<PAGE>



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

                                    FORM 10-Q

(Mark One)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2001.

OR

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


                         Commission File Number 0-26944


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


           California                                           77-0225590
(State or other jurisdiction of                              (I.R.S. Employer
Incorporation or organization)                            Identification Number)

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

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

                                   ----------



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

Number of shares outstanding of our Common Stock, no par value, as of the latest
practicable date, July 31, 2001:   91,035,352


<PAGE>


                        SILICON STORAGE TECHNOLOGY, INC.

                     FORM 10-Q: QUARTER ENDED JUNE 30, 2001
                                TABLE OF CONTENTS



Part I - FINANCIAL INFORMATION

  Item 1.  Condensed Consolidated Financial Statements:
           Condensed Consolidated Statements of Operations....................3
           Condensed Consolidated Balance Sheets..............................4
           Condensed Consolidated Statements of Cash Flows....................5
           Notes to Condensed Consolidated Financial Statements...............6


  Item 2.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations..........................................13


  Item 3.  Quantitative and Qualitative Disclosures About Market Risk.........25




Part II - OTHER INFORMATION


  Item 1.  Legal Proceedings..................................................27

  Item 4.  Submission of Matters to a Vote of Security Holders................28

  Item 6.  Exhibits and Reports on Form 8-K...................................28


                                       2
<PAGE>


                                     PART I

Item 1.   Condensed Consolidated Financial Statements


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

<TABLE>
<CAPTION>
                                              Three months ended June 30,           Six months ended June 30,
                                           ----------------------------------   -----------------------------------
                                                2000               2001               2000              2001
                                           ----------------   ---------------   -----------------  ----------------
                                             (unaudited)       (unaudited)        (unaudited)        (unaudited)
<S>                                             <C>               <C>                <C>                <C>

Net revenues:
     Product revenues - unrelated parties       $   92,306        $   31,847         $   147,976        $   99,922
     Product revenues - related parties              9,770            21,050              15,913            32,904
     License revenues                                1,110             9,818               1,611            16,187
                                           ----------------   ---------------   -----------------  ----------------
          Total net revenues                       103,186            62,715             165,500           149,013
Cost of revenues                                    57,084            38,037              93,559            95,395
                                           ----------------   ---------------   -----------------  ----------------
Gross profit                                        46,102            24,678              71,941            53,618
                                           ----------------   ---------------   -----------------  ----------------

Operating expenses:
     Research and development                        9,181            12,425              17,257            24,711
     Sales and marketing                             5,876             6,179              10,503            12,523
     General and administrative                      3,680             5,637               6,319            10,445
                                           ----------------   ---------------   -----------------  ----------------
          Total operating expenses                  18,737            24,241              34,079            47,679
                                           ----------------   ---------------   -----------------  ----------------
Income from operations                              27,365               437              37,862             5,939
Interest and other income                            3,082             1,469               3,100             4,846
Interest expense                                      (101)              (87)               (545)             (186)
                                           ----------------   ---------------   -----------------  ----------------
Income before provision for income taxes            30,346             1,819              40,417            10,599
Provision for income taxes                           7,810               692               8,237             4,028
                                           ----------------   ---------------   -----------------  ----------------
Net income                                      $   22,536         $   1,127          $   32,180        $    6,571
                                           ================   ===============   =================  ================

Net income per share - basic                    $     0.25         $    0.01          $     0.39         $    0.07
                                           ================   ===============   =================  ================
Shares used in per share calculation                88,753            90,982              82,530            90,827
                                           ================   ===============   =================  ================

Net income per share - diluted                  $     0.24         $    0.01          $     0.36         $    0.07
                                           ================   ===============   =================  ================
Shares used in per share calculation                95,842            96,001              90,444            96,212
                                           ================   ===============   =================  ================
</TABLE>


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


                                       3
<PAGE>

                SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

<TABLE>
<CAPTION>
                                      ASSETS
                                                                          December 31,         June 30,
                                                                              2000               2001
                                                                        ------------------ -----------------
                                                                           (unaudited)       (unaudited)
<S>                                                                           <C>               <C>
Current assets:
      Cash and cash equivalents                                               $   109,086       $    10,914
      Restricted cash                                                                   -            12,490
      Short-term available-for-sale investments                                   139,963           121,648
      Trade accounts receivable-unrelated parties, net                            106,258            34,869
      Trade accounts receivable-related parties, net                               20,000            31,093
      Inventories                                                                  73,290           179,239
      Deferred tax asset                                                            9,491             8,568
      Other current assets                                                         14,835            24,165
                                                                        ------------------ -----------------
           Total current assets                                                   472,923           422,986

Equipment, furniture and fixtures, net                                             16,874            24,540
Long-term available-for-sale investments                                                -            10,129
Equity investments                                                                 19,369            71,421
Other assets                                                                        3,424             3,526
                                                                        ------------------ -----------------
           Total assets                                                       $   512,590       $   532,602
                                                                        ================== =================

                                   LIABILITIES
Current liabilities:
      Notes payable, current portion                                          $         -       $       299
      Trade accounts payable-unrelated parties                                     39,184            56,400
      Trade accounts payable-related parties                                        7,339             6,900
      Accrued expenses and other liabilities                                       33,879            23,697
      Deferred revenue-unrelated parties                                           15,274             8,676
      Deferred revenue-related parties                                                  -             9,697
                                                                        ------------------ -----------------
           Total current liabilities                                               95,676           105,669

Other liabilities                                                                     279             1,575
                                                                        ------------------ -----------------
           Total liabilities                                                       95,955           107,244
                                                                        ------------------ -----------------

                               SHAREHOLDERS' EQUITY
Common stock                                                                      330,310           332,377
Accumulated other comprehensive income                                                132               217
Retained earnings                                                                  86,193            92,764
                                                                        ------------------ -----------------
      Total shareholders' equity                                                  416,635           425,358
                                                                        ------------------ -----------------
           Total liabilities and shareholders' equity                         $   512,590       $   532,602
                                                                        ================== =================
</TABLE>


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


                                       4
<PAGE>

                SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                               Six Months Ended June 30,
                                                                          -------------------------------------
                                                                                2000               2001
                                                                          ------------------ ------------------
                                                                             (unaudited)        (unaudited)
<S>                                                                             <C>                 <C>

Cash flows from operating activities:
    Net income                                                                  $    32,180         $    6,571
    Adjustments to reconcile net income to net cash
      provided by (used in) operating activities:
       Depreciation/amortization                                                      2,855              4,582
       Provision for doubtful accounts receivable                                        25              2,429
       Provision for excess and obsolete inventories and
         write down to market                                                         1,742             11,765
       Deferred income taxes                                                         (1,900)                 -
       Tax benefit from employee stock plans                                          8,552                  -
       (Gain) loss on sale of equipment                                                 (62)                25
    Changes in operating assets and liabilities:
       Accounts receivable-unrelated parties                                        (41,901)            69,147
       Accounts receivable-related parties                                           (3,869)           (11,280)
       Inventories                                                                  (26,500)          (117,714)
       Other current and noncurrent assets                                           (4,180)            (9,197)
       Trade accounts payable-unrelated parties                                      16,597             17,216
       Trade accounts payable-related parties                                             -               (439)
       Accrued expenses and other current liabilities                                10,487            (10,182)
       Deferred revenue-unrelated parties                                             6,413             (6,598)
       Deferred revenue-related parties                                                   -              9,697
                                                                          ------------------ ------------------
           Net cash provided by (used in) operating activities                          439            (33,978)
                                                                          ------------------ ------------------
Cash flows from investing activities:
    Restricted cash                                                                       -            (12,490)
    Investment in equity securities                                                 (17,110)           (52,052)
    Acquisition of equipment, furniture and fixtures                                 (4,501)           (11,585)
    Proceeds from sale of property and equipment                                         62                  -
    Purchases of available-for-sale investments                                     (45,958)           (52,331)
    Sales and maturities of available-for-sale investments                                -             60,602
                                                                          ------------------ ------------------
           Net cash used in investing activities                                    (67,507)           (67,856)
                                                                          ------------------ ------------------
Cash flows from financing activities:
    Borrowings                                                                       39,750              1,800
    Repayments                                                                      (59,037)              (115)
    Issuance of shares of common stock                                              255,846              2,067
    Other                                                                               (82)               (90)
                                                                          ------------------ ------------------
           Net cash provided by financing activities                                236,477              3,662
                                                                          ------------------ ------------------
             Net increase (decrease) in cash and cash equivalents                   169,409            (98,172)
Cash and cash equivalents at beginning of period                                      1,223            109,086
                                                                          ------------------ ------------------
Cash and cash equivalents at end of period                                      $   170,632         $   10,914
                                                                          ================== ==================
Supplemental Disclosure of Cash Flow Information:
Cash received during the period for interest                                    $     2,225         $    5,496
Cash paid during the period for interest                                        $       545         $      183
Net cash paid during the period for income taxes                                $         3         $   11,662
</TABLE>



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


                                       5
<PAGE>

                SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES


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

1.  Basis of Presentation

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

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

Recent Accounting Pronouncements

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

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

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


                                       6
<PAGE>


2. Computation of Net Income Per Share

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

<TABLE>
<CAPTION>
                                                             Three months ended June 30,         Six months ended June 30,
                                                           --------------------------------    ------------------------------
                                                                2000             2001              2000            2001
                                                           ---------------  ---------------    --------------  --------------
<S>                                                            <C>               <C>               <C>             <C>
Numerator - Basic
     Net income                                                $   22,536        $   1,127         $  32,180       $   6,571
                                                           ===============  ===============    ==============  ==============
Denominator - Basic
     Weighted average common stock outstanding                     88,753           90,982            82,530          90,827
                                                           ===============  ===============    ==============  ==============
Basic net income per share                                     $     0.25        $    0.01         $    0.39       $    0.07
                                                           ===============  ===============    ==============  ==============

Numerator - Diluted
     Net income                                                $   22,536        $   1,127         $  32,180       $   6,571
                                                           ===============  ===============    ==============  ==============
Denominator - Diluted
     Weighted average common stock outstanding                     88,753           90,982            82,530          90,827
     Dilutive potential of common stock equivalents:
         Options                                                    7,089            5,019             7,914           5,385
                                                           ---------------  ---------------    --------------  --------------
                                                                   95,842           96,001            90,444          96,212
                                                           ===============  ===============    ==============  ==============

Diluted net income per share                                   $     0.24        $    0.01         $    0.36       $    0.07
                                                           ===============  ===============    ==============  ==============
</TABLE>

Anti-dilutive stock options to purchase approximately 66,000 shares and
2,809,000 shares of common stock were excluded from the computation of diluted
net income per share for the six months ended June 30, 2000 and 2001,
respectively, because the exercise price of these options exceeded the average
fair market value of our common stock for the six months ended June 30, 2000 and
2001.

3. Marketable Securities

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

Our investments comprise federal, state, and municipal government obligations
and foreign and public corporate equity 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
six months ended June 30, 2001 were not material.


                                       7
<PAGE>

3. Marketable Securities (continued):

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

<TABLE>
<CAPTION>
                                          Amortized         Unrealized           Fair
                                            Cost               Gain             Value
                                       ----------------   ---------------  -----------------
<S>                                        <C>                  <C>               <C>
Corporate bonds and notes                  $    29,240          $     33          $  29,273
Government bonds and notes                     110,508               317            110,825
                                       ----------------   ---------------  -----------------
Total bonds and notes                      $   139,748          $    350            140,098
                                       ================   ===============

Less amounts classified as cash equivalents                                          (8,321)
                                                                           -----------------
              Total long and short-term marketable securities                     $ 131,777
                                                                           =================
Contractual maturity dates for investments:
              Less than 1 year                                                    $ 121,648
              1 to 5 years                                                           10,129
                                                                           -----------------
                                                                                  $ 131,777
                                                                           =================
</TABLE>

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

<TABLE>
<CAPTION>
                                          Amortized          Unrealized            Fair
                                             Cost           Gain (Loss)           Value
                                      ------------------- ----------------- -------------------
<S>                                          <C>                <C>                <C>
Corporate bonds and notes                    $    69,155        $     (20)         $    69,135
Government bonds and notes
                                                 141,523               152             141,675
                                      ------------------- ----------------- -------------------
Total bonds and notes                        $   210,678        $      132             210,810
                                      =================== =================

Less amounts classified as cash equivalents                                            (70,847)
                                                                            -------------------
                          Total short-term marketable securities                   $   139,963
                                                                            ===================
</TABLE>

4. Balance Sheet Detail

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

<TABLE>
<CAPTION>
                                                               December 31,           June 30,
                                                                   2000                 2001
                                                              ----------------     ---------------
<S>                                                                <C>                  <C>
Trade accounts receivable-unrelated parties                        $  107,041           $  37,894
Less allowance for doubtful accounts-unrelated  parties                  (783)             (3,025)
Trade accounts receivable-related parties                              20,000              31,280
Less allowance for doubtful accounts-related parties                        -                (187)
                                                              ----------------     ---------------
                                                                   $  126,258           $  65,962
                                                              ================     ===============


                                                                December 31,          June 30,
                                                                    2000                2001
                                                              -----------------    ---------------
Raw materials                                                      $   29,025           $ 118,012
Work in process                                                        17,631               7,485
Finished goods                                                         26,634              53,742
                                                              -----------------    ---------------
                                                                   $   73,290           $ 179,239
                                                              =================    ===============
</TABLE>

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 write down our inventory value
to reflect the lower of cost or market. Our inventories include high technology
parts and components that are specialized in nature or subject to rapid
technological obsolescence. While we have programs to minimize the required
inventories on hand and we consider technological obsolescence when estimating
allowances for potentially excess and obsolete inventories and those required to
reduce recorded amounts to market values, it is reasonably possible that such
estimates could change in the near term. Such changes in estimate could have a
significant impact on our financial position and results of operations.


                                       8
<PAGE>


4. Balance Sheet Detail (continued):

<TABLE>
<CAPTION>
                                                     December 31,         June 30,
                                                         2000               2001
                                                    ----------------    -------------
<S>                                                      <C>               <C>
Equipment                                                $   13,389        $  14,447
Design hardware                                               4,234            6,353
Software                                                      5,781            6,665
Furniture and fixtures                                        2,269            9,204
                                                    ----------------    -------------
                                                             25,673           36,669
Less accumulated depreciation                                 9,906           13,682
                                                    ----------------    -------------
                                                             15,767           22,987
Construction in progress                                      1,107            1,553
                                                    ----------------    -------------
                                                         $   16,874        $  24,540
                                                    ================    =============

                                                     December 31,         June 30,
                                                         2000               2001
                                                    ----------------    -------------
Accrued compensation and related items                   $   14,509        $   4,378
Accrued income tax payable                                   11,292            3,658
Accrued liabilities-related parties                             356            1,298
Customer advances                                               630            5,927
Other accrued liabilities                                     7,092            8,436
                                                    ----------------    -------------
                                                         $   33,879        $  23,697
                                                    ================    =============
</TABLE>

5. Commitments

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


6. Contingencies

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

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

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

As to one of these four patents, Atmel's claims were withdrawn because of the
summary judgment granted by the District Court, as described above. The
administrative law judge, or ALJ, who makes recommended determinations to the
ITC, ruled that we did not infringe the remaining three patents. As to one of
these patents, U.S. Patent No. 4,451,903 ("the `903 patent,"


                                       9
<PAGE>

also known as "Silicon Signature"), the ALJ ruled on May 17, 2000 that it is
invalid and unenforceable because the patent did not name the proper inventors
and because Atmel intentionally misled the U.S. Patent Office. On October 16,
2000, the ITC overturned the ALJ's recommendation on the `903 patent and ruled
that we could not import into the United States certain products that use this
circuit. We appealed the ITC ruling and in January 2001 the Federal Circuit
Court issued an order upholding the ITC's decision, but has not yet issued a
written opinion setting forth the basis of that order. The Limited Exclusion
order expires September 14, 2001. The ITC also ruled that we do not infringe the
two other patents at issue ("the `811 and `829" patents). Atmel appealed that
determination but dropped the appeal. On May 8, 2001, we filed a motion with the
Commission to terminate the Limited Exclusion Order based on newly discovered
evidence. The motion is pending and we do not know when, and what, the
Commission's response will be.

In April 2001, Atmel filed motions for summary judgment on the `811 and `829
patents as well as the `903 patent. On May 11, 2001 we filed our opposition
papers with the court and filed motions for summary judgment that the `903
patent is invalid. The trial court denied Atmel's motion for summary judgment
and our motion for summary judgment. We currently have two motions for sanctions
pending before the trial court based on various discovery abuses by Atmel. The
motions were argued July 27, 2001, and have been submitted. The motions for
sanctions were granted in part and denied in part. The trial court set the trial
date on all issues for January 22, 2002.

On October 1, 2000, we announced a settlement in our lawsuit with Winbond
Electronics of Taiwan. We filed a lawsuit against Winbond in July 1998 in the
U.S. District Court in San Jose, California pursuant to the termination of our
SuperFlash technology licensing agreement with Winbond. As part of the
settlement, Winbond agreed to a consent judgment and will not contest the
validity and appropriateness of SST's termination of the licensing agreement in
June 1998. This settlement concludes all litigation between us and Winbond. We
received $10.4 million and $10.0 million in license fees during 2000 and for the
six months ended June 30, 2001, respectively, as part of this settlement.

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

7. Line of Credit

As of June 30, 2001 we had no borrowings on our line of credit. As of June 30,
2001, our line of credit was for $35.0 million. This agreement expires September
2002. Borrowing is limited to 80.0% of eligible worldwide accounts receivable
and is also reduced by any letters of credit issued under a $35.0 million
sub-agreement to this line. As of June 30, 2001 there was no credit available
under this line, and we had approximately $12.5 million in restricted cash to
secure our letters of credit. Subsequent to June 30, 2001, we renegotiated
certain terms related to the eligible accounts receivable, resulting in a
substantial increase in our availability under the line of credit. As a result,
as of July 18, 2001, the restricted cash balance of $12.5 million had been
released to us. The line bears interest at a rate of the bank's reference rate
plus 0.5% (7.5% at June 30, 2001). There is a minimum interest rate of 6.0%. We
are required to maintain specified levels of tangible net worth. Under the
agreement we are not permitted to pay a dividend. We must pay an unused line fee
at the annual rate of one quarter of one percent on the unused portion. As of
June 30, 2001, we were in compliance with the covenants of this agreement.

8. Segment Information

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

Previously we managed our business in two reportable segments: Flash products
and Technology Licensing. In January 2001, we introduced further granularity
into our management information systems which now allow us to segregate the
Flash products segment into three separate business units. These business units
are considered reportable segments. The new segments which comprise the former
Flash products segment are: the Standard Memory Product Group, or SMPG, the
Application Specific Product Group, or ASPG, and the Special Product Group, or
SPG. We make financial decisions and allocate resources based on the information
that we receive from this internal management system. We do not allocate


                                       10
<PAGE>

operating expenses, interest income or expense, other income, net or the
provision for income taxes to any of these segments for internal reporting
purposes, as we do not believe that allocating the expense is material in
evaluating a business unit's performance. Information for the prior period has
been restated to conform to the new presentation.

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

<TABLE>
<CAPTION>
                                               Three Months Ended                      Six Months Ended
                                                  June 30, 2001                          June 30, 2001
                                        ----------------------------------     ----------------------------------
                                           Revenues         Gross Profit          Revenues         Gross Profit
                                        ---------------    ---------------     ---------------    ---------------
<S>                                          <C>                <C>                <C>                 <C>
SMPG                                         $  29,407          $   1,696          $   79,744          $   8,359
ASPG                                            21,683             12,087              49,538             27,399
SPG                                              1,807              1,077               3,544              1,673
Technology Licensing                             9,818              9,818              16,187             16,187
                                        ---------------    ---------------     ---------------    ---------------
                                             $  62,715          $  24,678          $  149,013          $  53,618
                                        ===============    ===============     ===============    ===============


                                               Three Months Ended                      Six Months Ended
                                                  June 30, 2000                          June 30, 2000
                                        ----------------------------------     ----------------------------------
                                           Revenues         Gross Profit          Revenues         Gross Profit
                                        ---------------    ---------------     ---------------    ---------------
SMPG                                         $  96,340          $  42,364          $  155,786          $  67,180
ASPG                                             3,148              1,354               4,570              1,485
SPG                                              2,588              1,274               3,533              1,665
Technology Licensing                             1,110              1,110               1,611              1,611
                                        ---------------    ---------------     ---------------    ---------------
                                             $ 103,186          $  46,102          $  165,500          $  71,941
                                        ===============    ===============     ===============    ===============
</TABLE>

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

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

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

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


                                       11
<PAGE>

9. Comprehensive Income

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

<TABLE>
<CAPTION>
                                                  Three Months Ended                       Six Months Ended
                                         --------------------------------------  --------------------------------------
                                              June 30,           June 30,            June 30,            June 30,
                                                2000               2001                2000                2001
                                         ------------------- ------------------  -----------------   ------------------
<S>                                             <C>                <C>                <C>                  <C>
Net income                                      $    22,536        $     1,127        $    32,180          $     6,571
Other comprehensive income:
   Change in net unrealized gains
      on investments, net of tax                         56                 13                 56                   85
                                         ------------------- ------------------  -----------------   ------------------
Total comprehensive income                      $    22,592        $     1,140        $    32,236          $     6,656
                                         =================== ==================  =================   ==================
</TABLE>


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

<TABLE>
<CAPTION>
                                               December 31,                June 30,
                                                   2000                      2001
                                             ------------------       -------------------
<S>                                                 <C>                       <C>
Net unrealized gains on investments,
   net of tax                                       $      132                $      217
                                             ==================       ===================
</TABLE>

10. Equity Investment

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

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


                                       12
<PAGE>

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

The following discussion may be understood more fully by reference to the
condensed consolidated financial statements, notes to the condensed consolidated
financial statements, and management's discussion and analysis of financial
condition and results of operations contained in our Annual Report on Form 10-K,
as amended, for the year ended December 31, 2000, as filed with the Securities
and Exchange Commission.

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

Overview

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

The semiconductor industry has historically been cyclical, characterized by wide
fluctuations in product supply and demand. From time to time, the industry has
also experienced significant downturns, often in connection with, or in
anticipation of declines in general economic conditions. Downturns of this type
occurred in 1996, 1997 and 1998. These downturns have been characterized by
weakening product demand, production over-capacity and accelerated decline of
selling prices, and in some cases have lasted for more than a year. We began to
experience a sharp downturn in several of our markets late in the fourth quarter
of 2000, as our customers reacted to weakening demand for their products. During
the early portion of the first quarter of 2001, market conditions had not
improved and our customers continued to return product, cancel backlog and/or
push out shipments. However, during the latter portion of the first quarter, we
began to see a slowing of this activity and some of our customers had begun to
place orders, primarily in the personal computer segment. The second quarter
continued to be a difficult quarter for the industry and for us due to the
excess inventory situation and a continuing slowdown in new orders. In reaction
to sluggish sales, we were able to work with our foundry partners to
significantly reduce our wafer-start rate in order to control our inventory
level. Compared with the first quarter, we experienced weaker demand across all
major applications except graphics cards, PDAs and digital cameras. In addition,
despite the orders received at the end of the first quarter, we also experienced
weaker demand in the personal computer segment during the second quarter. The
networking and wireless communications segments continue to be very weak. Our
business could be harmed by industry-wide fluctuations in the future.

         We derived 74.9% and 78.4% of our net product revenues during the six
months ended June 30, 2000 and 2001, respectively, from product shipments to
Asia. Additionally, all of our major wafer suppliers and packaging and testing
subcontractors are located in Asia.

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

         Sales to direct customers and foreign stocking representatives are
recognized upon shipment, net of an allowance for estimated returns. Sales to
distributors are made primarily under arrangements allowing price protection and
the right of stock rotation on merchandise unsold to customers. Because of the
uncertainty associated with pricing concessions and future returns, we defer
recognition of such revenues, related costs of revenues and related gross margin
until we are notified by the distributor that the merchandise is sold by the
distributor. In March 2001, one of our stocking representatives, Professional
Computer Technology Limited ("PCT"), established a separate company, Silicon
Professional Technology Ltd. ("SPT"), to provide warehousing, logistics and
distribution services for us in Taiwan. SPT now services substantially all of
our customers in Taiwan. For revenue recognition purposes we treat SPT as a
distributor and we defer recognition of the revenue and cost of products shipped
to SPT until it has been sold to the end customer. In the first half of 2001,
PCT and SPT accounted for 20.9% of revenue recognized during this period.


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


                                       13
<PAGE>

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

Results of Operations: Quarter Ended June 30, 2001

Net Revenues

     Net revenues were $62.7 million for the three months ended June 30, 2001 as
compared to $86.3 million in the first quarter of 2001 and $103.2 million for
the three months ended June 30, 2000. Revenues decreased compared to the second
quarter of last year due to decreased shipment volume of our products and due to
decreased average selling prices. Revenues decreased compared to the prior
quarter due to the lower volume of units shipped as a result of a deterioration
in market conditions which began in the fourth quarter of 2000 and continued
through the second quarter of 2001. 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
$149.0 million for the six months ended June 30, 2001 as compared to $165.5
million for the comparable period in 2000. The decrease from year to year was
due to decreased shipment volume of our products and decreased average selling
prices.

     Product Revenues. Product revenues were $52.9 million in the second quarter
of 2001 as compared to $79.9 million in the first quarter of 2001 and $102.1
million for the second quarter of 2000. Product revenues decreased compared to
the second quarter of last year due to decreased shipment volume of our products
and due to decreased average selling prices. Product revenues decreased compared
to the prior quarter due to the lower volume of units shipped as a result of a
deterioration in market conditions which began in the fourth quarter of 2000 and
continued through the second quarter of 2001. Product revenues decreased to
$132.8 million in the first half of 2001 from $163.9 in the first half of 2000
due to decreased shipment volume of our products from period to period. We
anticipate shipping volumes to continue to fluctuate due to overall industry
supply and demand.

     License Revenues. Revenues from license fees and royalties were $9.8
million in the second quarter of 2001, as compared to $6.4 million in the first
quarter of 2001 and $1.1 million in the second quarter of 2000. The increase
from the second quarter of 2000 to the second quarter of 2001 was primarily due
to $5.0 million in license fees received as part of our legal settlement with
Winbond. The increase from the first quarter of 2001 to the second quarter of
2001 was primarily due to increase in royalty payments received from our
licensees. We anticipate an additional $5.0 million to be paid under this legal
settlement in each of the remaining quarters of 2001. Revenues from license fees
and royalties increased to $16.2 million for the six months ended June 30, 2001
from $1.6 million for the comparable period in 2000. The period to period
increase was primarily due to $10.0 million license fees received as part of our
legal settlement with Winbond and increase in royalty payments from our
licensees. We anticipate that license revenues may fluctuate significantly in
the future.

Gross Profit

     Gross profit was $24.7 million, or 39.3% of net revenues, in the second
quarter of 2001 as compared to $28.9 million, or 33.5% of net revenues, in the
first quarter of 2001 and $46.1 million, or 44.7% of net revenues, in the second
quarter of 2000. Gross profit decreased in absolute dollars when compared to the
second quarter of 2000 and the first quarter of 2001 due primarily to write
downs and allowances for products in inventory and decreases in average selling
prices. We wrote down $5.9 million of inventory in each of the first two
quarters of 2001, or a total of $11.8 million for the first half of 2001. As a
percentage of net revenues, gross profit increased when compared to the first
quarter of 2001 primarily due to the increase in license revenues in the second
quarter of 2001. Product gross margin was 28.1% for the second quarter 2001,
compared to 28.2% for the first quarter of 2001 and 44.1% for the second quarter
of 2000. For the six months ended June 30, 2001, gross profit was $53.6 million,
or 36.0 %, compared to $71.9 million, or 43.5%, for the comparable period in
2000. Product gross margin for the six months ended June 30, 2001 decreased to
28.2% from 42.9% for the same period in 2000. The period to period decrease was
primarily due to decreased unit shipments, decreased average selling prices and
write downs and allowances for products in inventory.


Operating Expenses

     Our operating expenses consist of research and development, sales and
marketing, and general and administrative expenses. Operating expenses were
$24.2 million, or 38.7% of net revenues, in the second quarter of 2001, compared
to $23.4 million, or 27.2% of net revenues, in the first quarter of 2001, and
$18.7 million, or 18.2% of net revenues, in the second quarter of 2000. The
increase from the comparable quarter last year was due primarily to hiring
additional personnel, the development of new products and improvements in our
infrastructure. This is offset by the lack of profit sharing expense, as none
was earned in the second quarter of 2001. The increase from the first quarter
2001 was due primarily to an increase in our allowance for doubtful accounts of
$2.3 million, offset by $1.4 million in legal accruals booked in the first
quarter of 2001 in connection with the Atmel litigation. Operating expenses
increased to $47.7 million for the six months ended June 30, 2001 from $34.1
million for the comparable period in 2000. The period to period increase was due
to hiring additional personnel, development of new products, improvements in our
infrastructure, an increase in our allowance for doubtful accounts for $2.3
million, and an increase in legal accruals for $1.4 million in connection with
the Atmel litigation. We anticipate that we will continue to devote substantial
resources to research and development, sales and marketing and to general and
administrative, and that these expenses will continue to increase in absolute
dollar amounts.


                                       14
<PAGE>

     Research and development. Research and development expenses include costs
associated with the development of new products, enhancements to existing
products, quality assurance activities and occupancy costs. These costs consist
primarily of employee salaries, benefits, mask tooling and the cost of outside
resources that supplement the internal development team. Research and
development expenses were $12.4 million, or 19.8% of net revenues, during the
second quarter of 2001, as compared to $12.3 million, or 14.2% of net revenues,
during the first quarter of 2001 and $9.2 million, or 8.9% of net revenues,
during the second quarter of 2000. Research and development expenses increased
35.3% from the second quarter of 2000 due primarily to expenses related to
increased engineering evaluation and mask costs, increased depreciation related
to purchases of new engineering equipment, increased engineering headcount and
occupancy costs. For the six months ended June 30, 2001, research and
development expenses increased to $24.7 million from $17.3 million for the
comparable period in 2000. The period to period increase was primarily due to
expenses related to increased engineering and mask costs, increased depreciation
related to purchases of new engineering equipment, and increased engineering
headcount and occupancy costs. We expect research and development expenses to
continue to increase in absolute dollars as we continue to invest in new product
offerings, drive to new deep sub-micron technologies and cost reduce our
existing products.

     Sales and marketing. Sales and marketing expenses consist of personnel
costs, commissions to stocking representatives, travel and entertainment and
promotional expenses. Sales and marketing expenses were $6.2 million, or 9.9% of
net revenues, in the second quarter of 2001 as compared to $6.3 million, or 7.4%
of net revenues, in the first quarter of 2001 and $5.9 million, or 5.7% of net
revenues, during the second quarter of 2000. Sales and marketing expenses
remained relatively flat in absolute dollars, but increased as a percentage of
net revenues due to the decrease in net revenues from the first quarter of 2001
to the second quarter of 2001, as well as from the second quarter of the
previous year. Sales and marketing expenses for the six months ended June 30,
2001 were $12.5 million as compared to $10.5 million for the same period in
2000. The period to period increase was primarily due to increased commissions
payable on higher product revenues in the first quarter of 2001 when compared to
the first quarter of 2000, increased headcount and occupancy cost and increased
marketing costs. We expect sales and marketing expenses to increase in absolute
dollars as we continue to expand our sales and marketing efforts.

     General and administrative. General and administrative expenses consist of
salaries for administrative, executive and finance personnel, recruiting costs,
professional services and legal fees and allowances for doubtful accounts.
General and administrative expenses were $5.6 million, or 9.0% of net revenues,
in the second quarter of 2001, as compared to $4.8 million, or 5.6% of net
revenues, in the first quarter of 2001 and $3.7 million, or 3.6% of net
revenues, during the second quarter of 2000. Expenses increased from the second
quarter of 2000 due to increased occupancy and headcount related costs, as well
as depreciation expense associated with new leasehold improvements on additional
leased office space. Our allowance for doubtful accounts increased by $2.3
million from the first quarter of 2001 due to the aging of certain accounts
receivable during this period. This was offset by $1.4 million in legal accruals
booked in the first quarter of 2001 booked in connection with the Atmel
litigation. General and administrative expenses for the six months ended June
30, 2001 were $10.4 million as compared to $6.3 million for the same period in
2000. The period to period increase was due primarily to increased allowance for
doubtful accounts and increased legal accrual. We anticipate that general and
administrative expenses will continue to increase in absolute dollar amount as
we scale our facilities, infrastructure, and head count to support our overall
expected growth. We may also incur additional expenses in connection with the
Atmel litigation. For further information on this litigation see "Legal
Proceedings."

     Interest and other income. Interest and other income was approximately $1.5
million, or 2.3% of net revenues, during the second quarter of 2001, as compared
to $3.4 million, or 3.9% of net revenues, during the first quarter of 2001 and
$3.1 million, or 3.0% of net revenues, during the second quarter of 2000.
Interest income decreased from the second quarter of 2000 to the second quarter
of 2001 and from the first quarter of 2001 to the second quarter of 2001 due to
a decrease in cash ,cash equivalent and available-for-sale investments balances.
Interest and other income increased to $4.8 million for the first half of 2001
from $3.1 million in the first half of 2000. The increase from period to period
was due to the change in cash, cash equivalents and available-for-sale
investment balances as a result of our follow-on public offering at the end of
the first quarter of 2000.

     Interest Expense. Interest expense was approximately $87,000 for the second
quarter of 2001 as compared to $99,000 for the first quarter of 2001 and
$101,000 for the second quarter of 2000. Interest expense decreased to $186,000
for the first half of 2001 from $545,000 in the first half of 2000. Interest
expense relates to interest and fees under our line of credit. Fees will
continue and will fluctuate depending on our use of the line of credit facility.

Provision for Income Taxes

     Our income tax provision of $692,000 in the second quarter of 2001 consists
of a 38.0% tax rate on income before taxes. This compares with a tax provision
of $3.3 million in the first quarter of 2001 which was a 38.0% tax rate on
income before taxes and a tax provision of $7.8 million in the second quarter of
2000 which was a 25.7% tax rate on income before taxes. For the first six months
of 2001, we recorded an income tax provision of $4.0 million, or 38.0% tax rate
on income before taxes, as compared to $8.2 million, or 20.4% tax rate on income
before taxes, for the same period in 2000. The increase in the effective tax
rate during 2001 is a result of our continued profitability. All of our prior
year net operating losses were fully utilized by the end of the second quarter
of 2000. We expect our effective tax rate to be 38.0% for the remainder of 2001.
Our tax rate may change depending on our profitability and the timing of the
implementation of certain tax planning strategies which are being designed to
decrease the effective rate in future years.


                                       15
<PAGE>

Segment Reporting

   Our operations involve the design, development, manufacturing, marketing and
technical support of our non-volatile memory products. We offer low and medium
density devices that target a broad range of existing and emerging applications
in the digital consumer, networking, wireless communications and Internet
computing markets. Our products are differentiated based upon attributes such as
density, voltage, access speed, package and predicted endurance. We also license
our technology for use in non-competing applications. Our reportable segments
are: the Standard Memory Product Group, or SMPG, the Application Specific
Product Group, or ASPG, and the Special Product Group, or SPG. Refer to Note 8
to the Condensed Consolidated Financial Statements for revenue and gross profit
information by reportable segment. Note that during 2000 we had different
reportable segments, and therefore the prior period information has been
restated to conform to the new presentation. Our analysis of the changes for
each segment is discussed below.

SMPG includes our three standard flash memory product families: the Small-Sector
Flash, or SSF, family, the Multi-Purpose Flash, or MPF, family, and the
Many-Time Programmable, or MTP, family and certain custom products based on
these standard flash memory families. These families allow us to produce
products optimized for cost and functionality to support the broad range of
applications that use nonvolatile memory products. Gross margin decreased from
44.0% in the second quarter of 2000 to 13.2% in the first quarter of 2001 and to
5.8% in the second quarter of 2001 for this segment due to the inventory
write-down during the first and second quarters of 2001.

     ASPG includes FlashBank, Concurrent SuperFlash, Serial Flash, Firmware Hub,
or FWH, and LPC flash products. These products are designed to address specific
applications such as cellular phones, pagers, PDAs, set-top boxes, hard disk
drives and PC BIOS applications. It also includes flash embedded controllers and
our mass storage products such as the FlashFlex51, ADC, ADM, and CompactFlash
Card product families, address digital cameras, digital cellular phones,
Internet appliances, PDAs, MP3 players, Set-top boxes and other types of mass
data storage applications. Gross margin increased from 43.0% in the second
quarter of 2000 to 55.0% in the first quarter of 2001 and to 55.7% in the second
quarter of 2001 for this segment due to increased shipment of the Firmware Hub
product, which was introduced during the second half of 2000.

SPG includes ComboMemory, ROM/RAM Combos and SRAM-related products. Gross margin
increased from 49.2% in the second quarter of 2000 and 34.3% in the first
quarter of 2001 to 59.6% in the second quarter of 2001 for this segment due to
changes in the mix of the types of products sold between the reporting periods.

Revenue and gross profit related to Technology Licensing was $1.1 million for
the second quarter of 2000, $6.4 million for the first quarter of 2001 and $9.8
million for the second quarter of 2001.

Recent Accounting Pronouncements

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

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


                                       16
<PAGE>

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

Liquidity and Capital Resources

   Operating activities. Our operating activities used cash of $34.0 million for
the six month period ended June 30, 2001 as compared to generating cash of
$439,000 for the six month period ended June 30, 2000. The cash used by
operating activities for the six month period ended June 30, 2001 related
primarily to increases in inventory of $117.7 million, accounts
receivable-related parties of $11.3 million and other assets of $9.2 million and
decreases in accrued expenses of $10.2 million and deferred revenues-unrelated
parties of $6.6 million. Cash used in operating activities was reduced by net
income of $6.6 million, a decrease in trade accounts receivable-unrelated
parties of $69.1 million and increases in trade accounts payable of $16.8
million and deferred revenues-related parties of $9.7 million and non-cash
adjustments of $18.8 million, primarily relating to depreciation and
amortization, inventory write-downs and increased provisions for doubtful
accounts receivable. Decreased accounts receivable-unrelated parties relates to
decreased shipment volume and decreased average selling prices due to the
downturn in the economy. Increased accounts receivable-related parties and
increased deferred revenue-related parties relates to a new distribution
relationship with a company owned by one of our equity investments. The cash
provided by operating activities for the six month period ended June 30, 2000
related primarily to net income of $32.2 million and increases in trade accounts
payable by $16.6 million, tax benefits from employee stock plans of $8.6 million
and increases in accrued expenses and deferred revenue of $16.9 million.
Increases in accounts receivable and accounts receivable from related parties of
$45.8 million and increases in inventory of $26.5 million mostly offset the net
income and increases in accounts payable. In addition, depreciation and
amortization of $2.9 million and provision for inventory write-downs of $1.7
million represented adjustments to reconcile net income to cash provided by
operating activities.

  Investing activities. Our investing activities used cash of $67.9 million for
the six month period ended June 30, 2001, as compared to using cash of $67.5
million for the first six months of 2000. In the first quarter of 2001, we made
a $50.0 million equity investment in Grace Semiconductor Manufacturing
Corporation, a Cayman Islands company with operations in China, as a part of
multi-phased strategic plan to expand into China. Additionally, in the second
quarter of 2001, we invested an additional $2.1 million in a production
subcontractor, and invested $12.5 million in restricted cash for securing our
letters of credit. Capital expenditures were $11.6 million for the current six
month period as compared to $4.5 million in capital expenditures for the same
period of 2000. The expenditures for the six month period ended June 30, 2001
include $5.2 million of leasehold improvements on new building leases signed in
2000. Cash used in investing activities was also reduced by the excess of sales
and maturities of available for sale investments over the purchases of such
investments by $8.3 million.

     Financing activities. Our financing activities provided cash of
approximately $3.7 million during the six month period ended June 30, 2001 as
compared to provided $236.5 million for the six month period ended June 30,
2000. For the current six month period, the cash provided was from $2.1 million
of common stock issued under the employee stock purchase plan and the exercise
of employee stock options and $1.8 million related to a leasehold improvement
loan as stipulated by the lease agreement, offset by $205,000 in loan repayments
and other. The cash provided for the six month period ended June 30, 2000 was
primarily from the issuance of common stock for $255.8 million and primarily
related to net proceeds from a follow-on public offering in which we issued and
sold 12.1 million shares of common stock, a private placement in which we issued
and sold 504,000 shares of common stock, and $2.2 million from common stock
issued under the employee stock purchase plan and the exercise of employee stock
options, offset by the repayment of our entire line of credit at the end of
March, 2000.

   Principal sources of liquidity at June 30, 2001 consisted of $155.2 million
of cash, cash equivalents, restricted cash, short-term investments and long-term
available for sale investments and the line of credit. As of June 30, 2001 we
had no borrowings on our line of credit. As of June 30, 2001, our line of credit
was for $35 million. This agreement expires September 2002. Borrowing is limited
to 80.0% of eligible worldwide accounts receivable and is also reduced by any
letters of credit issued under a $35 million sub-agreement to this line. As of
June 30, 2001 there was no credit available under this line, and we had
approximately $12.5 million in restricted cash to secure our letters of credit.
Subsequent to June 30, 2001, we renegotiated certain terms related to the
eligible accounts receivable, resulting in a substantial increase in our
availability under the line of credit. As a result, as of July 18, 2001, the
restricted cash balance of $12.5 million had been released to us. The line bears
interest at a rate of the bank's reference rate plus 0.5% (7.5% at June 30,
2001). There is a minimum interest rate of


                                       17
<PAGE>

6.0%. We are required to maintain specified levels of tangible net worth. Under
the agreement we are not permitted to pay a dividend. We must pay an unused line
fee at the annual rate of one quarter of one percent on the unused portion. As
of June 30, 2001 we were in compliance with the covenants of this agreement.

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

   Lease Commitments. We have long-term, non-cancelable building lease
commitments. We are currently seeking subtenants for our unused office space. We
may be unable to secure subtenants for such space due to the recent decrease in
demand for commercial rental space in Silicon Valley. See also "Business Risks
-If we are not successful in subleasing our unused office space, we will be
required to take a period charge for the difference between the total future
sublease income and our lease cost."

   We believe that our cash balances, together with funds expected to be
generated from operations and the line of credit availability, will be
sufficient to meet our projected working capital and other cash requirements
through at least the next twelve months. However, there can be no assurance that
future events will not require us to seek additional borrowings or capital and,
if so required, that such borrowing or capital will be available on acceptable
terms.


Business Risks

Risks Related to Our Business

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

Although we were profitable in 2000 and the six months ended June 30, 2001, we
have experienced a sequential decline in net revenues over the past three
quarters and our past financial performance should not be used to predict future
operating results. In addition, we incurred net losses in fiscal 1997, 1998 and
1999. 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:

     o  the availability, timely delivery and cost of wafers from our
        suppliers;
     o  competitive pricing pressures and related changes in selling prices;
     o  fluctuations in manufacturing yields and significant yield losses;
     o  new product announcements and introductions of competing products by
        us or our competitors;
     o  product obsolescence;
     o  lower of cost or market inventory adjustments;
     o  changes in demand for, or in the mix of, our products;
     o  the gain or loss of significant customers;
     o  market acceptance of products utilizing our SuperFlash(R)technology;
     o  changes in the channels through which our products are distributed
        and the timeliness of receipt of distributor resale information;
     o  exchange rate fluctuations;
     o  general economic, political and environmental-related conditions,
        such as natural disasters;
     o  difficulties in forecasting, planning and management of inventory
        levels;
     o  unanticipated research and development expenses associated with new
        product introductions; and
     o  the timing of significant orders and of license and royalty revenue.

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

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

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

o    sudden drops in consumer demand which causes customers to cancel backlog,
     push out shipment schedules, or reduce new orders, possibly due to a
     slowing economy or inventory corrections among our customers;


                                       18
<PAGE>

o    significant declines in selling prices that occur because of competitive
     price pressure during an over-supply market environment;
o    sudden shortages of raw materials or fabrication, test or assembly capacity
     constraints that lead our suppliers to allocate available supplies or
     capacity to other customers which, in turn, harm our ability to meet our
     sales obligations; and
o    the reduction, rescheduling or cancellation of customer orders.

We have a large amount of inventory on hand which could be subject to a
potential write down.

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 write down our inventory value to reflect the
lower of cost or market. As of June 30, 2001, we had $179.2 million of inventory
on hand, a sequential increase of $50.7 million, or 39.4% from March 31, 2001.
During the first half of 2001, we have written down a total of $11.8 million of
our inventory, $5.9 million of which occurred in the second quarter. Further
write downs of 16Mbit and other inventory may occur in the third quarter if
projected selling prices deteriorate beyond our expectations. The inventory of
the 16Mbit products accounted for approximately 8.1% of total inventory at June
30, 2001. Due to large amount of this inventory, even a small change in average
selling prices could result in a significant write-down and have a significant
impact on our financial position and results of operations.

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

Due to possible customer changes in delivery schedules and cancellations of
orders, our backlog at any particular date is not necessarily indicative of
actual sales for any succeeding period. A reduction of backlog during any
particular period, or the failure of our backlog to result in future revenue,
could harm our business. We experienced a sharp downturn in several of our
markets late in the fourth quarter of 2000, as our customers reacted to
weakening demand for their products. The second quarter was another difficult
quarter for us due to the excess inventory situation. Our customers have
continued to return product, cancel backlog and/or push out shipments. 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 1998, 1999, 2000 and the six months ended June 30, 2001, our export
product and licensing revenues accounted for approximately 92.7%, 89.1%, 84.3%,
and 90.5% 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:

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

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

We derived 80.8%, 77.6%, and 78.4% of our net product revenues from Asia during
1999, 2000, and the six months ended June 30, 2001, respectively. Additionally,
our major wafer suppliers and assembly and packaging subcontractors are all
located in Asia. Any kind of economic, political or environmental instability in
this region of the world can have a severe negative impact on our operating
results due to the large concentration of our production and sales activities in
this region. For example, during 1997 and 1998, several Asian countries where we
do business, such as Japan, Taiwan and Korea, experienced


                                       19
<PAGE>

severe currency fluctuation and economic deflation, which negatively impacted
our total revenues and also negatively impacted our ability to collect payments
from these customers. During this period, the lack of capital in the financial
sectors of these countries made it difficult for our customers to open letters
of credit or other financial instruments that are guaranteed by foreign banks.
Finally, the economic situation in this period exacerbated a decline in selling
prices for our products as our competitors reduced product prices to generate
needed cash.

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

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

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

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

We rely on stocking representatives and distributors to establish and maintain
customer relationships and, at times, to sell our products. These stocking
representatives and distributors could discontinue their relationship with us or
discontinue selling our products at any time. Prior to 2001, two of our stocking
representatives were responsible for relationships with customers which
accounted for substantially all of our product sales in Taiwan, which were 28.3%
and 25.5% of our net product revenues during 1999 and 2000. In March 2001, one
of our stocking representatives, Professional Computer Technology Limited
("PCT"), established a separate company, Silicon Professional Technology Ltd.
("SPT"), to provide warehousing, logistics and distribution services for us in
Taiwan. SPT now services substantially all of our customers in Taiwan. For
revenue recognition purposes we treat SPT as a distributor and we defer
recognition of the revenue and cost of products shipped to SPT until it has been
sold to the end customer. In the first half of 2001, PCT and SPT accounted for
20.9% of revenue recognized during this period. For the entire six months ended
June 30, 2001, product sales in Taiwan, which were serviced by four stocking
representatives, were 31.8% of our net product revenues. One stocking
representative was responsible for relationships with customers which accounted
for substantially all of our sales in China, including Hong Kong, during 1999
and 2000, which accounted for 24.3%, 19.1%, and 15.4% of our total net product
revenues during 1999, 2000 and the six months ended June 30, 2001, respectively.

Product sales to our top 10 accounts, which comprise OEM end customers, stocking
representatives and distributors represented approximately 62.8%, 53.6%, 43.0%,
and 60.5% of our net product revenues for 1998, 1999, 2000 and the six months
ended June 30, 2001, respectively. During 2000, 7 of our top 10 accounts were
stocking representatives, two were domestic distributors and one was an OEM. No
single customer account represented 10.0% or more of product revenues during
2000. In 1998, one customer account represented 15.2% of product sales. Another
customer account represented 10.7% and 12.4% of product sales in 1998 and 1999,
respectively.

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

                                       20
<PAGE>

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

     We outsource all of our manufacturing with the exception of limited testing
activities. We currently buy all of our wafers and sorted die from a limited
number of suppliers. Substantially all of our products are manufactured by four
foundries, Taiwan Semiconductor Manufacturing Co., Ltd., in Taiwan, Sanyo
Electric Co., Ltd., in Japan, Seiko-Epson Corp. in Japan, and Samsung
Electronics Ltd. in Korea. We anticipate that these foundries, together with
National Semiconductor Corporation in the United States, Nanya Technology
Corporation and Vanguard International Semiconductor Corporation in Taiwan, and
OKI Electric Industry Co. in Japan will manufacture the majority of our products
in the second half of 2001 and into 2002. On March 6, 2001, we invested $50.0
million in Grace Semiconductor Manufacturing Corporation (GSMC), a Cayman
Islands company, for a wafer foundry project located in Shanghai, P.R.C. If
these suppliers fail to satisfy our requirements on a timely basis and at
competitive prices we could suffer manufacturing delays, a possible loss of
revenues or higher than anticipated costs of revenues, any of which could harm
our operating results.

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

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

     In order to grow, we need to increase our present manufacturing capacity.
Events that we have not foreseen could arise which would limit our capacity. We
have a remaining commitment to prepay a total of $45.0 million in 2001 and 2002,
subject to certain economic and business conditions, to secure increased wafer
capacity in 2002 and 2003. We are continually engaged in attempting to secure
additional manufacturing capacity to support our long-term growth. Similar to
our $50.0 million investment in GSMC, we may determine that it is necessary to
invest substantial capital in order to secure appropriate production capacity
commitments. If we cannot secure additional manufacturing capacity on acceptable
terms, our ability to grow will be impaired and our operating results will be
harmed.

If we are not successful in subleasing our unused office space, we will 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 commerical rental space in Silicon Valley. If we are unable to secure
subtenants, or if the rental values in Silicon Valley decrease such that even if
we found subtenants we would still be obligated to pay a portion of the rent, we
will be required to take a period charge for the difference between the total
future sublease income and our lease cost, and this will harm our operating
results.

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

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

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

The fabrication of our products requires wafers to be produced in a highly
controlled and ultra-clean environment. Semiconductor companies that supply our
wafers sometimes have experienced problems achieving acceptable wafer
manufacturing yields. Semiconductor manufacturing yields are a function of both
our design technology and the foundry's manufacturing process technology. Low
yields may result from marginal design or manufacturing process drift. Yield


                                       21
<PAGE>

problems may not be identified until the wafers are well into the production
process, which often makes them difficult, time consuming and costly to correct.
Furthermore we rely on independent foreign foundries for our wafers which
increases the effort and time required to identify, communicate and resolve
manufacturing yield problems. If our foundries fail to achieve acceptable
manufacturing yields, we will experience higher costs of revenues and reduced
product availability, which would harm our operating results.

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

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

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

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

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

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

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

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

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

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


                                       22

<PAGE>

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:

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

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

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

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

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

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

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

We rely on a combination of patent, trade secrets, copyrights, mask work rights,
nondisclosure agreements and other contractual provisions and technical measures
to protect our intellectual property rights. Policing unauthorized use of our
products, however, is difficult, especially in foreign countries. Litigation may
continue to be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Litigation could result in substantial costs and diversion of
resources and could harm our business, operating results and financial condition
regardless of the outcome of the litigation. We own 37 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.


                                       23
<PAGE>

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

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

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

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

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

Our litigation may be expensive, may be protracted and confidential information
may be compromised. Whether or not we are successful in our lawsuit with Atmel,
we expect this litigation to consume substantial amounts of our financial and
managerial resources. At any time Atmel may file additional claims against us,
which could increase the risk, expense and duration of the litigation. Further,
because of the substantial amount of discovery required in connection with this
type of litigation, there is a risk that some of our confidential information
could be compromised by disclosure.

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

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

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

Our design and process research and development facilities and our corporate
offices are located in California, which is currently susceptible to power
outages and shortages as well as increased energy costs. To limit this exposure,
we are in the process of securing back-up generators and power supplies to our
main California facilities. While the majority of our production facilities are
not located in California, more extensive power shortages in the state could
delay our design and process research and development as well as increase our
operating costs.

Our growth continues to place a significant strain on our management systems and
resources and if we fail to manage our growth, our ability to market and sell
our products and develop new products may he harmed.

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


                                       24
<PAGE>

implement these new systems in a timely fashion, that in themselves they will be
adequate to address our expected growth, or that we will be able to foresee in a
timely manner other infrastructure needs before they arise. Our success depends
on the ability of our executive officers to effectively manage our growth. If we
are unable to manage our growth effectively, our results of operations will be
harmed. If we fail to successfully implement new management information systems,
our business may suffer severe inefficiencies that may harm the results of our
operations.

Risks Related to Our Industry

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

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

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

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

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

Sales of our products in the consumer electronics applications market are
subject to seasonality. As a result, sales of these products are impacted by
seasonal purchasing patterns with higher sales generally occurring in the second
half of each year. In 1999 and the first half of 2000, this seasonality was
partially offset by the introduction of new products as we continued to
diversify our product offerings. However, in the first quarter of 2001, this
seasonality again became pronounced as it was combined with deteriorating market
conditions, which together resulted in a decline in product revenues from the
fourth quarter of 2000 to the first half of 2001. If we fail to continue to
introduce new products, our business may suffer and the seasonality of a portion
of our sales may become more pronounced.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

         We are exposed to risks associated with foreign exchange rate
fluctuations due to our international manufacturing and sales activities. These
exposures may change over time as business practices evolve and could negatively
impact our operating results and financial condition. All of our sales are
denominated in U.S. dollars. An increase in the value of the U.S. dollar
relative to foreign currencies could make our products more expensive and
therefore reduce the demand for our products. Such a decline in the demand could
reduce revenues and/or result in operating losses. In addition, a downturn in
the economies of Japan, Taiwan or China could impair the value of our equity
investments in companies with operations in these countries. If we consider the
value of these companies to be impaired, we would write off, or expense, some or
all of our investments. As of June 30, 2001 the cost of our equity investments
in companies with operations in Japan, Taiwan and China was approximately $0.9
million, $20.5 million, and $50.0 million, respectively.

         At any time, fluctuations in interest rates could effect interest
earnings on our cash, cash equivalents and short-term investments, any interest
expense owed on the line of credit facility, or the fair value of our investment
portfolio. We believe that the effect, if any, of reasonably possible near term
changes in interest rates on our financial position, results of operations,


                                       25
<PAGE>

and cash flows would not be material. Currently, we do not hedge these interest
rate exposures. As of June 30, 2001, the carrying value of our marketable
securities approximated fair value. The table below presents the carrying value
and related weighted average interest rates for our cash, cash equivalents,
restricted cash and available-for-sale investments as of June 30, 2001.

<TABLE>
<CAPTION>
                                                                      Carrying        Interest
                                                                        Value            Rate
                                                                     ----------       --------
<S>                                                                  <C>               <C>
Investment securities:
    Short-term investments - fixed rate                              $  121,648         4.5%
    Long-term investments - fixed rate                                   10,129         3.3%
                                                                     ----------
        Total investment securities                                     131,777         4.4%

    Cash, cash equivalents and restricted cash - variable rate           23,404         1.5%
                                                                     ----------
                                                                     $  155,181         3.9%
                                                                     ==========
</TABLE>



                                       26
<PAGE>

PART II

Item 1.  Legal Proceedings

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

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

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

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

In April, 2001, Atmel filed motions for summary judgment on the `811 and `829
patents as well as the `903 patent. On May 11, 2001 we filed our opposition
papers with the court and filed motions for summary judgment that the `903
patent is invalid. The trial court denied Atmel's motion for summary judgment
and our motion for summary judgment. We currently have two motions for sanctions
pending before the trial court based on various discovery abuses by Atmel. The
motions were argued July 27, 2001, and have been submitted. The motions for
sanctions were granted in part and denied in part. The trial court set the trial
date on all issues for January 22, 2002.

On October 1, 2000, we announced a settlement in our lawsuit with Winbond
Electronics of Taiwan. We filed a lawsuit against Winbond in July 1998 in the
U.S. District Court in San Jose, California pursuant to the termination of our
SuperFlash technology licensing agreement with Winbond. As part of the
settlement, Winbond agreed to a consent judgment and will not contest the
validity and appropriateness of SST's termination of the licensing agreement in
June 1998. This settlement concludes all litigation between us and Winbond. We
received $10.4 million and $10.0 million in license fees during 2000 and for the
six months ended June 30, 2001, respectively, as part of this settlement.

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


                                       27
<PAGE>

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

Our Annual Meeting of Shareholders was held on June 22, 2001. At the Annual
Meeting, the shareholders:

1.    elected the persons listed below to serve as a director of the company for
      the ensuing year and until their successors are elected,

2.    approved the 1995 Equity Incentive Plan, as amended, to increase the
      aggregate number of shares of Common Stock authorized for issuance under
      such plan by 2,000,000 to 28,250,000 shares, and

3.    ratified the selection of PricewaterhouseCoopers LLP as our independent
      accountants for the fiscal year ending December 31, 2001.

On May 11, 2001, the record date of the Annual Meeting, we had 90,937,015 shares
of Common Stock outstanding. At the Annual Meeting, holders of 80,428,276 shares
of Common Stock were present in person or represented by proxy. The following
sets forth information regarding the results of the voting at the Annual
Meeting.

Proposal 1 - Election of Directors

      Director                  Votes in Favor   Votes Against      Abstentions
      --------                  --------------   -------------      -----------
      Bing Yeh                    77,137,466          0              3,290,810
      Yaw Wen Hu                  77,933,166          0              2,495,110
      Tsuyoshi Taira              79,804,014          0                624,262
      Yasushi Chikagami           76,300,365          0              4,127,911
      Ronald Chwang               79,012,914          0              1,415,362

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

      Votes in Favor              69,294,691
      Votes Against               10,936,155
      Abstentions                    197,430

Proposal 3 -- Ratification of Selection of Independent Accountant

      Votes in Favor              80,033,109
      Votes Against                  324,491
      Abstentions                     70,676


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

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

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


                                       28
<PAGE>

                                   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 14th day of August, 2001.

                                 SILICON STORAGE TECHNOLOGY, INC.

                                    By:

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


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










                                       29