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                                    UNITED STATES
                          SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C. 20549
                                     ___________
                                      FORM 10-K
(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT
     OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.

                                          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 Registrant 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
                                      __________

Securities registered pursuant to Section 12(b) of the Act:
     Title of class.          Name of each exchange on which registered.
     ---------------          -------------------------------------------
          None.                              None.

Securities registered pursuant to Section 12(g) of the Act:
     Common Stock, no par value.
                                      __________

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   .
                                       ---   ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X    No   .
              ---     ---

Aggregate market value of the voting stock held by non-affiliates of the Company
as of February 28, 1998: $72,502,225. based on the closing price of the
Company's Common Stock as reported on NASDAQ.  Number of shares outstanding of
the Company's Common Stock, no par value, as of February 28, 1998: 22,745,796.

Documents incorporated by reference: Exhibits previously filed as noted on page
29.  Index to Exhibits is on page 29.
Total number of pages in this Form 10-K is 53.

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<PAGE>
                           SILICON STORAGE TECHNOLOGY, INC.
                                      FORM 10-K
                         FOR THE YEAR ENDED DECEMBER 31, 1997

                                  TABLE OF CONTENTS

<TABLE>
<S>                                                                         <C>
PART I

     Item 1.   Business       ..............................................  3

     Item 2.   Properties     .............................................. 13

     Item 3.   Legal Proceedings   ......................................... 14

     Item 4.   Submission of Matters to a Vote of Security Holders ......... 14

PART II

     Item 5.   Market for Registrant's Common Stock and Related
               Shareholder Matters ......................................... 15

     Item 6.   Selected Consolidated Financial Data........... ............. 15

     Item 7.   Management's Discussion and Analysis of Financial Condition
               and Results of Operations.................................... 16

     Item 8.   Consolidated Financial Statements and Supplementary
               Data......................................................... 21

     Item 9.   Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosure..................................... 22

PART III

     Item 10.  Directors and Executive Officers of the Company.............. 22

     Item 11.  Executive Compensation....................................... 24

     Item 12.  Security Ownership of Certain Beneficial
               Owners and Management........................................ 27

     Item 13.  Certain Relationships and Related Transactions............... 28

PART IV

     Item 14.  Exhibits, Financial Statement Schedule, and Reports
               on Form 8-K.................................................. 29

Index to Exhibits........................................................... 29

Signatures.................................................................. 30

Index to Consolidated Financial Statements.................................. 35
</TABLE>

                                       2

<PAGE>

                                        PART I

ITEM 1.   BUSINESS

     Silicon Storage Technology, Inc. ("SST" or the "Company") was
incorporated in California in 1989.  The Company is a supplier of flash
memory devices, addressing the requirements of high volume applications.
Currently, the Company offers medium density devices ranging from 512Kbit to
4Mbit that target a broad range of existing and emerging applications in the
personal computer ("PC"), PC peripheral, communications, consumer and
industrial markets.  The Company's product revenues to date have
substantially been derived from the sale of 512Kbit and 1Mbit memory devices
used in personal computers and personal computer peripheral devices. The
Company is developing higher density memory products to address emerging
markets such as digital cameras, voice recorders, memory cards, networking
systems, digital cellular phones, telecommunications and printer font
storage. The Company is also developing flash embedded controller products to
address the emerging application of in-system programmable (ISP) embedded
controllers and has continued the expansion of the Company's technology
licensing strategy with respect to the Company's technology for embedded
applications.  The Company's executive offices are located at 1171 Sonora
Court, Sunnyvale, California, 94086, and its telephone number is (408)
735-9110. Except for the historical information contained herein, the
following discussion contains forward-looking statements that involve risks
and uncertainties.  The Company's actual results could differ materially from
those discussed here.  Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this section,
as well as in the sections entitled Risk Factors, Legal Proceedings, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.

BACKGROUND

     The Company operates in one industry segment, flash memory, and is also
developing logic products incorporating the Company's flash memory technology.
All of the Company's memory products are nonvolatile memory devices. Nonvolatile
memory represents a major class of the semiconductor memory market. The
nonvolatile memory market is experiencing significant growth and facing new
performance, reliability and cost requirements. Nonvolatile memory devices are
distinguished from volatile memory devices, such as static random access
memories ("SRAMs") and dynamic random access memories ("DRAMs"), by their
ability to retain data without the continuous supply of power. Virtually all
microprocessor and microcontroller based electronic systems require nonvolatile
memory to store "program code" consisting of a basic instruction set critical to
the operation of the system and information regarding the system configuration.

     Read-only memory ("ROM") devices, which are permanently encoded when they
are produced, were the earliest and most basic type of nonvolatile memory.
However, when program code had to be modified or changed, manufacturers needed
to order new ROM devices. Erasable Programmable ROMs ("EPROMs") were developed
in the early 1970s to enable system manufacturers to install or update program
code immediately prior to system assembly. Furthermore, EPROMs can be
reprogrammed by removing the device from the system, erasing the data through
exposure to ultraviolet light for approximately 30 minutes, reprogramming and
reinstalling the device in the system. Despite this rather costly and
time-consuming erasure procedure, EPROMs have achieved market acceptance in a
wide variety of applications.

     Nevertheless, system manufacturers generally prefer nonvolatile memory
devices that can be reprogrammed efficiently in the system in order to achieve
several important advantages. With in-system reprogrammable devices,
manufacturers can more cost effectively change program codes in response to
faster product cycles and changing market specifications thereby simplifying
their inventory management and manufacturing process. With these devices,
systems can be easily customized for the end user's specific system
configuration, or remotely programmed and updated using a modem. In addition,
in-system reprogrammable devices can be used for data storage functions, such as
storage of phone numbers for speed dialing in a cellular phone. These market
opportunities were initially addressed by the advent of Electrically Erasable
PROMs ("EEPROMs") which could be electrically altered while remaining in the
system. However, EEPROMs have remained considerably more expensive than EPROMs
for a given amount of storage capacity ("density"). Flash memory was first
introduced in the late 1980s as an alternative solution to EPROMs and EEPROMs.
Flash memory devices are significantly less expensive than EEPROMs and can
electrically erase select blocks of data on the chip "in a flash." The flash
memory market has grown quickly as customers substitute flash memory for EPROMs
and the more expensive EEPROMs.

                                       3

<PAGE>

PRODUCTS AND APPLICATIONS

     The Company currently designs and markets flash memory devices, all of
which incorporate and are manufactured using the Company's proprietary
SuperFlash technology. SuperFlash is a registered trademark of SST. The
Company's products are differentiated based upon certain attributes, such as
density, voltage, access speed, packaging and predicted endurance. The following
table sets forth current  products and sample applications.

<TABLE>
<CAPTION>
                                                                                                               INITIAL
                                        ACCESS                                                                SHIPMENT
DENSITY   PRODUCT     DESCRIPTION     SPEED (ns)          APPLICATION                                           DATE
-------   -------     -----------     ---------           -----------                                           -----
<S>       <C>       <C>                <C>             <C>                                                     <C>
512Kbit   29EE512   Page Mode, 5.0V     70, 90         CD-ROM Drive, Analog Cellular Phone, Network Card         4/95
          29LE512   Page Mode, 3.0V     120, 150       Analog Cellular Phone, Graphics Card                      3/96
          29VE512   Page Mode, 2.7V     200, 250       Electronic Organizer/Data Bank                            2/96

1Mbit     29EE010   Page Mode, 5.0V     90, 120        PC-BIOS, Hard Disk Drive, CD-ROM Drive,                   6/93
                                                       Analog Cellular Phone, Modem, Set-top Box
                                                       Point of Sale Terminal
          29LE010   Page Mode, 3.0V     150, 200       Wireless Modem, Analog Cellular Phone, Video Game         6/95
          29VE010   Page Mode, 2.7V     200, 250       Electronic Organizer/Data Bank, DECT Phone                9/95

2Mbit     29EE020   Page Mode, 5.0V     120, 150       PC-BIOS, Telecom                                         10/96
          29LE020   Page Mode, 3.0V     200, 250       BIOS for Notebook PC, Telecom                             4/97
          29VE020   Page Mode, 2.7V     200, 250       Electronic Organizer/Data Bank, Pager, DECT Phone         4/97

4Mbit     28SF040   Byte-Write, 5.0V    120, 150       Point of Sale Terminal, Video Game, Industrial Control   11/94
                                                       Printer
          28LF040   Byte-Write, 3.0V    200, 250       Digital Cellular Phone                                   10/95
          28VF040   Byte-Write, 2.7V    200, 250       Data Bank, Organizer, Digital Cellular Phone, Pager      10/96
</TABLE>


     During 1997, a majority of the Company's product revenues were derived
from sales of the Company's 512Kbit and 1Mbit products.  The largest
application of the Company's product is for PC-BIOS storage by PC
manufacturers. This product also addresses applications for hard disk drives,
CD-ROM drives, video games, modems and set-top boxes. The Company believes
that PC manufacturers are, over time, replacing 1Mbit Flash products with
2Mbit Flash memory products. While the Company has shipped 2Mbit and 4Mbit
devices in volume, there can be no assurance that these sales will grow above
their current levels. The Company is in the process of developing new memory
products with increased densities of 8Mbit, 16Mbit and higher densities and
maintaining the voltage requirement of either 5.0V-only, 3.0V-only or
2.7V-only.  In addition, the Company is developing new product lines in
different industry segments, such as memory cards and embedded controllers
with embedded SuperFlash memory. However, there can be no assurance that the
Company can anticipate future market demands or that the products it develops
will meet future market needs. A decline in market demand for the Company's
512Kbit or 1Mbit SuperFlash products may adversely affect the Company's
operating results. The risk associated with the Company's present revenue
reliance on 512Kbit and 1Mbit products is heightened by the concentration of
1Mbit product sales in the PC motherboard industry and 512Kbit product sales
are concentrated in the CD-ROM and hard disk industry. A decline in demand in
the PC or PC peripheral industries could have a material adverse effect on
the Company's operating results and financial condition.

                                       4

<PAGE>

SALES AND DISTRIBUTION

     The Company's products are commodity products, and sales are highly
dependent on the overall strength and sales of the PC and PC peripheral product
industries.  A reduction in activity in one of these industries could have an
adverse impact on the Company's product revenues and overall earnings. In 1997,
the semiconductor memory industry experienced significant declines in average
selling prices for all memory products, including flash memory.  Such
significant price declines have impacted gross margins in 1997 and, should they
continue, may impact gross margin in 1998 and beyond.

     Most of the Company's sales are made to customers in Asia for use in PCs
and PC peripherals. The Company primarily sells to customers in Asia through
manufacturers' representatives.  The Company sells and distributes its products
in North America and Europe through a sales organization supported primarily by
manufacturers' representatives and distributors. These manufacturers'
representatives and distributors could discontinue selling the Company's
products at any time.  Two of the manufacturers' representatives accounted for
29% of the Company's product revenues during 1997.  The loss of any of these
manufacturers' representatives or any other significant manufacturers'
representative or distributor could have an adverse effect on the Company's
operating results.

     During 1997, one customer, Silicon Technology Corporation, Ltd., in which
the Company holds a 14% equity investment, accounted for 15% of the Company's
net revenues.  International product and license revenues represented
approximately 85% or $33.8 million, 86% or $80.3 and 87% or $65.3 million of the
Company's net revenues during fiscal 1995, 1996 and 1997, respectively. Most of
the Company's international revenues during 1995 through 1997 have been earned
on revenues to Asian manufacturers in the personal computer industry. These
customers include Acer, Elite Computer Systems, First International Computer,
Giga-Byte Technology Corporation, Asustek Computer Corporation, Adaptec, Group
Sense, and Quantum Designs. The Company's products are also being used in
CD-ROM drives, DVD players, hard disk drives, video games, and portable
electronic devices manufactured by Sony, Hitachi, Matsushita, Toshiba, TEAC,
NEC, Seagate, and InterAct.

     Due to its level of international sales, the Company is subject to the
risks of conducting business internationally. These risks include unexpected
changes in regulatory requirements, delays resulting from difficulty in
obtaining export licenses of certain technology, tariffs and other barriers and
restrictions, and the burdens of complying with a variety of foreign laws. The
Company is also subject to general geopolitical risks in connection with its
international operations, such as political and economic instability and changes
in diplomatic and trade relationships. During 1997, currency depreciation and
economic deflation was experienced in several Asian economies in which the
Company does business, such as Japan, Korea, and Taiwan.  During 1997, the
Company derived 82% of its sales revenue from the Far East.  Economic problems
in this region can have an adverse impact on the Company's total revenues and
can negatively impact the Company's ability to collect payments from these
customers.  Furthermore, the lack of capital in the finance sector of these
countries may impact the customers' ability to open letters of credit or other
financial instruments which are guaranteed by foreign banks.  Additionally, the
Company's major wafer suppliers, assembly and packaging subcontractors are
located in the Far East.  Major disruptions in their businesses due to these
economic problems can have an adverse impact on their business which, in turn,
may negatively impact their ability to adequately supply the Company.  Finally,
the current economic situation in the Far East has impaired the Company's
ability to compete on the basis of price.  This situation has exacerbated the
current decline in the average selling prices for the Company's products as the
Company's competitors reduce product prices to generate needed cash. Continued
economic and/or political instability of any kind in this region may continue to
have a material adverse effect on the Company's operating results due to the
large concentration of the Company's activities in this region in the
foreseeable future.  In addition, because the Company's international sales are
denominated in U.S. dollars, fluctuations in the U.S. dollar could increase the
price in local currencies of the Company's products in foreign markets and make
the Company's products relatively more expensive than competitors' products that
are denominated in local currencies.  The Company has experienced, and may
continue to experience, material adverse effects on its operations as a result
of such regulatory, geopolitical and other factors.  These events may adversely
impact the Company's operations or may require the Company to modify its current
business practices.

                                       5

<PAGE>

MANUFACTURING

     The Company subcontracts to semiconductor manufacturing foundries.  In
February 1997, the Company entered into an agreement with the Taiwan
Semiconductor Manufacturing Co. Ltd. ("TSMC").  Under the agreement, TSMC will
license the Company's technology to manufacture wafers, pay a royalty on wafers
manufactured using the Company's technology, and grant the Company favorable
considerations for wafer pricing and allocation.  The Company will also provide
TSMC with the information necessary to establish the Company's technology in
TSMC's foundry.  Full production began in the third quarter of 1997.  However,
there can be no assurance that TSMC will be able to maintain volume production
in a timely fashion or that TSMC will allocate sufficient production capacity to
the Company to satisfy the Company's requirements.  As of December 31, 1997, the
Company's major wafer fabrication foundries are Sanyo Electric Co. Ltd.
("Sanyo") and TSMC.  In the past, the Company was not always able to procure
from its current wafer fabrication foundries sufficient wafers to meet all of
the demand and experienced difficulties in meeting scheduled shipments to its
customers.  There can be no assurance that such a situation, which resulted in
allocating available products among its customers, may not recur again in the
future.

     In order to obtain, on an ongoing basis, an adequate supply of wafers,
especially for future products fabricated using advanced processing
technologies, the Company has considered and will continue to consider various
possible options, including equity investments in foundries in exchange for
guaranteed production volumes and the formation of joint ventures to own and
operate foundries. There can be no assurance that the Company's current
foundries, together with any additional foundries whose capacities might be
obtained, would be willing or able to satisfy all of the Company's requirements
on a timely basis at competitive prices.

     In 1996, the Company entered into an agreement with Seiko Epson Corporation
("Seiko Epson") whereby Seiko Epson paid the Company an upfront license fee,
agreed to pay the Company a royalty on wafers manufactured using the Company's
technology other than wafers for sale to the Company and provide the Company
with a monthly minimum quantity of wafers which increases over time. The Company
granted Seiko Epson a license to use certain of the Company's technology to
manufacture wafers and to provide Seiko Epson with the information necessary to
establish the Company's technology in Seiko Epson's foundry. In 1997, the
Company entered into an agreement with Seiko Epson which extended technology
license coverage and provided the Company with increased capacity for the
production of products using 0.35 micron technology. At the present time, no
volume production is anticipated as a result of these agreements.  No
significant revenue was received from Seiko Epson in 1997.

     The Company purchases wafers from Sanyo under a manufacturing agreement
that expires in the year 2009.  The Company has encountered delays in the
qualification process and production ramp-up in the past, and there can be no
assurance that the Company will not experience future delays in the
qualification or production ramp-up of this facility. The Company purchases
wafers from Winbond under a licensing agreement that expires in the year 2008.
During 1997, no wafers were purchased from Winbond and volume production from
Winbond is not anticipated during 1998.  However, royalty revenue was received
from Winbond.

     Wafer sort is performed at Sanyo, TSMC and the Company.  The Company may
add additional wafer sort capacity at its Sunnyvale, California facility;
however, there can be no assurance that the Company will not experience delays
in the qualification or production ramp-up of such facilities. The Company uses
various offshore vendors for assembly.  In the assembly process, the silicon
wafers are separated into individual die that are then assembled into packages.
The Company packages die into PDIP, PLCC and TSOP packages at various facilities
in various countries.  In the event of a rapid growth in demand for the
Company's products, the Company may not be able to procure from its package
assembly foundries a sufficient supply of packages to satisfy its customers.

     Following assembly, the packaged devices require screening, testing, and
finishing to segregate good from nonconforming devices and to identify devices
by performance levels.  Currently, all devices are screened, tested, and
inspected pursuant to the Company's quality assurance program at the Company's
test facilities in Sunnyvale, California or  at other domestic or international
subcontracted facilities.  Finishing operations are performed at either domestic
subcontractors, the Company's facility in Sunnyvale, California or subcontracted
facilities in Lingsen, Taiwan, as applicable, before shipment to customers.
There can be no assurance that the Company will not experience delays in the
production ramp-up of future facilities.

                                       6

<PAGE>

     While the timeliness, yield, quality and reliability of wafers and packaged
devices delivered from the Company's foundries have been acceptable to date,
there can be no assurance that problems will not occur in the future. Any
significant disruption in adequate supplies from foundries, subcontractors, or
the Company's own test facilities could delay shipment and result in loss of
customers, limitations, or reductions in the Company's revenues, and other
adverse effects on the Company's operating results. To date the Company has not
found it necessary to seek ISO-9000 certification.  If in the future the
Company's customers were to require such certification, the Company would be
required to spend significant time and resources implementing the systems and
controls necessary to obtain certification. There can be no assurance that the
Company would be able to achieve such certification.

     The Company maintains an information system for monitoring work-in-process
inventory and various quality parameters. The information system maintains both
forward and backward traceability for each wafer lot through test, finish, and
inspection. Records are maintained in order to maximize yields, evaluate foundry
performance, diagnose potential problems, and monitor and improve product and
process quality. As the Company expands its products and markets, there is no
assurance that the Company's current information system will be adequate for its
future needs.

RESEARCH AND DEVELOPMENT

     During 1995, 1996 and 1997, the Company spent $4.1 million, $6.9 million
and $8.7 million, respectively, on research and development.  The Company is
developing 16Mbit and higher density products with applications for
networking systems, cellular telephones, printer font storage, digital
cameras, voice recorders, and memory cards. The Company is also developing
flash embedded controller products to address the emerging application of
in-system programmable (ISP) embedded controllers and has continued the
expansion of the Company's technology licensing strategy with respect to the
Company's technology for embedded applications. In addition the Company is
developing a new 0.35 micron process for these high density products. The
markets for the Company's products are characterized by rapidly changing
technology, product obsolescence, and the frequent introduction of new
products.  There can be no assurance that the Company can anticipate future
market demands or that the products it develops will meet future market needs.

     The Company's ability to succeed depends upon its ability to develop
products with which the Company has limited or no experience. There can be no
assurance that the Company will be able to identify new product opportunities,
much less that the Company will be able to develop and market new products
successfully. Delays in developing new products or achieving volume production
of new products could have a material adverse effect on the Company's
operations. In addition, there can be no assurance that such products, even if
introduced, will gain market acceptance or that the Company will be able to
respond effectively to new technological changes or new product announcements by
others.

COMPETITION

     The semiconductor industry is intensely competitive and has been
characterized by price erosion, rapid technological change and product
obsolescence.  The Company competes with major domestic and international
semiconductor companies, many of whom have substantially greater financial,
technical, marketing, distribution, and other resources than the Company.
The Company's medium density products, sales of which presently account for
substantially all of the Company's revenues, compete principally against
products offered by Intel Corporation, Advanced Micro Devices, Inc., Atmel
Corporation, SGS-Thomson Microelectronics, Inc. and Macronix, Inc.  If the
Company is successful in developing its high density products, it expects
that these products will compete principally with products offered by Intel
Corporation, Advanced Micro Devices, Inc., Fujitsu, Sharp, Samsung
Semiconductor, Inc., SanDisk Corporation and Toshiba Corporation, as well as
any new entrants to the market.  In addition, the Company believes that a
primary source of competition comes from alternative technologies.  If
ferroelectric random access memory devices ("FRAMs") technology is
commercialized for higher density applications, the competition may result
from companies that offer FRAMs.   The Company may also in the future
experience direct competition from its foundry partners.  The Company has
licensed to each foundry the right to fabricate products based on the
Company's technology and circuit design, and to sell such products worldwide,
subject to royalty payments to the Company. There can be no assurance that
the Company will be able to compete successfully in the future.

                                       7

<PAGE>

     The Company believes that the principal factors upon which its products
must compete are price, reliability, functionality and the ability to offer
timely delivery to customers. The current economic situation in the Far East has
impaired the Company's ability to compete on the basis of price.  This situation
has exacerbated the current decline in the average selling prices for the
Company's products as the Company's competitors reduce product prices to
generate needed cash.  While the Company believes that its medium density
products currently compete favorably on the basis of reliability and
functionality, the Company's principal competitors have a significant advantage
over the Company in terms of financial, technical and marketing resources. The
long-term ability of the Company to compete successfully in the evolving flash
memory market will depend on factors both within and beyond its control,
including access to advanced process technologies at competitive prices,
successful and timely product development, wafer supply, product pricing,
actions of its competitors and general economic conditions. The failure of the
Company to compete successfully in these or other areas could materially and
adversely affect the Company's business and operating results.

PATENTS AND LICENSES

     The Company's products are designed around patented memory cell
technology and are fabricated using patented process technology.  The Company
owns 19 U.S. patents concerning certain aspects of its products and
processes, although not all of these patents are in the field of memory cell
or process technology. Foreign patent applications have been filed in Europe,
Japan and Canada.  There can be no assurance that pending patent applications
will be granted. The Company's products are also protected by copyrights and
mask work production rights.  There can be no assurance, however, that the
Company's patents, copyrights or mask work production rights will provide it
meaningful protection from competition, especially abroad. The Company's
operating results could be materially adversely affected by piracy of the
Company's intellectual property. The Company has from time to time received,
and may in the future receive, communications from third parties asserting
patent rights embracing the Company's products. In particular, on January 3,
1996, Atmel Corporation ("Atmel") sued the Company in the U.S. District Court
for the Northern District of California. Atmel's complaint alleges that the
Company, by making, using and selling devices, is willfully infringing five
U.S. patents owned by or exclusively licensed to Atmel.  Regarding each of
these five patents, Atmel seeks a judgment that the Company has infringed the
patent, an injunction prohibiting further infringement, treble the amount of
damages caused by the alleged infringement and attorney's fees, costs and
expenses.  On February 13, 1996 the Company filed an answer denying Atmel's
allegations and asserting affirmative defenses and counterclaims.  On
February 17, 1997, Atmel filed an action with the International Trade
Commission ("ITC") against two suppliers of the Company's parts.  On March
18, 1997, the ITC instituted an investigation against two suppliers of the
Company's parts based upon a complaint filed by Atmel.  This action involves
certain of the patents that Atmel has alleged the Company infringes. Pursuant
to indemnification agreements with these suppliers, the Company has agreed to
indemnify both to the extent that it is required to do so under the
agreements. A hearing was held on December 8, 1997 regarding this matter.
There can be no assurance that the Atmel complaint or other third party
assertions will be resolved without costly litigation.

     On June 25, 1997, a U.S. District Court Judge denied Atmel's motions for
summary judgment for certain patents mentioned in the above lawsuit.  The basis
for the denial was that not all elements of the claims of the patents were
infringed as required for a favorable ruling for Atmel.  On September 23, 1997,
a U.S. District Court Judge granted the Company's motion for summary judgment of
noninfringement of one its patents mentioned in the above lawsuit.  There is no
trial date pending in the District Court action at this time.

     On November 14, 1997, Intel Corporation ("Intel") sued the Company in the
U.S. District Court for the District of Delaware.  Intel's complaint alleges
that the Company, by making, using and selling devices, is willfully infringing
four U.S. patents owned by Intel.  Regarding each of these four patents, Intel
seeks a judgment that the Company has infringed on the patent, an injunction
prohibiting further infringement, an accounting of all damages caused by the
alleged infringement, treble the amount of damages caused by the alleged
infringement and attorney's fees, costs and expenses.  The Company believes that
the allegations in the Intel complaint are without merit and intends to
vigorously defend itself against such action.  The Federal Trade Commission has
initiated contact with the Company to gather information about the case.

                                       8

<PAGE>

     The Atmel and Intel complaints state that the Company's use of its
SuperFlash technology infringes the patents of those third parties. Since the
design of all the Company's products, including the 1Mbit product, are based on
the Company's SuperFlash technology, any finding that the Company's use of its
SuperFlash technology infringes a third party patent could have a material
adverse effect on the Company's entire product line. Similarly, any finding that
the Company's products infringe a third party patent could have a material
adverse effect on the Company's product line and operating results. There can be
no assurance that other third parties will not bring suit against the Company
claiming an infringement of intellectual property. The Company cannot predict
the effects of any such litigation. If any of the Company's products were found
to infringe on the protected technology of a third party, there can be no
assurance that the Company could license such technology on commercially
reasonable terms or that the Company could successfully operate without such
technology. While the Company has accrued certain amounts for the estimated
costs associated with defending these matters, there can be no assurance that
the Atmel complaint or other third party assertions will be resolved without
costly litigation, in a manner that is not adverse to the Company's financial
position or results of operations, or without requiring royalty payments in the
future which may adversely impact gross margins. Moreover, the Company, if found
to infringe, 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 U.S. any products that infringe the protected technology. In addition,
the management attention consumed by and legal costs associated with any such
litigation could have a material adverse effect on the Company's operating
results.

     The Company has licensed to its current foundries the right to fabricate
products based on the Company's technology and to sell such products worldwide,
subject to royalty payments to the Company.  The Company intends to license its
technology to other third parties in the future who may also compete against the
Company.

BACKLOG

     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. Accordingly,
the Company believes that its open purchase orders at any given time are not a
meaningful indicator of future sales and that changes in the amount of its open
purchase orders do not necessarily reflect a corresponding change in the level
of actual sales.

EMPLOYEES

     As of December 31, 1997, the Company employed 184 individuals on a
full-time basis, all but three of whom reside in the U.S. Two employees reside
in Japan and one in England.  Of these 184 employees, 57 were employed in
manufacturing support, 19 in manufacturing engineering, 52 in research and
development, 26 in sales and marketing and 30 in administration and finance.
None of the Company's employees are represented by a collective bargaining
agreement, nor has the Company ever experienced any work stoppage. Management
believes that the Company's relationship with its employees is good.

RISK FACTORS

     The following factors should be considered carefully in addition to other
information contained in this report:

FLUCTUATIONS IN OPERATING RESULTS; SHORT HISTORY OF PROFITABILITY.  The Company
has a limited operating history and its operating results are subject to
quarterly and annual fluctuations due to a variety of factors including the
availability, deliverability and cost of wafers from the Company's suppliers,
competitive pricing pressures and related changes in average selling prices,
fluctuations in manufacturing yields, new product announcements and
introductions by the Company or its competitors, changes in demand for, or in
the mix of, the Company's products, the gain or loss of significant customers,
market acceptance of products utilizing the Company's SuperFlash technology,
changes in the channels through which the Company's products are distributed,
foreign currency fluctuations, unanticipated research and development expenses
associated with new product introductions and the timing of significant orders.
Specifically, industry overcapacity during 1997 has resulted in higher than
normal price declines in the markets to which the Company sells. This
significant price erosion has unfavorably impacted the Company's revenues, gross
margins and profitability during the year.

                                       9

<PAGE>

     Operating results could also be adversely affected by general economic
conditions and a downturn in the market for consumer products which incorporate
the Company's products, such as personal computers and cellular telephones.  All
of these factors, and other factors, are difficult to forecast and can
materially affect the Company's quarterly or annual operating results.
Fluctuations in revenues and operating results may cause volatility in the
Company's stock price.

     The Company typically receives and fulfills a majority of its orders within
the quarter, with a substantial portion occurring in the third month of the
fiscal quarter. As a result, the Company may not learn of revenue shortfalls
until late in a fiscal quarter. Additionally, the Company's operating expenses
are based in part on its expectations for future revenues and are relatively
fixed in the short term.  Any revenue shortfall below expectations could have an
immediate and significant adverse effect on results of operations.

POSSIBLE VOLATILITY OF STOCK PRICE. In recent years, the stock market in
general, and the price of stock of technology companies in particular, have
experienced extreme price fluctuations, sometimes without regard to operating
performance of particular companies. Factors such as quarterly variations in
actual or anticipated operating results, changes in earnings estimates by
analysts, market conditions in the industry, announcements by competitors,
regulatory actions and general economic conditions or broad market trends
unrelated to performance may have a significant effect on the market price of
the Company's Common Stock.

LIMITED OFFERING OF PRODUCT LINES; CONCENTRATION OF PRODUCT APPLICATION.  The
Company's sales are concentrated in the nonvolatile memory class of the
semiconductor memory industry.  During 1997, a majority of the Company's
product revenues were derived from sales of the 1Mbit or 512Kbit SuperFlash
products. A decline in market demand for the Company's 1Mbit or 512Kbit
SuperFlash products may adversely affect the Company's operating results.  In
addition, during 1997 the majority of product revenues came from sales to
customers in the personal computer industry. A decline in demand in these
industries could have a material adverse effect on the Company's operating
results and financial condition.

LIMITS OF PATENT PROTECTION; CLAIMS OF OTHERS.  The Company owns 19 U.S. patents
concerning certain aspects of its products and processes. Foreign patent
applications have been filed in Europe, Japan, and Canada. There can be no
assurance that pending patent applications will be granted.  The Company's
products are also protected by copyrights and mask work production rights. There
can be no assurance, however, that the Company's patents, copyrights or mask
work production rights will provide it meaningful protection from competition,
especially abroad. The Company's operating results could be materially adversely
affected by piracy of the Company's intellectual property.

     The Company is the defendant in a patent infringement lawsuit filed by
Atmel in the U.S. Federal District Court for the Northern District of
California on January 3, 1996.  On February 13, 1996 the Company filed an
answer denying Atmel's allegations and asserting affirmative defenses and
counterclaims.  On February 17, 1997, Atmel filed an action with the
International Trade Commission ("ITC") against two suppliers of the Company's
parts.  On March 18, 1997, the ITC instituted an investigation against two
suppliers of the Company's parts based upon a complaint filed by Atmel.  This
action involves certain of the patents that Atmel has alleged the Company
infringes. Pursuant to indemnification agreements with these suppliers, the
Company has agreed to indemnify both to the extent that it is required to do
so under the agreements. A hearing was held on December 8, 1997 regarding
this matter. There can be no assurance that the Atmel complaint or other
third party assertions will be resolved without costly litigation.

     On June 25, 1997, a U.S. District Court Judge denied Atmel's motions for
summary judgment for certain patents mentioned in the above lawsuit.  The basis
for the denial was that not all elements of the claims of the patents were
infringed as required for a favorable ruling for Atmel.  On September 23, 1997,
a U.S. District Court Judge granted the Company's motion for summary judgment of
noninfringement of one of its patents mentioned in the above lawsuit.  There is
no trial date pending in the District Court action at this time.

                                       10

<PAGE>

     On November 14, 1997, Intel Corporation ("Intel") sued the Company in the
U.S. District Court for the District of Delaware.  Intel's complaint alleges
that the Company, by making, using and selling devices, is willfully infringing
four U.S. patents owned by Intel.  Regarding each of these four patents, Intel
seeks a judgment that the Company has infringed on the patent, an injunction
prohibiting further infringement, an accounting of all damages caused by the
alleged infringement, treble the amount of damages caused by the alleged
infringement and attorney's fees, costs and expenses.  The Company believes that
the allegations in the Intel complaint are without merit and intends to
vigorously defend itself against such action.  The Federal Trade Commission has
initiated contact with the Company to gather information about the case.

      In addition to the Atmel and Intel lawsuits, the Company has from time to
time received and may in the future receive, communications from third parties
asserting patent rights embracing the Company's products.  The Atmel and Intel
complaints state that the Company's use of its SuperFlash technology infringes
the patents of those third parties. Since the design of all the Company's
products, including the 1Mbit product, are based on the Company's SuperFlash
technology, any finding that the Company's use of its SuperFlash technology
infringes a third party patent could have a material adverse effect on the
Company's entire product line and operating results. The Company has responded
to each of these claims of infringement asserting defenses that it believes are
meritorious. There be no assurance that other third parties will not bring suit
against the Company claiming an infringement of intellectual property. The
Company cannot predict the effects of any such litigation. If any of the
Company's products were found to infringe the protected technology of a third
party, there can be no assurance that the Company could license such technology
on commercially reasonable terms or that the Company could successfully operate
without such technology. Moreover, the Company, if found to infringe, 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 U.S. any products
that infringe the protected technology. In addition, the management attention
consumed by and legal cost associated with any litigation could have a material
adverse effect on the Company's operating results.

DEPENDENCE ON FOREIGN FOUNDRIES.  The Company does not have the complete
internal capability to manufacture its product. The Company currently buys all
of its wafers, an integral component of its products, from a limited number of
suppliers. Failure by these suppliers to satisfy the Company's requirements on a
timely basis at competitive prices could cause a delay in manufacturing and a
possible loss of revenues or higher than anticipated cost of revenues, which
would affect operating results adversely. During 1997, substantially all of the
raw material was supplied by Sanyo and TSMC.

     At times, the Company has been unable to meet all of the demand for its
products, and, at times, has failed to meet scheduled shipment dates, due to the
Company's inability to obtain a sufficient supply from its foundries. There can
be no assurance that the Company's current contract foundries, together with any
additional foundry at which capacity might be obtained, would be willing or able
to satisfy all of the Company's requirements on a timely basis at favorable
prices. In addition, the Company has encountered delays in the qualification
process and production ramp-up in the past, and qualification and production
ramp-up times at any additional foundry, assuming an additional foundry could be
found at all, could take longer than anticipated. The Company is also subject to
the risks of service disruptions, raw material shortages and price increases by
the foundries. Such disruptions, shortages and price increases could have a
material adverse effect on the Company's operating results.

DEPENDENCE ON MANUFACTURERS' REPRESENTATIVES AND DISTRIBUTORS.  Most of the
Company's sales are made through manufacturers' representatives and
distributors. These manufacturers' representatives and distributors can
discontinue selling the Company's products at any time.  Two of the
manufacturers' representatives accounted for 29% of the Company's product
revenues during 1997.  The loss of any of the manufacturers' representatives or
any other significant manufacturers' representatives or distributors could have
a material adverse effect on the Company's operating results.

FLASH MEMORY MARKET.  All of the Company's products, as well as all new products
currently under design, are flash memory devices. A technology other than
SuperFlash may be adopted as the industry standard. The Company's competitors
are generally in a better financial and marketing position than the Company from
which to influence industry acceptance of a particular flash technology.  To the
extent those competitors are able to promote a technology other than SuperFlash
as an industry standard, the Company's operating results and financial condition
may be adversely affected.

                                       11

<PAGE>

PRICE VOLATILITY; RECENT MARKET CONDITIONS; COMPETITION.  The semiconductor
memory industry is intensely competitive and has been characterized by price
erosion, rapid technological change and product obsolescence. Historically, the
selling prices for semiconductor memory products fluctuate significantly with
changes in the supply and demand for these products. During 1997, industry
overcapacity has resulted in higher than normal price declines in the Company's
markets, which has unfavorably impacted the Company's revenues, gross margins,
and profitability.  The Company expects this price erosion may continue for some
time, as market conditions indicate that growth in worldwide supply outpaced
growth in demand during 1997 and such market conditions may continue into 1998
and beyond.  The Company is attempting to accelerate its cost reduction efforts
and to develop new products to expand and diversify the Company's application
and geographic base.  However, there can be no assurance that these activities
will be implemented in a timely manner to offset anticipated future declines in
average selling prices.

     The Company competes with major domestic and international semiconductor
companies, many of whom have substantially greater financial, technical,
marketing, distribution, and other resources than the Company.  Many of the
Company's competitors have recently added significant capacity for the
production of semiconductor memory components. The Company's medium density
products, sales of which presently account for substantially all of the
Company's revenues, compete principally against products offered by Intel
Corporation, Advanced Micro Devices, Inc., Atmel Corporation, SGS-Thomson
Microelectronics, Inc. Sanyo, Winbond Electronics Co. and Macronix, Inc. If the
Company is successful in developing its high density products, it expects that
these products will compete principally with products offered by Intel
Corporation, Advanced Micro Devices, Fujitsu, Sharp, Samsung Semiconductor,
Inc., SanDisk Corporation and Toshiba Corporation, as well as any new entrants
to the market.

     In addition, the Company believes that a primary source of competition may
come from alternative technologies. In particular, competition may come from
companies that offer FRAMs if such technology is commercialized for higher
density applications.

     The Company may in the future experience direct competition from its
foundry partners.  The Company has licensed the right to fabricate product
based on the Company's technology and circuit design, and to sell such
products worldwide, subject to royalty payments to the Company. There can be
no assurances that the Company will be able to compete successfully in the
future.

INTERNATIONAL OPERATIONS. During 1995, 1996, and 1997, export product and
licensing account for approximately 85%, 86%, and 87% of the Company's net
revenues, respectively.  Due to its international sales and manufacturing, the
Company is exposed to risks associated with tariffs, non-tariff trade barriers,
taxes, import license requirements, exchange rate fluctuations, foreign
government regulations, and geopolitical risks such as political and economic
instability including changes in diplomatic and trade relations.

     During 1997, currency depreciation and economic deflation was experienced
in several Asian economies in which the Company does business, such as Japan,
Korea, and Taiwan.  During 1997, the Company derived 82% of its sales revenue
from the Far East.  Economic problems in this region can have an adverse impact
on the Company's total revenues and can negatively impact the Company's ability
to collect payments from these customers.  Furthermore, the lack of capital in
the finance sector of these countries may impact the customers' ability to open
letters of credit or other financial instruments which are guaranteed by foreign
banks.  Additionally, the Company's major wafer suppliers and assembly and
packaging subcontractors are located in the Far East.  Major disruptions in
their businesses due to these economic problems can have an adverse impact on
their business, which in turn may negatively impact their ability to adequately
supply the Company.  Finally, the economic situation may exacerbate the current
decline in average selling prices for the Company's products if the Company's
competitors reduce product prices to generate needed cash.  Continued economic
and/or political instability of any kind in this region may have a material
adverse effect on the Company's operating results due to the large concentration
of the Company's activities in this region.

                                       12

<PAGE>

RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT.  The markets for the
Company's product are characterized by rapidly changing technology, product
obsolescence, and the frequent introduction of new products.  The Company's
ability to succeed depends on its ability to develop products with which the
Company has limited or no experience.  There can be no assurance that the
Company will be able to identify new product opportunities, much less that the
Company will be able to both develop and market new products successfully or in
a timely fashion.

PURCHASE OF MANUFACTURING CAPACITY; FUTURE CAPITAL NEEDS.  In order to obtain
additional manufacturing capacity, the Company has considered expenditures in
the form of deposits, equipment purchases, loans, joint ventures or equity
investments in or with wafer fabrication companies. Any such transaction could
involve a Company commitment of substantial capital and technology licenses in
return for production capacity. The need to commit substantial capital may
require the Company to seek additional equity or debt financing.  There can be
no assurance that such additional financing, if required, will be available when
needed on terms acceptable to the Company. The Company's inability to secure
such financing, if needed, could have a material adverse impact on the Company's
operating results.

READINESS FOR YEAR 2000.  Many existing computer systems and applications, and
other control devices, use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century.  They
could fail or create erroneous results unless corrected so that they can process
data related to the year 2000.  The Company relies on its systems (such as
general ledger, accounts payable and payroll modules), customer services,
infrastructure, embedded computer chips, networks and telecommunications
equipment and end products.  The Company also relies on external systems of
business enterprises such as customers, suppliers, creditors, financial
organizations, and of governments, both domestically and globally, directly for
accurate exchange of data and indirectly.  The Company's current estimate is
that the costs associated with the Year 2000 issue, and the consequences of
incomplete or untimely resolution of the Year 2000 issue, will not have a
material adverse affect on the results of operations or financial position of
the Company in any given year.  However, despite the Company's efforts to
address the Year 2000 impact on its internal systems, the Company is not sure
that it has fully identified such impact and that it can resolve it without
disruption of its business and without incurring significant expense.  In
addition, even if the internal systems of the Company are not materially
affected by the Year 2000 issue, the Company could be affected through
disruption in the operation of the enterprises with which the Company
interacts.

CONSTRUCTION OF NEW BUILDING; RISKS OF LAND OWNERSHIP.  In January, 1998 the
Company entered into an agreement to purchase a 14 acre plot of land located in
San Jose, California for $9.2 million.  The Company plans to build its corporate
headquarters on this site, scheduled for completion in 1999.  The Company plans
to pay cash for the land in April, 1998, and to secure a revolving line of
credit to help finance the construction of the corporate headquarters.  The cost
of construction for the planned 100,000 square foot building is estimated at
$11.3 million.  The Company is subject to certain risks in connection with the
purchase, financing, construction, and occupation of the site, among others,
liquidity risks involving the financing of construction and the timing and
schedule of project completion, risk of devaluation of the fair market value of
the land purchased, risk of hazardous materials in connection with substances
deposited on the land by former owners, and risk of business interruption
related to the relocation of the Company's facilities.


ITEM 2.  PROPERTIES

     The Company occupies three leased facilities totaling approximately
53,000 square feet in Sunnyvale, California in which its executive offices,
manufacturing engineering, research and development and testing facilities
are located. The lease on the first of these facilities that the Company
occupies, accounting for approximately 20,000 square feet, expires in May
1998.  The lease on the second facility expires in June  1998.  On March 4,
1998, the Company signed an option to renew each of these two leases for an
additional five years. The lease on the third facility of 20,000 square feet
expires in April, 2000. It is renewable with one two-year option to extend
the lease. The Company believes these facilities are adequate to meet its
needs for at least the next 12 months.

     In January, 1998 the Company entered into an agreement to purchase a 14
acre plot of land located in San Jose, California for approximately $9.2
million.  The Company plans to build its corporate headquarters on this site,
scheduled for completion in the second quarter of 1999.

                                       13

<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

     On January 3, 1996, Atmel sued the Company in the U.S. District Court
for the Northern District of California.  Atmel's complaint alleges that the
Company, by making, using and selling devices, is willfully infringing five
U.S. patents owned by or exclusively licensed to Atmel.  Regarding each of
these five patents, Atmel seeks a judgment that the Company has infringed the
patent, an injunction prohibiting further infringement, treble the amount of
damages caused by the alleged infringement and attorney's fees, costs and
expenses.  On February 13, 1996 the Company filed an answer denying Atmel's
allegations and asserting affirmative defenses and counterclaims.  On
February 17, 1997, Atmel filed an action with the International Trade
Commission ("ITC") against two suppliers of the Company's parts.  On March
18, 1997, the ITC instituted an investigation against two suppliers of the
Company's parts based upon a complaint filed by Atmel.  This action involves
certain of the patents that Atmel has alleged the Company infringes. Pursuant
to indemnification agreements with these suppliers, the Company has agreed to
indemnify both to the extent that it is required to do so under the
agreements. A hearing was held on December 8, 1997 regarding this matter.
There can be no assurance that the Atmel complaint or other third party
assertions will be resolved without costly litigation.

     On June 25, 1997, a U.S. District Court Judge denied Atmel's motions for
summary judgment for certain patents mentioned in the above lawsuit.  The basis
for the denial was that not all elements of the claims of the patents were
infringed as required for a favorable ruling for Atmel.  On September 23, 1997,
a U.S. District Court Judge granted the Company's motion for summary judgment of
noninfringement of one its patents mentioned in the above lawsuit.  There is no
trial date pending in the District Court action at this time.

     On November 14, 1997, Intel Corporation ("Intel") sued the Company in the
U.S. District Court for the District of Delaware.  Intel's complaint alleges
that the Company, by making, using and selling devices, is willfully infringing
four U.S. patents owned by Intel.  Regarding each of these four patents, Intel
seeks a judgment that the Company has infringed on the patent, an injunction
prohibiting further infringement, an accounting of all damages caused by the
alleged infringement, treble the amount of damages caused by the alleged
infringement and attorney's fees, costs and expenses. The Company believes that
the allegations in the Intel complaint are without merit and intends to
vigorously defend itself against such action.  The Federal Trade Commission has
initiated contact with the Company to gather information about the case.

     At the present time, there is no other pending litigation or proceeding
involving a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted during the fourth quarter to a vote of security
holders.


                                       14

<PAGE>

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

Price Range of Common Stock

     The principal U.S. market for the Company's Common Stock is The Nasdaq
Stock Market.  The only class of the Company's common equity that is traded is
the Company's Common Stock. The Company's Common Stock has traded on The Nasdaq
Stock Market since November 21, 1995, under the symbol SSTI. The following table
sets forth the quarterly high and low closing sales prices of the Common Stock
for the period indicated as reported by The Nasdaq Stock Market.  These prices
do not include retail mark-ups, mark-downs, or commissions. The closing sales
price of the Company's Common Stock on December 31, 1997 (the last trading day
in 1997) was $3.125.

<TABLE>
<CAPTION>
1996:                                             High close     Low close
                                                  ----------     ---------
<S>                                               <C>            <C>
First Quarter: January 1 - March 31, 1996          $ 13 1/4       $  9 7/8
Second Quarter: April 1 - June 30, 1996              20 1/8         11 1/4
Third Quarter: July 1 - September 30, 1996           13 3/4          6 5/8
Fourth Quarter: October 1 - December 31, 1996         9 5/8          4 3/8

1997:
First Quarter: January 1 - March 31, 1997             5 1/4          3 1/4
Second Quarter: April 1 - June 30, 1997               4 1/8          2 3/4
Third Quarter: July 1 - September 30, 1997            8              3 1/4
Fourth Quarter: October 1 - December 31, 1997         6 5/8          3 1/8
</TABLE>

Approximate Number of Equity Securityholders

     As of February 5, 1998, there were approximately 3,643 record holders of
the Company's Common Stock.

Dividends

     The Company has never paid a cash dividend on its Common Stock and intends
to continue to retain earnings, if any, to finance future growth. Accordingly,
the Company does not anticipate the payment of cash dividends to holders of
Common Stock in the foreseeable future.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the notes thereto
included elsewhere in this Report. The statements of operations data for the
years ended December 31, 1995, 1996 and 1997 and the balance sheet data at
December 31, 1996 and 1997 are derived from, and should be read in conjunction
with, the audited consolidated financial statements and notes thereto included
elsewhere in this Report. The statements of operations data for the year ended
December 31, 1993 and 1994 and the balance sheet data at December 31, 1993, 1994
and 1995 are derived from audited financial statements not included in this
Report. The results of operations are not necessarily indicative of the results
to be expected for future periods.

                                       15

<PAGE>

<TABLE>
<CAPTION>

                                                                      YEAR ENDED DECEMBER 31,
                                           --------------------------------------------------------------------
                                              1993           1994          1995           1996          1997
                                              ----           ----          ----           -----         -----
<S>                                         <C>            <C>           <C>            <C>            <C>
                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenues:
   Product revenues                           $112         $3,355        $38,283        $90,638        $73,796
   License revenues                          4,079            730          1,245          2,652          1,526
                                           --------      ---------      ---------      ---------      ----------
      Net revenues                           4,191          4,085         39,528         93,290         75,322
                                           --------      ---------      ---------      ---------      ----------

Costs and expenses:
   Cost of revenues                            391          4,080         26,360         59,494         62,747
   Research and development                  2,393          2,722          4,058          6,948          8,744
   Sales and marketing                         217            599          2,455          5,292          6,587
   General and administrative                  751            910          1,464          3,370          9,479
                                           --------      ---------      ---------      ---------      ----------
                                             3,752          8,311         34,337         75,104         87,557
                                           --------      ---------      ---------      ---------      ----------
      Income (loss) from operations            439         (4,226)         5,191         18,186        (12,235)
Interest and other income, net                  61             77            517          1,763          2,146
Interest expense                               (32)          (309)          (273)             -              -
                                           --------      ---------      ---------      ---------      ----------
      Income (loss) before provision for
      (benefit from) income taxes              468         (4,458)         5,435         19,949        (10,089)
Provision for (benefit from) income taxes      307             51           (594)         7,598         (3,165)
                                           --------      ---------      ---------      ---------      ----------
      Net income (loss)                       $161        ($4,509)        $6,029        $12,351        ($6,924)
                                           --------      ---------      ---------      ---------      ----------
                                           --------      ---------      ---------      ---------      ----------
Net income (loss) per share (1) - basic      $0.02         ($0.59)         $0.70          $0.54         ($0.30)
                                           --------      ---------      ---------      ---------      ----------
                                           --------      ---------      ---------      ---------      ----------
Net income (loss) per share (1) - diluted    $0.01         ($0.59)         $0.32          $0.49         ($0.30)
                                           --------      ---------      ---------      ---------      ----------
                                           --------      ---------      ---------      ---------      ----------
Total assets                                $7,952         $7,749        $66,403        $80,914       $82,539
                                           --------      ---------      ---------      ---------      ----------
                                           --------      ---------      ---------      ---------      ----------
Long-term obligations                       $3,532         $3,571           $  -           $  -         $  -
                                           --------      ---------      ---------      ---------      ----------
                                           --------      ---------      ---------      ---------      ----------
</TABLE>

(1)  As restated according to Statement of Financial Accounting Standard No.
128.  See Note 1 of Notes to Consolidated Financial Statements describing the
net income (loss) per share computation.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the sections entitled Business, Risk Factors, and Legal Proceedings. All of the
Company's products are currently manufactured through collaborative
manufacturing relationships with two semiconductor manufacturers: Sanyo and
TSMC. To date, the Company has obtained the majority of its wafers from Sanyo.
The Company's orders from these manufacturers are based upon existing and
forecasted customer demand. As demand for the Company's products has increased,
the Company has been unable to obtain its desired allotment of wafers. The
Company is in the process of transitioning production of its primary SuperFlash
products to smaller geometries, thereby increasing the number of usable die per
wafer that the Company receives from its manufacturers.

     The Company has entered into agreements with Seiko Epson and TSMC to obtain
additional wafer manufacturing capacity. Bringing a new manufacturer up to full
volume production is a complex procedure and there can be no assurance that
either Seiko Epson or TSMC will be able to achieve volume production in a timely
fashion or that either Seiko Epson or TSMC will allocate sufficient production
capacity to the Company.

                                      16

<PAGE>

     Average selling prices have declined significantly over the past year and
average selling prices of semiconductor products have generally declined over
time and are expected to decline in the future, principally due to increased
market competition. Specifically, industry overcapacity during 1997 has resulted
in higher than normal price declines in the Company's markets, which has
unfavorably impacted the Company's revenues, gross margins, and profitability.
The Company expects this price erosion may continue for some time. The Company
is attempting to accelerate its cost reduction efforts and to develop new
products to expand and diversify the Company's application and geographic base.
If such activities can not be implemented in a timely manner to offset
anticipated declines in average selling prices, losses may result and liquidity
may be impacted.

     During 1997, the Company derived approximately 29% of its product revenues
from sales to Taiwan-based PC manufacturers. The Company intends to diversify
its customer base by increasing sales in other geographic areas and targeting
additional high volume applications such as the cellular telephone, pager,
modem, CD-ROM drive, hard disk drive, video game, electronic organizer and
set-top box markets. The Company anticipates that as sales in Japan, the United
States and Europe increase, overall days sales outstanding will increase. During
1995, 1996 and 1997 respectively, international sales accounted for
approximately 85% or $33.8 million, 86% or $80.3 million, and 87% or $65.3
million of the Company's net revenues, respectively. The Company is in the
process of increasing the scope of its international operations and expects that
international sales will continue to account for a significant portion of its
product revenues although the percentage may fluctuate from period to period.
Although the Company's international sales are primarily denominated in U.S.
dollars, these sales are subject to a number of risks associated generally with
international sales, including the effect of currency fluctuations,
state-imposed restrictions on the repatriation of funds, import and export
duties and restrictions.

     During 1997, currency depreciation and economic deflation was experienced
in several Asian economies in which the Company does business, such as Japan,
Korea, and Taiwan.  During 1997, the Company derived 82% of its sales revenue
from the Far East.  Economic problems in this region can have an adverse impact
on the Company's total revenues and can negatively impact the Company's ability
to collect payments from these customers.  Furthermore, the lack of capital in
the finance sector of these countries may impact the customers' ability to open
letters of credit or other financial instruments that are guaranteed by foreign
banks.  Additionally, the Company's major wafer suppliers and assembly and
packaging subcontractors are located in the Far East.  Major disruptions in
their businesses due to these economic problems can have an adverse impact on
their business, which in turn may negatively impact their ability to adequately
supply the Company.  Finally, the economic situation may exacerbate the current
decline in average selling prices for the Company's products if the Company's
competitors reduce product prices to generate needed cash.  Continued economic
and/or political instability of any kind in this region may have a material
adverse effect on the Company's operating results due to the large concentration
of the Company's activities in this region.

RESULTS OF OPERATIONS: YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

NET REVENUES.  Net revenues increased from $39.5 million in 1995 to $93.3
million in 1996 and decreased to $75.3 million in 1997, due to lower average
selling prices in 1997 despite an increase in units shipped each year as
compared to the prior year.

     The Company began recognizing product revenue in June 1993. Product
revenues were $38.3 million in 1995, $90.6 million in 1996, and $73.8 million in
1997. The decrease from 1996 to 1997 was primarily the result of a decline in
average selling prices due to industry overcapacity.  Product revenue is
typically recognized upon shipment to manufacturing customers. Sales to
distributors are made primarily under arrangements allowing price protection and
the right of stock rotation on merchandise unsold by the distributors. Because
of the uncertainty associated with pricing concessions and future returns, the
Company defers recognition of such revenues, related cost of revenues and
related gross margin until the merchandise is sold by the distributors to the
end user.

                                      17

<PAGE>

     The Company's ability to maintain or increase revenues will be highly
dependent upon its ability to increase unit sales volumes and decrease
manufacturing costs of existing products and to introduce and sell new products
in quantities sufficient to compensate for the anticipated declines in average
selling prices. The Company's ability to increase its unit sales volumes depends
on the capacity of its manufacturers' representatives and distributors to
generate orders, increasing its wafer capacity allocation from current
foundries, improving the yield of die per wafer from its foundries through
reductions in the die size of the Company's products, adding additional
foundries and implementing advanced process technologies. Industry overcapacity
during 1997 has resulted in higher than normal price declines in the Company's
markets, which has unfavorably impacted the Company's revenues, gross margins,
and profitability. The Company expects that this price erosion may continue
throughout 1998.

     License revenues were $1.2 million in 1995, $2.7 million in 1996, and $1.5
million in 1997. License revenues in 1995 included a one time payment of $1.0
million from Rockwell International Corporation and license revenues in 1996
included a one-time payment of $1.0 million from Seiko Epson. Most of the
Company's technology licenses provide for the payment of upfront license fees
and continuing royalties based on product sales. Revenue from license or other
technology arrangements is recognized upon the shipment of the product or
documentation if the remaining obligations are insignificant and collection of
the resulting accounts receivable is probable. The Company anticipates that
license revenues will fluctuate significantly in the future. Revenue from best
efforts joint development contracts is recognized under the percentage of
completion method. See Note 1 of Notes to Consolidated Financial Statements.

COST OF REVENUES.  Gross margin was $13.2 million or 33% in 1995, $33.8 million
or 36% of net revenues in 1996, and $12.6 million or 17% of net revenues in
1997. The fluctuations in gross margins between 1995 and 1997 were primarily due
to a declines in  average selling prices in 1997 which may continue throughout
1998.  Year-to-year fluctuations in gross margin during 1995 through 1997 were
not necessarily reflective of quarterly results during this period. Refer to
Item 8: Selected Consolidated Quarterly Data for a discussion of quarterly
results.

GROSS MARGIN. Average selling prices of Flash memory products are subject to
significant fluctuations due to periodic changes in supply and demand. Declining
average selling prices will continue to adversely affect gross margins unless
the Company is able to offset such declines with reductions in per unit costs or
changes in product mix. Specifically, industry overcapacity during 1997 has
resulted in higher than normal price declines in the markets to which the
Company sell. This significant price erosion has unfavorably impacted the
Company's revenues, gross margins and profitability for 1997.

OPERATING EXPENSES. Operating expenses (research and development, sales and
marketing, and general and administrative expenses) as a percentage of product
revenues were 20.1% ($8.0 million) in 1995, 17% ($15.6 million) in 1996, and 34%
($24.8 million) in 1997.  The increase was due to hiring additional personnel
and accruing legal fees for defending the Company's patents.  While the amount
of operating expenses as a percentage of product revenues from year to year is
not necessarily indicative of future behavior of operating expenses as a
percentage of product revenues, operating expenses are expected to increase in
absolute dollar amount over time.  The expected increase is due to the hiring of
additional personnel and development of the Company's infrastructure.

RESEARCH AND DEVELOPMENT.  Research and development expenses were $4.1 million
or 10% of net revenues in 1995, $6.9 million or 7% or net revenues in 1996, and
$8.7 million or 12% of net revenues in 1997. These year over year increases in
the level of research and development expense were primarily due to the hiring
of additional personnel, depreciation related to purchases of additional test
equipment, and increased prototyping and product qualification costs associated
with the Company's product and process development efforts.

SALES AND MARKETING.  Sales and marketing expenses were $2.5 million or 6% of
net revenues in 1995, $5.3 million or 6% of net revenues in 1996, and $6.6
million or 9% of net revenues in 1997. Sales and marketing expenses consist
primarily of sales commissions to manufacturers' representatives, salaries of
the Company's sales and marketing personnel and product literature. The
significant increase in sales and marketing expenses from 1996 and 1997 was
primarily due to the hiring additional sales personnel.

                                      18

<PAGE>

     Historically, a majority of the Company's product revenues have been
generated through manufacturers' representatives. Manufacturers' representatives
are expected to continue to be responsible for a majority of the Company's
product revenues for the foreseeable future, but the Company anticipates an
increase in the volume of distributor sales. The Company's sales commission
structure for its manufacturers' representatives decreases as manufacturers'
representatives achieve higher levels of sales activities within a given year.
Accordingly, the Company expects that sales commissions to manufacturers'
representatives will decrease as a percentage of product revenues as cumulative
yearly product revenues increase.

GENERAL AND ADMINISTRATIVE.  General and administrative expenses were $1.5
million or 4% of net revenues in 1995, $3.4 million or 4% of net revenues in
1996, and $9.5 million or 13% of net revenues in 1997. These increases in the
level of general and administrative expenses were primarily due to legal
expenses associated with pending lawsuits.  The Company anticipates that general
and administrative expenses will continue to increase in absolute dollar amount.
Additionally, it is reasonably possible that the Company may incur additional
expenses in connection with the Atmel and Intel litigation.

INTEREST AND OTHER INCOME.  Interest and other income was $517,000 or 1% of net
revenues in 1995, $1.8 million or 2% of net revenues in 1996, and $2.1 million
or 3% of net revenues in 1997. Interest income increased during 1995 through
1997 as working capital increased, particularly as a result of the investment of
proceeds from the Company's initial public offering in late 1995.

INTEREST EXPENSE.  Interest expense was $273,000 or 1% of net revenues in 1995.
There was no interest expense in 1996 or 1997.  The interest expense in 1995 was
primarily due to borrowings against the Company's line of credit facility in
order to finance equipment purchases and interest payments on corporate debt.
All such long-term debt was repaid as of December 31, 1995.

PROVISION FOR (BENEFIT FROM) INCOME TAXES.  The Company's provision for (benefit
from) income taxes was $(594,000) in 1995, $7.6 million in 1996, and $(3.2)
million in 1997.  The benefit in 1995 relates to the recording of a deferred tax
asset by the Company during the fourth quarter which previously had been fully
reserved by a valuation allowance. During 1996, the Company was fully subject to
federal and state income taxes.  The benefit in 1997 relates to the Company's
loss position for that year and related future benefits.  The minimum amount
of future taxable income that would need to be generated to realize the deferred
tax asset at December 31, 1997 is approximately $4.0 million.  See Note 6 of
Notes to Consolidated Financial Statements.

RECENT ACCOUNTING PRONOUNCEMENTS.  In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 28), which specifies the computation, presentation
and disclosure requirements for earnings per share.  SFAS 128 supersedes
Accounting Principles Board Opinion No. 15 (APB 15) and is effective for
financial statements issued for periods ending after December 15, 1997.  SFAS
128 requires restatement of all prior-period earnings per share data
presented after the effective date.  Basic net income (loss) per share was
$0.70, $0.54 and ($0.30) for the years ended 1995, 1996 and 1997,
respectively.  Diluted net income (loss) per share was $0.32, $0.49 and
($0.30) for the years ended 1995, 1996 and 1997, respectively.  Previously
reported primary net income (loss) per share computed under the primary
method prescribed by APB 15 was $0.30 and $0.49 in 1995 and 1996,
respectively.

LIQUIDITY AND CAPITAL RESOURCES

     From  inception to November 1995, the Company used proceeds from the
private sale of equity securities, funds generated from corporate borrowing and
convertible debentures and internal cash flow to support its operations, acquire
capital equipment and finance inventory and accounts receivable. In November
1995, the Company completed its initial public offering.  Cash from the offering
and the subsequent exercise of an over-allotment option by the underwriters
resulted in net proceeds of $40.9 million to the Company.

                                     19

<PAGE>

     Cash provided by operating activities was $8.2 million during 1995 and
primarily resulted from net income of $6.0 million and increases in accounts
payable and accrued expenses of $10.8 million offset by cash used for increases
to accounts receivable of $6.9 million and increases to inventories of $2.7
million. Cash used in operating activities was $1.4 million during 1996 and
primarily resulted from net income of $12.4 million and increases in accounts
payable of $2.3 million being offset by inventory increases of $13.6 million and
increases to accounts receivable and accounts receivable from related parties of
$5.5 million.  Cash provided by operations was $13.3 million during 1997 and
primarily resulted from a decrease in accounts receivable and accounts
receivable from related parties of $2.1 million, an increase in accounts payable
of $8.5 million and an increase in accrued expenses of $2.8 million offset by a
net loss of $6.9 million.

     During fiscal 1995, the Company had a line of credit of $4 million with
Quantum Corporation. Total borrowings under this line of credit were
$3.3 million at the end of the third quarter 1995. This loan was repaid in full
in October 1995 and the facility was canceled. The Company issued Quantum
Corporation a $1 million convertible debenture in December 1993 and another
$1 million convertible debenture in January 1994. The principal and accrued
interest on the debentures were converted into approximately 740,000 shares of
the Company's common stock immediately prior to the completion of the offering
and were sold as a part of the offering. The Company had no long-term debt
outstanding as of December 31, 1995, 1996 or 1997.

     The Company made capital expenditures of approximately $4.3 million,
$10.7 million, and $2.8 million in 1995, 1996, and 1997, respectively. These
expenditures were primarily for the purchase of test equipment, design and
engineering tools, and computer equipment.  During 1996 and 1997, the Company
resold certain equipment to a subcontractor for proceeds of  $1.3 million and
$2.6 million, respectfully.  Management estimates that gross expenditures for
capital equipment will be approximately $13.4 million in 1998. The Company may
use its working capital to secure additional foundry capacity. These
expenditures may be in the form of deposits, equipment purchases, loans or
equity investments or joint ventures in or with wafer fabrication or other
companies.

     In January 1998 the Company entered into an agreement to purchase a 14 acre
plot of land located in San Jose, California for $9.2 million.  The Company
plans to build its corporate headquarters on this site, scheduled for completion
in 1999.  The Company plans to pay cash for the land in April 1998, and to
secure a revolving line of credit to help finance the construction of the
corporate headquarters.  The line of credit may be collateralized by either some
or all of the Company's accounts receivable, capital assets, or cash accounts.
The cost of construction for the planned 100,000 square foot building is
estimated at $11.3 million.

     In July 1996 the Board of Directors authorized the purchase of up to
500,000 shares of the Company's Common Stock in the open market. Approximately
100,000 shares were repurchased under this authorization during August and
September 1996 for an aggregate purchase price of approximately $723,000.

     In February 1997 the Board of Directors approved a stock repurchase program
whereby up to an aggregate of 1,000,000 shares of the Company's common stock may
be repurchased on the open market at prevailing market prices.  The repurchase
program ended June, 1997.  Approximately 352,000 shares were repurchased under
this authorization during the quarter ended June 30, 1997 for an aggregate
purchase price of $1.4 million.  Purchase prices ranged from $3.688 to $3.875
per share.

          In July 1997 the Board of Directors authorized a stock repurchase
program whereby 1,000,000 shares of the Company's common stock may be
repurchased on the open market at prevailing market prices.  The purchase
program ended December 15, 1997.  Approximately 233,500 shares were repurchased
under this authorization during the period ended December 15, 1997 for an
aggregate purchase price of $872,000.  Purchase prices ranged from $3.615 to
$3.781 per share.

     In January 1998 the Board of Directors authorized a stock repurchase
program whereby 1,000,000 shares of the Company's common stock may be
repurchased on the open market at prevailing market prices.  The repurchase plan
is expected to continue until June 16, 1998, unless extended or shortened by the
Board of Directors.

     In February 1998 the Company agreed to purchase technology from a product
development partner for $1.8 million, payable upon the completion of certain
product development milestones over the next eighteen months.

                                      20

<PAGE>

     As of December 31 1997, the Company's principal sources of liquidity
included cash, cash equivalents, and short-term investments of approximately
$47.2 million. The Company had no open lines of credit at December 31, 1997.
However, the Company is expected to open a line to credit in the future to
secure sufficient working capital to finance growth in operations and site
construction activity, as noted above. The Company believes that the cash
balances, together with funds expected to be generated from operations will be
sufficient to meet its projected working capital and other cash requirements
through at least the next twelve months. However, there can be no assurance that
events in the future will not require the Company to seek additional capital
sooner or, if so required, that it will be available on terms acceptable to the
Company.

     Specifically, industry overcapacity during 1997 has resulted in higher than
expected price declines in the Company's markets, which has unfavorably impacted
the Company's revenues, gross margins, and profitability. The Company expects
this price erosion may continue for some time. The Company is attempting to
accelerate its cost reduction efforts and to develop new products to expand and
diversify the Company's application and geographic base. If such activities can
not be implemented in a timely manner to offset anticipated declines in average
selling prices, losses may result and liquidity may be impacted.

ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements, together with the report thereon of
Coopers & Lybrand L.L.P., independent accountants, dated January 15, 1998,
except for Note 9 as to which the date is March 4, 1998, are included in a
separate section of this Report. See Index to Consolidated Financial Statements
on Page 35.

SUPPLEMENTARY DATA: SELECTED CONSOLIDATED QUARTERLY DATA

<TABLE>
<CAPTION>

                                                 YEAR ENDED DECEMBER 31, 1996         YEAR ENDED DECEMBER 31, 1997
                                          -------------------------------------  ---------------------------------------
                                           FIRST     SECOND    THIRD     FOURTH   FIRST     SECOND    THIRD     FOURTH
                                          QUARTER   QUARTER   QUARTER   QUARTER  QUARTER   QUARTER   QUARTER    QUARTER
                                          -------   -------   -------   -------  -------   -------   --------   --------
<S>                                       <C>       <C>       <C>       <C>      <C>       <C>       <C>        <C>
Net revenues                              $23,023   $23,371   $23,405   $23,491  $17,092   $18,056   $20,015     $20,159
Gross margin                                9,871     9,330     9,066     5,529      559     3,182     4,585       4,249
Income (loss) from operations               6,275     5,564     5,502       845   (3,928)   (1,834)     (165)     (6,308)
Net income (loss)                           4,199     3,722     3,693       737   (2,519)   (1,019)      395      (3,781)
Net income (loss) per share - basic (1)     $0.18     $0.16     $0.16     $0.03   ($0.11)   ($0.04)    $0.02      ($0.16)
Net income (loss) per share - diluted (1)   $0.17     $0.15     $0.15     $0.03   ($0.11)   ($0.04)    $0.02      ($0.16)
</TABLE>

(1)  As restated according to Statement of Financial Accounting Standard No.
128.  See Note 1 of Notes to Consolidated Financial Statements the net income
(loss) per share calculation.

NET REVENUES.  The percentage increase in net revenues from quarter to quarter
was virtually flat during 1996 as increased product shipment volumes were offset
by declining average selling prices for the Company's products.  Net revenues
decreased from the fourth quarter of 1996 to the first quarter of 1997 due to a
17% decrease in units shipped from quarter to quarter as well as declining
average selling prices.  For each quarter after the first quarter of 1997, net
revenues increased due to increasing volume of shipments.

GROSS MARGIN.  Gross margin decreased as a percentage of net revenues and in
absolute dollars from quarter to quarter of 1996, primarily due to a decline in
average selling prices due to industry overcapacity.  Gross margin dropped from
24% in the fourth quarter of 1996 to 3% in the first quarter of 1997 due to a
$3.2 million charge to reduce the carrying value of inventory to its approximate
replacement cost.  For each successive quarter thereafter, changes in gross
margin reflected declines in average selling prices outpacing per unit
manufacturing cost reductions being implemented by the Company.

                                      21

<PAGE>

INCOME (LOSS) FROM OPERATIONS.  Income (loss) from operations generally
decreased from quarter to quarter during the last three quarters of 1996 because
declining average selling prices outpaced manufacturing cost reductions.  Loss
from operations decreased steadily during the first three quarters of 1997 due
to increases in volume of shipments and slowing declines in average selling
prices during the last two quarters of 1997.  In addition, a $3.2 million charge
in the first quarter of 1997 to reduce the carrying value of inventory to its
approximate replacement cost and a charge of approximately $3 million in the
fourth quarter of 1997 to accrue estimated costs to defend on-going legal
actions, significantly reduced net income from operations for those respective
quarters.  Operating expenses as a percentage of revenue generally increased
quarter to quarter, largely driven by increased personnel costs.

NET INCOME (LOSS). Net income (loss) generally decreased from quarter to quarter
during 1996 due to declining gross margins and declining income from operations
over this period.  Net loss decreased steadily during the first two quarters of
1997 due to increases in volume of shipments and slowing declines in average
selling prices.  In addition, a $3.2 million charge in the first quarter of 1997
to reduce the carrying value of inventory to its approximate replacement cost
and a charge of approximately $3 million in the fourth quarter of 1997 to accrue
estimated costs to defend on-going legal actions, significantly reduced net
income from operations for those respective quarters.

NET INCOME (LOSS) PER SHARE.  Net income (loss) per share generally decreased
from quarter to quarter during 1996 due to declining gross margins and declining
income from operations over this period as well as the impact of providing for
income taxes.  Net income (loss) per share increased steadily during the first
three quarters of 1997 due to increases in volume of shipments and slowing
declines in average selling prices during the last two quarters of 1997.  In
addition, a $3.2 million charge in the first quarter of 1997 to reduce the
carrying value of inventory to its approximate replacement cost and a charge of
approximately $3 million in the fourth quarter of 1997 to accrue estimated costs
to defend on-going legal actions, significantly reduced net income from
operations for those respective quarters.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     Not applicable.

                                  PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The following table lists the names, ages and positions held with the Company of
all executive officers and Directors of the Company as of February 28, 1998.
There are no family relationships between any director or executive officer of
the Company.  Executive officers serve at the discretion of the Board of
Directors.

<TABLE>
<CAPTION>
     NAME                    AGE  POSITION
     ----                    ---  --------
<S>                          <C>  <C>
Bing Yeh (1)(4)               47   President and Chief Executive Officer and Director

Thomas A. Freeze (5)          51   Chief Operating Officer and Executive Vice President

Isao Nojima                   54   Vice President, Advanced Development

Yaw-Wen Hu                    48   Vice President, Process Development
                                   and Wafer Manufacturing, and Director

David Sweetman                50   Vice President, Quality and Customer Support

Michael Briner                50   Vice President, Design Engineering
Derek Best                    47   Vice President, Sales and Marketing

     NAME                    AGE  PRINCIPAL OCCUPATION/POSITION HELD WITH THE COMPANY
     ----                    ---   --------------------------------------------------
Tsuyoshi Taira (1)(2)(3)      59   Director
Yasushi Chikagami (1)(2)(3)   59   Director
Ronald Chwang (1)(2)(3)       49   Director
</TABLE>

                                  22

<PAGE>


(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Stock Option Committee
(4) Sole Member of Non-Officer Stock Option Committee
(5) Thomas A. Freeze is no longer with the Company as of March 1998.

     Bing Yeh, co-founder of the Company, has served as President, Chief
Executive Officer and a director of the Company since its inception in 1989.
Prior to founding the Company, Mr. Yeh served as a Senior Research and
Development Manager of Xicor, Inc., a nonvolatile memory semiconductor
company. From 1981 to 1984, Mr. Yeh held program manager and other positions
at Honeywell Inc. From 1979 to 1981, Mr. Yeh was a senior development
engineer of EEPROM technology of Intel Corporation. He was a Ph.D. candidate
in Applied Physics and earned an Engineer degree at Stanford University.
Mr. Yeh holds an M.S. and a B.S. in Physics from National Taiwan University.

     Thomas A. Freeze joined the Company as Chief Operating Officer and
Executive Vice President in December 1996. Prior to joining the company, Mr.
Freeze served as President of Exel Microelectronics from 1994 to 1996. From 1988
to 1994, he served as a Vice President of Cypress Semiconductor where he managed
several operations including Technology Development, EPROMs, and Programmable
Logic Products. Mr. Freeze holds a B.S.E.E. from Texas A & M University.

     Isao Nojima has served the Company as Vice President, Advanced Development
since July, 1997.  From March, 1993 to June, 1997 he served as Vice President,
Memory Design and Product Engineering. From 1990 to 1993, Mr. Nojima served as
Director of Design Engineering of Pioneer Semiconductor Corporation (Pericom), a
manufacturer of semiconductors. From 1980 to 1990, he served as Design Manager
of Xicor Inc., a nonvolatile semiconductor company. From 1977 to 1980, he served
as a Senior Design Engineer for Intel Corporation.  From 1969 to 1976, he was a
Senior Researcher at Toshiba's R&D Center in Japan.  Mr. Nojima holds a B.S. and
an M.S. in Electrical Engineering from Osaka University in Japan.

     Yaw Wen Hu, Ph.D., has served the Company as Vice President, Process
Development and Wafer Manufacturing since July 1993 and became a director of the
Company in September 1995. From 1990 to 1993, Dr. Hu served as Deputy General
Manager of Technology Development of Vitelic Taiwan Corporation. From 1988 to
1990, he served as FAB Engineering Manager of Integrated Device Technology, Inc.
From 1985 to 1988 he was the Director of Technology Development at Vitelic
Corporation.  From 1978 to 1985 he worked as a senior development engineer in
Intel Corporation's Technology Development group.  Mr. Hu holds a B.S. in
Physics from National Taiwan University and an M.S. in Computer Engineering and
a Ph.D. in Applied Physics from Stanford University.

     David Sweetman has served the Company as Vice President, Quality and
Customer Support since February 1994. Prior to joining the Company, he served
from 1991 to 1993 as Vice President of Quality and Reliability of Catalyst
Semiconductor Inc. From 1986 to 1991, he served as Director of Military Programs
of Seeq Technology Inc. He has published numerous papers on the quality,
reliability and performance of reprogrammable nonvolatile memories, SPC and PPM.
Mr. Sweetman holds a B.S. in Physics from San Diego State University and an
M.B.A. from the University of Santa Clara.

     Michael Briner joined the Company as Vice President, Design Engineering in
November 1997.  From 1993 to 1997, he served as Vice President of Design
Engineering for Micron Quantum Devices, Inc., a subsidiary of Micron Technology,
Inc., chartered to develop and manufacture flash memory products.  From 1986
through 1992, he served as Director of Design Engineering for the Nonvolatile
Division of Advanced Micro Devices, Inc.  In this position, he was instrumental
in helping AMD become a major nonvolatile memory manufacturer.  Mr. Briner holds
a B.S. in Electrical Engineering from the University of Cincinnati.

     Derek Best joined the Company in June 1997 as Vice President of Sales and
Marketing. Prior to joining the Company he worked for Micromodule Systems as
Vice President Marketing and Sales World Wide from 1992 to 1996.  From 1987 to
1992 he owned his own company, Mosaic Semiconductor.  Mr. Best holds an
Electrical Engineering degree from Portsmouth University in England.

                                  23

<PAGE>

     Tsuyoshi Taira has been a director of the Company since July 1993. Mr.
Taira served as a member of the board of directors of Atmel Corporation from
1987 to 1992. Mr. Taira served as president of Sanyo Semiconductor Corporation
from 1986 to 1993. Mr. Taira was Chairman of the Sanyo Semiconductor Corporation
from 1993 to 1996. Mr. Taira left the Sanyo Semiconductor Corporation in August,
1996. Mr. Taira currently owns and runs a marketing and management consulting
company, Tazan International, Inc. Mr. Taira holds a B.S. from Tokyo
Metropolitan University.

     Yasushi Chikagami became a director of the Company in September 1995.
Mr. Chikagami has been Chairman of Keian Corporation, a personal computer and PC
peripheral distributor, since 1993. Mr. Chikagami has also served as director of
GVC Corporation and Trident Microsystems, Inc. since 1993. Mr. Chikagami holds a
B.S. in Agricultural Engineering from Taiwan University and a M.S. in
engineering from University of Tokyo.

     Ronald Chwang, Ph.D. became a director of the Company in June 1997.  Dr.
Chwang is the president of Acer Capital America and managing general partner
of Acer Technology Venture Fund.  Previously, Dr. Chwang was President and
Chief Executive Officer of Acer America, a subsidiary of Acer Group, a
worldwide computer, component and semiconductor manufacturer, from 1992 to
1997, and has been with Acer in various capacities since 1986.  Dr. Chwang
has previously held development and management positions at Intel Corporation
and Bell Northern Research.  Dr. Chwang holds a B.S. in Engineering from
McGill University and a Ph.D. in Electrical Engineering from the University
of Southern California.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

     Section 16(a) of the Securities Exchange Act of 1934 (the "Securities
Exchange Act") requires Company's directors and executive officers, and persons
who own more than ten percent of a registered class of the Company's equity
securities, to file with the Securities & Exchange Commission initial reports of
ownership and reports of changes in ownership of the Common Stock and other
equity securities of the Company. Officers, directors, and greater than ten
percent shareholders are required by the Securities & Exchange Commission
regulations to furnish the Company with copies of all Section 16(a) forms they
file.

     To the Company's knowledge all Section 16(a) filing requirements applicable
to its officers, directors and greater than ten percent beneficial owners were
complied with in accordance with the Securities Exchange Act.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS

     Directors do not currently receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for certain travel-related expenses in connection with attendance at
Board and Committee meetings.

                                  24

<PAGE>

COMPENSATION OF EXECUTIVE OFFICERS

     The following table sets forth certain compensation awarded or paid by the
Company during the fiscal years ended December 31, 1995, December 31, 1996 and
December 31, 1997 to its President and Chief Executive Officer and the four
other Named Executive Officers:


               SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                          LONG-TERM COMPENSATION
                                                    --------------------  -----------------------   ALL OTHER
                                                     SALARY       BONUS   SECURITIES UNDERLYING   COMPENSATION
   NAME AND PRINCIPAL POSITION                YEAR     ($)        ($)(4)      STOCK OPTIONS           ($) (3)
------------------------------------------    ----   -------     --------  --------------------   -------------
<S>                                           <C>    <C>          <C>      <C>                    <C>
Bing Yeh
   President and Chief Executive Officer      1997   207,121       -----          -----               1,480
                                              1996   195,000      78,682          -----               2,592
                                              1995   128,690      40,824          -----               -----

Michael J. Praisner   (1)                     1997   138,877       -----          -----               -----
   Vice President, Finance and                1996   132,000      38,324          -----                 712
   Administration, Chief Financial Officer    1995    37,919       -----        200,000               -----
   and Secretary

Thomas A. Freeze (2)                          1997   161,051       -----        100,000       (5)       240
   Chief Operating Officer and Executive
   Vice President

Yaw-Wen Hu                                    1997   137,280       -----         25,640       (5)       280
   Vice President, Process                    1996   132,000      40,814          -----               1,792
   Development and Wafer Manufacturing        1995   115,121      18,281          2,800               -----

Isao Nojima                                   1997   141,353       -----         24,420       (5)     -----
   Vice President, Memory Design and          1996   135,000      41,851          -----               1,072
   Product Engineering                        1995   115,500      18,492          3,000               -----
</TABLE>

(1)  Michael J. Praisner, Vice President of Finance and Administration, Chief
Financial Officer and Secretary left the Company in January 1998.

(2)  Thomas A. Freeze, Chief Operating Officer and Executive Vice President,
left the Company in March 1998.

(3)  Other compensation for travel time, new hire referrals, amounts paid by the
Company for supplemental term life insurance, etc.

(3)  Bonuses received pursuant to the Company's profit sharing plan.

(4)  Stock option grant, net of impact of repriced stock options (see following
table).


                                     25

<PAGE>

         Stock Option Grants Of Named Executive Officers In Last Fiscal Year

<TABLE>
<CAPTION>
                                                                                             POTENTIAL REALIZABLE VALUE
                                           PERCENT OF                                          AT ASSUMED ANNUAL RATES
                                         TOTAL OPTIONS                                       OF STOCK PRICE APPRECIATION
                                           GRANTED TO     EXERCISE   MARKET                        FOR OPTION TERM
                     DATE     OPTIONS     EMPLOYEES IN      PRICE     PRICE   EXPIRATION    --------------------------------
    NAME           OF GRANT  GRANTED      FISCAL YEAR (1)   ($/Sh)    ($/Sh)      DATE         0%         5%         10%
    ----           --------  ----------   --------------   -------   -------  -----------   --------  --------     --------
<S>                <C>       <C>          <C>              <C>        <C>     <C>           <C>       <C>          <C>
Thomas A. Freeze    Jan-97    100,000         4.41%          $4.88     $4.88     1/31/06       -      $306,586     $776,949
Thomas A. Freeze    Apr-97    100,000         4.41%          $3.13     $3.13     4/30/06       -      $196,530     $498,045
Yaw-Wen Hu          Jan-97     25,640         1.13%          $4.88     $4.88     1/31/06       -       $78,609     $199,210
Yaw-Wen Hu          Apr-97     25,640         1.13%          $3.13     $3.13     4/30/06       -       $50,390     $127,699
Isao Nojima         Jan-97     24,420         1.08%          $4.88     $4.88     1/31/06       -       $74,868     $189,731
Isao Nojima         Apr-97     24,420         1.08%          $3.13     $3.13     4/30/06       -       $47,993     $121,622
</TABLE>

(1)  The Company granted 2,265,162 options to employees during the fiscal
year.  Of those options, 844,750 options granted in January were converted
into repriced option grants in April as described below.

No grants to officers in 1996.

AGGREGATE OPTION EXERCISES OF NAMED EXECUTIVE OFFICERS IN LAST FISCAL YEAR AND
FISCAL YEAR=END OPTION VALUES


<TABLE>
<CAPTION>
                                                       NUMBER (#) OF SECURITIES      $ VALUE OF UNEXCERCISED
                                                        UNDERLYING UNEXCERCISED      IN-THE-MONEY OPTIONS AT
                      SHARES ACQUIRED  $  VALUE       OPTIONS AT DECEMBER 31, 1997       DECEMBER 31, 1997
NAME                    ON EXERCISE    REALIZED (1)    EXCERCISABLE/UNEXCERSABLE     EXCERCISABLE/UNEXCERSABLE(2)
----                    -----------    ------------    -------------------------     ----------------------------
<S>                    <C>             <C>             <C>                           <C>
Bing Yeh                    -             -                      -                             -
Michael J. Praisner         -             -                93,333/106,667              $198,333/$226,668
Isao Nojima              30,000       $  198,000           287,000/42,420               $853,675/$53,550
Yaw-Wen Hu               15,500       $  56,238            243,967/46,973               $725,662/$63,466
Thomas A. Freeze            -             -                 25,000/75,000                      -
</TABLE>


(1)  Based on the fair market value of the Company's Common Stock on the
dates of exercise minus the exercise price.

(2)  Based on the closing price of the Company's Common Stock ($3.125) on
December 31, 1997, the last trading day of the fiscal year, as reporting on the
Nasdaq National Market, minus the exercise price of the option, multiplied by
the number of shares underlying the option.

     As of February 28, 1998, options to purchase a total of 684,800 shares were
outstanding and exercisable under the Equity Incentive Plan for purchase by
beneficial owners and options to purchase a total of 23,500 shares were
outstanding and exercisable under the Directors' Option Plan for purchase by
beneficial owners.  Options to purchase approximately 222,000 and 65,000 shares
remained authorized and available for grant as of that date for the Equity
Incentive Plan and the Directors' Options Plan, respectively.

    On April 23, 1997 the Board of Directors approved an offer to employees
of the Company to reprice outstanding options granted prior to that date with
an exercise price above $3.125 per share (the "1997 Repricing Program").
Under the 1997 Repricing Program, as of April 28, 1997, 844,750 option grants
were converted into repriced option grants with an exercise price of $3.125
(based on the closing price as reported on the Nasdaq National Stock Market
on such date). As consideration for the grant of repriced options, optionees
are prohibited from exercising the repriced options for a period of three
months following the initial vest date of such repriced options.  The 1997
Repricing Program terminated on April 28, 1997.  The following officers
received repriced option grants pursuant to the 1997 Repricing Program:

                                   26

<PAGE>


                     STOCK OPTIONS REPRICED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
                                                                                           Length of Original
                             Number of Securities     Market Price of Stock                Option Term Remaining
                               Underlying Options    at Time of Repricing  New Exercise   at Date of Repricing
Name                  Date   Repriced or Amended (#)    or Amendment ($)     Price ($)        or Amendment
----                  ----   -----------------------    ----------------     ---------    --------------------
<S>                 <C>       <C>                       <C>                   <C>           <C>
Isao Nojima         4/28/97          24,420                4.875               3.125          117 months
Thomas A. Freeze    4/28/97         100,000                4.875               3.125          117 months
Yaw-Wen Hu          4/28/97          25,640                4.875               3.125          117 months
David Sweetman      4/28/97          25,640                4.875               3.125          117 months
</TABLE>


                                     COMPENSATION PLANS

     On October 3, 1995 the Company adopted its Equity Incentive Plan, Employee
Stock Purchase Plan and 1995 Non-Employee Directors' Stock Option Plan.  The
Employee Stock Purchase Plan was amended in January 1998 to increase the number
of shares allowed to be purchased by the employees in each period.  No other
amendments to these plans were made in 1997 or are proposed for the Annual
Meeting to be held July 17, 1998.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the ownership of
the Company's Common Stock as of February 28, 1998 by: (i) each director and
each nominee for director; (ii) each of the executive officers named in the
Summary Compensation Table employed by the Company in that capacity on February
28, 1998; (iii) all executive officers and directors of the Company as a group;
and (iv) all those known by the Company to be beneficial owners of more than
five percent of its Common Stock.

<TABLE>
<CAPTION>
                                                     BENEFICIAL OWNERSHIP (1)
                                               ------------------------------------
5% SHAREHOLDERS, DIRECTORS, AND OFFICERS       NUMBER OF SHARES    PERCENT OF TOTAL
----------------------------------------       ----------------    ----------------
<S>                                            <C>                 <C>
Bing Yeh (2)                                       3,650,000            16.0%
     c/o Silicon Storage Technology, Inc.
     1171 Sonora Court
     Sunnyvale, CA 94086
Ching S. Jenq                                      1,980,000              8.7
     13030 Cumbra Vista Court
     Los Altos Hills, CA 94022
Su Hwa Tseng                                       1,570,000              6.2
     22, R&D Road 2
     Hsin-Chu Science Park
     Taiwan, R.O.C. 30077
Thomas A. Freeze (3)                                  35,419               *
Isao Nojima (4)                                      336,458              1.5
Yaw Wen Hu (5)                                       317,674              1.4
Tsuyoshi Taira (6)                                    15,227               *
Yasushi Chikagami (6)                                 15,227               *
Ronald Chwang (7)                                      5,575               *
All directors and executive officers as a group
(ten persons) (8)                                  4,525,580            19.9%
</TABLE>

*    Represents beneficial ownership of less than 1%.


                                   27

<PAGE>

(1)  This table is based upon information supplied by officers, directors and
principal shareholders and schedules 13D and 13G filed with the Securities &
Exchange Commission. Unless otherwise indicated in the footnotes to this table,
and subject to community property laws where applicable, each of the
shareholders named in this table above has sole voting and investment power with
respect to the shares of Common Stock shown as beneficially owned. Percentage of
beneficial ownership is based on 22,745,796 shares of the Company's Common Stock
outstanding as of February 28, 1998 adjusted as required by rules promulgated by
the Securities & Exchange Commission.

(2)  Includes (i) 1,160,000 shares held by the Yeh Family Trust U/D/T dated
August 14, 1995, of which Mr. Yeh and his wife are trustees and (ii) 2,480,000
shares held by the Yeh 1995 Children's Trust U/T/A dated July 31, 1995 (the
"Children's Trust") of which Su-Wen Y. Liu and Yeon-Hong Chan are trustees.
Mr. Yeh disclaims beneficial ownership of the shares held by the Children's
Trust.  Also includes 10,000 shares purchased under an IRA account in the name
of Bing Yeh.

(3)  Includes 33,333 shares issuable subject to options exercisable on or before
April 28, 1998.

(4)  Includes 306,994 shares issuable subject to options exercisable on or
before April 28, 1998.

(5)  Includes (i) 5,000 shares held by each of Mr. Hu's two minor children and
(ii) 266,370 shares issuable subject to options exercisable on or before
April 28, 1997.

(6)  Includes 15,227 shares issuable subject to options exercisable on or before
April 28, 1998.

(7)  Includes 5,575 shares issuable subject to options exercisable on or before
April 28, 1998.

(8)  Includes 752,726 shares subject to stock options held by directors and
officers exercisable within 60 days of February 28, 1998. See footnotes (4),
(5), (6), (7), (8) and (9).

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     On January 31, 1996, the Company acquired a 14% interest in a Japanese
company for approximately $939,000 paid in cash.  The president of the Japanese
company is a shareholder of the Company.  In 1996 and 1997 this customer
accounted for 12.7% or approximately $11.8 million and 15.4% or approximately
$11.6 million, respectfully, of net revenues of the Company.  This was the only
customer that accounted for more than 10% of the Company's net revenues in 1996
and 1997.

     In June, 1997 Dr. Ronald Chwang became a member of the Board of Directors.
Dr. Chwang is the president of Acer Capital America and managing general partner
of Acer Technology Venture Fund.  A related entity, Acer Corporation, is a
customer of the Company.  In 1997, this customer  accounted for 6.0% or $4.5
million of net revenues.

     The Compensation Committee of the Board of Directors is composed of the
following persons:  Mr. Bing Yeh, Mr. Tsuyoshi Taira, Mr. Yasushi Chikagami and
Dr. Ronald Chwang. Of these Directors, Mr. Yeh is also an officer of the
Company.

     As a matter of policy, all future transactions between the Company or any
of its officers, directors, or principal shareholders will be approved by a
majority of the independent and disinterested members of the Board of Directors,
and will be on terms no less favorable to the Company than could be obtained
from unaffiliated third parties and will be in connection with bona fide
business purposes of the Company.

                                   28

<PAGE>

                                PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.

(a)  1. CONSOLIDATED FINANCIAL STATEMENTS.  The index to the consolidated
     financial statements is found on page 35 of this Report.

(a)  2. FINANCIAL STATEMENT SCHEDULE.  Financial statement schedule Number II is
     included on page 33 of this Report.

(a)  3. EXHIBITS.  See Exhibit Index in part (c), below.

(b)  Reports on Form 8-K filed in the last quarter of the period and subsequent:
     Cautionary statement regarding lawsuit initiated by Intel Corporation
     against the Company filed on November 26, 1997.

(c)  INDEX TO EXHIBITS.

<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER             DESCRIPTION OF DOCUMENT
  ------             -----------------------
<S>       <C>
  3.2+    Bylaws of the Company.
  3.4+    Form of Restated Articles of Incorporation of the Company to be
          effective upon the closing of the offering, dated November 3, 1995.
  4.1+    Reference is made to Exhibits 3.2.
 10.1+    Equity Incentive Plan and related agreements.
 10.2+    1990 Stock Option Plan and related agreements.
 10.3+    Employee Stock Purchase Plan.
 10.4+    1995 Non-Employee Directors' Stock Option Plan.
 10.5+    Profit Sharing Plan.
 10.6+    Lease Agreement between the Company and Sonora Court Properties, dated
          March 15, 1993, as amended.
 10.7+    Lease Agreement between the Company and Coast Properties, dated May 4,
          1995, as amended.
10.8+     License Agreement between the Company and Winbond Electronics
          Corporation, dated July 30, 1990, as amended on September 14, 1990,
          August 27, 1992, December 15, 1992 and December 1, 1993.
 10.9+    License Agreement between the Company and Sanyo Electric Co., Ltd.,
          dated April 7, 1993, as clarified by two letters each dated April 8,
          1993.
 10.10+   Manufacturing Agreement between the Company and Sanyo Electric Co.,
          Ltd., dated December 10, 1994.
10.11+    License and Technical Assistance Agreement between the Company and
          Rockwell International Corporation, Digital Communications Division,
          dated September 1993, as amended on March 29, 1995.
10.13++   Documents relating to investment in Japanese company.
10.14++   Lease Agreement between the Company and Aetna Life Insurance Company,
          dated March 5, 1996.
10.15++   License Agreement between the Company and Seiko Epson Corporation
          dated March 31, 1996.
10.16++   License Agreement between the Company and Taiwan Semiconductor
          Manufacturing Co., Ltd. dated March 31, 1996.
 23.1     Consent of Coopers & Lybrand L.L.P., Independent Accountants.  See
          page 34.
27.1      Financial Data Schedule
27.2      Financial Data Schedule
27.3      Financial Data Schedule
</TABLE>

+    Previously filed as an Exhibit to the Registration Statement filed on Form
     S-1 and incorporated by reference herein.
++   Previously filed as an Exhibit to Form 10-K or Form 10-Q and incorporated
     by reference herein.

                                   29

<PAGE>

                               SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly 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 27th day of March, 1998.

                                   SILICON STORAGE TECHNOLOGY, INC.

                                   By:    /s/ BING YEH
                                        -------------------------------------
                                        Bing Yeh
                                        President and Chief Executive Officer
                                        (Principle Executive Officer)

     Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
    SIGNATURE                     TITLE                               DATE
    ---------                     -----                               -----
<S>                      <C>                                     <C>
  /s/ BING YEH           President, Chief Executive              March 27, 1998
-------------------      Officer and Director (Principal
    Bing Yeh             Executive Officer and Principal
                         Financial and Accounting Officer)

  /S/ YAW WEN HU         Vice President, Process                 March 27, 1998
-------------------      Development and Wafer
     Yaw Wen Hu          Manufacturing and Director

/s/ TSUYOSHI TAIRA
-------------------      Director                                March 27, 1998
  Tsuyoshi Taira

/s/ RONALD CHWANG
-------------------      Director                                March 27, 1998
  Ronald Chwang

-------------------      Director
Yasushi Chikagami
</TABLE>





SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY COMPANIES WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

No annual report or proxy material has been sent to security holders as of the
date of the filing of this report. Such report and proxy material is to be
furnished to security holders subsequent to the filing of the annual report of
this Form, and the Company shall furnish copies of such material to the
Commission when it is sent to security holders.

                                    30

<PAGE>

TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005

LEGAL COUNSEL
Cooley Godward LLP
5 Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155

INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Ten Almaden Blvd., Suite 1600
San Jose, CA 95113


                                             31

<PAGE>

     REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

Our report on the consolidated financial statements of Silicon Storage
Technology, Inc. and Subsidiary is included on page 36 of this Form 10-K.  In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in Item 14(a) of this Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.

                                   COOPERS & LYBRAND L.L.P.

San Jose, California
January 15, 1998


                                        32

<PAGE>


SCHEDULE II

                           SILICON STORAGE TECHNOLOGY, INC.
                          VALUATION AND QUALIFYING ACCOUNTS
                                    (IN THOUSANDS)



<TABLE>
<CAPTION>

DESCRIPTION                                         BALANCE AT       CHARGED TO    WRITE-OFF     BALANCE AT
-----------                                        BEGINNING OF      COSTS AND     OF ACCOUNTS     END OF
                                                      PERIOD         EXPENSES        /OTHER       PERIOD
                                                   -------------     ---------     ----------    -----------
<S>                                                <C>               <C>           <C>           <C>
Year ended December 31, 1995
   Allowance for doubtful accounts..................  $   72         $   261       $      -      $    333
   Allowance for excess and obsolete inventories....  $  264         $   832       $      -      $  1,096
Year ended December 31, 1996
   Allowance for doubtful accounts..................  $  333         $    17       $      -      $    350
   Allowance for excess and obsolete inventories....  $1,096         $ 1,622       $      -      $  2,718
Year ended December 31, 1997
   Allowance for doubtful accounts..................  $  350         $   400       $     30      $    720
   Allowance for excess and obsolete inventories.... $ 2,718         $ 4,175       $  3,160      $  3,733
</TABLE>


                                             33

<PAGE>

EXHIBIT 23.1


                   CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration statement of
Silicon Storage Technology, Inc. on Form S-8 (File No. 0-26944) of our report
dated January 15, 1998, except for Note 9 as to which the date is March 4,
1998, and of our report dated January 15, 1998, on our audits of the
consolidated financial statements and financial statement schedule,
respectively, of Silicon Storage Technology, Inc. as of December 31, 1996 and
1997, and for the years ended December 31, 1995, 1996 and 1997, which reports
are included in this Annual Report on Form 10-K.

                                   COOPERS & LYBRAND L.L.P.

San Jose, California
March 27, 1998


                                            34

<PAGE>

                   SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
                      INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                        Page
                                                                        -----
<S>                                                                     <C>
 Report of Independent Accountants . . . . . . . . . . . . . . . . . . . 36
 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . 37
 Consolidated Statements of Operations . . . . . . . . . . . . . . . . . 38
 Consolidated Statements of Shareholders' Equity (Deficit) . . . . . . . 39
 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . 40
 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . 41
</TABLE>


                                           35


<PAGE>

                     REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareholders
Silicon Storage Technology, Inc. and Subsidiary

    We have audited the accompanying consolidated balance sheets of Silicon
Storage Technology, Inc. and Subsidiary as of December 31, 1996 and 1997, and
the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Silicon Storage
Technology, Inc. and Subsidiary as of December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.


                                   COOPERS & LYBRAND L.L.P.


San Jose, California
January 15, 1998,
except for Note 9 as to which
the date is March 4, 1998

                                           36

<PAGE>

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

                                       ASSETS

<TABLE>
<CAPTION>
                                                              December 31,
                                                          --------------------
                                                           1996         1997
                                                          -------      -------
<S>                                                       <C>          <C>
Current assets:
   Cash and cash equivalents                              $10,280      $26,743
   Short-term investments                                  25,960       20,476
   Accounts receivable, net of allowance
    for doubtful accounts of $350 in 1996
    and $720 in 1997                                        9,802        8,318
   Accounts receivable from related parties                 3,124        2,124
   Inventories, net                                        14,495       11,909
   Current deferred tax asset                               3,589        3,716
   Other current assets                                     1,394        1,011
                                                          -------      -------
      Total current assets                                 68,644       74,297

Furniture, fixtures, and equipment, net                    11,274        7,224
Other assets                                                  996        1,018
                                                          -------      -------
         Total assets                                     $80,914      $82,539
                                                          -------      -------
                                                          -------      -------

                          LIABILITIES
Current liabilities:
   Trade accounts payable                                   4,075       18,957
   Account payable to related party                         6,412            0
   Accrued expenses                                         4,164        6,327
   Deferred revenue                                         1,404        1,300
                                                          -------      -------
      Total current liabilities                            16,055       26,584

   Other liabilities                                           71           66
                                                          -------      -------
      Total liabilities                                    16,126       26,650
                                                          -------      -------

                        SHAREHOLDERS' EQUITY

Common stock, no par value:
   Authorized: 45,000 shares
   Issued and outstanding: 23,225 shares (1996)
     and 23,107 shares (1997)                              54,312       53,356
Deferred stock compensation                                  (100)         (66)
Retained earnings                                          10,576        2,599
                                                          -------      -------
      Total shareholders' equity                           64,788       55,889
                                                          -------      -------
         Total liabilities and shareholders' equity       $80,914      $82,539
                                                          -------      -------
                                                          -------      -------

</TABLE>

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

                                          37

<PAGE>

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

<TABLE>
<CAPTION>
                                                 Year ended December 31,
                                             ----------------------------------
                                               1995        1996         1997
                                               ----        ----         ----
<S>                                           <C>         <C>         <C>
Net revenues:
   Product revenues                           $38,283     $90,638      $73,796
   License revenues                             1,245       2,652        1,526
                                              -------     -------      -------
      Total net revenues                       39,528      93,290       75,322
                                              -------     -------      -------

 Costs and expenses:
   Cost of revenues                            26,360      59,494       62,747
   Research and development                     4,058       6,948        8,744
   Sales and marketing                          2,455       5,292        6,587
   General and administrative                   1,464       3,370        9,479
                                              -------     -------      -------
                                               34,337      75,104       87,557
                                              -------     -------      -------

      Income (loss) from operations             5,191      18,186      (12,235)

Interest income                                   517       1,648        2,146
Interest expense                                 (273)          -          -
Other income, net                                   -         115          -
                                              -------     -------      -------
      Income (loss) before provision
         for (benefit from) income taxes        5,435      19,949      (10,089)

Provision for (benefit from) income taxes        (594)      7,598       (3,165)
                                              -------     -------      -------

      Net income (loss)                        $6,029     $12,351      ($6,924)
                                              -------     -------      -------
                                              -------     -------      -------

Net income (loss) per share - basic             $0.70       $0.54       ($0.30)
                                              -------     -------      -------
                                              -------     -------      -------

Net income (loss) per share - diluted           $0.32       $0.49       ($0.30)
                                              -------     -------      -------
                                              -------     -------      -------
</TABLE>

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

                                        38

<PAGE>

                   SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
                     STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                    (in thousands)


<TABLE>
<CAPTION>
                                                   Convertible                                          Retained
                                                 Preferred Stock         Common Stock                    Earnings/
                                                -----------------     ---------------   Deferred Stock (Accumulated
                                                 Shares    Amount     Shares    Amount   Compensation     Deficit)     Total
                                                --------  --------   -------   -------  --------------  ------------- --------
<S>                                             <C>       <C>        <C>       <C>      <C>             <C>          <C>
Balances, January 1, 1995                         3,488   $  5,259    6,465   $   162        $   -     $ (7,314)     $ (1,893)
   Issuance of shares of common stock
      upon initial public offering, net of
      offering costs of $1,062                        -          -    5,010    40,871            -            -        40,871
   Issuance of shares of common stock
   upon stock option and warrant exercise             -          -    1,101       151            -            -           151
   Issuance of shares of preferred stock          1,250      4,776        -         -            -            -         4,776
   Conversion of preferred stock in
      initial public offering                    (4,738)   (10,035)   9,475    10,035            -            -             -
   Conversion of debt and accrued
      interest to common stock                        -          -      740     2,220            -            -         2,220
   Deferred stock compensation                        -          -        -       151         (151)           -             -
   Amortization of deferred stock
      compensation                                    -          -        -         -           18            -            18
   Net income                                         -          -        -         -            -        6,029         6,029
                                                 ------   --------  -------   -------        -----     --------      --------
Balances, December 31, 1995                           -          -   22,791    53,590         (133)      (1,285)       52,172
   Repurchase of shares of common stock               -          -     (100)     (233)           -         (490)         (723)
   Issuance of shares of common stock under
      employees' stock purchase and option plans      -          -      534       263            -            -           263
   Tax benefit from exercise of stock options         -          -        -       692            -            -           692
   Amortization of deferred stock
      compensation                                    -          -        -         -           33            -            33
   Net income                                         -          -        -         -            -       12,351        12,351
                                                 ------   --------  -------   -------        -----     --------      --------

Balances, December 31, 1996                           -          -   23,225    54,312         (100)      10,576        64,788
   Repurchase of shares of common stock               -          -     (725)   (1,682)           -       (1,053)       (2,735)
   Issuance of shares of common stock under
      employees' stock purchase and option plans      -          -      607       599            -            -           599
   Tax benefit from exercise of stock options         -          -        -       127            -            -           127
   Amortization of deferred stock
      compensation                                    -          -        -         -           34            -            34
   Net loss                                           -          -        -         -            -       (6,924)       (6,924)
                                                 ------   --------  -------   -------        -----     --------      --------
Balances, December 31, 1997                           -   $      -   23,107   $53,356        $ (66)    $  2,599      $ 55,889
                                                 ------   --------  -------   -------        -----     --------      --------
                                                 ------   --------  -------   -------        -----     --------      --------
</TABLE>

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

                                          39

<PAGE>

                          SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY
                               CONSOLIDATED STATEMENTS OF CASH FLOWS
                                          (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                                  --------------------------
                                                                    1995      1996     1997
                                                                  -------   -------  -------
<S>                                                               <C>       <C>      <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                               $6,029   $12,351  ($6,924)
   Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
   Depreciation                                                     1,837     3,431    4,206
   Provision for doubtful accounts receivable                         261        17      400
   Provision for excess and obsolete inventories                      832     1,622    4,175
   Amortization of deferred stock compensation                         18        33       34
   (Gain) loss on sale of equipment                                     -      (179)       7
   Deferred income taxes                                           (2,163)   (1,390)    (127)
   Changes in operating assets and liabilities:
      Accounts receivable                                          (6,937)   (2,339)   1,084
      Accounts receivable from related parties                          -    (3,124)   1,000
      Inventories                                                  (2,678)  (13,634)  (2,121)
      Other current and noncurrent assets                            (657)     (789)     361
      Trade accounts payable and accounts payable
        to related party                                            6,585     2,347    8,470
      Accrued expenses and other liabilities                        4,263       173    2,817
      Deferred revenue                                                837        67     (104)
                                                                  -------   -------  -------
         Net cash provided by (used in) operating activities        8,227    (1,414)  13,278
                                                                  -------   -------  -------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition of furniture, fixtures and equipment                (4,290)  (10,659)  (2,777)
   Proceeds from sale of equipment                                      -     1,311    2,614
   Purchases of available-for-sale investments                    (22,026)  (36,375)(101,659)
   Sales and maturities of available-for-sale investments          11,013    21,428  107,143
   Other                                                               (6)     (943)       -
                                                                  -------   -------  -------
         Net cash provided by (used in) investing activities      (15,309)  (25,238)   5,321
                                                                  -------   -------  -------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Issuance of shares of preferred stock                            3,776         -        -
   Payments under corporate line of credit                         (2,924)        -        -
   Issuance of shares of common stock                              40,871       263      599
   Change in restricted cash balance                                  800         -        -
   Repayment of notes payable to bank                                (800)        -        -
   Repurchase of common stock                                           -      (723)  (2,735)
                                                                  -------   -------  -------
         Net cash provided by (used in) financing activities       41,723      (460)  (2,136)
                                                                  -------   -------  -------

            Net increase (decrease) in cash and cash equivalents   34,641   (27,112)  16,463
Cash and cash equivalents at beginning of period                    2,751    37,392   10,280
                                                                  -------   -------  -------
Cash and cash equivalents at end of period                        $37,392   $10,280  $26,743
                                                                  -------   -------  -------
                                                                  -------   -------  -------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest                             $176      $  -    $  -
Cash paid during the period for income taxes                           51     9,392       -
Notes payable converted into shares of Series C preferred stock     1,000         -       -
Deferred stock compensation                                           151         -       -
Conversion of convertible debentures and
   accrued interest to common stock                                 2,220         -       -
Conversion of preferred to common stock                            10,035         -       -
Exercise of warrant                                                    44         -       -
Tax benefit from exercise of stock options                              -       692      127
</TABLE>


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

                                      40

<PAGE>

1.   NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

NATURE OF OPERATIONS:

     Silicon Storage Technology, Inc. ("SST" or "the Company") is a supplier of
Flash memory devices, addressing the requirements of high volume customers and
applications.  The Company's product revenues to date have substantially been
derived from the sale of 1Mbit and 512Kbit memory devices used in personal
computers and personal computer peripheral devices manufactured primarily by
companies located in Asia.

USE OF ESTIMATES IN PREPARATION OF THE FINANCIAL STATEMENTS:

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those estimates.

RISKS AND UNCERTAINTIES:

     The Company's sales are concentrated in the nonvolatile memory class of
the semiconductor memory industry, which is highly competitive and rapidly
changing. Significant technological changes in the industry, changes in
customer requirements, changes in product costs and selling prices, or the
emergence of competitor products with new capabilities or technologies could
affect the Company's operating results adversely.  Specifically, average
selling prices declined during 1997.  The Company currently buys all of its
wafers, an integral component of its products, from a limited number of
suppliers.  Failure by these suppliers to satisfy the Company's requirements
on a timely basis at competitive prices could cause a delay in manufacturing
and a possible loss of revenues, which would affect operating results
adversely.

     Most of the Company's sales are made through manufacturers' representatives
and distributors.  These manufacturers' representatives and distributors can
discontinue selling the Company's products at any time.  Two of the
manufacturers' representatives accounted for 29% of the Company's product
revenues during 1997.  The loss of any of the manufacturers' representatives or
any other significant manufacturers' representatives or distributors could have
a material adverse effect on the Company's operating results.

During 1997, currency depreciation and economic deflation was experienced in
several Asian economies in which the Company does business, such as Japan,
Korea, and Taiwan.  During 1997, the Company derived 82% of its sales revenue
from the Far East.  Economic problems in this region can have an adverse impact
on the Company's total revenues and can negatively impact the Company's ability
to collect payments from these customers.  Furthermore, the lack of capital in
the finance sector of these countries may impact the customers' ability to open
letters of credit or other financial instruments that are guaranteed by foreign
banks.  Additionally, the Company's major wafer suppliers and assembly and
packaging subcontractors are located in the Far East.  Major disruptions in
their businesses due to these economic problems can have an adverse impact on
their business which, in turn, may negatively impact their ability to adequately
supply the Company.  Finally, the economic situation may exacerbate the current
decline in average selling prices for the Company's products if the Company's
competitors reduce product prices to generate needed cash.  Continued economic
and/or political instability of any kind in this region may have a material
adverse effect on the Company's operating results due to the large concentration
of the Company's activities in this region.

                                      41

<PAGE>

1.   NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:

RISKS AND UNCERTAINTIES, CONTINUED:

READINESS FOR YEAR 2000.  Many existing computer systems and applications, and
other control devices, use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century.  They
could fail or create erroneous results unless corrected so that they can process
data related to the year 2000.  The Company relies on its systems (such as
general ledger, accounts payable and payroll modules), customer services,
infrastructure, embedded computer ships, networks and telecommunications
equipment and end products.  The Company also relies on external systems of
business enterprises such as customers, suppliers, creditors, financial
organizations, and of governments, both domestically and globally, directly for
accurate exchange of data and indirectly.  The Company's current estimate is
that the costs associated with the Year 2000 issue, and the consequences of
incomplete or untimely resolution of the Year 2000 issue, will not have a
material adverse affect on the results of operations or financial position of
the Company in any given year.  However, despite the Company's efforts to
address the Year 2000 impact on its internal systems, the Company is not sure
that is has fully identified such impact and that it can resolve it without
disruption of its business and without incurring significant expense.  In
addition, even if the internal systems of the Company are not materially
affected by the Year 2000 issue, the Company could be affected through
disruption in the operation of the enterprises with which the Company
interacts.

BASIS OF CONSOLIDATION:

     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary after elimination of intercompany balances and
transactions.

FINANCIAL INSTRUMENTS:

     Cash equivalents are highly liquid investments with original or remaining
maturities of three months or less as of the dates of purchase, are classified
as available for sale and are carried at cost which approximates fair value.
Cash equivalents present insignificant risk of changes in value because of
interest rate changes.  The Company maintains substantially all of its cash
balances with several major financial and/or brokerage institutions domiciled in
the United States and has not experienced any material losses relating to these
investment instruments.

     Short-term investments, which comprise state and municipal securities, 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.  Gross unrealized holding gains and losses have not been
material.  The amortized 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. As of December 31, 1997 and 1996, the fair value of the
short-term investments approximated cost, and all such investments are scheduled
to mature within one year.

     The carrying amounts reported for cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses are considered to approximate
fair values based upon the short maturities of those financial instruments.
Financial instruments that potentially subject the Company to concentrations of
credit risks comprise, principally, cash, investments and trade accounts
receivable.  The Company invests its excess cash in accordance with its
investment policy which is approved by the Board of Directors and reviewed
periodically.  The Company performs credit evaluations of new customers and
requires those without positive, established histories to pay in advance, upon
delivery or through letters of credit.  Otherwise, the Company does not require
collateral of its customers, and maintains allowances for potential credit
losses which have historically not been material.

                                      42

<PAGE>

1.   NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:

FINANCIAL INSTRUMENTS, CONTINUED:

     The Company acquired a 14% interest in a privately held Japanese company in
January, 1996 (see Note 7).  It was not practicable to estimate the fair value
of the investment in the issued untraded common stock of this company.  The
investment is carried at its original cost of $939,000 in the accompanying
balance sheets.

INVENTORIES:

     Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value.  The Company's inventories include high
technology parts and components that are specialized in nature or subject to
rapid technological obsolescence.  During the quarter ended March 31, 1997, the
Company recorded a charge of approximately $3.2 million to reduce the carrying
value of inventories to replacement cost.  While the Company has programs to
minimize the required inventories on hand and considers 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.

FURNITURE, FIXTURES AND EQUIPMENT:

     Furniture, fixtures and equipment are stated at cost and depreciated using
the straight-line method over estimated useful lives of three to seven years
(Note 3).

LONG-LIVED ASSETS:

     Whenever events or changes in circumstances indicate that the carrying
amounts of long-lived assets and goodwill related to those assets may not be
recoverable, the Company estimates the future cash flows,  undiscounted and
without interest charges, expected to result from the use of those assets and
their eventual cash position.  If the sum of the expected future cash flows is
less then the carrying amount of those assets, the Company recognizes an
impairment loss based on the excess of the carrying amount over the fair value
of the assets.

WARRANTIES:

     The Company's products are generally subject to warranty and the Company
provides for the estimated future costs of repair, replacement or customer
accommodation in the accompanying statements of operations.

REVENUE RECOGNITION:

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

     Revenue from license or other technology arrangements is recognized upon
the completion and shipment of the product and/or documentation if the remaining
obligations are insignificant and collection of the resulting account receivable
is probable. Advance payments for product licenses with significant vendor
obligations are included in deferred revenue until the product and/or
documentation has been shipped and the remaining obligations become
insignificant. Revenue from best efforts joint development contracts is
generally recognized under the percentage of completion method.

                                      43

<PAGE>


1.    NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:

RESEARCH AND DEVELOPMENT:

     Research and development expenses are charged to operations as incurred.

INCOME TAXES:

     Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.

COMPUTATION OF NET INCOME (LOSS) PER SHARE:

     The Company adopted Statement of Financial Accounting Standard No. 128,
"Earnings Per Share" ("SFAS 128") during the fourth quarter of 1997 and,
accordingly, has restated all prior-period net income (loss) per share data
presented.  Pursuant to the requirements of SFAS 128, the Company has computed
and presented net income (loss) per share under two methods, basic and diluted.
Basic net income (loss) per share is computed by dividing income (loss)
available to common shareholders by the weighted average number of common shares
outstanding for the period.  Diluted net income (loss) per share is computed by
dividing income (loss) available to common shareholders, adjusted for
convertible preferred dividends and after-tax interest expense on convertible
debt, if any, by the sum of the weighted average number of common shares
outstanding and potential common shares (when dilutive).

STOCK COMPENSATION:

     The Company accounts for stock-based compensation using the intrinsic value
method.  The Company calculates the fair value of stock-based compensation and
discloses the pro forma impact of the value on net income (loss) and net income
(loss) per share in the footnotes to the financial statements.

RECLASSIFICATIONS:

     Certain amounts in the prior years' financial statements have been
reclassified to conform to the 1997 presentation. These reclassifications did
not change previously reported total assets, liabilities, shareholders' equity
(deficit), or net income.

INITIAL PUBLIC OFFERING:

     On November 20, 1995, the Company completed an initial public offering of
5,000,000 shares of common stock at a price of $9.00 per share.  Of these
shares, 4,260,000 were sold by the Company and 740,000 were sold by existing
shareholders.  On November 22, 1995 the Company's underwriters exercised an
option to purchase an additional 750,000 shares to cover over-allotments.  The
net proceeds realized by the Company from this offering were approximately $40.9
million after deducting underwriting discounts and commissions and expenses
payable by the Company related to the offering.

                                      44

<PAGE>


2.    INVENTORIES (IN THOUSANDS):
<TABLE>
<CAPTION>
                                  DECEMBER 31,
                            -----------------------
                              1996           1997
                            -------         -------
<S>                         <C>             <C>
     Raw materials          $     3         $   118
     Work in process          9,555           9,249
     Finished goods           4,937           2,542
                            -------         -------
                            $14,495         $11,909
                            -------         -------
                            -------         -------
</TABLE>


FURNITURE, FIXTURES AND EQUIPMENT, NET (IN THOUSANDS):

<TABLE>
<CAPTION>
                                     DECEMBER 31,
                               ------------------------     ESTIMATED
                                   1996          1997       USEFUL LIVES
                               ---------      ---------     ------------
<S>                            <C>            <C>           <C>
Equipment                      $  12,549      $  11,606     Four years
Design hardware                    3,450          2,273     Three years
Software                           1,095          1,755     Four years
Furniture and fixtures               605            714     Seven years
                               ---------      ---------
                                  17,699         16,348
Less accumulated depreciation      6,425          9,124
                               ---------      ---------
                               $  11,274      $   7,224
                               ---------      ---------
</TABLE>

     Depreciation expense was $1,837,000, $3,431,000, and $4,206,000 for 1995,
1996, and 1997, respectively.

4.    COMMITMENTS AND CONTINGENCIES:

     The Company leases its corporate facilities under noncancelable operating
leases that expire in 1998 and 2000. The leases require escalating monthly
payments over their terms and, therefore, periodic rent expense is being
recognized on a straight-line basis. Under the terms of the leases, the Company
is responsible for maintenance costs, including real property taxes, utilities
and other costs.  Rent expense was $212,000, $449,000, and $421,000 in 1995,
1996, and 1997, respectively.

Future minimum rental payments at December 31, 1997 are as follows (IN
THOUSANDS):

<TABLE>
<S>                    <C>
1998                   $  361
1999                      249
2000                       63
2001                        -
                       ------
                       $  673
                       ------
                       ------
</TABLE>

                              45

<PAGE>

COMMITMENTS AND CONTINGENCIES, CONTINUED:

     On January 3, 1996, Atmel Corporation ("Atmel") sued the Company in the
U.S. District Court for the Northern District of California. Atmel's complaint
alleges that the Company, by making, using and selling devices, is willfully
infringing five U.S. patents owned by or exclusively licensed to Atmel.
Regarding each of these five patents, Atmel seeks a judgment that the Company
has infringed the patent, an injunction prohibiting future infringement, treble
the amount of damages caused by the alleged infringement and attorney's fees,
costs and expenses.  On February 13, 1996, the Company filed an answer denying
Atmel's allegations and asserting affirmative defenses and counterclaims.  On
February 17, 1997, Atmel filed an action with the International Trade Commission
("ITC") against two suppliers of the Company's parts.  On March 18, 1997, the
ITC instituted an investigation against two suppliers of the Company's parts
based upon a complaint filed by Atmel.  This action involves certain of the
patents that Atmel has alleged the Company infringes.  The Company has
intervened as a party to that investigation.  Pursuant to indemnification
agreements with these suppliers, the Company has agreed to indemnify both to the
extent that it is required to do so under the agreements.  A hearing was held
on December 8, 1997 regarding this matter. There can be no assurance that the
Atmel complaint or other third party assertions will be resolved without
costly litigation.

     On June 25, 1997, a U.S. District Court Judge denied Atmel's motions for
summary judgment for certain patents mentioned in the above lawsuit.  The basis
for the denial was that not all elements of the claims of the patents were
infringed as required for a favorable ruling.  There is no trial date pending in
the District Court action at this time.

     On November 14, 1997, Intel Corporation ("Intel") sued the Company in the
U.S. District Court for the District of Delaware.  Intel's complaint alleges
that the Company, by making, using and selling devices, is willfully infringing
four U.S. patents owned by Intel.  Regarding each of these four patents, Intel
seeks a judgment that the Company has infringed on the patent, an injunction
prohibiting further infringement, an accounting of all damages caused by the
alleged infringement, treble the amount of damages caused by the alleged
infringement and attorney's fees, costs and expenses.  The Company believes that
the allegations in the Intel complaint are without merit and intends to
vigorously defend itself against such action.  The Federal Trade Commission has
initiated contact with the Company to gather information about the case.

     While the Company has accrued certain amounts for the estimated costs
associated with defending these matters, there can be no assurance that the
Atmel complaint or other third party assertions will be resolved without costly
litigation, in a manner that is not adverse to the Company's financial position,
results of operations, or cash flows, or without requiring royalty payments in
the future which may adversely impact gross margins.  No estimate can be made of
the possible loss or possible range of loss associated with the resolution of
these contingencies.

5.    SHAREHOLDERS' EQUITY:

 AUTHORIZED CAPITAL SHARES:

     In connection with the closing of the offering described in Note 1, all of
the Company's convertible preferred stock outstanding converted into an
aggregate of 9,475,000 common shares.  In November 1995, the Company's
shareholders amended and restated the Articles of Incorporation.  The Company's
authorized capital shares consist of 45,000,000 shares of common stock and
7,000,000 shares of preferred stock. None of the preferred stock has been
designated or is outstanding.  All of the Company's capital shares have no par
value.

                                 46

<PAGE>

SHAREHOLDERS' EQUITY, CONTINUED:

NET INCOME (LOSS) PER SHARE:

     A reconciliation of the numerator and the denominator of basic and diluted
income (loss) per share is as follows:

<TABLE>
<CAPTION>
                                                1995       1996       1997
                                               ------     -------   -------
<S>                                            <C>        <C>       <C>
Numerator - Basic:
   Net income (loss)                           $6,029     $12,351   ($6,924)
                                               ------     -------   -------
                                               ------     -------   -------
Denominator - Basic:
   Weighted average common stock outstanding    8,633      22,972    23,166
                                               ------     -------   -------
                                               ------     -------   -------

Basic net income (loss) per share               $0.70       $0.54    ($0.30)
                                               ------     -------   -------
                                               ------     -------   -------


Numerator - Diluted:
   Net income (loss)                           $6,029     $12,351   ($6,924)
                                               ------     -------   -------
                                               ------     -------   -------
Denominator - Diluted:
   Weighted average common stock outstanding    8,633      22,972    23,166
   Dilutive potential of common stock:
   Options and warrants                         2,503       2,142         -
   Preferred stock                              7,638           -         -
                                               ------     -------   -------
                                               18,774      25,114    23,166
                                               ------     -------   -------
                                               ------     -------   -------

Diluted net income (loss) per share             $0.32       $0.49    ($0.30)
                                               ------     -------   -------
                                               ------     -------   -------
</TABLE>

     Stock options to purchase 2,886,000 shares of common stock were outstanding
in 1997, but were not included in the computation of diluted loss per share
because the Company has a net loss in 1997.

     Stock options to purchase shares 45,966 of common stock were outstanding in
1996, but were not included in the computation of diluted net income per share,
because the exercise price was greater than the average market value of the
common shares.

     Stock options to purchase 164,000 shares of common stock were outstanding
in 1995, but were not included in the computation of diluted net income per
share, because the exercise price was greater than the average market value of
the common shares.

REPURCHASE OF COMMON STOCK:

     In July 1996 the Board of Directors authorized the purchase of up to
500,000 shares of the Company's stock in the open market.  Approximately 100,000
shares were repurchased under this authorization during August and September
1996 for an aggregate purchase price of approximately $723,000.

     In February 1997 the Board of Directors approved a stock repurchase program
whereby up to an aggregate of 1,000,000 shares of the Company's common stock may
be repurchased on the open market at prevailing market prices.  The repurchase
program ended June, 1997.  Approximately 491,500 shares were repurchased under
this authorization during the quarter ended June 30, 1997 for an aggregate
purchase price of $1,863,000 at prices ranging from $3.688 to $3.875 per share.

                                      47

<PAGE>

5.  SHAREHOLDERS' EQUITY, CONTINUED:

REPURCHASE OF COMMON STOCK, CONTINUED:

          In July 1997 the Board of Directors authorized a stock repurchase
program whereby 1,000,000 shares of the Company's common stock may be
repurchased on the open market at prevailing market prices.  The purchase
program ended December 15, 1997.  Approximately 233,500 shares were repurchased
under this authorization during the period ended December 15, 1997 for an
aggregate purchase price of $872,000 at prices ranging from $3.615 to $3.781 per
share.

EQUITY INCENTIVE PLAN:

     In 1990, the Company adopted a combined incentive and supplemental stock
option plan (the Option Plan) under which the Board of Directors could issue
options to purchase up to 4,000,000 shares of common stock to employees and
directors of and consultants to the Company and its affiliates.  In November
1995, the Company amended the Option Plan, restated it as the Equity Incentive
Plan and reserved an additional 2,000,000 shares of common stock for issuance
under the plan.

     Under the Equity Incentive Plan, the Board of Directors has the authority
to determine to whom options will be granted, the number of shares under option,
the option term and the exercise price.  The options generally are exercisable
beginning one year from date of grant and generally vest over periods ranging
from four to five years from the date of grant. The term of any options issued
under either plan may not exceed ten years from the date of grant.  At December
31, 1995 options to purchase approximately 636,000 shares of common stock were
exercisable at a weighted average exercise price of $0.17.  At December 31,
1996, options to purchase approximately 967,000 shares of common stock were
exercisable at a weighted average exercise price of $0.34.   At December 31,
1997, options to purchase approximately 1,132,000 shares of common stock were
exercisable at a weighted average exercise price of $0.67.  Activity under the
plans is as follows: (IN THOUSANDS, EXCEPT PER SHARE DATA):

<TABLE>
<CAPTION>
                                      AVAILABLE               OPTIONS OUTSTANDING                 WEIGHTED
                                         FOR         -------------------------------------        AVERAGE
                                        GRANT          SHARES     PRICE PER SHARE   AMOUNT    EXERCISE PRICE
                                     ----------      ---------    ---------------  -------    --------------
<S>                                  <C>             <C>          <C>              <C>        <C>
Balances, January 1, 1995                 980          2,555       $0.075-$0.20       $391         $0.15
     Granted                           (1,241)         1,241       $0.20-$16.50      2,005         $1.62
     Exercised                              -         (1,057)      $0.075-$0.20       (151)        $0.14
     Terminated                           132           (132)       $0.15-$0.20        (24)        $0.18
     Authorized                         2,000              -                  -          -              -
                                       ------         ------                        ------
Balances, December 31, 1995             1,871          2,607      $0.075-$16.50      2,221         $0.85
     Granted                             (541)           541      $6.875-$15.25      4,987         $9.22
     Exercised                              -           (509)      $0.075-$2.50       (106)        $0.21
     Terminated                           366           (366)      $0.15-$16.50     (3,695)       $10.10
                                       ------         ------                        ------
Balances, December 31, 1996             1,696          2,273        $0.15-$9.50      3,407         $1.50
     Granted                           (2,228)         2,228       $3.125-$6.00      8,422         $3.78
     Exercised                              -           (493)      $0.15-$3.125       (167)        $0.34
     Terminated                         1,207         (1,207)       $0.15-$9.50     (5,719)        $4.74
                                       ------         ------                        ------
Balances, December 31, 1997               675          2,801        $0.15-$6.00     $5,943         $2.12
                                       ------         ------                        ------
</TABLE>


                                       48

<PAGE>

5.   SHAREHOLDERS' EQUITY, CONTINUED:

     The Company has recorded for financial statement purposes a deferred charge
of $151,000, representing the difference between the exercise price and the
deemed fair value of the Company's common stock for 66,000 shares subject to
common stock options granted prior to September 30, 1995. The deemed fair value
for 566,400 and 252,000 shares of the Company's common stock granted on April 6,
1995 and August 31, 1995, respectively, at an exercise price of $0.25 and $1.00,
respectively, was determined to be $0.30 and $1.10, respectively. For grants on
other dates, during 1995, the Company determined the deemed fair value based
upon the Company's operating results and certain key events compared to the
deemed fair value as determined on April 6 and August 31, 1995. The deferred
stock compensation is being amortized to expense over the period during which
the options become exercisable, generally four to five years.

     On September 11, 1996, the Board of Directors authorized employees the
right to convert certain outstanding stock options into option grants with an
exercise price of $7.125 per share (the fair market value as of the date of the
Board's authorization).  The converted option grants vest on a date that is six
months after the date such installment would have vested had the option not been
amended by the employee exercising this conversion right.  Approximately 276,500
stock options were terminated at exercise prices ranging from $9.00 to $16.50,
and new options were issued pursuant to this program.

     On April 23, 1997 the Board of Directors approved an offer to employees
of the Company to reprice outstanding options granted prior to that date with
an exercise price above $3.125 per share (the "1997 Repricing Program").
Under the 1997 Repricing Program, as of April 28, 1997, 844,750 option grants
were converted into repriced option grants with an exercise price of $3.125
(based on the closing price as reported on the Nasdaq National Stock Market
on such date). As consideration for the grant of repriced options, optionees
are prohibited from exercising the repriced options for a period of three
months following the initial vest date of such repriced options.  The 1997
Repricing Program terminated on April 28, 1997.

DIRECTORS' OPTION PLAN:

     In October 1995, the Company adopted the Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") which became effective upon the effective
date of the Company's initial public offering. The Directors' Plan provided
for the automatic grant of options to purchase 24,000 shares of the Company's
common stock to non-employee directors of the Company upon the initial public
offering. It also provides for automatic grants upon new non-employee
directors being elected to the Board of Directors. The Directors' Plan also
provides for the grant of options to purchase up to an additional 6,000
shares annually thereafter. Options under the Directors' Plan vest over 48
months and the exercise price of options granted must equal or exceed the
fair market value of the Company's common stock on the date of grant. The
options expire ten years after the date of grant. The Company has reserved
150,000 shares of its common stock for issuance under the Directors' Plan.
During 1995, 72,000 such options were granted to outside directors at an
exercise price of $9.00 per share and were outstanding at December 31, 1995.
As of December 31, 1995, none of these options were exercisable.  During
1996, no options were granted and 24,000 options were terminated.  At
December 31, 1996, 48,000 options remained outstanding, of which 12,000 were
exercisable at a weighted-average exercise price of $9.00 per share.  During
1997, 37,000 options were granted and no options terminated.  At December 31,
1997, 85,000 options remained outstanding, of which 29,000 were exercisable
at a weighted-average exercise price of $6.52 per share.

                                      49

<PAGE>

5.   SHAREHOLDERS' EQUITY, CONTINUED:

EMPLOYEE STOCK PURCHASE PLAN:

     In October 1995, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") which became effective upon the effective date of the Company's
initial public offering. A total of 850,000 shares of common stock have been
reserved for issuance under the Purchase Plan. The Purchase Plan provides for
eligible employees to purchase shares of common stock at a price equal to 85% of
the fair market value of the Company's common stock on the date of the option
grant by withholding up to 10 percent of their annual base earnings.  In August
1997, the Company sold approximately 60,000 shares to employees for net proceeds
of approximately $226,000.  Compensation cost which would be recognized under
SFAS 123 for the fair value of the employees' purchase rights was estimated
using the Black-Scholes model with the following assumptions for 1997: dividend
yield of 0 percent; expected life of 1/2 year; expected volatility of 92%; and
risk-free interest rate of 5.7%.  The valuation per share of rights to purchase
stock under the Purchase Plan for these periods was $1.205 per share, for a
total valuation of approximately $65,000.

     For the following Purchase Plan period, from August, 1997 through January,
1998, the same model and assumptions were used.  Estimated contributions during
this period were $178,000. The valuation per share of rights to purchase stock
under the Purchase Plan for this period was estimated at $1.205 per share for a
total valuation of approximately $51,000.

STOCK COMPENSATION:

     The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for the Equity Incentive
Plan, the Directors' Option Plan or the Stock Purchase Plan.  Had compensation
cost for these plans been determined based on the fair value at the grant date
for the awards consistent with the provisions of SFAS 123, the Company's net
income (loss) and net income  (loss) per share for the years ended 1995, 1996
and 1997 would have been reduced to the pro forma amounts indicated below (IN
THOUSANDS):

<TABLE>
<CAPTION>
                                                    1995            1996           1997
                                                  -------        ---------      ---------
<S>                                               <C>            <C>            <C>
Pro forma net income (loss)                       $ 5,956        $  11,440      $ (8,857)
Pro forma net income (loss) per share - basic     $  0.69        $    0.50      $  (0.38)
Pro forma net income (loss) per share- diluted    $  0.32        $    0.46      $  (0.38)
</TABLE>

The weighted average fair value of options granted during 1997 and 1996 was
$3.14 and $0.41, respectively, per share.  For options granted during 1995, the
weighted average exercise price and weighted average fair value for options
granted when the fair market value exceeded the grant price were $0.46 and
$0.09, respectively, and the weighted average exercise price and weighted
average fair value for options granted when the fair market value equaled the
grant price were $5.42 and $2.17, respectively.

     The Company made option grants prior to 1995, the effective disclosure date
of SFAS 123.  Therefore the pro forma disclosures may not be representative of
the effects on reported net income (loss) or net income (loss) per share for
future years.

     The fair value of each option grant for both the Directors' Plan and the
Equity Incentive Plan is estimated on the date of grant using the Black-Scholes
multiple options pricing model with the following weighted average assumptions
by year:

<TABLE>
<CAPTION>
                                      1995           1996           1997
                                      ----           ----           ----
<S>                                <C>            <C>            <C>
     Risk-free interest rate       5.8 - 6.9%     5.2 - 6.0%     5.5 - 6.9%
     Expected term of option       2 years        2 years        2 years
     Expected volatility           0%             92%            92%
     Expected dividend yield       $ -            $ -            $ -
</TABLE>

                                      50

<PAGE>

5.   SHAREHOLDERS' EQUITY, CONTINUED:

STOCK COMPENSATION, CONTINUED:

     Option grants are priced at the date of grant.  The risk-free interest rate
range represents the low and high end of the range used at different points
during the year.

     The options outstanding and currently exercisable by exercise price under
the Equity Incentive Plan and the Directors' Option Plan at December 31, 1997
are as follows:

<TABLE>
<CAPTION>
                                 OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
                    --------------------------------------------------   -------------------------------
                                     WEIGHTED-AVERAGE
    RANGE OF             NUMBER          REMAINING     WEIGHTED-AVERAGE     NUMBER      WEIGHTED-AVERAGE
EXERCISE PRICES       OUTSTANDING    CONTRACTUAL LIFE   EXERCISE PRICE    OUTSTANDING    EXERCISE PRICE
---------------     ---------------- ----------------  ----------------   -----------   -----------------
<S>                 <C>              <C>               <C>                <C>           <C>
$0.15 - $0.20            827,000           8.14              $0.16           729,000         $0.16
$0.25 - $2.50            456,000           7.52              $0.65           247,000         $0.59
$3.125 - $3.125        1,269,000          11.22              $3.13           152,000         $3.13
$3.25 - $9.00            334,000          12.35              $5.62            33,000         $7.71
                       ---------                                           ---------
$0.15 - $9.00          2,886,000           9.89              $2.17         1,161,000         $0.85
                       ---------                                           ---------
</TABLE>


6.    INCOME TAXES:

     The components of the provision for (benefit from) income taxes reflected
in the statements of operations are as follows (IN THOUSANDS):

<TABLE>
<CAPTION>
                                   DECEMBER 31,
                       --------------------------------------
                          1995         1996           1997
                       --------      --------      ----------
<S>                    <C>           <C>           <C>
Current:
     Federal           $  1,136      $  7,464      $  (2,693)
     State                  500         1,349           (471)
     Foreign                  -           175            126
                       --------      --------      ---------
                          1,636         8,988         (3,038)
                       --------      --------      ---------
Deferred:
     Federal             (1,904)       (1,258)           240
     State                 (326)         (132)          (367)
                       --------      --------      ---------
                         (2,230)       (1,390)          (127)
                       --------      --------      ---------
                        $  (594)     $  7,598      $  (3,165)
                       --------      --------      ---------
                       --------      --------      ---------
</TABLE>

     Substantially all of the Company's revenue is taxable in the United States.
The principal items accounting for the difference between income taxes computed
at the U.S. statutory rate and the provision for income taxes reflected in the
statements of operations are as follows:

<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                  ----------------------------
                                                  1995         1996      1997
                                                  -----       -----     ------
<S>                                               <C>         <C>       <C>
United States statutory rate                       34.0%       34.0%    (34.0)%
State taxes, net of federal benefit                 6.1         6.1      (3.0)
Foreign taxes, net                                    -           -       1.0
Utilization of operating loss carryforwards       (30.9)          -         -
Utilization of tax credit carryforwards            (8.0)          -         -
Change in valuation allowance                     (16.2)          -         -
Other                                               4.1        (2.0)      4.6
                                                  -----       -----     -----
                                                  (10.9)%      38.1%    (31.4)%
                                                  -----       -----     -----
                                                  -----       -----     -----
</TABLE>

                                   51

<PAGE>

6.    INCOME TAXES, CONTINUED:

     The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset are as follows (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                                -------------------
                                                  1996        1997
                                                --------    --------
<S>                                             <C>         <C>
Capitalization of research and development
   and purchased software costs                 $   258     $   176
State taxes                                         273        -
Accrued expenses and allowances                   3,149       3,522
Depreciation                                       (227)       (463)
Other                                               167         512
                                                -------     -------
Net deferred tax asset                          $ 3,620     $ 3,747
                                                -------     -------
                                                -------     -------
</TABLE>

     Management has determined that no valuation allowance is required because,
although realization is not assured, the Company has sufficient taxable income
in carryback years to absorb a portion of the items deductible in the future for
federal tax purposes and anticipates that its estimated future taxable income
will allow the deferred tax asset for state tax purposes and the remainder of
the deferred tax asset for federal purposes to be fully realized in future
years.  The amount of the deferred tax asset that is realizable could be reduced
in the near term if actual results differ significantly from estimates of future
taxable income.

7.    BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION:

     The Company currently operates in one industry segment, the nonvolatile
memory class of the semiconductor memory market, for financial reporting
purposes. The Company's export product and license revenues are all denominated
in U.S. dollars and are summarized as follows (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                                -----------------------------
                                                 1995         1996     1997
                                                -------     -------  --------
<S>                                             <C>         <C>      <C>
Taiwan                                          $24,289     $36,597  $21,763
Japan                                             3,303      18,438   18,142
Hong Kong                                         3,281       8,701   11,832
Singapore                                           143       5,552    7,185
Other                                             2,749      10,990    7,897
                                                -------     -------  -------
                                                $33,765     $80,278  $66,819
                                                -------     -------  -------
</TABLE>


     No customer accounted for more than 10% of net revenues in 1995.

     On January 31, 1996, the Company acquired a 14% interest in a Japanese
company for approximately $939,000 paid in cash, which interest is carried at
cost in the other noncurrent assets category in the accompanying balance sheet.
The president of the Japanese company is a shareholder of the Company.  In 1996
and 1997 this customer accounted for 12.7% and 15.4%, respectively or
approximately $11,823,000 and $11,598,000, respectively of net revenues.  This
customer was the only customer that accounted for more than 10% of net revenues
in 1996 and 1997.

     Until August 1996, one member of the Board of Directors was the Chairman of
a subsidiary of Sanyo Electric Company, Ltd. ("Sanyo").  The Company purchased
$15,533,000 and $40,013,000 of raw materials from Sanyo in 1995 and 1996,
respectively.

     In June 1997 Dr. Ronald Chwang became a member of the Board of Directors.
Dr. Chwang is the president of Acer Capital America and managing general partner
of Acer Technology Venture Fund.  A related entity, Acer Corporation, is a
customer of the Company.  In 1997, this customer accounted for 6.0% or $4.5
million of net revenues.

                                     52

<PAGE>

8.    EMPLOYEE BENEFIT PLANS:

PROFIT SHARING PLAN:

     In April 1995, the Board adopted the Profit Sharing Plan under which
employees may collectively earn up to 10% of the Company's operating profit,
provided that both net earnings before interest income (expense), net and
provision for (benefit from) income taxes and operating profit are greater than
10% of sales. For purposes of the Profit Sharing Plan, "operating profit" is
product revenues less cost of revenues and less operating expenses. The sum paid
to any particular employee as profit sharing is a function of the employee's
length of service, performance and salary. The Company plans to pay profit
sharing sums, when available, to employees twice a year. For the years ended
December 31, 1995 and 1996, the Company expensed approximately $560,000 and
$1,785,000, respectively, under this plan.   No profit sharing was paid in 1997.

401(K) PLAN:

     In 1995, the Company adopted the SST 401(k) Tax Sheltered Savings Plan and
Trust (the Plan), as amended, which is intended to qualify under Section 401 of
the Internal Revenue Code of 1986. The Plan covers essentially all employees.
Each eligible employee may elect to contribute to the Plan, through payroll
deductions, up to 15% of their compensation, subject to certain limitations. The
Company, at its discretion, may make additional contributions on behalf of
employees. All employee contributions are 100% vested. No employer contributions
were made in 1995, 1996, or 1997.

9.   SUBSEQUENT EVENTS:

     In January 1998, the Board of Directors authorized a stock repurchase
program whereby 1,000,000 shares of the Company's common stock may be
repurchased on the open market at prevailing market prices.  The repurchase plan
is expected to continue until June, 1998, unless extended or shortened by the
Board of Directors.

     In January 1998, the Company entered into an agreement to purchase a 14
acre plot of land located in San Jose, California for $9.2 million in cash
including closing costs.  The Company plans to build its corporate headquarters
on this site, scheduled for completion in 1999.

     In March 1998, the Company signed options to renew two noncancelable
building leases for an additional five years.  Future minimum rental payments
increased by the following amounts as follows:

<TABLE>
<S>                      <C>
1998                     $  360
1999                        651
2000                        677
2001                        704
2002 and thereafter       1,041
                         ------
                         $3,433
                         ------
                         ------
</TABLE>


                                       53