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

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FORM 10-Q

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

For the quarterly period ended September 30, 2002

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

Number of shares outstanding of our Common Stock, no par value, as of the latest
practicable date, October 31, 2002:   93,137,330.

1









Silicon Storage Technology, Inc.
              FORM 10-Q: QUARTER ENDED SEPTEMBER 30, 2002
                                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 | 14      
|                                                                                                                      |         
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                  | 30      
|                                                                                                                      |         
|Item 4.   Controls and Procedures                                                                                     | 31      
|                                                                                                                      |         
|PART II.  OTHER INFORMATION                                                                                           |         
|                                                                                                                      |         
|Item 1.  Legal Proceedings                                                                                            | 31      
|                                                                                                                      |         
|Item 6.   Exhibits and Reports on Form 8-K                                                                            | 32      
|                                                                                                                      |         
|Signatures                                                                                                            | 33      
|Certifications                                                                                                        | 33      

2

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Part I.   FINANCIAL INFORMATION



Item 1.	Condensed Consolidated Financial Statements

SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                      (in thousands, except per share data)
Three Months Ended            Nine Months Ended
                                                   September 30,                September 30,
                                            ------------------------     ------------------------
                                               2001         2002            2001         2002
                                            -----------  -----------     -----------  -----------
                                            (unaudited)  (unaudited)     (unaudited)  (unaudited)

Net revenues:
     Product revenues - unrelated parties  $    39,368  $    21,712     $   139,290  $    80,965
     Product revenues - related parties         25,795       37,733          58,699      106,255
     License revenues                            9,034        8,311          25,221       24,595
                                            -----------  -----------     -----------  -----------
          Total net revenues                    74,197       67,756         223,210      211,815
Cost of revenues                                92,239       49,400         187,634      150,137
                                            -----------  -----------     -----------  -----------
Gross profit (loss)                            (18,042)      18,356          35,576       61,678
                                            -----------  -----------     -----------  -----------
Operating expenses:
     Research and development                   13,588       11,955          38,299       35,746
     Sales and marketing                         7,098        5,083          19,621       19,106
     General and administrative                  4,548        3,086          14,993       14,257
     Other                                         756           --             756           --
                                            -----------  -----------     -----------  -----------
          Total operating expenses              25,990       20,124          73,669       69,109
                                            -----------  -----------     -----------  -----------
Loss from operations                           (44,032)      (1,768)        (38,093)      (7,431)
Interest and other income                        1,398          670           6,244        2,545
Interest expense                                   (79)         (41)           (265)        (171)
Other expense                                       --       (7,757)             --       (7,757)
                                            -----------  -----------     -----------  -----------
Loss before benefit from income taxes          (42,713)      (8,896)        (32,114)     (12,814)
Benefit from income taxes                      (16,231)      (4,128)        (12,203)      (5,382)
                                            -----------  -----------     -----------  -----------
Net loss                                   $   (26,482) $    (4,768)    $   (19,911) $    (7,432)
                                            ===========  ===========     ===========  ===========

Net loss per share - basic and diluted     $     (0.29) $     (0.05)    $     (0.22) $     (0.08)
                                            ===========  ===========     ===========  ===========

Shares used in per share calculation            91,208       93,037          90,954       92,492
                                            ===========  ===========     ===========  ===========

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, September 30,
                                                                       2001          2002
                                                                   ------------  ------------
                                                                   (unaudited)   (unaudited)
                             ASSETS

Current assets:
    Cash and cash equivalents                                     $     93,598  $    107,614
    Short-term available-for-sale investments                           71,666        39,799
    Trade accounts receivable-unrelated parties, net of allowance
      for doubtful accounts of $2,814 at December 31, 2001 and
      $5,197 at September 30, 2002                                      19,874        14,603
    Trade accounts receivable-related parties                           20,796        25,446
    Inventories                                                        108,224        92,892
    Deferred tax asset                                                  24,115        18,257
    Other current assets                                                11,839        18,940
                                                                   ------------  ------------
         Total current assets                                          350,112       317,551
Equipment, furniture and fixtures, net                                  22,006        18,566
Long-term available-for-sale investments                                 1,299         3,625
Restricted cash and cash equivalents                                        --        13,016
Restricted available-for-sale investments                                   --        23,700
Equity investments                                                      67,007        60,574
Other assets                                                             6,336         5,767
                                                                   ------------  ------------
         Total assets                                             $    446,760  $    442,799
                                                                   ============  ============
LIABILITIES

Current liabilities:
    Notes payable, current portion                                $        316  $        343
    Trade accounts payable-unrelated parties                            24,098        30,140
    Trade accounts payable-related parties                               7,253         7,712
    Accrued expenses and other liabilities                              16,390        11,630
    Deferred revenue                                                     5,499         3,683
                                                                   ------------  ------------
         Total current liabilities                                      53,556        53,508
Other liabilities                                                        1,793         1,284
                                                                   ------------  ------------
         Total liabilities                                              55,349        54,792
                                                                   ------------  ------------
Commitments and Contingencies (Notes 7 and 8)
SHAREHOLDERS' EQUITY

Common stock, no par value:
    Authorized: 250,000 shares
    Issued and outstanding: 91,585 shares at December 31, 2001
    and 93,117 shares at September 30, 2002                            333,989       337,961
Accumulated other comprehensive income                                     225           281
Retained earnings                                                       57,197        49,765
                                                                   ------------  ------------
         Total shareholders' equity                                    391,411       388,007
                                                                   ------------  ------------
         Total liabilities and shareholders' equity               $    446,760  $    442,799
                                                                   ============  ============

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)
Nine Months Ended
                                                                             September 30,
                                                                        ----------------------
                                                                            2001        2002
                                                                        ----------  ----------
                                                                        (unaudited) (unaudited)
Cash flows from operating activities:
    Net loss                                                           $  (19,911) $   (7,432)
    Adjustments to reconcile net loss to net cash
      provided by (used in) operating activities:
       Depreciation/amortization                                            7,156       7,512
       Provision for doubtful accounts receivable                           2,692       3,178
       Provision for sales returns                                         26,276       1,315
       Provision for excess and obsolete inventories and
         lower of cost or market                                           56,281       6,793
       Other expenses                                                         756       7,757
       Deferred income taxes                                              (14,264)      5,804
      (Gain) Loss on sale of equipment                                         29         (93)
    Changes in operating assets and liabilities:
       Accounts receivable-unrelated parties                               47,213         778
       Accounts receivable-related parties                                 (9,163)     (4,650)
       Inventories                                                       (119,208)      8,539
       Other current and non-current assets                                (1,017)     (7,019)
       Trade accounts payable-unrelated parties                           (12,048)      6,042
       Trade accounts payable-related parties                              (2,477)        459
       Accrued expenses and other liabilities                             (15,443)     (4,935)
       Deferred revenue                                                    (1,539)     (1,816)
                                                                        ----------  ----------
           Net cash provided by (used in) operating activities            (54,667)     22,232
                                                                        ----------  ----------
Cash flows from investing activities:
    Investment in equity securities                                       (52,058)     (1,324)
    Acquisition of equipment, furniture and fixtures                      (12,568)     (3,438)
    Purchases of available-for-sale investments and restricted cash       (57,359)    (63,087)
    Sales and maturities of available-for-sale investments                118,286      56,002
                                                                        ----------  ----------
           Net cash used in investing activities                           (3,699)    (11,847)
                                                                        ----------  ----------
Cash flows from financing activities:
    Borrowings                                                              1,800          --
    Repayments                                                               (187)       (234)
    Issuance of shares of common stock                                      3,446       3,972
    Other                                                                    (136)       (107)
                                                                        ----------  ----------
           Net cash provided by financing activities                        4,923       3,631
                                                                        ----------  ----------
Net increase (decrease) in cash and cash equivalents                      (53,443)     14,016
Cash and cash equivalents at beginning of period                          109,086      93,598
                                                                        ----------  ----------
Cash and cash equivalents at end of period                             $   55,643  $  107,614
                                                                        ==========  ==========

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 SEPTEMBER 30, 2002
(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, 2001 and the Quarterly Reports on Form 10-Q for the three months
ended March 31, 2002 and the three and six months ended June 30, 2002.

The year-end balance sheet at December 31, 2001 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, 2001.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 142, "Goodwill and
Other Intangible Assets," which is effective for fiscal years beginning after
December 15, 2001. SFAS No. 142 requires, among other things, the discontinuance
of goodwill amortization. In addition, the standard includes provisions upon
adoption for the reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. We
adopted SFAS No. 142 during the quarter ended March 31, 2002. The adoption of
SFAS No. 142 did not have a significant impact on our financial position or
results of operations and goodwill amortization recorded in prior periods was
not material.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." SFAS No. 144 applies to all long-lived assets, including
discontinued operations, and consequently amends the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Division of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
SFAS No. 144 develops one accounting model for long-lived assets that are to be
disposed of by sale and requires the measurement to be at the lower of book
value or fair value less cost to sell. Additionally, SFAS No. 144 expands the
scope of discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and (2)
will be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. We adopted SFAS No. 144 during the quarter ended March 31, 2002. The
adoption of SFAS No. 144 to date has not had a significant impact on our
financial position or results of operations.

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 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 and early
application is encouraged. We will adopt SFAS No. 146 during the
quarter ending March 31, 2003. The provisions of EITF No. 94-3 shall continue to
apply for an exit activity initiated under an exit plan that met the criteria of
EITF No. 94-3 prior to the adoption of SFAS No. 146. 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.

6

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2. Other Expense

In 2000, we acquired a 10.0% interest in Apacer Technology, Inc. , or
Apacer, a privately held company located in Taiwan that designs,
manufactures and markets memory modules, for approximately $9.9 million in cash.
Our investment in Apacer was valued at cost. Bing Yeh, our President and CEO and
a member of our Board of Directors, is a member of Apacer's Board of Directors.
In 2001, we invested an additional $2.1 million in Apacer. In August 2002, we
made an additional investment of $181,000. At the end of the third quarter of
2002, we determined that a continued and significant decline in Apacer's price
per share was other than temporary, and accordingly, in the third quarter of
2002, we recorded a period charge to other expense of approximately $7.8 million
to write down our investment in Apacer to $4.4 million which was determined
using the price per share paid for the additional investment in August 2002.

3. 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):

`Three Months Ended            Nine Months Ended
                                                   September 30,                September 30,
                                            ------------------------     ------------------------
                                               2001         2002            2001         2002
                                            -----------  -----------     -----------  -----------
Numerator - basic and diluted
  Net loss                                 $   (26,482) $    (4,768)    $   (19,911) $    (7,432)
                                            ===========  ===========     ===========  ===========
Denominator - basic and diluted
  Weighted average common stock
    outstanding                                 91,208       93,037          90,954       92,492
                                            ===========  ===========     ===========  ===========

Basic and diluted net loss per share       $     (0.29) $     (0.05)    $     (0.22) $     (0.08)
                                            ===========  ===========     ===========  ===========`

Stock options to purchase approximately 10,309,000 and
10,069,000 shares of common stock were outstanding as of September 30, 2001 and
2002 with weighted average exercise prices of $7.19 and $7.70, respectively.
These stock options were not included in the computation of diluted net loss per
share for the three and nine months ended September 30, 2001 and 2002 because we
had a net loss for these periods.



4. Restricted Cash, Cash Equivalents and Available-for-Sale
Investments

In July 2002, in connection with our Atmel litigation (see Note 8), 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, cash equivalents
and available-for-sale investments. As of September 30, 2002, total restricted
cash, cash equivalents and available-for-sale investments was $36.7 million,
which consisted of the bond amount of $36.5 million and restricted interest
earned on the investments of approximately $216,000.

5. 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 nine months ended September 30, 2002
were not material.

7

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An investment in King Yuan Electronics Company Limited, or KYE, a Taiwanese
company that completed an initial public offering during 2001, has been included
in "Long-term available-for-sale investments," and we have recorded the
investment at fair market value, with unrealized gains and losses, net of tax,
reported in shareholders' equity as other comprehensive income. Any other than
temporary loss will be reported as "Other expense." 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 September 30, 2002 were as follows (in
thousands):

`Amortized   Unrealized       Fair
                                                 Cost         Gain          Value
                                              -----------  -----------   -----------
Corporate bonds and notes                    $        58  $        --   $        58
Government bonds and notes                       123,644          101       123,745
Foreign listed equity securities                   1,299          352         1,651
                                              -----------  -----------   -----------
Total bonds, notes and equity securities     $   125,001  $       453       125,454
                                              ===========  ===========
Less amounts classified as cash equivalents                                 (58,330)
                                                                         -----------
      Total short and long-term available-for-sale investments          $    67,124
                                                                         ===========
Contractual maturity dates for investments in bonds and notes:
      Less than 1 year                                                  $    39,799
      Less than 1 year - restricted                                          23,700
      1 to 5 years                                                            1,974
                                                                         -----------
                                                                        $    65,473
                                                                         ===========`

The unrealized gains as of September 30, 2002 are recorded in
accumulated other comprehensive income, net of tax of $172,000.

The fair value of available-for-sale investments as of December 31, 2001 were
as follows (in thousands):

`Amortized   Unrealized       Fair
                                                 Cost         Gain          Value
                                              -----------  -----------   -----------
Corporate bonds and notes                    $    56,988  $        59   $    57,047
Foreign bonds and notes                            5,418           49         5,467
Government bonds and notes                        58,944          255        59,199
Foreign listed equity securities                   1,299           --         1,299
                                              -----------  -----------   -----------
Total bonds, notes and equity securities     $   122,649  $       363       123,012
                                              ===========  ===========
Less amounts classified as cash equivalents                                 (50,047)
                                                                         -----------
      Total short and long-term available-for-sale investments          $    72,965
                                                                         ===========
Contractual maturity dates for investments in bonds and notes:
      Less than 1 year                                                  $    71,666
                                                                         ===========`

The unrealized gains as of December 31, 2001 are recorded in
accumulated other comprehensive income, net of tax of $138,000.

8

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6. Balance Sheet Detail

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

Inventories:

`December 31,  September 30,
                                                              2001          2002
                                                           -----------   -----------
Raw materials                                             $    65,518   $    53,423
Work in process                                                 4,971         7,663
Finished goods                                                 33,968        26,603
Consigned inventory                                             3,767         5,203
                                                           -----------   -----------
                                                          $   108,224   $    92,892
                                                           ===========   ===========`

Inventories are stated at the lower of cost, determined on a
first-in, first-out basis, or market value. We typically plan our production and
inventory levels based on internal forecasts of customer demand, which are
highly unpredictable and can fluctuate substantially. The value of our inventory
is dependent on our estimate of future average selling prices, and, if our
projected average selling prices are over estimated, we may be required to
adjust our inventory value to reflect the lower of cost or market. Due to the
large number of units in our inventory, even a small change in average selling
prices could result in a significant adjustment and have a significant 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 or two years 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 or
two years, which could result in a significant adjustment and could harm our
financial results. 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
significant impact on our financial position and results of operations.

Accrued expenses and other liabilities:

`December 31,  September 30,
                                                              2001          2002
                                                           -----------   -----------
Accrued compensation and related items                    $     4,372   $     3,975
Accrued liabilities-related parties                               764           378
Accrued warranty                                                2,883           916
Other accrued liabilities                                       8,371         6,361
                                                           -----------   -----------
                                                          $    16,390   $    11,630
                                                           ===========   ===========`

7. Commitments

In December 2000, we committed, subject to certain business conditions,
to prepay $50.0 million to a vendor to secure increased wafer capacity in 2002
and 2003. The prepayment will be applied against inventory material purchases.
As of September 30, 2002, we had prepaid a total of $5.0 million towards this
commitment, which is included in other current assets on the balance sheet.
Under the agreement, we have a remaining commitment of $45.0 million. However,
at this time we are in the process of renegotiating this agreement and expect
that this commitment will no longer be required. In addition, as of September
30, 2002, we had outstanding purchase commitments with our foundry vendors of
approximately $25.7 million for delivery in 2002.

During the third quarter of 2001, we recorded a period charge to other
operating expense of approximately $756,000 relating to an operating lease for
an abandoned building. This charge 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 recent 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, 2001 and September 30,
2002, payments made have reduced the recorded liability to $662,000 and $521,000
respectively.

9

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8. Contingencies

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

On two of the six patents, the District Court ruled by summary judgment that
we did not infringe. Two of the other patents were invalidated by another U.S.
District Court in a proceeding to which we were not a party, but this decision
was later reversed by the Federal Circuit Court of Appeals. 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 can no longer 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
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. We appealed from the Limited Exclusion
Order, and in August 2001 the Court of Appeals for the Federal Circuit issued an
opinion giving its reasons for denying that appeal. 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, there will not be any impact
on our ability to sell 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. Briefing is scheduled to conclude by the end of 2002 with
a decision expected sometime in mid-to-late 2003. 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 September 30, 2002, this amount is included in
restricted cash, cash equivalents and available-for-sale investments in our
balance sheet (see Note 4).

Trial on the '903 patent was severed and heard before a jury beginning on
July 29, 2002. The jury was unable to unanimously decide whether the `903 patent
is valid, and a mistrial was declared. Atmel has not yet indicated whether it
will seek another trial. The Court has ruled that we infringed that patent, so
if the jury finds the patent valid, it will assess what, if any, damages are due
Atmel.

On October 1, 2000, we announced a settlement in our lawsuit with Winbond Electronics of Taiwan.  We
filed a lawsuit against Winbond in July 1998 in the U.S. District Court in San Jose, California pursuant to
the termination of our SuperFlash technology licensing agreement with Winbond.  As part of the
settlement, Winbond agreed to a consent judgment and will not contest the validity and appropriateness of
our termination of the licensing agreement in June 1998.  This settlement concludes all litigation between
us and Winbond.  We received a total of $30.4 million in back royalties during 2000 and 2001 as part of
this settlement in addition to royalties relating to products sold during 2001.  No further back royalty
payments are required after 2001 under this legal settlement.

From time to time, we are also involved in other legal actions arising in the
ordinary course of business. We have incurred certain amounts associated with
defending these matters. There can be no assurance the Atmel complaint or other
third party assertions will be resolved without costly litigation, in a manner
that is not adverse to our financial position, results of operations or cash
flows or without requiring royalty payments in the future which may adversely
impact gross margins. No estimate can be made of the possible loss or possible
range of loss associated with the resolution of these contingencies. As a
result, no losses have been accrued in our financial statements as of September
30, 2002.

10

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9. Line of Credit

We terminated our line of credit on July 12, 2002.

10. Segment Information

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

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, other expense,
and 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 an individual 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, quality and functionality to support the
broad range of applications that use nonvolatile memory products.

ASPG includes FlashBank, Concurrent SuperFlash, Serial Flash, Firmware Hub,
or FWH, and LPC flash products. These products are designed to address specific
applications such as cellular phones, pagers, PDAs, set-top boxes, hard disk
drives and PC BIOS. ASPG also includes flash embedded controllers such as the
FlashFlex51 controller and the ATA controller to address digital cameras,
Internet appliances, PDAs, MP3 players, set-top boxes and other types of mass
data storage applications.

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

Technology Licensing includes both up front license fees and royalties.

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

11

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`Three Months Ended            Three Months Ended
                                                  September 30, 2001            September 30, 2002
                                              -------------------------     -------------------------
                                                              Gross                         Gross
                                               Revenues     Profit (Loss)    Revenues       Profit
                                              -----------  ------------     -----------  ------------
SMPG                                         $    36,164  $    (35,989)    $    42,251  $      2,956
ASPG                                              25,945         9,655          15,481         6,159
SPG                                                3,054          (742)          1,713           930
Technology Licensing                               9,034         9,034           8,311         8,311
                                              -----------  ------------     -----------  ------------
                                             $    74,197  $    (18,042)    $    67,756  $     18,356
                                              ===========  ============     ===========  ============



                                                Nine Months Ended             Nine Months Ended
                                                  September 30, 2001            September 30, 2002
                                              -------------------------     -------------------------
                                                              Gross                         Gross
                                               Revenues    Profit (Loss)     Revenues       Profit
                                              -----------  ------------     -----------  ------------
SMPG                                         $   115,908  $    (27,630)    $   130,248  $     15,803
ASPG                                              75,483        37,054          52,517        19,481
SPG                                                6,598           931           4,455         1,799
Technology Licensing                              25,221        25,221          24,595        24,595
                                              -----------  ------------     -----------  ------------
                                             $   223,210  $     35,576     $   211,815  $     61,678
                                              ===========  ============     ===========  ============`

11. Comprehensive Loss

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

`Three Months Ended            Nine Months Ended
                                                   September 30,                September 30,
                                            ------------------------     ------------------------
                                               2001         2002            2001         2002
                                            -----------  -----------     -----------  -----------
Net loss                                   $   (26,482) $    (4,768)    $   (19,911) $    (7,432)

Other comprehensive income:
   Change in net unrealized gains
      on investments, net of tax                    85           95             170           56
                                            -----------  -----------     -----------  -----------
Total comprehensive loss                   $   (26,397) $    (4,673)    $   (19,741) $    (7,376)
                                            ===========  ===========     ===========  ===========`

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

`December 31, September 30,
                                                           2001          2002
                                                       ------------  ------------
Net unrealized gains on investments, net of tax       $        225  $        281
                                                       ============  ============`

12. Related Party Transactions

The following table is a summary of our related party revenues and
purchases for the quarter and nine months ended September 30, 2002, and our
related party accounts receivable and payable balances as of September 30, 2002
(in thousands):

12

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`Three Months Ended             Nine Months Ended
                                                  September 30, 2002            September 30, 2002
                                              -------------------------     -------------------------
                                               Revenues      Purchases       Revenues      Purchases
                                              -----------  ------------     -----------  ------------
Silicon Technology Co., Ltd.                 $       392  $         --     $     1,348  $         --
Acer and related entities (1)                         45           232             891           721
Apacer Technology, Inc.                              229           321             656           467
Professional Computer Technology Limited              --            --             141            --
Silicon Professional Technology Ltd.              37,067            --         103,219            --
King Yuan Electronics Company, Limited                --         4,111              --        13,677
Powertech Technology, Incorporated                    --         1,399              --         6,151
                                              -----------  ------------     -----------  ------------
                                             $    37,733  $      6,063     $   106,255  $     21,016
                                              ===========  ============     ===========  ============


                                                   September 30, 2002
                                              -------------------------
                                                             Accounts
                                               Accounts    Payable and
                                              Receivable     Accruals
                                              -----------  ------------
Silicon Technology Co., Ltd.                 $       221  $         --
Acer and related entities (1)                         45           217
Apacer Technology, Inc.                              132           140
Professional Computer Technology Limited              --           132
Silicon Professional Technology Ltd.              25,048           991
King Yuan Electronics Company, Limited                --         4,639
Powertech Technology, Incorporated                    --         1,971
                                              -----------  ------------
                                             $    25,446  $      8,090
                                              ===========  ============

(1) Excludes Apacer Technology, Inc. balances`

Professional Computer Technology Limited, or PCT continues to earn commissions for point-of-sales
transactions to its customers. PCT's commissions are paid at the same rate as
all of our other manufacturer's 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 our
inventory and accounts receivable, personnel costs required to maintain
logistics and information technology functions and the costs to perform billing
and collection of accounts receivable.

In August 2002, we made an additional investment of $181,000 in Apacer. At
the end of the third quarter of 2002, we determined that a continued and
significant decline in Apacer's price per share was other than temporary, and
accordingly, in the third quarter of 2002, we recorded a period charge to other
expense of approximately $7.8 million to write down our investment in Apacer to
$4.4 million which was determined using the price per share paid for the
additional investment in August 2002. As of September 30, 2002, we owned
approximately 9.8% of Apacer's outstanding shares.

13

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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, 2001, as filed with the Securities and Exchange
Commission.

The following discussion contains forward-looking statements, which involve
risk and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors
which are difficult to forecast and can materially affect our quarterly or
annual operating results. Fluctuations in revenues and operating results may
cause volatility in our stock price. Please refer to the section below entitled
"Business Risks".

Overview

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

The semiconductor industry has historically been
cyclical, characterized by wide fluctuations in product supply and demand. From
time to time, the industry has also experienced significant downturns, often in
connection with, or in anticipation of, production over-capacity and declines in
general economic conditions. Downturns of this type occurred in 1996, 1997 and
1998 and more recently in late 2000 through the first nine months of 2002. These
downturns have been characterized by weakening product demand, excessive
inventoryand accelerated decline of selling prices, and in some cases
have lasted for more than a year. We began to experience a sharp downturn in
several of our markets late in the fourth quarter of 2000, as our customers
reacted to weakening demand for their products. We saw a positive change in
order activities for most of our market segments from the second half of 2001
through the first quarter of 2002. However, in the second quarter of 2002, we
experienced a substantial drop in our products for Internet computing
applications, more specifically in the PC related business, partially due to
seasonal softness in the PC market and partially due to the inventory
replenishment caused by our customers over buying during the first quarter of
2002. Unit shipments of our products for Internet computing applications grew in
the third quarter of 2002, driven by strong shipments for PC BIOS applications
and increased shipments for hard disk drive and printer applications. Compared
to the second quarter of 2002, unit shipments of our products for wireless
communications application grew, primarily driven by strong shipments to
Bluetooth and cordless phone applications. Unit shipments of our products for
networking applications in the third quarter of 2002 decreased compared to the
second quarter of 2002, driven by decreased unit shipments to all Internet
access device and networking equipment applications. The only exception to the
general weakness in the networking industry is wireless LAN. Overall unit
shipments of our products for digital consumer applications in the third quarter
of 2002 decreased slightly compared to the second quarter of 2002. Our business
could be harmed by industry-wide fluctuations in the future.

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

We derived 77.6%, 80.7% and 88.5% of our product revenues during 2000, 2001
and the nine months ended September 30, 2002, 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 19.3%, 31.5% and 45.6% of our
net product revenues in 2000, 2001 and the nine months ended September 30, 2002,
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 2000, 2001 or the nine months ended September 30,
2002.

14

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Since March 2001, we have been out-sourcing our customer service logistics in
Taiwan and other parts of Asia to Silicon Professional Technology Ltd., or SPT.
SPT is a wholly owned subsidiary of one of our stocking representatives in
Taiwan, Professional Computer Technology Limited, or PCT. SPT provides planning,
warehousing, delivery, billing, collection and other logistic functions for us
in Taiwan. SPT now services substantially all of our end customers based in
Taiwan, China and selected end customers throughout Asia. Products shipped to
SPT are accounted for as consigned inventory, and revenue is recognized when the
products have been delivered and are considered as a sale to our end customers
by SPT. For the year ended December 31, 2001 and the nine months ended September
30, 2002, SPT serviced end customer sales accounting for 30.3% and 55.1% of our
net product revenues recognized, respectively. We are in the process of working
with SPT to expand their service coverage to include all of our end customers in
Southeast Asia.

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 net product
revenues in 2000, 2001 or the nine months ended September 30, 2002.

As of December 31, 2001, SPT, our logistics center,
represented 48.8% of our net accounts receivable and Actron Technology Co., or
Actron, a stocking representative, represented 21.9% of our net accounts
receivable. As of September 30, 2002, SPT, represented 62.5% of our net accounts
receivable and Actron represented 0.0% of our net accounts receivable.

Results of Operations: Quarter and Nine Months Ended September 30, 2002

Net Revenues

Net revenues were $67.8 million for the third quarter of 2002 as compared
to $69.5 million in the second quarter of 2002 and $74.2 million for the third
quarter of 2001. Revenues for the third quarter of 2002 decreased compared to
the prior quarter primarily due to decreased average selling prices for our
products, offset by increased unit shipments. Revenues decreased compared to the
third quarter of last year due to decreased average selling prices, offset by
increased unit shipments. Our quarterly results are not indicative of annual
results. Average selling prices fluctuate due to a number of factors including
the overall supply and demand for our products in the marketplace, maturing
product cycles and general economic conditions. Net revenues were $211.8 million
for the nine months ended September 30, 2002 as compared to $223.2 million for
the comparable period in 2001. The decrease from year to year was due to
decreased average selling prices, offset by increased unit shipments. 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. We saw a positive change in order activities for most of our market
segments from the second half of 2001 through the first quarter of 2002.
However, in the second quarter of 2002, we experienced a substantial drop in our
products for Internet computing applications, more specifically in the PC
related business, partially due to seasonal softness in the PC market and
partially due to the inventory replenishment caused by our customers over buying
during the first quarter of 2002. Unit shipments of our products for Internet
computing applications grew in the third quarter of 2002, driven by strong
shipments to PC BIOS applications and increased shipments to hard disk drive and
printer applications. Compared to the second quarter of 2002, unit shipments of
our products for wireless communications application grew, primarily driven by
strong shipments to Bluetooth and cordless phone applications. Unit shipments of
our products for networking applications in the third quarter of 2002 decreased
compared to the second quarter of 2002, driven by decreased unit shipments to
all Internet access device and networking equipment applications. The only
exception to the general weakness in the networking industry is wireless LAN.
Overall unit shipments of our products for digital consumer applications in the
third quarter of 2002 decreased slightly compared to the second quarter of
2002.

Product Revenues. Product revenues were $59.4 million in the third
quarter of 2002 as compared to $61.5 million in the second quarter of 2002 and
$65.2 million for the third quarter of 2001. Product revenues decreased compared
to the second quarter of 2002 primarily due to decreased average selling prices
by approximately 5.2%, offset by increased unit shipments of our products by
approximately 1.5%. Product revenues decreased compared to the third quarter of
last year due to decreased average selling prices for our products by
approximately 28.0%, offset by increased unit shipments of our products by
approximately 23.9%. Product revenues decreased to $187.2 million in the first
nine months of 2002 from $198.0 million in the first nine months of 2001 due to
decreased average selling prices, offset by increased unit shipments of our
products of approximately 38.5%. Unit shipments fluctuate due to overall
industry supply and demand.

License Revenues. Revenues from license fees and royalties were $8.3
million in the third quarter of 2002, as compared to $8.0 million in the second
quarter of 2002 and $9.0 million in the third quarter of 2001. On October 1,
2000, we announced a settlement in our lawsuit with Winbond Electronics of
Taiwan. During 2001, Winbond paid us $5.0 million per quarter for a total of
$20.0 million under a settlement agreement. No further back royalty payments are
required after 2001 under this legal settlement. Although the settlement
payments have ceased, Winbond continues to pay royalties. The decrease from the
third quarter of 2001 to the third quarter of 2002 was primarily due to a
decrease in Winbond settlement license fees, offset by increases in upfront license fees and royalty
payments received from our licensees. Revenues from license fees and royalties
decreased to $24.6 million for the nine months ended September 30, 2002 from
$25.2 million for the comparable period in 2001. The period to period decrease
relates primarily to the termination of license fees received as part of our
legal settlement with Winbond during 2001, offset by increased upfront license
fees and royalty payments received during the period. We anticipate that license revenues may
fluctuate significantly in the future.

15

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Gross Profit

Gross profit was $18.4 million, or 27.1% of net revenues, in the third
quarter of 2002 as compared to gross profit of $19.2 million, or 27.7% of net
revenues, in the second quarter of 2002 and gross loss of $18.0 million, or
24.3% of net revenues, in the third quarter of 2001. The decrease in gross
profit from the second quarter of 2002 to the third quarter of 2002 is due to
decreased average selling prices for our products, offset by increased unit
shipments. The increase in gross profit in the third quarter of 2002 when
compared to the third quarter of 2001 is due primarily to a $42.7 million
inventory valuation adjustment recorded in the third quarter of 2001, offset by
decreases in average selling prices and decreases in license revenues. For the
nine months ended September 30, 2002, gross profit was $61.7 million, or 29.1%,
compared to $35.6 million, or 15.9%, for the comparable period in 2001. Product
gross margin was 16.9% for the third quarter of 2002, compared to 18.3% for the
second quarter of 2002 and negative 41.6% for the third quarter of 2001. The
decrease in product gross margin from the second quarter of 2002 to the third
quarter of 2002 is due to decreased average selling prices for our products by
approximately 5.2% and changes in unit shipment mix. The increase in product
gross margin from the third quarter of 2001 to the third quarter of 2002 relates
to a $42.7 million inventory valuation adjustment recorded in the third quarter
of 2001, offset by decreased average selling prices of our products by
approximately 28.0%. Product gross margin for the nine months ended September
30, 2002 increased to 19.8% from 5.2% for the comparable period in 2001. The
period to period increase was primarily due to $54.5 million of inventory
valuation adjustments recorded in the first nine months of 2001, offset by
decreased average selling prices. Assuming there is no major improvement in the
market place, we expect our product gross margin to continue to decline in the
next two to three quarters before it improves when the technology transition
begins to make significant positive impact. For other factors affecting our
gross profit, please also see "Business Risks - We incurred significant
inventory valuation adjustments in 2001 and we may incur additional significant
inventory valuation adjustments in the future."

Operating Expenses

Our operating expenses consist of research and development, sales and
marketing, and general and administrative expenses. Operating expenses were
$20.1 million, or 29.7% of net revenues, in the third quarter of 2002, compared
to $26.3 million, or 37.8% of net revenues, in the second quarter of 2002, and
$26.0 million, or 35.0% of net revenues, in the third quarter of 2001. The
decrease from the second quarter of 2002 was primarily due to bad debt expense
of $4.1 million that was recorded in the second quarter of 2002 related to the
deteriorating financial condition of one customer and decreased commissions
expense by approximately $1.0 million for the current quarter primarily due to
decreased product revenues. The decrease from the third quarter of 2001 was
primarily due to decreases in non-production engineering material expense by
$2.0 million, commissions expense by $1.2 million, sales bonuses by $328,000 and
the allowance for doubtful accounts by $1.1 million. Operating expenses
decreased to $69.1 million for the nine months ended September 30, 2002 from
$73.7 million for the comparable period in 2001. The period to period decrease
was primarily due to decreases in non-production engineering material expense by
$2.2 million, commissions expense by $1.1 million, advertising expense by
$621,000 and intangible amortization expense by $492,000. 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 continue to increase.

Research and development. Research and development expenses include
costs associated with the development of new products, enhancements to existing
products, quality assurance activities and occupancy costs. These costs consist
primarily of employee salaries and benefits and the cost of materials such as
masks, wafers and evaluation parts. Research and development expenses were $12.0
million, or 17.6% of net revenues, during the third quarter of 2002, as compared
to $11.9 million, or 17.2% of net revenues, during the second quarter of 2002
and $13.6 million, or 18.3% of net revenues, during the third quarter of 2001.
Research and development expenses decreased by approximately 12.0% from the
third quarter of 2001 due primarily to decreased non-production engineering
material expense of approximately $2.0 million. For the nine months ended
September 30, 2002, research and development expenses decreased to $35.7 million
from $38.3 million for the comparable period in 2001. The period to period
decrease was primarily due to decreased non-production engineering material
expense of approximately $2.2 million. We expect research and development
expenses to increase as we continue to invest in new product offerings, drive to
new deep sub-micron technologies and reduce costs associated with our existing
products.

16

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Sales and marketing. Sales and marketing expenses consist of
commissions, headcount and related costs, as well as travel and entertainment
and promotional expenses. Sales and marketing expenses were $5.1 million, or
7.5% of net revenues, in the third quarter of 2002, as compared to $6.5 million,
or 9.4% of net revenues, in the second quarter of 2002 and $7.1 million, or 9.6%
of net revenues, during the third quarter of 2001. The decrease in sales and
marketing expenses from the second quarter of 2002 to the third quarter of 2002
by approximately 22.0% was primarily attributable to decreased commissions
expense for the current quarter of $1.0 million primarily due to decreased
product revenues and decreased costs related to support of our patent and
intellectual property of $459,000. The decrease in sales and marketing expenses
from the third quarter of 2001 to the third quarter of 2002 by approximately
28.4% was primarily attributable to decreased commissions expense of
approximately $1.2 million, decreased sales bonus expense of approximately
$328,000 and decreased costs related to support of our patent and intellectual property
of approximately $229,000. Sales and marketing expenses for the nine months
ended September 30, 2002 were $19.1 million as compared to $19.6 million for the
same period in 2001. The period to period decrease was primarily due to
decreased commissions expense of approximately $1.1 million and decreased
advertising expense of approximately $621,000, offset by increased headcount and
related costs of approximately $968,000. We expect sales and marketing expenses
to increase as we continue to expand our sales and marketing efforts. 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 $3.1 million, or
4.6% of net revenues, in the third quarter of 2002, as compared to $7.9 million,
or 11.3% of net revenues, in the second quarter of 2002 and $4.5 million, or
6.1% of net revenues, during the third quarter of 2001. The decrease in general
and administrative expenses from the second quarter of 2002 by approximately
60.7% was primarily due to a bad debt expense of $4.1 million that
was recorded in the second quarter of 2002 related to the deteriorating
financial condition of one customer. The decrease in general and administrative
expenses from the third quarter of 2001 was primarily due to a decrease in bad
debt expense by approximately $1.2 million. General and administrative expenses
for the nine months ended September 30, 2002 were $14.3 million as compared to
$15.0 million for the same period in 2001. The period to period decrease was
primarily due to a decrease in intangible amortization expense by $492,000. We
anticipate that general and administrative expenses may continue to increase as
we scale our facilities, infrastructure, and headcount to support our overall
expected growth. We may also incur additional expenses in connection with the
Atmel litigation. For further information on this litigation see "Legal
Proceedings."

Interest and other income. Interest and other income was approximately
$670,000, or 1.0% of net revenues, during the third quarter of 2002, as compared
to $907,000, or 1.3% of net revenues, during the second quarter of 2002 and $1.4
million, or 1.9% of net revenues, during the third quarter of 2001. Interest
income decreased from the second quarter of 2002 to the third quarter of 2002,
and from the third quarter of 2001 to the third quarter of 2002, primarily due
to decreasing interest rates on invested cash. Interest and other income
decreased to $2.5 million for the nine months ended September 30, 2002 from $6.2
million for the comparable period in 2001. The decrease from period to period
was due to decreasing interest rates on invested cash.

Interest Expense. Interest expense was approximately $41,000 for the
third quarter of 2002 as compared to $66,000 for the second quarter of 2002 and
$79,000 for the third quarter of 2001. Interest expense decreased to $171,000
for the nine months ended September 30, 2002 from $265,000 for the comparable
period in 2001. Interest expense relates to interest and fees under our line of
credit and to our notes payable. We terminated our line of credit in July
2002.

Other Expense. In 2000, we acquired a 10.0% interest in Apacer
Technology, Inc., or Apacer, a privately held company located in
Taiwan that designs, manufactures and markets memory modules, for approximately
$9.9 million in cash. Our investment in Apacer was valued at cost. Bing Yeh, our
President and CEO and a member of our Board of Directors, is a member of
Apacer's Board of Directors. In 2001, we invested an additional $2.1 million in
Apacer. In August 2002, we made an additional investment of $181,000. At the end
of the third quarter of 2002, we determined that a continued and significant
decline in Apacer's price per share was other than temporary, and accordingly,
in the third quarter of 2002, we recorded a period charge to other expense of
approximately $7.8 million to write down our investment in Apacer to $4.4
million which was determined using the price per share paid for the additional
investment in August 2002.

17

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Benefit from Income Taxes

As a result of a review of our estimates as they relate to our expected
loss for 2002, we revised our expected tax benefit and determined that the
resulting tax rate is 42.0%. Our income tax benefit of $4.1 million in the third
quarter of 2002 represented a 46.4% tax rate on the loss before taxes. This
46.4% rate consists of a 42.0% rate for the current quarter plus the additional
benefit derived from the tax rate adjustments from the first and second quarters
of 2002. The additional 4.4% for the first and second quarters of 2002 rate
adjustments are added to the current rate of 42.0% to arrive at a cumulative
rate of 42.0% for the nine months ended September 30, 2002. This compares with a
tax benefit of $2.0 million in the second quarter of 2002 which is based on a
32.0% tax rate on loss before taxes and a tax benefit of $16.2 million in the
third quarter of 2001 which is based on a 38.0% tax rate on income before taxes.
Our tax rate may change depending on our profitability and the timing of the
implementation of certain tax planning strategies. As of September 30, 2002, we
have total short-term and long-term deferred tax assets of $23.6 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 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 10 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. These families allow us to produce
products optimized for cost and functionality to support the broad range of
applications that use nonvolatile memory products. SMPG revenues were $42.3
million for the third quarter of 2002, as compared to $43.4 million in the
second quarter of 2002 and $36.2 million in the third quarter of 2001. The
decrease in revenues from the second quarter of 2002 was primarily due to a
decrease in average selling prices, offset by an increase in unit shipments. The
increase in revenues from the third quarter of 2001 was primarily due to
increased unit shipments, offset by decreased average selling prices. For the
nine months ended September 30, 2002, SMPG revenues were $130.2 million, as
compared to $115.9 million for the comparable period in 2001. The period to
period increase in revenues was primarily due to increased unit shipments,
offset by decreased average selling prices. Gross margin decreased from 9.2% in
the second quarter of 2002 to 7.0% in the third quarter of 2002 primarily due to
the decreased average selling prices and changes in product mix. Gross margin
increased from negative 99.5% in the third quarter of 2001 to 7.0% in the third
quarter of 2002 primarily due to inventory valuation adjustments to cost of
sales during the third quarter of 2001 and changes in product mix. For the nine
months ended September 30, 2002, gross margin was 12.1%, as compared to negative
23.8% for the comparable period in 2001. The period to period increase in gross
margin was primarily due to inventory valuation adjustments to cost of sales
during each of the first three quarters of 2001 and changes in product mix.

ASPG includes FlashBank, Concurrent SuperFlash, Serial Flash, Firmware Hub,
or FWH, and LPC flash products. These products are designed to address specific
applications such as cellular phones, pagers, PDAs, set-top boxes, hard disk
drives and PC BIOS. ASPG also includes flash embedded controllers such as the
FlashFlex51 controller and the ATA controller to address digital cameras,
Internet appliances, PDAs, MP3 players, set-top boxes and other types of mass
data storage applications. ASPG revenues were $15.5 million for the third
quarter of 2002, as compared to $16.5 million in the second quarter of 2002 and
$25.9 million in the third quarter of 2001. The decrease in revenues from both
the second quarter of 2002 and third quarter of 2001 was primarily due to a
decrease in unit shipments and a decrease in average selling prices. For the
nine months ended September 30, 2002, ASPG revenues were $52.5 million, as
compared to $75.5 million for the comparable period in 2001. The period to
period decrease in revenues was primarily due to decreased average selling
prices, offset by increased unit shipments. Gross margin decreased from 43.1% in
the second quarter of 2002 to 39.8% in the third quarter of 2002 primarily due
to changes in product mix. Gross margin increased from 37.2% in the third
quarter of 2001 to 39.8% in the third quarter of 2002 primarily due to changes
in product mix. For the nine months ended September 30, 2002, gross margin was
37.1%, as compared to 49.1% for the comparable period in 2001. The period to
period decrease in gross margin was primarily due to changes in product mix and
decreased average selling prices, offset by inventory valuation adjustments to
cost of sales during the nine months ended September 30, 2001.

18

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SPG includes ComboMemory, ROM/RAM Combos and other special flash products.
SPG revenues were $1.7 million for the third quarter of 2002, as compared to
$1.6 million in the second quarter of 2002 and $3.1 million in the third quarter
of 2001. The increase in revenues from the second quarter of 2002 was primarily
due to changes in product mix. The decrease from the third quarter of 2001 was
primarily due to lower average selling prices and decreased unit shipments. For
the nine months ended September 30, 2002, SPG revenues were $4.5 million, as
compared to $6.6 million for the comparable period in 2001. The period to period
decrease in revenues was primarily due to decreases in unit shipments and
average selling prices. Gross margin increased from 7.7% in the second quarter
of 2002 to 54.3% in the third quarter of 2002 and from negative 24.3% in the
third quarter of 2001 to 54.3% in the third quarter of 2002 primarily due to
changes in product mix. For the nine months ended September 30, 2002, gross
margin was 40.4%, as compared to 14.1% for the comparable period in 2001. The
period to period increase in gross margin was primarily due to inventory
valuation adjustments to cost of sales during the nine months ended September
30, 2001 and changes in product mix.

Revenue and gross profit related to Technology Licensing was $8.3 million for
the third quarter of 2002, $8.0 million for the second quarter of 2002 and $9.0
million for the third quarter of 2001. For the nine months ended September 30,
2002, revenue and gross profit related to Technology Licensing was $24.6
million, as compared to $25.2 million for the comparable period in 2001.

Related Party Transactions

The
following table is a summary of our related party revenues and purchases for the
quarter and nine months ended September 30, 2002, and our related party accounts
receivable and payable balances as of September 30, 2002 (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, 2001.

`Three Months Ended             Nine Months Ended
                                                  September 30, 2002            September 30, 2002
                                              -------------------------     -------------------------
                                               Revenues      Purchases       Revenues      Purchases
                                              -----------  ------------     -----------  ------------
Silicon Technology Co., Ltd.                 $       392  $         --     $     1,348  $         --
Acer and related entities (1)                         45           232             891           721
Apacer Technology, Inc.                              229           321             656           467
Professional Computer Technology Limited              --            --             141            --
Silicon Professional Technology Ltd.              37,067            --         103,219            --
King Yuan Electronics Company, Limited                --         4,111              --        13,677
Powertech Technology, Incorporated                    --         1,399              --         6,151
                                              -----------  ------------     -----------  ------------
                                             $    37,733  $      6,063     $   106,255  $     21,016
                                              ===========  ============     ===========  ============


                                                   September 30, 2002
                                              -------------------------
                                                             Accounts
                                               Accounts    Payable and
                                              Receivable     Accruals
                                              -----------  ------------
Silicon Technology Co., Ltd.                 $       221  $         --
Acer and related entities (1)                         45           217
Apacer Technology, Inc.                              132           140
Professional Computer Technology Limited              --           132
Silicon Professional Technology Ltd.              25,048           991
King Yuan Electronics Company, Limited                --         4,639
Powertech Technology, Incorporated                    --         1,971
                                              -----------  ------------
                                             $    25,446  $      8,090
                                              ===========  ============

(1) Excludes Apacer Technology, Inc. balances`

19

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PCT continues to earn commissions for point-of-sales transactions to its
customers. PCT's commissions are paid at the same rate as all of our other
manufacturer's 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 our inventory and
accounts receivable, personnel costs required to maintain logistics and
information technology functions and the costs to perform billing and collection
of accounts receivable.

In August 2002, we made an additional investment of $181,000 in Apacer. At
the end of the third quarter of 2002, we determined that a continued and
significant decline in Apacer's price per share was other than temporary, and
accordingly, in the third quarter of 2002, we recorded a period charge to other
expense of approximately $7.8 million to write down our investment in Apacer to
$4.4 million which was determined using the price per share paid for the
additional investment in August 2002. As of September 30, 2002, we owned
approximately 9.8% of Apacer's outstanding shares.

Critical Accounting Policies

For information related to our revenue recognition and other critical
accounting policies, please refer to the "Critical Accounting Policies" section
of our Management's Discussion and Analysis of Financial Condition and Results
of Operations contained in our Annual Report on Form 10-K for the year ended
December 31, 2001, as filed with the Securities and Exchange Commission.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 142, "Goodwill and
Other Intangible Assets," which is effective for fiscal years beginning after
December 15, 2001. SFAS No. 142 requires, among other things, the discontinuance
of goodwill amortization. In addition, the standard includes provisions upon
adoption for the reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. We
adopted SFAS No. 142 during the quarter ended March 31, 2002. The adoption of
SFAS No. 142 did not have a significant impact on our financial position or
results of operations and goodwill amortization recorded in prior periods was
not material.

In October 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS No. 144 applies to all long-lived assets,
including discontinued operations, and consequently amends the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Division of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 develops one accounting model for long-lived assets
that are to be disposed of by sale and requires the measurement to be at the
lower of book value or fair value less cost to sell. Additionally, SFAS No. 144
expands the scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from the rest of the entity
and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. We adopted SFAS No. 144 during the quarter ended March 31,
2002. The adoption of SFAS No. 144 to date has not had a significant impact on
our financial position or results of operations.

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 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 and early
application is encouraged. We will adopt SFAS No. 146 during the
quarter ending March 31, 2003. The provisions of EITF No. 94-3 shall continue to
apply for an exit activity initiated under an exit plan that met the criteria of
EITF No. 94-3 prior to the adoption of SFAS No. 146. 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.

20

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Liquidity and Capital Resources

Operating activities. Our operating activities generated cash of
$22.2 million for the nine months ended September 30, 2002 as compared to using
cash of $54.7 million for the nine months ended September 30, 2001. The cash
provided by operating activities for the nine months ended September 30, 2002
related primarily to non-cash adjustments of $32.3 million, primarily relating
to provision for doubtful accounts receivable of $3.2 million, provision for
excess and obsolete inventories and lower of cost or market of $6.8 million,
provision for sales returns of $1.3 million, other expense of $7.8 million,
deferred income taxes of $5.8 million and depreciation and amortization of $7.5
million, decreases in inventory of $8.5 million and accounts receivable from
unrelated parties of $778,000 and increases in trade accounts payable from
related and unrelated parties of $6.5 million. Cash provided by operating
activities was reduced by our net loss of $7.4 million for the nine months ended
September 30, 2002, an increase of $4.7 million in trade accounts receivable
from related parties, an increase of $7.0 million in other current and
non-current assets and decreases in accrued expenses and other liabilities of $4.9
million and deferred revenue of $1.8 million. The cash used in operating
activities for the nine months ended September 30, 2001 related primarily to net
loss of $19.9 million, increases in inventory of $119.2 million, accounts
receivable from related parties of $9.2 million, deferred income taxes of $14.3
million and other assets of $1.0 million and decreases in trade accounts payable
from related and unrelated parties of $14.5 million, accrued expenses of $15.4
million and deferred revenue of $1.5 million. Cash used in operating activities
was reduced by a decrease in trade accounts receivable from unrelated parties of
$47.2 million and non-cash adjustments of $78.9 million, primarily relating to
depreciation and amortization, inventory write-downs and increased provisions
for doubtful accounts receivable and sales returns.

Investing activities. Our investing activities used cash of $11.8
million for the nine months ended September 30, 2002 as compared to using cash
of $3.7 million for the nine months ended September 30, 2001. Investing
activities in the nine months ended September 30, 2002 were primarily related to
capital expenditures of approximately $3.4 million and net purchases of
available-for-sale investments and restricted cash of $7.1 million. In addition, in the nine months
ended September 30, 2002, we invested $964,000 in Insyde Software Corporation, a
privately held Taiwanese company, and made additional investments of $179,000 in
PCT and $181,000 in Apacer. In the nine months ended September 30, 2001,
investing activities were primarily related to a $50.0 million equity investment
in Grace Semiconductor Manufacturing Corporation, a Cayman Islands company with
operations in China, a $2.1 million investment in a production subcontractor and
approximately $12.6 million spent in capital expenditures, offset by net sales
and maturities of available-for-sale investments of approximately $60.9 million.

Financing activities. Our financing activities provided cash of
approximately $3.6 million during the nine months ended September 30, 2002 as
compared to $4.9 million for the nine months ended September 30, 2001. For the
nine months ended September 30, 2002, the cash provided was primarily from $4.0
million of common stock issued under the employee stock purchase plan and the
exercise of employee stock options, offset by $234,000 in loan repayments. The
cash provided for the first nine months of 2001 was primarily from the issuance of
common stock for $3.4 million and $1.8 million related to a loan from a
landlord, offset by $187,000 in loan repayments.

We terminated our line of credit on July 12, 2002.

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
September 30, 2002, this amount is included in restricted cash, cash equivalents
and available-for-sale investments in our balance sheet.

Principal sources of liquidity as of September 30, 2002 consisted of $151.1
million of cash, cash equivalents, short and long-term available-for-sale
investments.

Purchase Commitments. In December 2000, we committed, subject to
certain business conditions, to prepay $50.0 million to a vendor to secure
increased wafer capacity in 2002 and 2003. The prepayment will be applied
against inventory material purchases. As of September 30, 2002, we had prepaid a
total of $5.0 million towards this commitment, which is included in other
current assets on the balance sheet. Under the agreement, we have a remaining
commitment of $45.0 million. However, at this time we are in the process of
renegotiating this agreement and expect that this commitment will no longer be
required. In addition, as of September 30, 2002, we had outstanding purchase
commitments with our foundry vendors of approximately $25.7 million for delivery
in 2002.

Lease Commitments. We have long-term, non-cancelable building lease
commitments. We are currently seeking subtenants for our unused office space. We
may be unable to secure subtenants, for this space, due to the recent decrease
in demand for commercial rental space in Silicon Valley. 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."

21

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Future payments due under building lease and purchase
commitments as of September 30, 2002 (in thousands):

`Building     Purchase
                                                 Lease     Commitments      Total
                                              -----------  -----------   -----------
2002                                         $     1,248  $    70,712   $    71,960
2003                                               5,102           --         5,102
2004                                               5,221           --         5,221
2005                                               3,624           --         3,624
2006                                               2,468           --         2,468
Thereafter                                         8,647           --         8,647
                                              -----------  -----------   -----------
                                             $    26,310  $    70,712   $    97,022
                                              ===========  ===========   ===========`

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 was recently extended until October 31, 2003 and will stay in effect unless earlier revoked by our board
of directors. As of September 30, 2002, 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 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.

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

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
significant impact on our business and be forced to pay damages."

Business Risks

Risks Related to Our Business

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

Although we were profitable in 2000 and in the first quarter of 2002, we
incurred net losses for 1998, 1999, 2001 and in the second and third quarters of
2002. 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:

22

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- 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
SuperFlash

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

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

Our operating expenses are relatively fixed, and we therefore have
limited ability to reduce expenses quickly in response to any revenue
shortfalls. Consequently, our operating results will be harmed if our revenues
do not meet our 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 on September 11, 2001 has 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 per share.

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

We typically plan our production and inventory levels
based on internal forecasts of customer demand, which are highly unpredictable
and can fluctuate substantially. The value of our inventory is dependent on our
estimate of future average selling prices, and, if our projected average selling
prices are over estimated, we may be required to adjust our inventory value to
reflect the lower of cost or market. As of September 30, 2002, we had $92.9
million of inventory on hand, a decrease of $15.3 million, or 14.2%, from
December 31, 2001. Total valuation adjustments to inventory were $72.2 million
in 2001. Due to the large number of units in our inventory, even a small change
in average selling prices could result in a significant adjustment and could
harm our financial results. Some of our customers have requested that we ship
them product that has a finished goods date of manufacture that is less than one
or two years 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 or two years,
which could result in a significant adjustment and could harm our financial
results.

23

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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. Although we had improvements in
total units shipped for the first nine months of 2002 from the first nine months
of 2001, our revenues declined in the first nine months of 2002 when compared to
the first nine months of 2001 due to decreased average selling prices. 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 2000, 2001 and first nine months of 2002, our
export product and licensing revenues accounted for approximately 84.3%, 90.3%
and 92.1% 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. For example, in the third
quarter of 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.

We derived 77.6%, 80.7% and 88.5% of our net product revenues from Asia
during 2000, 2001 and the first nine months of 2002, 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 may be impacted by political, economic and
military conditions in Taiwan. Taiwan and China are continuously engaged in
political disputes and both countries have continued to conduct military
exercises in or near the other's territorial waters and airspace. Such disputes
may continue and even escalate, resulting in an economic embargo, a disruption
in shipping or even military hostilities. Additionally, we believe the economic
uncertainty fueled by the September 11, 2001 terrorist attacks in the United
States has caused our customer base to become more cautious. Any of these events
could delay production or shipment of our products. Any kind of activity of this
nature or even rumors of such activity could harm our operations, revenues,
operating results, and stock price.

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

We do not typically enter into long-term contracts with our customers. 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.

24

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

We rely on stocking representatives, distributors and our logistics
center to establish and maintain customer relationships and to sell our
products. These stocking representatives, distributors and our logistics center
could discontinue their relationship with us or discontinue selling our products
at any time. The majority of our stocking representatives and our logistics
center are located in Asia.

Since March 2001, we have been out-sourcing our customer service logistics in
Taiwan and other parts of Asia to Silicon Professional Technology Ltd., or SPT.
SPT is a wholly owned subsidiary of one of our stocking representatives in
Taiwan, Professional Computer Technology Limited, or PCT. SPT provides planning,
warehousing, delivery, billing, collection and other logistic functions for us
in Taiwan. SPT now services substantially all of our end customers based in
Taiwan, China and selected end customers throughout Asia. Products shipped to
SPT are accounted for as consigned inventory, and revenue is recognized when the
products have been delivered and are considered as a sale to our end customers
by SPT. For the year ended December 31, 2001 and the nine months ended September
30, 2002, SPT serviced end customer sales accounting for 30.3% and 55.1% of our
net product revenues recognized, respectively.

Product shipments to Asia accounted for 77.6%, 80.7% and 88.5% of net product
revenues for 2000, 2001 and the nine months ended September 30, 2002,
respectively. For further description of our relationships with PCT and SPT,
please refer to "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation - Related Party Transactions" in our Annual
Report on Form 10-K for the year ended December 31, 2001.

We ship to, and have accounts receivable from, OEMs, ODMs, CEMs, stocking
representatives, distributors, and our logistics center. Our logistics center,
stocking representatives and distributors 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 net product revenues in 2000,
2001 or the nine months ended September 30, 2002.

No single customer, which we define as an OEM, ODM, CEM, or end user that
purchases product directly from us or through our logistics center, represented
10.0% or more of our net product revenues during 2000, 2001 or the nine months
ended September 30, 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 would harm our
business.

The loss of our relationship with any stocking representative, logistics
center or distributor could harm our operating results by impairing our ability
to sell our products to our end customers.

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

We outsource 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 four
foundries, TSMC in Taiwan, Sanyo and Seiko-Epson in Japan, and Samsung in Korea.
We anticipate that these foundries, together with Nanya and Vanguard in Taiwan
and Oki in Japan, will manufacture the majority of our products in 2002. On
March 6, 2001, we invested $50.0 million in 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 2003. If these suppliers fail to
satisfy our requirements on a timely basis at competitive prices we could suffer
manufacturing delays, a possible loss of revenues or higher than anticipated
costs of revenues, any of which could harm our operating results.

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

25

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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. We have a remaining commitment to prepay a total of
$45.0 million, subject to certain economic and business conditions,
to secure increased wafer capacity in 2002 and 2003.  However, at this time we are
in the process of renegotiating this agreement and expect that this commitment will no longer be required.
Similar to our $50.0 million investment in GSMC, we may determine
that it is necessary to invest substantial capital in order to secure
appropriate production capacity commitments. If we cannot secure additional
manufacturing capacity on acceptable terms, our ability to grow will be impaired
and our operating results will be harmed.

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

We have long-term, non-cancelable building lease commitments. We are
currently in the process of locating subtenants for our unused office space. We
may be unable to secure subtenants, for this space, due to the recent decrease
in demand for commercial rental space in Silicon Valley. During the third
quarter of 2001, we recorded a period charge to other operating expense of
approximately $756,000 relating to an operating lease for an abandoned building.
This charge 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. 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 from time to time have experienced problems achieving
acceptable wafer manufacturing yields. Semiconductor manufacturing yields are a
function of both our design technology and the foundry's manufacturing process
technology. Low yields may result from marginal design or manufacturing process
drift. Yield problems may not be identified until the wafers are well into the
production process, which often makes them difficult, time consuming and costly
to correct. Furthermore we rely on independent foundries for our wafers which
increases the effort and time required to identify, communicate and resolve
manufacturing yield problems. If our foundries fail to achieve acceptable
manufacturing yields, we will experience higher costs of revenues and reduced
product availability, which could harm our operating results.

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

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

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

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

26

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- 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 limited rights to
fabricate products based on our technology and circuit design, and to sell such
products worldwide, subject to our receipt of royalty payments.

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

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

The markets for our products are characterized by:



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

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

27

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

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

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

We are highly dependent on Bing Yeh, our President and Chief Executive
Officer, as well as the other principal members of our management team and
engineering staff. There is intense competition for qualified personnel in the
semiconductor industry, in particular the highly skilled design, applications
and test engineers involved in the development of flash memory technology.
Competition is especially intense in Silicon Valley, where our corporate
headquarters is located. We may not be able to continue to attract and retain
engineers or other qualified personnel necessary for the development of our
business or to replace engineers or other qualified personnel who may leave our
employ in the future. Our anticipated growth is expected to place increased
demands on our resources and will likely require the addition of new management
and engineering personnel and the development of additional expertise by 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 54
patents in the United States relating to our products and processes, and have
filed for several more. In addition, we hold several patents in Europe and
Canada, and have filed several foreign patent applications in Europe, Japan,
Korea, Taiwan and Canada. We cannot assure you that any pending patent
application will be granted. Our operating results could be harmed by the
failure to protect our intellectual property.

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

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

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.

28

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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. A jury
recently 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, there will not be any impact on our ability to sell 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. Briefing is scheduled
to conclude by the end of 2002 with a decision expected sometime in mid-to-late
2003. 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 amounts 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.

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

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

29

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Risks Related to Our Industry

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

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

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

The semiconductor industry has historically been cyclical, characterized
by wide fluctuations in product supply and demand. From time to time, the
industry has also experienced significant downturns, often in connection with,
or in anticipation of, maturing product cycles and declines in general economic
conditions. Downturns of this type occurred in 1997 and 1998, and more recently
in late 2000 through the first nine months of 2002. These downturns are
characterized by diminished product demand, production over-capacity and
accelerated decline of average selling prices, and in some cases have lasted for
more than a year. Our business could be harmed by industry-wide fluctuations in
the future. The flash memory products portion of the semiconductor industry,
from which we derive substantially all of our revenues suffered from excess
capacity in 1996, 1997 and 1998, which resulted in greater than normal declines
in our markets, which unfavorably impacted our revenues, gross margins and
profitability. While these conditions improved in 1999 and 2000, deteriorating
market conditions at the end of 2000 and continuing through the first nine
months of 2002 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. If we fail to continue to introduce new products, our
business may suffer and the seasonality of a portion of our sales may become
more pronounced.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to risks associated with foreign exchange rate
fluctuations due to our international manufacturing and sales activities. These
exposures may change over time as business practices evolve and could negatively
impact our operating results and financial condition. All of our sales are
denominated in U.S. dollars. An increase in the value of the U.S. dollar
relative to foreign currencies could make our products more expensive and
therefore reduce the demand for our products. Such a decline in the demand could
reduce revenues and/or result in operating losses. In addition, a downturn in
the economies of China, Japan or Taiwan could impair the value of our equity
investments in companies with operations in these countries. If we consider the
value of these companies to be impaired, we will write off, 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 due to an other than temporary decline in its
market value. As of September 30, 2002, the recorded value of our KYE investment
was approximately $1.7 million, which represented the fair market value 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 September 30, 2002, the recorded value of our Apacer investment was
approximately $4.4 million. We also have equity investments in companies with
operations in China, Japan and Taiwan with recorded values as of September 30,
2002 of approximately $50.0 million, $0.9 million and $9.7 million,
respectively.

At any time, fluctuations in interest rates could effect interest earnings on
our cash, cash equivalents and available-for-sale investments, or the fair value
of our investment portfolio. We believe that the effect, if any, of reasonably
possible near term changes in interest rates on our financial position, results
of operations, and cash flows would not be material. Currently, we do not hedge
these interest rate exposures. As of September 30, 2002, 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, cash equivalents and
available-for-sale investments as of September 30, 2002 (in thousands):

30

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

  Short-term available-for-sale investments - fixed rate                    $  63,499      1.9%
  Long-term available-for-sale investments (1 to 2 years) - fixed rate          1,973      1.9%
  Cash and cash equivalents - variable rate                                   120,630      1.0%
                                                                             ---------
                                                                            $ 186,102      1.3%
                                                                             =========`

Item 4. Controls and Procedures

Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report.  Based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.

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

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 can no longer 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
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. We appealed from the Limited Exclusion
Order, and in August 2001 the Court of Appeals for the Federal Circuit issued an
opinion giving its reasons for denying that appeal. 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. We
intervened as a party in the Macronix case for purposes of opposing that motion.
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, there
will not be any impact on our ability to sell 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. Briefing is scheduled to conclude by the
end of 2002 with a decision expected sometime in mid-to-late 2003. 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 September 30, 2002,
this amount is included in restricted cash, cash equivalents and available-for-sale
investments in our balance sheet.

31

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Trial on the '903 patent was severed and heard before a jury
beginning on July 29, 2002. The jury was unable to unanimously decide whether
the `903 patent is valid, and a mistrial was declared. Atmel has not yet
indicated whether it will seek another trial. The Court has ruled that we
infringed that patent, so if the jury finds the patent valid, it will assess
what, if any, damages are due Atmel.

From time to time, we are also involved in other legal actions arising in the
ordinary course of business. We have incurred certain amounts associated with
defending these matters. There can be no assurance the Atmel complaint or other
third party assertions will be resolved without costly litigation, in a manner
that is not adverse to our financial position, results of operations or cash
flows or without requiring royalty payments in the future which may adversely
impact gross margins. No estimate can be made of the possible loss or possible
range of loss associated with the resolution of these contingencies. As a
result, no losses have been accrued in our financial statements as of September
30, 2002.





Item 6.  Exhibits and Reports on Form 8-K

(a)	Exhibits.







(b)	Reports on Form 8-K filed during the quarter ended September 30, 2002:
None.

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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sunnyvale, County of
Santa Clara, State of California, on the 13th day of November, 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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)

33

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CERTIFICATIONS

Certification of President and Chief Executive Officer
Pursuant to Section 302 of Sarbanes-Oxley Act of
2002

I, Bing Yeh, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Silicon Storage
Technology, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

1. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
2. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
3. presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

1. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

1. all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
2. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and

1. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.

Date: November 13, 2002

/s/ BING YEH  
Bing Yeh
President and Chief Executive Officer

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Certification of Vice President Finance & Administration,
Chief Financial Officer and Secretary
                  Pursuant to Section 302 of Sarbanes-Oxley Act of 2002



I, Jeffrey L. Garon, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Silicon Storage
Technology, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

1. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
2. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
3. presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

1. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

1. all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
2. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and

1. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.

Date: November 13, 2002

/s/ JEFFREY L. GARON
Jeffrey L. Garon
Vice President Finance & Administration, Chief Financial Officer and
Secretary



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