, Incorporated..........          --         4,752              --         4,196
                                              -----------  ------------     -----------  ------------
                                             $    67,900  $     14,464     $    70,900  $     13,359
                                              ===========  ============     ===========  ============

                                                  December 31, 2002              June 30, 2003
                                              -------------------------     -------------------------
                                                              Trade                         Trade
                                                 Trade       Accounts          Trade       Accounts
                                               Accounts    Payable and       Accounts    Payable and
                                              Receivable     Accruals       Receivable     Accruals  
                                              -----------  ------------     -----------  ------------
Silicon Technology Co., Ltd................. $       459  $         --     $       805  $         --
Apacer Technology, Inc......................         141           119             877           710
Professional Computer Technology Limited....          --            73              --           137
Silicon Professional Technology Ltd.........      24,648           432          22,637           345
King Yuan Electronics Company, Limited......          --         4,285              --         4,350
Powertech Technology, Incorporated..........          --         2,253              --         2,021
                                              -----------  ------------     -----------  ------------
                                             $    25,248  $      7,162     $    24,319  $      7,563
                                              ===========  ============     ===========  ============`

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

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 143, "Accounting for
Asset Retirement Obligations," which addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs.  SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. We adopted SFAS No. 143 during the quarter ended
March 31, 2003.  The adoption of SFAS No. 143 has not had a material impact on
our consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities."  SFAS No. 146 addresses significant issues regarding
the recognition, measurement, and reporting of costs that are associated with exit and disposal
21

---

In November 2002, the FASB issued FASB Interpretation, or FIN, No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee.  In addition, FIN No. 45 requires disclosures about the guarantees
that an entity has issued, including a reconciliation of changes in the entity's
product warranty liabilities.  The initial recognition and initial measurement
provisions of FIN No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the guarantor's
fiscal year-end.  The disclosure requirements of FIN No. 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002.  We adopted the disclosure provision of FIN No. 45 for the year ended
December 31, 2002 and since December 31, 2002 the recognition and measurement
provisions of FIN No. 45 has not had a material impact on our consolidated
financial statements.

In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF Issue No.
00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. We
are currently assessing the impact of EITF Issue No. 00-21 on our consolidated
financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123."  SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation.
SFAS No. 148 also requires that disclosures of the pro forma effect of using the
fair value method of accounting for stock-based employee compensation be
displayed more prominently and in a tabular format. Additionally, SFAS No. 148
requires disclosure of the pro forma effect in interim financial statements. The
transition and annual disclosure requirements of SFAS No. 148 are effective for
fiscal years ended after December 15, 2002.  The interim disclosure requirements
are effective for interim periods beginning after December 15, 2002.  We have
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in APB Opinion No. 25 and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the estimate of the market value of our stock at the date of the
grant over the amount an employee must pay to acquire our stock.  We adopted the
interim disclosure provisions for our financial reports beginning for the
quarter ended March 31, 2003. As the adoption of this standard involves
disclosures only, the adoption of SFAS No. 148 did not have a material impact on
our consolidated financial statements.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51."  FIN No. 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties.  FIN No. 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003.  For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN No. 46 must be applied for the first
interim or annual period beginning after June 15, 2003.  We are currently
reviewing our equity investments and associated relationships to determine if
they are variable interest entities as defined by FIN No. 46.  It is reasonably
possible that we are the primary beneficiary of or hold a significant variable
interest in a variable interest entity.  The nature, purpose and activities of
the potential variable interest entities is outlined in Note 13 of our Notes to
the Consolidated Financial Statements filed in our Annual Report on Form 10-K
for the year ended December 31, 2002.  Our maximum exposure to loss as a result
of our involvement with the potential variable interest entities is our
investment in such entities as we are not obligated to provide any additional
financing.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity."  SFAS No. 150
establishes standards for how an issuer classifies and measures certain financial
22

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Liquidity and Capital Resources

Operating activities.  Our operating activities generated cash
of $20.0 million and $19.9 million for the six months ended June 30, 2002 and
2003, respectively.  For the six months ended June 30, 2003, our primary sources
of operating cash flow were the collection on an income tax refund of $14.4
million and the timing of inventory purchases and payments to our vendors and
service providers.  Cash generated from operating activities included a decrease
of $17.7 million in inventories and non-cash adjustments of $4.1 million related
to depreciation and amortization and $4.9 million related to provision for
excess and obsolete inventories.  Working capital uses of cash included a net
loss of $15.3 million, an increase in deferred tax assets of $12.2 million and a
decrease in trade accounts payable balances of $3.2 million.   We measure the
effectiveness of our collection efforts by an analysis of average days sales
outstanding.  Days sales outstanding were 51 days for the six months ended June
30, 2003 as compared to 52 days for the comparable period in 2002.  Collections
of accounts receivable and related days sales outstanding will fluctuate in
future periods due to the timing and amount of our future revenues, customer
payment terms and the effectiveness of our collection efforts.

Investing activities.  Our investing activities used cash of $5.5
million and $407,000 for the six months ended June 30, 2002 and 2003,
respectively. Investing activities in the six months ended June 30, 2003 were
primarily related to capital expenditures of $680,000, offset by net sales and
maturities of available-for-sale and equity investments of $273,000.  Investing
activities in the six months ended June 30, 2002 were primarily related to net
purchases of available-for-sale investments of $2.4 million and capital
expenditures of $2.9 million.

Financing activities.  Our financing activities provided cash of
$2.0 million and $1.9 million during the six months ended June 30, 2002 and
2003, respectively.  Cash generated from financing activities primarily related
to issuance of common stock under the employee stock purchase plan and the
exercise of employee stock options totaling $2.3 million and $2.1 million in the
six months ended June 30, 2002 and 2003, respectively.

Principal sources of liquidity at June 30, 2003 consisted of $178.8
million of cash, cash equivalents, short-term and long-term available-for-sale
investments.  In July 2002, we posted a bond in the amount of $36.5 million for
the Atmel litigation.  In connection with the bond, we have pledged cash, cash
equivalents and available-for-sale investments in the amount of $36.5 million.
As of June 30, 2003, this amount is included in restricted cash, cash
equivalents and available-for-sale investments in our balance sheet.

Purchase Commitments.   As of June 30, 2003, we had outstanding
purchase commitments with our foundry vendors of $24.6 million for delivery in
2003.  We have recorded a liability of $318,000 for adverse purchase
commitments.

Lease Commitments. We have long-term, non-cancelable building lease
commitments.  We are currently seeking subtenants for our unused office space.
During the third quarter of 2001, we recorded a period charge to other operating
expense of  $756,000 relating to an operating lease for an abandoned building.
This charge represents the estimated difference between the total non-discounted
future sublease income and our non-discounted lease commitments relating to this
building. The charge was an estimate and may be adjusted if we obtain a sublease
for the building and the actual sublease income is significantly different from
the estimate.  We may be unable to secure subtenants for this space due to the
decrease in demand for commercial rental space in Silicon Valley.  If we are not
successful in subleasing our unused office space, we may be required to take an
additional period charge for the balance of the future lease cost.  At December
31, 2002 and June 30, 2003, payments made have reduced the recorded liability to
$473,000 and $373,000, respectively.   See also "Business Risks - If we are
not successful in subleasing our unused office space, we may be required to take
a period charge for the difference between the total future sublease income and
our lease cost."

Future payments due under building lease, purchase commitments and other
contractual obligations as of June 30, 2003 (in thousands):

23

---

`Less than                        More than
Contractual obligations          Total     1 year    1-3 years  3-5 years   5 years
-----------------------------  ---------  ---------  ---------  ---------  ---------
Notes payable................ $   1,052  $     372  $     680  $      --  $      --
Operating leases.............    22,566      5,208      7,478      5,082      4,798
Purchase commitments.........    24,556     24,556         --         --         --
Other long-term liability....     1,140         --        537        218        385
                               ---------  ---------  ---------  ---------  ---------
Total........................ $  49,314  $  30,136  $   8,695  $   5,300  $   5,183
                               =========  =========  =========  =========  =========`

Stock Purchase Plan.  In September 2001, our board of directors
authorized the purchase of an aggregate of up to  $15.0 million of our common
stock. The purchases may be made in the open market at prevailing market prices
or in negotiated transactions off the market, subject to compliance with
applicable provisions of the California Corporations Code and in accordance with
applicable federal and state securities laws and regulations.  The stock
purchase program will continue until October 31, 2003 and will stay in effect
unless earlier revoked by our board of directors.  As of June 30, 2003, no
shares had been purchased under this program.

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



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

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

In addition, on May 7, 2002, the Court entered judgment against us in Atmel's
lawsuit against us in the total amount of $36.5 million.  In the event our
appeal of this lawsuit is unsuccessful, we may have to pay this amount to Atmel.
For more information, please also see "Business Risks - If we are accused
of infringing the intellectual property rights of other parties we may become
subject to time-consuming and costly litigation.  If we lose, we could suffer a
material impact on our business and be forced to pay damages."

From time to time, we are also involved in other legal actions arising in
the ordinary course of business.  We have incurred certain costs associated with
defending these matters.  There can be no assurance the Atmel complaint or other
third party assertions will be resolved without costly litigation, in a manner
that is not adverse to our financial position, results of operations or cash
flows or without requiring royalty payments in the future which may adversely
impact gross margins. No estimate can be made of the possible loss or possible
range of loss associated with the resolution of these contingencies.  As a
result, no losses have been accrued in our financial statements as of June 30,
2003.

24

---

Business Risks



Risks Related to Our Business



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

Although we were profitable in 2000, we incurred net losses for 2001,
2002 and in the first half of 2003, and in fiscal 1998 and 1999.  Our operating
results have fluctuated significantly and our past financial performance should
not be used to predict future operating results. Our recent quarterly and annual
operating results have fluctuated, and may continue to fluctuate, due to the
following factors, all of which are difficult to forecast and many of which are
out of our control:



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

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

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

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

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

In addition, political or economic events beyond our control
can suddenly result in increased operating costs.  For example, the terrorist
attacks of September 11, 2001 have resulted in a substantial increase to our
business insurance costs.  In addition, there is considerable public debate as
to whether to require companies to record compensation expense on stock option
grants.  Such requirements, if enacted, would substantially increase our
operating costs and impact our earnings (loss) per share.

25

---

We incurred material inventory valuation adjustments in 2001
and 2002 and we may incur additional material inventory valuation adjustments in
the future.

We typically plan our production and inventory levels based on internal
forecasts of customer demand, which are highly unpredictable and can fluctuate
materially. The value of our inventory is dependent on our estimate of future
average selling prices, and, if our projected average selling prices are over
estimated, we may be required to adjust our inventory value to reflect the lower
of cost or market. As of June 30, 2003, we had $62.1 million of inventory on
hand, a decrease of  $20.9 million, or 25.2%, from December 31, 2002. Total
valuation adjustments to inventory were $72.2 million in 2001, $9.2 million in
2002 and $4.9 million in the six months ended June 30, 2003, of which $2.5
million was recorded in the second quarter of 2003. Due to the large number of
units in our inventory, even a small change in average selling prices could
result in a material adjustment and could harm our financial results. Some of
our customers have requested that we ship them product that has a finished goods
date of manufacture that is less than one year old.  As of June 30, 2003, our
allowance for excess and obsolete inventories includes an allowance for our on
hand finished goods inventory with a date of manufacture of greater than two
years old and for certain products with a date of manufacture of greater than
one year old.  In the event that this becomes a common requirement, it may be
necessary for us to provide for an additional allowance for our on hand finished
goods inventory with a date of manufacture of greater than one year old, which
could result in a significant adjustment and could harm our financial
results.

We have significant deferred tax assets which may require valuation
allowances in the future.

We incurred losses in 2001 and 2002 and have incurred losses in 2003 year to
date.  We will continue to evaluate the positive and negative evidence of the
recoverability of our deferred tax assets each quarter.  If we determine that it
is more likely than not that the deferred tax assets will not be recovered, we
will be required to provide a valuation allowance against our deferred tax
assets resulting in a material charge in that period.  As of June 30, 2003, we
had deferred tax assets of $34.5 million.

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

Due to possible customer changes in delivery schedules and cancellations of
orders, our backlog at any particular date is not necessarily indicative of
actual sales for any succeeding period.  A reduction of backlog during any
particular period, or the failure of our backlog to result in future revenue,
could harm our business.  We began to experience a sharp downturn in several of
our markets late in the fourth quarter of 2000, as our customers reacted to
weakening demand for their products.  While our total revenues increased in the
second quarter of 2003 compared to the first quarter of 2003, the market
environment for our business may continue to be difficult.  Our business could
be harmed by industry-wide fluctuations in the future.

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

During 2001, 2002 and first half of 2003, our export product and licensing
revenues accounted for 90.3%, 92.0% and 92.2% of our net revenues, respectively.
Our international business activities are subject to a number of risks, each of
which could impose unexpected costs on us that would harm our operating results.
These risks include:

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

In addition, we have made equity investments in companies with operations in
China, Japan and Taiwan.  The value of our investments is subject to the
economic and political conditions particular to their industry, their countries
and to foreign exchange rates and the global economy.  If we determine that a
change in the recorded value of an investment is other than temporary, we will
adjust the value of the investment.  Such an expense could have a negative
impact on our operating results. During 2002 we determined that a decline in the
value of our investment in Apacer was other than temporary and we wrote down the
value of our investment by $7.8 million.

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We derived 80.7%, 88.5% and 89.2% of our net product revenues from Asia
during 2001, 2002 and the first half of 2003, respectively.  Additionally,
substantially all of our wafer suppliers and packaging and testing
subcontractors are located in Asia.  Any kind of economic, political or
environmental instability in this region of the world can have a severe negative
impact on our operating results due to the large concentration of our production
and sales activities in this region.  For example, during 1997 and 1998, several
Asian countries where we do business, such as Japan, Taiwan and Korea,
experienced severe currency fluctuation and economic deflation, which negatively
impacted our revenues and also negatively impacted our ability to collect
payments from customers.  During this period, the lack of capital in the
financial sectors of these countries made it difficult for our customers to open
letters of credit or other financial instruments that are guaranteed by foreign
banks.  Finally, the economic situation during this period exacerbated a decline
in selling prices for our products as our competitors reduced product prices to
generate needed cash.

It should also be noted that we are greatly impacted by the political,
economic and military conditions in Taiwan.  Taiwan and China are continuously
engaged in political disputes and both countries have continued to conduct
military exercises in or near the other's territorial waters and airspace.  Such
disputes may continue and even escalate, resulting in an economic embargo, a
disruption in shipping or even military hostilities.  Any of these events could
delay production or shipment of our products.  Any kind of activity of this
nature or even rumors of such activity could harm our operations, revenues,
operating results and stock price.

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

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

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

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

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

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

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

Since March 2001, we have been increasing our out-sourcing activities with
our customer service logistics to support our customers.  Currently SPT supports
our customers in Taiwan, China and other Southeast Asia countries.  SPT provides
planning, warehousing, delivery, billing, collection and other logistic
functions for us in these regions.  SPT is a wholly owned subsidiary of one of
our stocking representatives in Taiwan, PCT.  During 2001, 2002 and the six
months ended June 30, 2003, SPT serviced end customer shipments accounted for
29.7%, 57.4% and 62.7% of our net product revenues recognized, respectively.
For further description of our relationships with PCT and SPT, please refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Related Party Transactions" in our Annual Report on Form 10-K for
the year ended December 31, 2002.

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

27

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

We outsource substantially all of our manufacturing and testing activities.
We currently buy all of our wafers and sorted die from a limited number of
suppliers.  Substantially all of our products are manufactured by five
foundries, Taiwan Semiconductor Manufacturing, Co., Ltd., or TSMC, in Taiwan,
Sanyo, Seiko-Epson and Yasu Semiconductor in Japan, and Samsung in Korea.  We
anticipate that these foundries, together with Vanguard in Taiwan will
manufacture the majority of our products for the remainder of 2003.  In March
2001, we invested $50.0 million in Grace Semiconductor Manufacturing
Corporation, or GSMC, a Cayman Islands company, for a wafer foundry project
located in Shanghai, China.  We anticipate that GSMC will begin to manufacture
some of our products in the second half of 2003. If these suppliers fail to
satisfy our requirements on a timely basis at competitive prices we could suffer
manufacturing delays, possible loss of revenues or higher than anticipated
costs of revenues, any of which could harm our operating results.

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

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

In order to grow, we need to increase our present manufacturing capacity.  We
currently believe that the existing capacity available to us will be sufficient
through 2003.  However, events that we have not foreseen could arise which would
limit our capacity.  Similar to our $50.0 million investment in GSMC, we may
determine that it is necessary to invest substantial capital in order to secure
appropriate production capacity commitments.  If we cannot secure additional
manufacturing capacity on acceptable terms, our ability to grow will be impaired
and our operating results will be harmed.

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

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

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

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

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

The fabrication of our products requires wafers to be produced in a highly
controlled and ultra-clean environment.  Semiconductor companies that supply our
wafers have, from time to time, experienced problems achieving acceptable wafer
manufacturing yields.  Semiconductor manufacturing yields are a function of both
our design technology and the foundry's manufacturing process technology.  Low
yields may result from marginal design or manufacturing process drift.  Yield
problems may not be identified until the wafers are well into the production
process, which often makes them difficult, time consuming and costly to correct.
Furthermore, we rely on independent foundries for our wafers which increases the effort and

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

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

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

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

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

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

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

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

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

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

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

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

29

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

The markets for our products are characterized by:

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

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

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

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

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

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

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

We rely on a combination of patent, trade secrets, copyrights, mask work
rights, nondisclosure agreements and other contractual provisions and technical
measures to protect our intellectual property rights.  Policing unauthorized use
of our products, however, is difficult, especially in foreign countries.
Litigation may continue to be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity.  Litigation could result in substantial
costs and diversion of resources and could harm our business, operating results
and financial condition regardless of the outcome of the litigation.   We own 68
patents in the United States relating to our products and processes, with
expiration dates ranging from 2008 to 2023, and have filed for several more.  In
addition, we hold several patents in Europe and Canada, and have filed several
more foreign patent applications in Europe, Japan, Korea, Taiwan and Canada.  We
cannot assure you that any pending patent application will be granted.  Our
operating results could be harmed by the failure to protect our intellectual
property.

30

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

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

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

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

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

Our litigation may be expensive, may be protracted and confidential
information may be compromised.  Whether or not we are successful in our
lawsuit with Atmel, we expect this litigation to continue to consume substantial
amounts of our financial and managerial resources.  On April 8, 2002, a jury
found that we willfully infringed Atmel's '811 and '829 patents, and awarded
Atmel $20.0 million in actual damages.  On May 7, 2002, the court entered
judgment in the total amount of $36.5 million, which includes the original
$20.0 million.  The '811 and '829 patents expired in February 2002.  Therefore,
we are not precluded from selling any of our products.  We believe that there
were significant errors in both the infringement and the damages verdicts, and
filed a Notice of Appeal on July 16, 2002.  On October 7, 2002, we filed our
opening brief in that appeal.  Our final reply brief was filed on January 16,
2003.  Atmel filed its final brief on January 30, 2003.  On May 8, 2003 the
Court of Appeals for the Federal Circuit heard oral arguments on our appeal of
the judgment finding that we infringed the '811 and '829 patents.  We are
awaiting the Court of Appeals' decision.  Atmel has agreed to stay its
enforcement of this judgment pending our appeal.  In July 2002, we posted a bond
in the amount of $36.5 million pending the appeal.  We have incurred certain
costs associated with defending this matter, and at any time Atmel may file
additional claims against us, which could increase the risk, expense and
duration of the litigation.  Further, because of the substantial amount of
discovery required in connection with this type of litigation, there is a risk
that some of our confidential information could be compromised by disclosure.
For more information with respect to our litigation, please also see "Part II,
Item 1 - Legal Proceedings."

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

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

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

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

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

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

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

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

Risks Related to Our Industry

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

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

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

The semiconductor industry has historically been cyclical, characterized by
periodic changes in business conditions caused by product supply and demand
imbalance.  When the industry experiences downturns, they often occur in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions.  These downturns are characterized by weak product
demand, excessive inventory and accelerated declines of average selling prices.
In some cases, downturns, such as the one we have experienced since late 2000,
have lasted for more than a year.  Our business could be harmed by industry-wide
fluctuations in the future.  The flash memory products portion of the
semiconductor industry, from which we derive substantially all of our revenues
suffered from excess capacity in 1996, 1997 and 1998, which resulted in greater
than normal declines in our markets, which unfavorably impacted our revenues,
gross margins and profitability.  While these conditions improved in 1999 and
2000, deteriorating market conditions at the end of 2000 and continuing through
the first half of 2003 have resulted in the decline of our selling prices and
harmed our operating results.

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

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

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to risks associated with foreign exchange rate fluctuations
due to our international manufacturing and sales activities. These exposures may
change over time as business practices evolve and could negatively impact our
operating results and financial condition. All of our sales are denominated in
U.S. dollars. An increase in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive and therefore reduce the
demand for our products. Such a decline in the demand could reduce revenues
and/or result in operating losses. In addition, a downturn in the economies of
China, Japan or Taiwan could impair the value of our equity investments in
companies with operations in these countries.  If we consider the value of these
companies to be impaired, we will write down, or expense, some or all of our
investments.  In the fourth quarter of 2001, we wrote down our investment in KYE
by $3.3 million to $1.3 million due to an other than temporary decline in its
market value.  At June 30, 2003, the recorded value of our KYE investment was
$1.6 million based on the quoted market price as of the balance sheet date.  In
the third quarter of 2002, we wrote down our investment in Apacer, a privately
held memory module manufacturer located in Taiwan by $7.8 million due to an
other than temporary decline in its value.  As of June 30, 2003, the recorded
value of our Apacer investment was $4.4 million.  We also have equity
investments in companies with operations in China, Japan, Taiwan and United
States with recorded values at June 30, 2003 of $50.0 million, $0.9 million,
$6.2 million and $0.3 million, respectively.

At any time, fluctuations in interest rates could affect interest earnings on
our cash, cash equivalents and available-for-sale investments or the fair value
of our investment portfolio. We believe that the effect, if any, of reasonably
possible near term changes in interest rates on our financial position, results
of operations, and cash flows would not be material. Currently, we do not hedge
these interest rate exposures. As of June 30, 2003, the
carrying value of our available-for-sale investments approximated fair value.
The table below presents the carrying value and related weighted average
interest rates for our unrestricted and restricted cash and cash equivalents and
available-for-sale investments as of June 30, 2003 (in thousands).

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

  Cash and cash equivalents - variable rate................................ $ 141,661      0.6%
  Short-term available-for-sale investments - fixed rate...................    58,112      1.5%
  Long-term available-for-sale investments (1 to 2 years) - fixed rate.....     7,842      1.4%
                                                                             ---------
                                                                            $ 207,615      0.9%
                                                                             =========`

Item 4.  Controls and Procedures

Based on their evaluation as of June 30, 2003, our chief executive
officer and chief financial officer, have concluded that our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) were sufficiently effective to ensure that the
information required to be disclosed by us in this quarterly report on Form 10-Q
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and Form 10-Q.
There were no changes in our internal control over financial
reporting during the quarter ended June 30, 2003 that have materially affected,
or are reasonably likely to materially affect our internal control over
financial reporting.

Our management, including our chief executive officer and chief financial
officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system

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PART II

Item 1.  Legal Proceedings

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

On two of the six patents, the District Court ruled by summary judgment that
we did not infringe.  Two of the other patents were invalidated by another U.S.
District Court in a proceeding to which we were not a party, but this decision
was later reversed by the Federal Circuit Court of Appeals. As discussed below,
as the result of a ruling in another case, Atmel has withdrawn its allegations
as to another patent ("the '747 patent").  At this point, three patents remain
at issue in Atmel's District Court case against us ("the '811, '829 and '903
patents").  All of these patents have expired, so Atmel cannot obtain an
injunction against the sale of our products.

On February 17, 1997, Atmel filed an action with the International Trade
Commission, or ITC, against two suppliers of our parts, involving four of the
six patents that Atmel alleged that we infringed in the District Court case
above.  We intervened as a party to that investigation.

On October 16, 2000, the ITC found the '903 patent valid and infringed, and
issued a Limited Exclusion Order, which
ruled that we could not import into the United States certain products that use
the claimed circuit made by one of our suppliers. The ITC also ruled that we do
not infringe the '811 and '829 patents.  The '903 patent and the ITC's Limited
Exclusion Order expired on September 14, 2001.

On January 14, 2002, the court in Atmel Corp. v. Macronix
America, Inc. denied Atmel's motion to correct the '747 patent. As a result
of the Court's decision, Atmel withdrew its claims against us based on the '747
patent.

A jury trial on the '811 and '829 patents began on April 8, 2002.  The jury
found that we willfully infringed those patents, and awarded Atmel $20.0 million
in actual damages.  On May 7, 2002, the Court entered judgment in the total
amount of $36.5 million, which includes the original $20.0 million.  The '811
and '829 patents expired in February 2002.  Therefore, we are not precluded from
selling any of our products.  We believe that there were significant errors in
both the infringement and the damages verdicts, and filed a Notice of Appeal on
July 16, 2002. On October 7, 2002, we filed our opening brief in that appeal.
Our final reply brief was filed on January 16, 2003.  Atmel filed its final
brief on January 30, 2003.  On May 8, 2003, the Court of Appeals for the Federal
Circuit heard oral arguments on our appeal of the judgment finding that we
infringed the '811 and '829 patents.  We are awaiting the Court of Appeals'
decision.  Atmel has agreed to stay its enforcement of this judgment pending our
appeal.  In July 2002, we posted a bond in the amount of $36.5 million pending
the appeal.  In connection with the bond, we have pledged cash, cash equivalents
and available-for-sale investments in the amount of $36.5 million.  As of June
30, 2003, this amount is included in restricted cash, cash equivalents and
available-for-sale investments in our balance sheet.

Trial on the '903 patent was severed and heard before a jury beginning on
July 29, 2002.  The Court ruled that we infringed that patent, so the jury was
asked to decide whether the patent is valid and, if so, assess what, if any,
damages are due Atmel.  The jury was unable to unanimously decide whether the
'903 patent is valid, and a mistrial was declared.  The Court denied Atmel's
request to schedule a retrial until the appeals of the verdict regarding the
'811 and '829 patents are decided.

From time to time, we are also involved in other legal actions arising in the
ordinary course of business.  We have incurred certain costs while defending
these matters.  There can be no assurance the Atmel complaint or other third
party assertions will be resolved without costly litigation, in a manner that is
not adverse to our financial position, results of operations or cash flows or
without requiring royalty payments in the future which may adversely impact
gross margins.  No estimate can be

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

Our Annual Meeting of Shareholders was held on June 20, 2003.  At the
Annual Meeting, the shareholders:

1. elected the persons listed below to serve as a director of SST for the
ensuing year and until their successors are elected,
2. approved the 1995 Equity Incentive Plan, as amended, to increase the
aggregate number of shares of Common Stock authorized for issuance under such
plan by 1,500,000 to 31,750,000 shares,
3. approved the 1995 Non-Employee Directors' Plan, as amended, to increase the
aggregate number of shares of Common Stock authorized for issuance under such
plan by 150,000 to 950,000 shares,
4. approved the 1995 Employee Stock Purchase Plan, as amended, to increase the
aggregate number of shares of Common Stock authorized for issuance under such
plan by 2,400,000 to 6,000,000 shares, and
5. ratified the selection of PricewaterhouseCoopers LLP as our independent
accountants for the fiscal year ending December 31, 2003.

On April 24, 2003, the record date of the Annual Meeting, we
had 94,349,473 shares of Common Stock outstanding.  At the Annual Meeting,
holders of 85,629,994 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 Directors



|Director          | Votes in Favor | Withheld 
|----------------- | -------------- | ---------
|Bing Yeh          | 77,963,654     | 7,666,340
|Yaw Wen Hu        | 78,326,303     | 7,303,691
|Tsuyoshi Taira    | 82,306,978     | 3,323,016
|Yasushi Chikagami | 82,307,878     | 3,322,116
|Ronald Chwang     | 82,306,878     | 3,323,116

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



|Votes in Favor | 60,706,882
|-------------- | ----------
|Votes Against  | 24,823,047
|Abstentions    | 100,065   

Proposal 3 - Approval of the 1995 Non-Employee Directors'
Plan, as Amended



|Votes in Favor | 79,515,492
|-------------- | ----------
|Votes Against  | 5,996,806 
|Abstentions    | 117,696   

Proposal 4 - Approval of the 1995 Employee Stock Purchase
Plan, as Amended



|Votes in Favor | 81,826,042
|-------------- | ----------
|Votes Against  | 3,690,791 
|Abstentions    | 113,161   

Proposal 5 - Ratification of Selection of Independent
Accountant



|Votes in Favor | 84,479,691
|-------------- | ----------
|Votes Against  | 948,402   
|Abstentions    | 201,901   

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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,
2002.

Exhibit 31.1  Certification required by Rule 13a-14(a).

Exhibit 31.2  Certification required by Rule 13a-14(a).

Exhibit 32.1  Certification of President and Chief Executive Officer, as
required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code (18 U.S.C. 1350).*

Exhibit 32.2  Certification of Vice President Finance & Administration,
Chief Financial Officer and Secretary, as required by Rule 13a-14(b) and Section
1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).*

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

(b)	Reports on Form 8-K filed during the quarter ended June 30, 2003: On April
23, 2003, we filed a current report on Form 8-K  in connection with
the issuance of a press release dated April 23, 2003 announcing our financial
results for the first quarter of 2003.  The press release was
furnished under Item 9.



SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sunnyvale, County of
Santa Clara, State of California, on the 13th day of August, 2003.



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

                           By: /s/ BING YEH

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

                           By: /s/ JEFFREY L. GARON

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

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