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FORM 10-K

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(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, 2003

OR

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

FOR THE TRANSITION PERIOD FROM ___________ TO  _____________

Commission file number 0-26944

Silicon Storage Technology, Inc.(Exact name of Registrant as Specified in its Charter)



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

1171 Sonora CourtSunnyvale, California     94086(Address of Principal Executive Offices including Zip Code)

(408) 735-9110(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

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

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

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


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 Registrant's knowledge, in definitive proxy or information statements
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
SST as of June 30, 2003: $341,607,260  based on the closing price of SST's
Common Stock as reported on the Nasdaq National Market. Number of shares
outstanding of SST's Common Stock, no par value, as of the latest practicable
date, February 29, 2004: 95,845,663.Documents incorporated by reference: Exhibits previously filed as noted
on page 41. Part III - A portion of the Registrant's definitive proxy statement
for the Registrant's Annual Meeting of Shareholders, to be held on June 4, 2004, which will be filed with
the Securities and Exchange Commission.1
Silicon Storage Technology, Inc.

                                    Form 10-K

                      For the Year Ended December 31, 2003

                                TABLE OF CONTENTS

Part I.

PageItem 1.
Business3Item 2.
Properties10Item 3.
Legal Proceedings10Item 4.
Submission of Matters to a Vote of Security Holders10Part II.Item 5.
Market for the Registrant's Common Equity and Related Shareholder Matters11Item 6.
Selected Consolidated Financial Data12Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations13Item 7A.
Quantitative and Qualitative Disclosures About Market Risk33Item 8.
Consolidated Financial Statements and Supplementary Data34Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure34Item 9A.
Controls and Procedures35Part III.Item 10.
Directors and Executive Officers of the Registrant36Item 11.
Executive Compensation36Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters36Item 13.
Certain Relationships and Related Transactions36Item 14.
Principal Accountant's Fees and Services36Part IV.Item 15.
Exhibits, Financial Statement Schedule and Reports on Form 8-K37Index to Exhibits
37Signatures
40Index to Consolidated Financial Statements
412PART I

Item 1. Business
OverviewWe are a leading supplier of flash memory semiconductor devices for
the digital consumer, networking, wireless communications and Internet computing
markets.
We offer over 90 products based on our SuperFlash design and manufacturing
process technology. Our customers include: 3Com, Apple, Asustek, BenQ, Cisco,
Dell, First International Computer, or FIC, Gigabyte, Huawei, Hyundai, Infineon,
Intel, IBM, Inventec, Legend, LG Electronics, or LG, Motorola, National
Semiconductor, NEC, Nintendo, Nortel, Panasonic, Philips, Quanta, Samsung,
Sanyo, Seagate, Siemens, Sony, Sony Ericsson, Texas Instruments and VTech.
We also license our SuperFlash technology to leading semiconductor companies
including Analog Devices, Advanced Technology Materials, Inc., or ATMI, IBM,
Motorola, National Semiconductor, NEC, Oki, Samsung, Sanyo, Seiko-Epson, Taiwan
Semiconductor Manufacturing Co., Ltd., or TSMC, Toshiba and Winbond for
applications in semiconductor devices that integrate flash memory with other
functions on a single chip.
Our products are manufactured at leading wafer foundries and semiconductor
manufacturers including Shanghai Grace Semiconductor Manufacturing Corporation,
or Grace, Shanghai Huahong NEC Electronic Company, Limited, or Huahong NEC,
Samsung, Sanyo, Seiko-Epson, TSMC and Yasu Semiconductor Corporation, or Yasu.
We also work with Grace, Powerchip, Samsung, TSMC and Vanguard to develop new
technology for manufacturing our products.
The semiconductor industry has historically been cyclical, characterized by
periodic changes in business conditions caused by product supply and demand
imbalance.  When the industry experiences downturns, they often occur in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions.  These downturns are characterized by weak product
demand, excessive inventory and accelerated declines of selling prices.  In some
cases, downturns, such as the one we have experienced from late 2000 through
2002, have lasted for more than a year.  We began to experience a slow recovery
during 2002 through the first half of 2003.  During the second half of 2003,
demand for our products increased sharply and we began to see improvements in
the average selling prices of our products.  Our business could be further
harmed by industry-wide prolonged downturns in the future.
We derived 90.0% of our net product revenues during 2003 and 88.5% of our net
product revenues during 2002 from product shipments to Asia.  Additionally,
substantially all of our wafer suppliers and packaging and testing
subcontractors are located in Asia.
Industry Background
Semiconductor integrated circuits are critical components used in an
increasingly wide variety of applications, such as computers and computer
systems, communications equipment, consumer products and industrial automation
and control systems.  As integrated circuit performance has increased and size
and cost have decreased, the use of semiconductors in these applications has
grown significantly.
Historically, the demand for semiconductors has been driven by the PC market.
In recent years, growth in demand for semiconductors relating to PCs has been
outpaced by growth in demand for semiconductors that are used in digital
electronic devices for communication and consumer applications.  Communications
applications include digital subscriber line modems, cable modems, networking
equipment, wireless local area network, or WLAN, devices, cellular phones and
pagers.  Consumer-oriented digital electronic devices include digital cameras,
DVD players, MP3 players, personal data assistants, or PDAs, set-top boxes,
CD-ROM drives and Global Positioning System, or GPS.  In order to function
correctly, PCs and other digital electronic devices require program code. The
program code defines how devices function and affects how they are configured.
In PCs, this program code, called BIOS, initiates the loading of the PC's
operating system, which is then read from the disk drive.  In the case of other
digital electronic devices, the program code is stored in its entirety in
nonvolatile memory, mostly in flash memory.  As a result, virtually all digital
electronic systems that use a processor or controller for computing, consumer,3communications, and industrial applications require nonvolatile memory.

System manufacturers generally prefer nonvolatile memory devices that can be
reprogrammed efficiently in the system in order to achieve several important
advantages.  With re-programmable memory, manufacturers can cost effectively
change program codes in response to faster product cycles and changing market
specifications.  This in turn greatly simplifies inventory management and
manufacturing processes.  Re-programmable memory also allows the manufacturer to
reconfigure or update a system either locally or through a network connection.
In addition, in-system re-programmable devices can be used for data storage
functions, such as storage of phone numbers for speed dialing in a cellular
phone or captured images in a digital camera.
Flash memory is the predominant re-programmable nonvolatile memory device
used to store program code and data.  Flash memory can electrically erase select
blocks of data on the device much faster and more simply than with alternative
solutions, such as Erasable Programmable Read-Only Memory, or EPROM. Moreover,
flash memory is significantly less expensive than other re-programmable
solutions, such as Electrically Erasable Programmable Read-Only Memory, or
EEPROMs.  As a result, the demand for flash memory has grown dramatically.  This
growth has been fueled by the need for code sharing and other storage functions
in a wide array of digital devices.  According to a February 2004 Webfeet
Research report, worldwide flash memory revenue was $11.7 billion in 2003 and is
expected to grow to $15.9 billion in 2004 and $30.0 billion in 2008.
Our Solution
We are a leading supplier of flash memory semiconductor devices
addressing the needs of high volume electronic applications.  We believe our
proprietary flash memory technology, SuperFlash, offers superior performance to
other flash memory solutions.  In addition, we believe SuperFlash has benefits
that include high reliability, fast, fixed erase time, the ability to be scaled
to a smaller size and a low-cost manufacturing process.    We offer over 90
products based on our proprietary SuperFlash design and manufacturing process
technology.  These products are produced to meet the needs of a wide range of
digital consumer, networking, wireless communications and Internet computing
markets. Our product offerings include standard flash products, application
specific memory products, embedded controllers and mass data storage products.
Our memory devices have densities ranging from 256 Kbit to 32 Mbit and are
generally used for the storage of program code.  Our flash embedded
microcontrollers support concurrent flash read-while-write operations using
In-Application Programming, or IAP. Our mass data storage products are used for
storing images, music and other data in devices such as digital cameras and MP3
players.
Our Strategy
Our objective is to be the leading worldwide supplier of flash memory
devices and intellectual property for program code storage applications.  In
addition, we intend to leverage our SuperFlash technology to penetrate the
high-density mass data storage markets.  We intend to achieve our objectives by:
Maintaining a leading position in the program code storage market. We
believe that program code storage is an attractive segment of the flash memory
market for a number of reasons.  While experiencing continued growth in all
densities, solutions for program code storage applications benefit from the
increasing number and variety of digital electronic applications, longer product
lives and lower density requirements relative to mass data storage applications.
We believe that our proprietary SuperFlash technology is a superior product for
program code storage applications because we believe it offers superior
reliability and performance at a lower cost of manufacture than competing
solutions.
Continuing to enhance our leading flash memory technology. We believe
that our proprietary SuperFlash technology is less complicated, more reliable,
more scalable and more cost-effective than competing flash memory technologies.
Our ongoing research and development efforts are focused on enhancing our
leading flash memory technology by working closely with technology partners who
own wafer fabrication facilities with advanced lithographic and other
manufacturing equipment.
Introducing new products based on SuperFlash. We intend to introduce
new standard memory and various application specific products.  We continue to
develop and expand our ComboMemory family.  ComboMemory is a new class of
devices for wireless and portable applications that combine volatile and
nonvolatile memory on a single monolithic device or multiple dies in a common
package with optimized performance.  We also continue to expand our flash
microcontroller family and Advanced Technology Architecture, or ATA, controller
products.  In 2003, we continued to expand our family of serial flash products
which now includes densities of 512kbit, 1Mbit, 2Mbit 4Mbit

4and 8Mbit.  For PC
BIOS applications, we are expanding our LPC Firmware Flash product offering to
match all the densities offered in our Firmware Hub, or FWH, products.

Maintaining a leading position in licensing embedded flash technology.
We believe that SuperFlash technology is well-suited for embedded memory
applications, which integrate flash memory and other functions onto a monolithic
chip.  We intend to continue to license SuperFlash technology to semiconductor
manufacturers for embedded flash applications, to enhance our technology and to
facilitate integration at higher densities and higher levels of complexity.
Penetrating the high-density mass data storage market. Many digital
electronic devices currently being introduced, such as MP3 players, digital
cameras and PDAs, require high-density flash memory for storing music, pictures
and other data that require mass data storage capacities.  We believe that the
market for high-density flash memory is attractive based on its potential size
and growth.  We further believe that SuperFlash technology can readily scale to
address this market's needs as they change.  We intend to leverage our leading
technology and strong manufacturing partnerships to introduce high-density mass
data storage flash products and to compete effectively in this market.
*Leveraging our leading SuperFlash technology to become a premier provider
of wireless memory solutions.*We intend to leverage our leading SuperFlash
technology to provide products for wireless memory applications such as cellular
phones, GPS, wireless LAN, Bluetooth, data pagers and cordless telephones.  We
have designed low-density flash products for wireless modems, wireless LANs,
data pagers, Bluetooth modules and cordless telephones, and we are currently
designing higher density products for the cellular phone market.  We intend to
continue to develop our products to take advantage of the significant growth
opportunities in the wireless memory applications market with specific focus on
cellular phone, GPS, wireless LAN and Bluetooth applications.
Our Flash Products
Currently, we offer low and medium density devices (256 Kbit to 32
Mbit) that target a broad range of existing and emerging applications in the
digital consumer, networking, wireless communications and Internet computing
markets.  Our products are segmented largely based upon attributes such as
density, voltage, access speed, package and target application.  We divide our
products into three distinct reportable segments: the Standard Memory Product
Group, or SMPG, the Application Specific Product Group, or ASPG, and the Special
Product Group, or SPG.
SMPG. SMPG includes the Multi-Purpose Flash, or MPF, family, the
Multi-Purpose Flash Plus, or MPF+, family and the Many-Time Programmable, or
MTP, family. These product families allow us to produce products optimized for
cost and functionality to support a broad range of mainstream applications that
use nonvolatile memory products.  Effective January 1, 2003, we transferred
certain MTP products from SMPG to SPG.  Effective July 1, 2003, we transferred
the Small Sector Flash, or SSF, family from SMPG to SPG.  Accordingly, our
segment revenues and gross profit information have been reclassified for
presentation purposes as if transfers occurred as of January 1, 2001.
ASPG. ASPG includes Concurrent SuperFlash, Serial Flash, Firmware Hub,
or FWH and Low Pin Count, or LPC, flash products. These products are designed to
address specific applications such as cellular phones, hard disk drives and PCs.
ASPG also includes flash embedded controllers such as the ATA flash disk
controller.  Effective January 1, 2003, we transferred FlashFlex51
microcontroller products from ASPG to SPG.  Accordingly, our segment revenues
and gross profit information have been reclassified for presentation purposes as
if the transfer occurred as of January 1, 2001.
SPG. SPG includes ComboMemory, ROM/RAM Combos, SSF, MTP, FlashFlex51
microcontroller and other special flash products.  These products are used in
applications requiring low power and a small form factor such as cellular
phones, wireless modems, MP3 systems, pagers and digital organizers.  Effective
January 1, 2003, we transferred certain MTP products from SMPG to SPG and
certain flash microcontroller products from ASPG to SPG.  Effective July 1,
2003, we transferred the SSF family from SMPG to SPG.  Accordingly, our segment
revenues and gross profit information have been reclassified for presentation
purposes as if the transfer occurred as of January 1, 2001.
Financial information by reportable segment is contained in Note 10 of the
Notes to Consolidated Financial Statements and is incorporated herein by
reference.
Technology Licensing
We license our SuperFlash technology to semiconductor manufacturers
for use in embedded flash applications.  We5intend to increase our market share
by entering into additional license agreements for our SuperFlash process and
memory cell technology with leading wafer foundries and semiconductor
manufacturers.  We expect to continue to receive licensing fees and royalties
from these agreements.  We design our products using our patented memory cell
technology and fabricate them using our patented process technology.  As of
December 31, 2003, we held 78 patents in the United States relating to certain
aspects of our products and processes, with expiration dates ranging from 2010
to 2023, and have filed for several more.  In addition, we hold several patents
in Europe, Japan, Korea, Taiwan and Canada and have filed several foreign patent
applications in Europe, Japan, Korea, Taiwan and Canada.
Customers
We provide high-performance flash memory solutions to customers in
four major markets: digital consumer, networking, wireless communications and
Internet computing.  Our customers benefit by obtaining products that we believe
are highly reliable, technologically advanced and have attractive cost
structures. As a result of these highly desirable benefits, we have developed
relationships with many of the industry's leading companies.  In digital
consumer products, we provide memory components for consumer companies including
Bang & Olufsen, BenQ, Creative Technologies, Hitachi, Infineon, JVC, LG,
Nintendo, Panasonic, Philips, Samsung, Sanyo, Sharp, Sony, Sony Ericsson,
Thomson Multimedia, TiVo and Yamaha. In networking, we provide memory components
for 3Com, Cisco, E-tech, Intel and Nortel. In wireless communications, we
provide products for companies including Bang & Olufsen, LG, Maxon, RTX,
Vtech and Wistron.  In Internet computing, we provide a wide array of memory
components for companies including Asustek, Compal, Dell, FIC, Gigabyte, HP,
IBM, Inventec, LG, Mitac, Quanta, Samsung, Trigem and Wistron.
The following tables illustrate the geographic regions in which our customers
or licensees operate based on the country to which the product is shipped by us
or the logistics center or license revenue is generated.

Year ended December 31,
                                              ---------------------------------------
                                                  2001          2002         2003
                                              ------------  ------------  -----------
United States............................... $     28,592  $     21,871  $    19,600
Europe......................................       21,332        10,599        9,957
Japan.......................................       23,549        28,465       27,575
Korea.......................................       22,039        30,321       25,214
Taiwan......................................      110,847        91,219      109,254
China (including Hong Kong).................       57,146        70,609       76,107
Other Asian countries.......................       28,157        21,574       27,334
Rest of world...............................        2,368            --           --
                                              ------------  ------------  -----------
                                             $    294,030  $    274,658  $   295,041
                                              ============  ============  ===========


Sales and Distribution
We sell a majority of our products to customers in Asia through our
manufacturers' representatives.  We distribute a majority of our products
through our logistics center.  We also sell and distribute our products in North
America and Europe through manufacturers' representatives and distributors.  Our
manufacturer representative and distributor relationships are generally
cancelable, with reasonable notice, by the other party or us.

6Applications
As the Digital Consumer, Networking, Wireless Communications and
Internet Computing industries continue to expand and diversify, new applications
are likely to be developed. We believe our products are designed to address this
expanding set of applications:

Wireless                  Internet
         Digital Consumer                      Networking         Communications              Computing
----------------------------------------- -------------------- -------------------- ------------------------------
TV Replayer          Set-top Box          VoIP                 Cellular Phone       Information Appliance
Digital TV           CD-ROM Drive         DSL Modem            Data Pager           Notebook PC
Digital Camera       CD-RW Drive          Cable Modem          Cordless             Desktop PC
Digital Camcorder    DVD-ROM Drive        V.90/56K Modem        Telephone           Hard Disk Drive
DVD Player           DVD-RAM Drive        Wireless LAN         GPS on Cellular      LCD Monitor
DVD Recorder         DVD-RW Drive         Network               Phone               Palm PC
VCD Player           Web Browser           Interface Card      Bluetooth            X-PC
MP3 Player           Hand-held GPS        Router/Switch         Applications        Server
Video Game           Electronic Toys                           Wireless Modems      Graphics Card
PDA                  Smart Cards                                                    Printer
Electronic Book      Memory Cards                                                   Copier/Scanner
Remote Controller    Electronic                                                     Bar Code Scanner
                      Organizer                                                     Thin Client System

Manufacturing
We purchase wafers and sorted die from semiconductor manufacturing
foundries, have this product shipped directly to subcontractors for packaging,
testing, and finishing, and then ship the final product to our customers.
Virtually all of our subcontractors are located in Asia.
Wafer and Sorted Die. During 2003, our major wafer fabrication
foundries were TSMC, Sanyo, Samsung and Seiko-Epson.  In 2003, wafer sort, which
is the process of testing individual die on silicon wafer, was performed at Acer
Testing, Inc., King Yuan Electronics Company, Limited, or KYE, Lingsen, Samsung,
Sanyo, Seiko-Epson and TSMC.  Although capacity is not guaranteed, under these
arrangements, we generally receive preferential treatment regarding wafer
pricing and capacity.  In order to obtain, on an ongoing basis, an adequate
supply of wafers, we have considered and will continue to consider various
possible options, including equity investments in foundries in exchange for
guaranteed production volumes, the formation of joint ventures to own and
operate foundries and the licensing of our proprietary technology.  In the first
quarter of 2001, we invested $50.0 million in Grace Semiconductor Manufacturing
Corporation, or GSMC, the parent company of Grace.  Grace is located in
Shanghai, People's Republic of China.  GSMC is funded mostly by investors who
reside outside of China.  Grace began to manufacture some of our products during
2003.  In March 2004, we committed to invest an additional $33.2 million in GSMC
during 2004.
Packaging, Testing and Finishing. In the assembly process, the
individual dies are separated and assembled into packages.  Following assembly,
the packaged devices require testing and finishing to segregate conforming from
nonconforming devices and to identify devices by performance levels.  Currently,
all devices are tested and inspected pursuant to our quality assurance program
at our domestic or international subcontracted test facilities or at our test
facilities in Sunnyvale, California before shipment to customers.  Certain
facilities currently perform consolidated assembly, packaging, test and
finishing operations all at the same location.  During 2003, most subcontracted
facilities performing the substantial majority of our operations were in Taiwan.
The subcontractors with the largest amount of our activity are KYE, Lingsen, and
Powertech Technology, Incorporated, or PTI. We hold equity investments in three
subcontractors: Apacer Technology, Inc., or Apacer, KYE and PTI.  For newly
released products, the initial test and finishing activities are performed at
our Sunnyvale facility.
Research and Development
We believe that our future success will depend in part on the
development of next generation technologies with reduced feature size.  During
2001, 2002 and 2003, we spent $50.4 million, $47.1 million and $43.1 million,
respectively, on research and development.  Our research efforts are focused on
process development and product development.  Our research strategy is to
collaborate with our partners to advance our technologies.  We work7

simultaneously with several partners on the development of multiple generations
of technologies.  In addition, we allocate our resources and personnel into
category-specific teams to focus on new product development.  From time to time
we invest in, jointly develop with, license or acquire technology from other
companies in the course of developing products.

Competition

The semiconductor industry is intensely competitive and has been
characterized by price erosion, rapid technological change and product
obsolescence.  We compete with major domestic and international semiconductor
companies, many of whom have substantially greater financial, technical,
marketing, distribution, manufacturing and other resources than us.  Our low to
medium density memory products, sales of which presently account for
substantially all of our revenues, compete against products offered by Advanced
Micro Devices, or AMD, Atmel, Intel, Macronix, STMicroelectronics and Winbond.
Our high-density memory products, if developed, may compete with products
offered by AMD, Atmel, Fujitsu, Intel, Mitsubishi, Samsung, Sharp Electronics
and Toshiba.  In addition, competition may come from alternative technologies
such as ferroelectric random access memory device, or FRAM, technology.

The competition in the existing markets for some of our product families,
such as the FlashFlex51 microcontroller product family and the ADC, ADM, and
CompactFlash Card product families, is extremely intense.  We compete
principally with major companies such as Atmel, Intel, Microchip Technology,
Motorola and Philips in the microcontroller market and with Hitachi, M-Systems
and SanDisk in the memory card and memory module market.  We may, in the future,
also experience direct competition from our foundry partners.  We have licensed
to our foundry partners the right to fabricate certain products based on our
proprietary technology and circuit design, and to sell such products worldwide,
subject to royalty payments back to us.

We compete principally on price, reliability, functionality and the ability
to offer timely delivery to customers.  While we believe that our low and medium
density products currently compete favorably on the basis of cost, reliability
and functionality, it is important to note that our principal competitors have a
significant advantage over us in terms of greater financial, technical and
marketing resources.  Our long-term ability to compete successfully in the
evolving flash memory market will depend on factors both within and beyond our
control, including access to advanced process technologies at competitive
prices, successful and timely product development, wafer supply, product
pricing, actions of our competitors and general economic conditions.

Employees

As of December 31, 2003, we employed 488 individuals on a full-time
basis, all but 103 of whom reside in the United States.  Of these 488 employees,
79 were employed in manufacturing support, 205 in engineering, 93 in sales and
marketing and 111 in administration, finance and information technology.  Our
employees are not represented by a collective bargaining agreement, nor have we
ever experienced any work stoppage related to strike activity. We believe that
our relationship with our employees is good.

Executive Officers

The following table lists the names, ages and positions of our
executive officers as of December 31, 2003. There are no family relationships
between any executive officer of SST.  Executive officers serve at the
discretion of our board of directors.

|Name                                                                            | Age                  | Position                                                                                                                                                                                                                                                                                                                                                                                               
|------------------------------------------------------------------------------- | -------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Bing Yeh 
Yaw Wen Hu
Derek Best
Michael Briner
Isao Nojima
Paul Lui
Jack K. Lai | 53
54
53
56
59
53
49 | President and Chief Executive Officer and Director
Senior Vice President, Operations and Process
Development and Director
Senior Vice President, Sales and Marketing
Senior Vice President, Application Specific Product Group
Vice President, Standard Memory Product Group
Vice President, Special Product Group
Vice President, Finance and Administration and
Chief Financial Officer and Secretary

8

---

__________

Bing Yeh, one of our co-founders, has served as our President and Chief
Executive Officer and has been a member of our board of directors since our
inception in 1989. Prior to that, 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 a M.S. and a
B.S. in Physics from National Taiwan University.

Yaw Wen Hu, Ph.D., joined us in July 1993 as Vice President,
Technology Development. In 1997, he was given the additional responsibility of
wafer manufacturing and, in August 1999, he became Vice President, Operations
and Process Development.  In January 2000, he was promoted to Senior Vice
President, Operations and Process Development. Dr. Hu has been a member of our
board of directors since 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.  Dr.
Hu holds a B.S. in Physics from National Taiwan University and a M.S. in
Computer Engineering and a Ph.D. in Applied Physics from Stanford University.

Derek Best joined us in June 1997 as Vice President of Sales and
Marketing.  In June 2000 he was promoted to Senior Vice President, Sales &
Marketing.  Prior to joining SST he worked for Micromodule Systems, a
manufacturer of high-density interconnect technology, as vice president
marketing and sales world wide from 1992 to 1996.  From 1987 to 1992 he was a
co-founder and owner of Mosaic Semiconductor, a SRAM and module semiconductor
company.  Mr. Best holds an Electrical Engineering degree from Portsmouth
University in England.

Michael Briner joined us as Vice President, Design Engineering in
November 1997, and became Vice President, Products during 1999.  He was promoted
to Senior Vice President of Application Specific Product Group in February 2001.
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.

Isao Nojima joined us as Vice President, Memory Design and Product
Engineering in March 1993 and became Vice President, Advanced Development in
July 1997.  He became Vice President of Standard Memory Product Group in July
2000.  From 1990 to 1993, Mr. Nojima served as director of design engineering of
Pioneer Semiconductor Corporation, now called 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 a
M.S. in Electrical Engineering from Osaka University in Japan.

Paul Lui joined us as Vice President and General Manager of the Linvex
Product Line in June 1999 and became Vice President, Special Product Group in
June 2001.  From 1994 to 1999, he was the president and founder of Linvex
Technology Corporation. From 1987 to 1994, he was the president and chief
executive officer of Macronix, Inc. From 1981 to 1985, he served as group
general manager at VLSI Technology, Inc. where he was responsible for
transferring that company's technology to Korea. In addition, Mr. Lui has held
senior engineering positions at the Synertek Division of Honeywell and McDonnell
Douglas. Mr. Lui holds a M.S.E.E. degree from University of California, Berkeley
and a B.S. degree in Electrical Engineering and Mathematics from California
Polytechnic State University, San Luis Obispo.

Jack Lai joined us as Chief Financial Officer and Vice President,
Finance and Administration and Secretary in November 2003.  Before joining SST,
he was vice president and chief financial officer of Aplus Flash Technology, a
memory design and manufacturing company, from 2001 to 2003.  Prior to this, Mr.
Lai had served as vice president of operations and finance and chief financial
officer at WireX Communications, Inc., a software system developer, from 2000 to
2001 and vice president and chief financial officer at Genoa Electronics Corp.,
a manufacturer of computer and related systems, from 1998 to 1999.  Mr. Lai
holds M.B.A.'s from San Jose State University in San Jose, CA and Culture
University in Taipei, Taiwan.  He also holds a B.A. in Business Administration
from Tamkang University in Taipei, Taiwan.

9

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Available Information

We were incorporated in California in 1989.  We make available free
of charge on or through our Internet website,

Item 2. Properties

As of January 31, 2004, we leased six major facilities totaling 188
thousand square feet in Sunnyvale, California in which our executive offices,
principal manufacturing engineering, research and development and testing
facilities are located. In Sunnyvale we currently occupy five of these
facilities totaling 168 thousand square feet. The leases on five facilities
expire in 2005 and the lease on one facility expires in 2010.  We also have 24
thousand square feet of office space in various international sites with
expiration dates ranging from 2004 to 2012.  We believe these facilities are
adequate to meet our needs for at least the next 12 months.

Item 3. Legal Proceedings

In January 1996, Atmel Corporation filed suit against the SST alleging
that we infringed six U.S. patents.  We successfully moved for summary judgment
on two of the six asserted patents in September 1997.  In January 2001, Atmel
withdrew its allegation that we infringed another patent.  On May 7, 2002, a
judgment was entered against us in the amount of $36.5 million.  We appealed the
judgment on July 16, 2002.  On September 12, 2003 the Court of Appeals upheld
the jury's verdict.  On November 18, 2003 the Court of Appeals denied our
request for a rehearing, and in December 2003 we paid Atmel $37.8 million to
satisfy the judgment plus statutory interest accrued during the appeals.  The
payment was recorded as other operating expense in the year ending December 31,
2003.

The other patent remaining in the case, the '903 patent, expired in September
2001.  The trial court has held that, if it is found to be valid, certain of our
products infringed that patent. Trial to determine whether the '903 patent is
invalid began on July 29, 2002.  On August 5, 2002 the jury announced that it
was unable to reach a verdict on our invalidity defense, and a mistrial was
declared.  Atmel requested a new trial, but the Court stayed the matter until
after our appeal of the earlier judgment is resolved.  At Atmel's request, the
Court has directed the parties to conduct a settlement conference before a
Magistrate Judge.  That settlement conference is scheduled for April 14, 2004.
If the parties are unable to reach a settlement agreement, the Court may set a
date for a new trial.  The impact related to the outcome of the remaining patent
is undeterminable at this time.

From time to time, we are also involved in other legal actions arising in the
ordinary course of business. We have incurred certain costs while defending
these matters.  There can be no assurance the remaining Atmel complaint or other
third party assertions will be resolved without costly litigation, in a manner
that is not adverse to our financial position, results of operations or cash
flows or without requiring royalty payments in the future which may adversely
impact gross margins. No estimate can be made of the possible loss or possible
range of loss associated with the resolution of these contingencies.  As a
result, no losses have been accrued in our financial statements as of December
31, 2003.

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.

10

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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 our Common Stock is the Nasdaq National
Market. The only class of our securities that is traded is our Common Stock. Our
Common Stock has traded on the Nasdaq National 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 National Market. These prices do not include retail mark-ups,
markdowns, or commissions. The closing sales price of our Common Stock on
December 31, 2003, the last trading day in 2003, was $11.00.





|2002                                                          |                                                                                                              | High Close                         | Low Close                     
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ---------------------------------- | ------------------------------
|First Quarter:
Second Quarter:
Third Quarter:
Fourth Quarter: | January 1 - March 31, 2002
April 1 - June 30, 2002
July 1 - September 30, 2002
October 1 - December 31, 2002 | $ 11.25
   12.51
    7.32
    7.50 | $ 6.52
   7.80
   3.91
   2.90
|2003                                                          |                                                                                                              | High Close                         | Low Close                     
|First Quarter:
Second Quarter:
Third Quarter:
Fourth Quarter: | January 1 - March 31, 2003
April 1 - June 30, 2003
July 1 - September 30, 2003
October 1 - December 31, 2003 | $  4.78
    4.80
  10.00
   14.11  | $ 2.25
   2.31
   4.19
   9.32
|2004                                                          |                                                                                                              | High Close                         | Low Close                     
|First Quarter:                                                | January 1 - February 27, 2004                                                                                | $13.46                             | $11.16                        

Approximate Number of Equity Security
Holders

As of December 31, 2003, there were approximately 278
record holders of our Common Stock.

Dividends

We have never paid a cash dividend on our Common Stock and we intend
to continue to retain earnings, if any, to finance future growth. Accordingly,
we do not anticipate the payment of cash dividends to holders of Common Stock in
the foreseeable future.

Equity Compensation Plan Information

Information regarding our equity compensation plans will be contained
in our definitive Proxy Statement with respect to our Annual Meeting of
Shareholders under the caption "Compensation - Equity Compensation Plan
Information," and is incorporated by reference into this report.  All of our
equity compensation plans have been approved by our shareholders.

11

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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.  Certain amounts in our prior
years' consolidated financial statements have been reclassified to conform to
the current year presentation.  These reclassifications have no impact on our
previously reported net income (loss).

`Year ended December 31,
                                               -----------------------------------------------------
                                                 1999       2000       2001       2002       2003
                                               ---------  ---------  ---------  ---------  ---------
                                                      (in thousands, except per share data)

Consolidated Statements of Operations Data:
Net revenues:
    Product revenues - unrelated parties..... $  99,769  $ 408,708  $ 168,593  $ 100,620  $  86,549
    Product revenues - related parties.......    18,473     66,608     90,025    143,401    169,980
    License revenues.........................     6,552     14,945     35,412     30,637     38,512
                                               ---------  ---------  ---------  ---------  ---------
      Total net revenues.....................   124,794    490,261    294,030    274,658    295,041
Cost of revenues.............................    94,652    264,139    248,161    206,246    218,775
                                               ---------  ---------  ---------  ---------  ---------
Gross profit.................................    30,142    226,122     45,869     68,412     76,266
                                               ---------  ---------  ---------  ---------  ---------
Operating expenses:
    Research and development.................    18,199     41,535     50,380     47,069     43,144
    Sales and marketing......................    10,576     27,968     26,794     25,498     22,272
    General and administrative...............     3,800     14,966     17,855     17,097     14,398
    Other....................................     2,011      3,911      1,346         --     37,849
                                               ---------  ---------  ---------  ---------  ---------
      Total operating expenses...............    34,586     88,380     96,375     89,664    117,663
                                               ---------  ---------  ---------  ---------  ---------
Income (loss) from operations................    (4,444)   137,742    (50,506)   (21,252)   (41,397)
Interest and other income....................       730     10,510      7,350      3,197      2,784
Interest expense.............................      (214)      (691)      (338)      (214)      (138)
Impairment of equity investments.............        --         --     (3,274)    (7,757)        --
                                               ---------  ---------  ---------  ---------  ---------
Income (loss) before provision for
    (benefit from) income taxes..............    (3,928)   147,561    (46,768)   (26,026)   (38,751)
Provision for (benefit from) income taxes....        88     41,813    (17,772)   (10,931)    26,416
                                               ---------  ---------  ---------  ---------  ---------
Net income (loss)............................ $  (4,016) $ 105,748  $ (28,996) $ (15,095) $ (65,167)
                                               =========  =========  =========  =========  =========
Net income (loss) per share - basic.......... $   (0.06) $    1.23  $   (0.32) $   (0.16) $   (0.69)
                                               =========  =========  =========  =========  =========
Net income (loss) per share - diluted........ $   (0.06) $    1.13  $   (0.32) $   (0.16) $   (0.69)
                                               =========  =========  =========  =========  =========

Consolidated Balance Sheet Data:
Total assets................................. $  88,806  $ 512,590  $ 446,760  $ 440,606  $ 396,361
                                               =========  =========  =========  =========  =========
Long-term obligations........................ $     446  $     279  $   1,793  $   1,873  $   1,423
                                               =========  =========  =========  =========  =========
Shareholders' equity......................... $  41,015  $ 416,635  $ 391,411  $ 381,851  $ 331,497
                                               =========  =========  =========  =========  =========`

12

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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. All forward-looking statements included in this document are
based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our actual results
could differ materially from those discussed. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below under the heading "Business Risks", as well as those discussed elsewhere
in this report.

Overview

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

The semiconductor industry has historically been cyclical, characterized by
periodic changes in business conditions caused by product supply and demand
imbalance.  When the industry experiences downturns, they often occur in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions.  These downturns are characterized by weak product
demand, excessive inventory and accelerated declines of selling prices.  In some
cases, downturns, such as the one we experienced from late 2000 through 2002,
have lasted for more than a year.  We began to experience a slow recovery during
2002 through the first half of 2003.  During the second half of 2003, demand for
our products increased sharply and we began to see improvements in the average
selling prices of our products.  Our business could be further harmed by
industry-wide prolonged downturns in the future.

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

We derived 80.7%, 88.5% and 90.0% of our net product revenues during 2001,
2002 and 2003, respectively, from product shipments to Asia. Additionally,
substantially all of our wafer suppliers and packaging and testing
subcontractors are located in Asia.

Our top ten end customers, which excludes transactions through stocking
representatives and distributors, accounted for 19.3%, 31.5% and 37.7% of our
net product revenues in 2001, 2002 and 2003, respectively.

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

Since March 2001, we have been increasing our out-sourcing activities for our
customer service logistics to support our customers.  Silicon Professional
Technology Ltd., or SPT, supports our customers in Taiwan, China and other
Southeast Asia countries.  SPT provides planning, warehousing, delivery,
billing, collection and other logistic functions for us in these regions.  SPT
is a wholly-owned subsidiary of one of our stocking representatives in Taiwan,
Professional Computer Technology Limited, or PCT.  Please see a description of
our relationship with PCT under "Related Party Transactions."  Products shipped
to SPT are accounted for as our inventory held at our logistics center, and
revenue is recognized when the products have been delivered and are considered
as a sale to our end customers by SPT. For the years ended December 31, 2001,
2002 and 2003, SPT serviced end customer sales accounting for 29.7%, 57.4% and
64.2% of our net product revenues recognized. As of December 31, 2001, 2002 and
2003, SPT represented 48.8%, 68.5% and 73.4% of our net accounts receivable,
respectively.

We ship products to, and have accounts receivable from, OEMs, ODMs, CEMs,
stocking representatives, distributors, and our logistics center. Our stocking
representatives, distributors and logistics center reship our products to our
end customers, including OEMs, ODMs, CEMs and end users.  Shipments, by us or
our logistic center, to our top three stocking representatives for reshipment
accounted for 10.9%, 16.9% and 29.9% of our product shipments in 2001, 2002 and
2003, respectively.  In addition, the same three stocking representatives
solicited sales, for which they received a commission, for 27.5%, 41.3% and
32.8% of our shipments to end users in 2001, 2002 and 2003, respectively.

13

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Results of Operations: Years Ended December 31, 2001, 2002 and 2003

Net Revenues

Net revenues were $295.0 million in 2003, $274.7 million in 2002 and
$294.0 million in 2001.  Net revenues for 2003 increased compared to 2002 due to
increased unit shipments and increased license and royalty revenues, offset by
decreased average selling prices.  Net revenues for 2002 decreased compared to
2001 primarily due to decreased average selling prices for our products and
decreased license and royalty revenues, partially offset by increased unit
shipments.  Average selling prices fluctuate due to a number of factors
including the overall supply and demand for our products in the marketplace,
maturing product cycles and changes in general economic conditions.

Product Revenues. Product revenues were $256.5 million in 2003, $244.0
million in 2002 and $258.6 million in 2001.  Products revenues for 2003
increased compared to 2002 primarily due to increased unit shipments by 23.5%,
partially offset by decreased average selling prices by 15.7%.  The decrease
from 2001 to 2002 was primarily due to decreased average selling prices by
36.5%, partially offset by increased unit shipments of our products by 31.6%.
Shipping volumes fluctuate due to overall industry supply and demand.

License Revenues. Revenues from license fees and royalties were $38.5
million in 2003, $30.6 million in 2002 and $35.4 million in 2001.  The increase
from 2002 to 2003 related primarily to increased royalty payments from our
existing licensees and up-front license fees from our new licensees.  During
2000 and 2001, Winbond Electronics of Taiwan paid us $10.4 million and $20.0
million, respectively, under a settlement agreement.  No further back royalty
payments were required after 2001 under this legal settlement.  Although the
settlement payments have ceased, Winbond continues to pay royalties under the
license agreement.  The decrease from 2001 to 2002 was primarily due to the
termination of license fees received as part of our legal settlement with
Winbond during 2001, offset by increases in upfront license fees and royalty
payments received from our licensees during 2002.  We anticipate that license
revenues may fluctuate significantly in the future.

Gross Profit

Gross profit was $76.3 million, or 25.8% of net revenues, in 2003, $68.4
million, or 24.9% of net revenues, in 2002, and $45.9 million, or 15.6% of net
revenues, in 2001.  The increase in gross profit in 2003 when compared to 2002
is primarily due to increased unit shipments of 23.5%, increased technology
licensing revenues of  $7.9 million and improved manufacturing costs as a result
of transitions to more advanced process technologies, offset by decreased
average selling prices by 15.7%.  The increase in gross profit in 2002 when
compared to 2001 is due primarily to a $72.2 million inventory valuation
adjustment recorded in 2001, offset by decreased average selling prices of 36.5%
and a decrease in technology licensing revenues of $4.8 million. Product gross
margin was 14.7% in 2003, compared to 15.5% in 2002 and 4.0% in 2001.  The
decrease in product gross margin in 2003 when compared to 2002 was primarily due
to decreased average selling prices of 15.7%, offset by improved manufacturing
costs as a result of transitions to more advanced process technologies.  The
increase in product gross margin from 2001 to 2002 primarily relates to a $72.2
million inventory valuation adjustment recorded in 2001.  Gross margin in 2002
was reduced by decreased average selling prices of our products by 36.5%.  For
other factors affecting our gross profit, please also see "Business Risks - We
incurred significant inventory valuation adjustments in 2001, 2002 and 2003 and
we may incur additional significant inventory valuation adjustments in the
future."

Operating Expenses

Operating expenses consist of research and development, sales and
marketing, general and administrative and other expenses.  Operating expenses
were $117.7 million, or 39.9% of net revenues, in 2003, $89.7 million or 32.6%
of net revenues, in 2002, and $96.4 million, or 32.8% of net revenues, in 2001.
The increase in 2003 from 2002 was primarily due to the Atmel judgement of $37.8
million, offset by decreases of $2.8 million in bad debt expense, $1.7 million
in mask, wafer and evaluation part expenses, $1.5 million in legal fees, $1.1
million in commission expense and $1.1 million in depreciation expense.  The
decrease from 2001 to 2002 was primarily due to decreases of $2.3 million in
wafer and mask expenses, $2.5 million in non-production engineering material
expenses and $1.9 million in commissions expenses.  We anticipate that we will
continue to devote substantial resources to research and development, sales and
marketing and to general and administrative activities, and that these expenses
will increase in dollars.

Research and development. Research and development expenses include
costs associated with the development of new products, enhancements to existing
products, quality assurance activities and occupancy costs.  These costs

14

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consist
primarily of employee salaries and benefits and the cost of materials such as
wafers and masks.  Research and development expenses were $43.1 million, or
14.6% of net revenues, in 2003, $47.1 million, or 17.1% of net revenues, in
2002, and $50.4 million, or 17.1% of net revenues, in 2001.  Research and
development expenses decreased by 8.3% from 2002 primarily due to decreases in
wafer, mask and evaluation part expenses of $1.7 million due to cost reduction
measures and the completion of certain technology projects during 2003,
headcount related expenses of  $1.4 million due to a reduction in headcount and
depreciation expense of $761 thousand.  Research and development expenses
decreased from 2001 to 2002 by 6.6% primarily due to decreases in wafer and mask
expenses of $2.3 million due to cost reduction measures during 2002,
non-production engineering material expenses of $2.5 million related to new product
testing and outside service expenses of $910 thousand, offset by increased
headcount and related costs of $2.1 million due to increased headcount and new
building costs.  We expect research and development expenses
will increase in dollars.

Sales and marketing. Sales and marketing expenses consist of
commissions, headcount and related costs, as well as travel, entertainment and
promotional expenses.  Sales and marketing expenses were $22.3 million, or 7.5%
of net revenues, in 2003, $25.5 million, or 9.3% of net revenues, in 2002, and
$26.8 million, or 9.1% of net revenues, in 2001.  The decrease in sales and
marketing expenses from 2002 to 2003 by 12.7% was primarily due to decreases in
headcount related costs of $1.7 million due to the transfer of some sales
personnel to Asia and decreased facility and information technology related
expenses, a decrease in commission expense of $1.1 million due to reduced
commission rates and decreased marketing expenses of $849 thousand, offset by
increased logistic center fees of $652 thousand due to increased activity
through the logistic center.  The decrease in sales and marketing expenses from
2001 to 2002 by 4.8% was primarily due to decreased commissions expenses of $1.9
million as a result of decreased product revenues and decreased marketing
expenses of $692 thousand, offset by increased headcount and related costs of
$1.2 million due to increased in sales and marketing headcount and a $510
thousand expense recorded for a bonus to our senior vice president of sales and
marketing. We expect sales and marketing expenses will
increase in dollars as we continue to expand our sales and marketing efforts.
In addition, fluctuations in revenues will cause fluctuations in sales and
marketing expenses as it impacts our commission expense.

General and administrative. General and administrative expenses
consist of salaries and related costs for administrative, executive and finance
personnel, recruiting costs, professional services and legal fees and allowances
for doubtful accounts.  General and administrative expenses were $14.4 million,
or 4.9% of net revenues, in 2003, $17.1 million, or 6.2% of net revenues, in
2002, and $17.9 million, or 6.1% of net revenues, in 2001.  The decrease in
general and administrative expenses from 2002 to 2003 by 15.8% was primarily due
to decreases in bad debt expenses of $2.8 million due to a charge taken in 2002
related to one specific customer, a decrease in legal fees of $1.5 million due
to decreased Atmel defense activity, and lower depreciation and amortization
expense of $876 thousand, offset by increases in headcount related costs of $2.4
million due to changes in allocations for facility, IT and insurance expenses.
The decrease in general and administrative expenses from 2001 to 2002 by 4.2%
was primarily due to decreased professional service expenses of $1.0 million and
decreased bank fees of $486 thousand, offset by increased bad debt expenses of
$795 thousand.  We anticipate that general and administrative expenses will
increase in dollars as we scale our facilities, infrastructure, and headcount to
support our overall expected growth.  We may also incur additional expenses in
connection with the Atmel litigation.  For further information on this
litigation see "Legal Proceedings."

Other operating expenses.  In 2003, other operating expenses were
$37.8 million, or 12.8% of net revenues, which related entirely to the Atmel
litigation settlement.  The $37.8 million of settlement fees and interest was
paid in December 2003.  There were no other operating expenses recorded in 2002.
In 2001, other operating expenses of $1.3 million, or 0.5% of net revenues, were
comprised of $590 thousand related to an expense for impairment of intangible
assets and a $756 thousand period charge related to an operating lease for an
abandoned building. This charge represents the estimated difference between the
total non-discounted future sublease income and our non-discounted lease
commitments relating to this building. The charge is an estimate and may be
adjusted if we obtain a sublease for the building and the actual sublease income
is significantly different from the estimate.  We may be unable to secure
subtenants for such space due to the recent decrease in demand for commercial
rental space in Silicon Valley.

During the quarter ended December 31, 2001, due to the delays in completing
this first flash memory device using the Agate technology, we recorded an
expense for impairment of intangible assets of $590 thousand. The assets related
to patents acquired as part of the acquisition of Agate Semiconductor Inc. in
December 2000.  We reviewed the recoverability of the recorded amounts based on
expected future cash flows (undiscounted and before interest) from use of these
assets and then determined the impairment loss of $590 thousand based on the
difference between the net book value of the assets and the estimated fair value
of the assets.

15

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Interest and other income. Interest and other income was $2.8 million,
or 0.9% of net revenues, during 2003, $3.2 million, or 1.2% of net revenues,
during 2002, and $7.4 million, or 2.5% of net revenues, during 2001.  Interest
income decreased from 2002 to 2003 primarily due to decreased interest rates on
invested cash, offset by realized gains of $649 thousand on the sale of some of
our investments.  Interest income decreased from 2001 to 2002 primarily due to
decreasing interest rates on invested cash.

Interest expense.  Interest expense was $138 thousand during 2003 as
compared to $214 thousand during 2002 and $338 thousand during 2001.  Interest
expense relates to interest and fees under our line of credit and to our notes
payable.  We terminated our line of credit in July 2002.

Impairment of equity investments.  In 2000, we acquired a 10.0%
interest in Apacer, a privately held company located in Taiwan that designs,
manufactures and markets memory modules, for $9.9 million in cash.  Our
investment in Apacer was valued at cost.  Bing Yeh, our President and CEO and
Board Director, is a member of Apacer's Board of Directors.  In 2001, we
invested an additional $2.1 million in Apacer.  In August 2002, we made an
additional investment of $181 thousand.  At the end of the third quarter of
2002, we determined that a continued and significant decline in Apacer's price
per share was other than temporary, and accordingly, in the third quarter of
2002, we recorded a period charge to impairment of equity investments of $7.8
million to write down our investment in Apacer to $4.4 million which was
determined using the price per share paid for the additional investment in
August 2002.  As of December 31, 2003 the recorded value of our investment in
Apacer was $4.4 million.

During 2001, KYE, a company in which we have an investment, completed an
initial public offering on the Taiwan Stock Exchange.  Since the initial public
offering there had been a significant decline in the market value of the
investment. We had concluded that the decline in value is "other-than-temporary"
and a write down of $3.3 million was necessary as of December 31, 2001.  The
investment was written down to $1.3 million based on the quoted market price as
of December 31, 2001.  As of December 31, 2003, the recorded value of our KYE
investment was $3.2 million based on the quoted market price as of the balance
sheet date.

Provision for (Benefit from) Income Taxes

In 2003, our income tax expense was $26.4 million on a net loss before
tax of $38.8 million.  Our provision for taxes included a charge recorded during
the third quarter of 2003 to establish a full valuation allowance against our
deferred tax assets offset by a reduction in income tax payable as a result of a
reassessment of expected liabilities for 2003 and certain exposures.  During the
fourth quarter of 2003, we maintained a full valuation allowance on our net
deferred tax assets. The valuation allowance was determined in accordance with
the provisions of Statement of Financial Accounting Standards No. 109
("SFAS No. 109"), "Accounting for Income Taxes," which
requires an assessment of both positive and negative evidence when determining
whether it is more likely than not that deferred tax assets are recoverable;
such assessment is required on a jurisdiction by jurisdiction basis. Cumulative
losses incurred in the U.S. in recent years represented sufficient negative
evidence under SFAS No. 109 and accordingly, a full valuation allowance was
recorded against U.S. deferred tax assets. We intend to maintain a full
valuation allowance on the U.S. deferred tax assets until sufficient positive
evidence exists to support reversal of the valuation allowance.  Our income tax
benefit of $10.9 million in 2002 consisted of a 42.0% tax rate on our loss
before income taxes.  In 2001, our income tax benefit of $17.8 million consisted
of a 38.0% tax rate on loss before income taxes.  In 2003, we implemented an
international tax structure, which in conjunction with the full valuation
allowance, will mean that going forward we will record a tax expense as a result
of foreign tax withholding and alternative minimum tax until such time that the
valuation allowance against the deferred tax asset is no longer required.

Segment Reporting

Our operations involve the design, development, manufacturing, marketing
and technical support of our nonvolatile memory technology and products.  We
offer low and medium density devices that target a broad range of existing and
emerging applications in the digital consumer, networking, wireless
communications and Internet computing markets. Our products are differentiated
based upon attributes such as density, voltage, access speed, package and
predicted endurance.  We also license our technology for use in non-competing
applications.  Our reportable segments are: the Standard Memory Product Group,
or SMPG, the Application Specific Product Group, or ASPG, the Special Product
Group, or SPG, and Technology Licensing.  Refer to Note 10 to the Consolidated
Financial Statements for revenue and gross profit information by reportable
segment.  Our analysis of the changes for each segment is discussed below.

SMPG includes our three standard flash memory product families: the MPF
family, the MPF+ family and the MTP

16

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family. Effective
January 1, 2003, we transferred certain MTP products from SMPG to SPG.
Effective July 1, 2003, we transferred the Small Sector Flash, or SSF, family
from SMPG to SPG.  Accordingly, our segment revenues and gross profit
information have been reclassified for presentation purposes as if the transfer
occurred as of January 1, 2001.SMPG revenues were $173.1 million in 2003,
$147.0 million in 2002 and $118.8 million in 2001.  The increase in revenues in
2003 compared to 2002 was primarily due to increases in unit shipments of our
products by 26.1%, offset by decreases in average selling prices of 9.0%. The
increase in revenues in 2002 compared to 2001 was primarily due to increases in
unit shipments of our products of 39.9% and lower product returns in 2002,
offset by decreases in average selling prices of 28.4%.  Gross margin was 13.3%
in 2003, 4.6% in 2002 and negative 21.1% in 2001.  The increase in gross margin
in 2003 from 2002 was primarily due to higher inventory valuation adjustments in
2002, the sale of previously reserved inventory in 2003 and product mix.  The
increase in gross margin from 2001 to 2002 was primarily due to inventory
valuation adjustments to cost of sales during 2001, offset by decreased average
selling prices in 2002.

ASPG includes Concurrent SuperFlash, Serial Flash, Firmware Hub, or FWH, and
Low Pin Count, or LPC flash products. ASPG also includes flash embedded
controllers such as the ATA controller.  Effective January 1, 2003, we
transferred FlashFlex51 microcontroller products from ASPG to SPG.  Accordingly,
our segment revenues and gross profit information have been reclassified for
presentation purposes as if the transfer occurred as of January 1, 2001. ASPG
revenues were $60.5 million in 2003, $67.8 million in 2002 and $89.6 million in
2001.  The decrease in revenues in 2003 compared to 2002 was primarily due to
decreases in average selling prices of 31.8%, offset by increases in unit
shipments of our products of 33.3%.  The decrease in revenues in 2002 compared
to 2001 was primarily due to decreases in average selling prices of 38.6% offset
by increases in unit shipments of our products of 15.0%.  Gross margin was 19.4%
in 2003, 35.6% in 2002 and 40.1% in 2001.  The decrease in gross margin in 2003
from 2002 and from 2001 to 2002 was primarily due to decreases in average
selling prices and product mix.

SPG includes ComboMemory, ROM/RAM Combos, SSF, MTP, FlashFlex51
microcontrollers and other special flash products.  Effective January 1, 2003,
we transferred certain MTP products from SMPG to SPG and FlashFlex51
microcontroller products from ASPG to SPG.  Effective July 1, 2003, we
transferred the SSF family from SMPG to SPG.  Accordingly, our segment revenue
and gross margin information have been reclassified for presentation purposes as
if the transfer occurred as of January 1, 2001.  SPG revenues were $22.9 million
in 2003, $29.2 million in 2002 and $50.1 million in 2001.  The decrease in
revenues in 2003 compared to 2002 was primarily due to decreases in average
selling prices of 17.2% and unit shipments of our products by 5.1%. The decrease
in revenues in 2002 compared to 2001 was primarily due to decreases in average
selling prices of 49.7%, offset by increased unit shipments of our products by
18.3%.  Gross margin was 13.0% in 2003, 23.4% in 2002 and negative 0.8% in 2001.
The decrease in gross margin in 2003 from 2002 was primarily due to decreases in
average selling prices and product mix.  Gross margin increased from 2001 to
2002 due to changes in the product mix and inventory valuation adjustments to
cost of sales in 2001.

Revenue and gross profit related to Technology Licensing was $38.5 million
for 2003, $30.6 million for 2002 and $35.4 million for 2001. The increase from
2002 to 2003 related primarily to increase royalty payments from our existing
licensees and up-front license fees from our new licensees.  During 2000 and
2001, Winbond Electronics of Taiwan paid us $10.4 million and $20.0 million,
respectively, under a settlement agreement.  No further back royalty payments
were required after 2001 under this legal settlement.  Although the settlement
payments have ceased, Winbond continues to pay royalties.  The decrease from
2001 to 2002 was primarily due to the termination of license fees received as
part of our legal settlement with Winbond during 2001, offset by increases in
upfront license fees and royalty payments received from our licensees during
2002.  We anticipate that license revenues will fluctuate significantly in the
future.

17

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Related Party Transactions

The following table is a summary of our related party revenues and
purchases (in thousands):

`Year Ended
                                                       December 31, 2003
                                                  --------------------------
                                                    Revenues      Purchases
                                                  ------------  ------------
Silicon Technology Co., Ltd..................... $      3,615  $         --
Apacer Technology, Inc and related entities.....        1,555         2,361
Silicon Professional Technology Ltd.............      164,810            --
Grace Semiconductor Manufacturing Corporation...           --            12
King Yuan Electronics Company, Limited..........           --        19,659
Powertech Technology, Incorporated..............           --         9,280
                                                  ------------  ------------
                                                 $    169,980  $     31,312
                                                  ============  ============

                                                          Year Ended
                                                       December 31, 2002
                                                  --------------------------
                                                    Revenues      Purchases
                                                  ------------  ------------
Silicon Technology Co., Ltd..................... $      2,089  $         --
Acer and related entities (1)...................          269            --
Apacer Technology, Inc and related entities.....          899           588
Professional Computer Technology Limited........          141            --
Silicon Professional Technology Ltd.............      140,003            --
King Yuan Electronics Company, Limited..........           --        18,163
Powertech Technology, Incorporated..............           --         8,378
                                                  ------------  ------------
                                                 $    143,401  $     27,129
                                                  ============  ============

                                                          Year Ended
                                                       December 31, 2001
                                                  --------------------------
                                                    Revenues      Purchases
                                                  ------------  ------------
Silicon Technology Co., Ltd..................... $      3,728  $         --
Acer and related entities (1)...................        5,129           290
Apacer Technology, Inc and related entities.....          280           626
Ocean Contract Manufacturing Ltd................        4,019            --
Professional Computer Technology Limited........       76,869            --
King Yuan Electronics Company, Limited..........           --        21,827
Powertech Technology, Incorporated..............           --         9,031
                                                  ------------  ------------
                                                 $     90,025  $     31,774
                                                  ============  ============`

(1) Excludes Apacer Technology, Inc. balances.

18

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The following table is a summary of our related party accounts receivable and
accounts payable and accruals (in thousands):

`December 31, 2002          December 31, 2003
                                              --------------------------  -----------------------
                                                              Accounts                  Accounts
                                                Accounts    Payable and    Accounts    Payable and
                                               Receivable     Accruals    Receivable    Accruals
                                              ------------  ------------  -----------  ----------
Silicon Technology Co., Ltd................. $        459  $         --  $       232  $       --
Ambit Microsystems Corp.....................           --            --           --           4
Apacer Technology, Inc and related entities.          141           119          400         736
Professional Computer Technology Limited....           --            73           --          15
Silicon Professional Technology Ltd.........       24,648           432       40,588         550
King Yuan Electronics Company, Limited......           --         4,285           --       6,896
Powertech Technology, Incorporated..........           --         2,253           --       2,533
                                              ------------  ------------  -----------  ----------
                                             $     25,248  $      7,162  $    41,220  $   10,734
                                              ============  ============  ===========  ==========`

In 1996, we acquired a 14% interest in Silicon Technology Co., Ltd., or
Silicon Technology, a privately held Japanese company, for $939 thousand in
cash.  Bing Yeh, our President, CEO and Board Director, is also a member of
Silicon Technology's board of directors.  We acquired the interest in Silicon
Technology in order to provide a presence for our products in Japan.  We now
have our own office in Japan, although Silicon Technology continues to sell our
products to smaller customers.  At December 31, 2003, our investment, which is
carried at cost, represented 9% of the outstanding equity of Silicon Technology.
Our sales to Silicon Technology were made at prevailing market prices and the
payment terms are consistent with the payment terms extended to our other
customers.  We are not obligated to provide Silicon Technology with any
additional financing.

Dr. Ronald Chwang, a member of our Board of Directors, is also a director of
Ambit Microsystems Corp., which is a related entity of Acer Incorporated, or
Acer.

In 2000, we acquired a 10% interest in Apacer Technology Inc, or Apacer, for
$9.9 million in cash.  Apacer, a privately held Taiwanese company and a related
entity of Acer, is a memory module manufacturer.  Bing Yeh, our President, CEO
and Board Director, is also a member of Apacer's board of directors.  In 2001,
we invested an additional $2.1 million in Apacer.  In August 2002, we made an
additional investment of $181 thousand.  The investment was written down to $4.4
million during 2002, please refer to Note 8 of the Notes to the Consolidated
Financial Statements.  At December 31, 2003, our investment represented 10% of
the outstanding equity of Apacer.  Our sales to the related Acer entities were
made at prevailing market prices and the payment terms are consistent with the
payment terms extended to our other customers.  Our purchases from Apacer are
made pursuant to purchase orders at prevailing market prices.  We do not have a
long-term contract with Apacer to supply us with products.  If Apacer were to
terminate its relationship with us, we believe that we would be able to procure
the necessary products from other production subcontractors.  We are not
obligated to provide Apacer with any additional financing.

In 2000, we acquired a 15% interest in Professional Computer Technology
Limited, or PCT, a privately held Taiwanese company, for $1.5 million in cash.
Bing Yeh, our President, CEO and Board Director, is also a member of PCT's board
or directors.  PCT is one of our stocking representatives.  In May 2002, we made
an additional investment of $179 thousand in PCT.  During 2003, PCT completed an
initial public offering on the Taiwan Stock Exchange and we sold a portion of
our holdings.  Under Taiwan security regulations, certain numbers of shares must
be held in a central custody and are restricted from sale for a period of time.
The shares available for sale within one year are carried at the quoted market
price and included in long-term available-for-sale investments in the balance
sheet as of December 31, 2003.  Shares required to be held in custody for
greater than a one year period are carried at cost and included in equity
investments.  As of December 31, 2003, the value of the investment recorded as
long-term available-for-sale is valued at $3.8 million and the restricted
portion of the investment carried at cost is recorded at $775 thousand.  At
December 31, 2003 our investment represented 13% of the outstanding equity of
PCT.  In February 2004, we purchased $1.7 million of PCT's European convertible
bonds.

PCT and it subsidiary, Silicon Professional Alliance Corporation, or SPAC,
earn commissions for point-of-sales transactions to its customers.  Commissions
to PCT and SPAC are paid at the same rate as all of our other stocking
representatives in Asia.  In 2001, 2002 and 2003 we paid sales commissions of
$1.7 million, $2.5 million and $1.2 million, respectively, to PCT and SPAC.
Shipments, by us or our logistics center, to PCT and SPAC for reshipment
accounted for 8.5%, 10.3% and 27.3% of our product shipments in 2001, 2002 and
2003.  In addition, PCT and

19

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SPAC solicited sales, for which they earned a
commission, for 13.4%, 19.5% and 12.0% of our shipments to end users in 2001,
2002 and 2003, respectively.

In March 2001, PCT established a separate company and wholly-owned
subsidiary, Silicon Professional Technology, Ltd., or SPT, to provide planning,
warehousing, delivery, billing, collection and other logistic functions for us
in Taiwan.  SPT now services substantially all of our end customers based in
Taiwan, China and other Southeast Asia countries.  Products shipped to SPT are
accounted for as our inventory held at our logistics center, and revenue is
recognized when the products have been delivered and are considered as a sale to
our end customers by SPT.  We pay SPT a fee based on a percentage of revenue for
each product sold through SPT to our end customers.  The fee paid to SPT covers
the cost of warehousing and insuring inventory and accounts receivable,
personnel costs required to maintain logistics and information technology
functions and the costs to perform billing and collection of accounts
receivable.  SPT receives extended payment terms and is obligated to pay us
whether or not they have collected the accounts receivable.

We do not have any long-term contracts with SPT or PCT, and SPT and PCT may
cease providing services to us at any time.  If SPT or PCT were to terminate
their relationship with us we would experience a delay in reestablishing
warehousing, logistics and distribution functions which would harm our business.
We are not obligated to provide SPT or PCT with any additional financing.

In 2000, we acquired a 1% interest in King Yuan Electronics Company, Limited,
or KYE, a publicly held Taiwanese company, which is a production subcontractor,
for $4.6 million in cash.  A member of our management team holds one supervisor
position at KYE.  The role and responsibilities of a supervisor are defined and
governed by Corporate Law in Taiwan.  The investment was made in KYE in order to
strengthen the relationship between us and KYE.  During 2001, KYE completed an
initial public offering on the Taiwan Stock Exchange.  Accordingly, the
investment has been included in long-term available-for-sale investments in the
balance sheet as of December 31, 2002 and 2003.  The investment was written down
to $1.3 million during 2001 and is valued at $3.2 million as of December 31,
2003 based on the quoted market price.   At December 31, 2003, our investment
represented 0.5% of the outstanding equity of KYE.  Our purchases from KYE are
made pursuant to purchase orders at prevailing market prices.  We do not have a
long-term contract with KYE to supply us with services.  If KYE were to
terminate its relationship with us we believe that we would be able to procure
the necessary services from other production subcontractors. We are not
obligated to provide KYE with any additional financing.

In 2000, we acquired a 3% interest in Powertech Technology, Incorporated, or
PTI, a privately held Taiwanese company, which is a production subcontractor,
for $2.5 million in cash.  The investment was made in PTI in order to strengthen
the relationship between us and PTI.  During 2003, PTI completed an initial
public offering on the Taiwan Stock Exchange and we sold a portion of our
holdings.  Under Taiwan security regulations, certain numbers of shares must be
held in a central custody and are restricted from sale for a period of time.
The shares available for sale within one year are carried at the quoted market
price and included in long-term available-for-sale investments in the balance
sheet as of December 31, 2003.  Shares required to be held in custody for
greater than a one year period are carried at cost and included in equity
investments.  As of December 31, 2003, the value of the investment recorded as
long-term available-for-sale is valued at $5.5 million and the restricted
portion of the investment carried at cost is recorded at $1.2 million.  At
December 31, 2003, our investment represented 3% of the outstanding equity of
PTI.  Our purchases from PTI are made pursuant to purchase orders at prevailing
market prices.  We do not have a long-term contract with PTI to supply us with
services.  If PTI were to terminate its relationship with us we believe that we
would be able to procure the necessary services from other production
subcontractors.  We are not obligated to provide PTI with any additional
financing.

In 2001, we acquired a 9% interest in Grace Semiconductor Manufacturing
Corporation, or GSMC, a privately held Cayman Islands company for $50.0 million
in cash.  Bing Yeh, our President, CEO and Board Director, is also a member of
GSMC's board of directors.  In addition, a member of our management team holds
one supervisor position at GSMC.  The role and responsibilities of a supervisor
are defined and governed by Corporate Law in the Cayman Islands.  This
investment is carried at cost.  GSMC has a wholly owned subsidiary, Shanghai
Grace Semiconductor Manufacturing Corporation, or Grace, which is a wafer
foundry company with operations in China.  Grace began to manufacture some of
our products during 2003.  We do not have a long-term contract with Grace to
supply us with products.  At December 31, 2003, our investment represented 7% of
the outstanding equity of GSMC.  In March 2004, we committed to invest an
additional $33.2 million in GSMC during 2004.

Critical Accounting Estimates

20

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Our critical accounting estimates are as follows:

- Revenue recognition;
- Allowance for sales returns;
- Allowance for doubtful accounts;
- Allowance for excess and obsolete inventory and lower of
cost or market;
- Warranty accrual;
- Litigation costs;
- Valuation of equity investments; and
- Accounting for income taxes.

Revenue recognition. Sales to direct customers and foreign stocking
representatives are recognized net of an allowance for estimated returns.  When
product is shipped to direct customers or stocking representatives, or by our
distributors or SPT to end users, prior to recognizing revenue, we also require
that evidence of the arrangement exists, the price is fixed or determinable and
collection is reasonably assured.  Our shipping terms are generally freight on
board, or FOB, shipping point and payment terms typically range from 30 to 75
days.  Sales to distributors are made primarily under arrangements allowing
price protection and the right of stock rotation on merchandise unsold.  Because
of the uncertainty associated with pricing concessions and future returns, we
defer recognition of such revenues, related costs of revenues and related gross
profit until the merchandise is sold by the distributor.  Products shipped to
SPT are accounted for as our inventory held at our logistics center, and revenue
is recognized when the products have been delivered and are considered as a sale
to our end customers by SPT.

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

Royalties received under these arrangements during the upgrade period are
recognized as revenue based on the ratio of the elapsed portion of the upgrade
period to the estimated upgrade period.  The remaining portions of the royalties
are recognized ratably over the remaining portion of the upgrade period.
Royalties received after the upgrade period has elapsed are recognized when
reported to us.

If we make different judgments or utilize different estimates in relation to
the estimated period of technology enhancement and development, the amount and
timing of our license and royalty revenues could be materially different.

Allowance for sales returns. We maintain allowances for sales returns
for estimated product returns by our customers.  We estimate our allowance for
sales returns based on our historical return experience, current economic
trends, changes in customer demand, known returns we have not received and other
assumptions.  The allowance for sales returns was $4.5 million, $1.8 million and
$1.3 million as of December 31, 2001, 2002 and 2003, respectively.  If we make
different judgments or utilize different estimates, the amount and timing of our
revenue could be materially different.

Allowance for doubtful accounts. We maintain allowance for doubtful
accounts for estimated losses from the inability of our customers to make
required payments.  We evaluate our allowance for doubtful accounts based on the
aging of our accounts receivable, the financial condition of our customers and
their payment history, our historical write-off experience and other
assumptions.  If we were to make different judgments of the financial condition
of our customers or the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.  The allowance for doubtful accounts was
$2.8 million, $4.4 million and $1.1 million as of December 31, 2001, 2002 and
2003, respectively.

21

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Allowance for excess and obsolete inventory and lower of cost or
market. Our inventories are stated at the lower of cost (determined on a
first-in, first-out basis) or market value.  We typically plan our production
and inventory levels based on internal forecasts of customer demand, which are
highly unpredictable and can fluctuate substantially.  The value of our
inventory is dependent on our estimate of future average selling prices, and, if
our projected average selling prices are over estimated, we may be required to
adjust our inventory value to reflect the lower of cost or market.  Our
inventories include high technology parts and components that are specialized in
nature or subject to rapid technological obsolescence.  We maintain allowance
for inventory for potentially excess and obsolete inventories and those
inventories carried at costs that are higher than their market values.  Some of
our customers have requested that we ship them product that has a finished goods
date of manufacture that is less than one year old.  In the event that this
becomes a common requirement, it may be necessary for us to provide for an
additional allowance for our on hand finished goods inventory with a date of
manufacture of greater than one year old, which could result in additional
inventory write-downs.  Our allowance for excess and
obsolete inventories includes an allowance for our on hand finished goods
inventory with a date of manufacture of greater than two years old and for
certain products with a date of manufacture of greater than one year old. If we determine that market conditions are less favorable
than those currently projected by management, such as an unanticipated decline
in average selling prices or demand not meeting our expectations, additional
inventory write-downs may be required. The allowance for excess and obsolete
inventories was $47.7 million, $27.4 million and $11.2 million as of December
31, 2001, 2002 and 2003, respectively.

Warranty accrual. Our products are generally subject to warranty and
we provide for the estimated future costs of repair, replacement or customer
accommodation upon shipment of the product in the accompanying statements of
operations.  Our warranty accrual is estimated based on historical claims
compared to historical revenues and assumes that we have to replace products
subject to a claim.  For new products, we use our historical percentage for the
appropriate class of product.  Should actual product failure rates differ from
our estimates, revisions to the estimated warranty liability would be required.

Litigation costs. From time to time, we are also involved in other
legal actions arising in the ordinary course of business. We have incurred
certain costs associated with defending these matters.  There can be no
assurance the Atmel complaint or other third party assertions will be resolved
without costly litigation, in a manner that is not adverse to our financial
position, results of operations or cash flows or without requiring royalty
payments in the future which may adversely impact gross margins.  As of December
31, 2003, no estimate can be made of the possible loss or possible range of loss
associated with the resolution of these contingencies.  If additional
information becomes available such that we estimate that there is a possible
loss or possible range of loss associated with these contingencies, then we
would record the minimum estimated liability, which could materially impact our
results of operations and financial position.

Valuation of equity investments. We hold minority interests in
companies having operations in the semiconductor industry.  We record an
investment impairment charge when we believe an investment has experienced a
decline in value that is other than temporary.  Future adverse changes in market
conditions or poor operating results of underlying investments could result in
losses or an inability to recover the carrying value of the investments, thereby
possibly requiring an impairment charge in the future.  The recorded value of
our equity investments at December 31, 2003 is $71.0 million.

Accounting for income taxes. During the third quarter of 2003 we
recorded a charge to establish a full valuation allowance against our deferred
tax assets offset by a reduction in income tax payable as a result of a
reassessment of expected liabilities for 2003 and certain exposures.
Accordingly, for 2003 we recorded an income tax expense of $26.4 million.
During the fourth quarter of 2003, we maintained a full valuation allowance on
our net deferred tax assets. The valuation allowance was determined in
accordance with the provisions of Statement of Financial Accounting Standards
No. 109 ("SFAS No. 109"), "Accounting for Income Taxes,"
which requires an assessment of both positive and negative evidence when
determining whether it is more likely than not that deferred tax assets are
recoverable; such assessment is required on a jurisdiction by jurisdiction
basis.  Cumulative losses incurred in the U.S. in recent years represented
sufficient negative evidence under SFAS No. 109 and accordingly, a full
valuation allowance was recorded against U.S. deferred tax assets. We intend to
maintain a full valuation allowance on the U.S. deferred tax assets until
sufficient positive evidence exists to support reversal of the valuation
allowance.  At December 31, 2003, the valuation allowance against our deferred
tax asset was $41.1 million.

Liquidity and Capital Resources

Operating activities.  Our operating activities generated cash of
$7.6 million in 2003 and $23.4 million in 2002.  For

22

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2003, our primary source of
operating cash flow was the timing of inventory purchases and payments to our
vendors and service providers, offset by the payment of $37.8 million to Atmel.
Cash generated from operating activities included a decreases in inventories of
$29.5 million due to increased sales , which reduced the amount of inventory
held, and other current and non-current assets of $18.3 million, increases in
trade accounts payable from related and unrelated parties of $12.4 million due
to increased strategic purchasing of certain products, increases in deferred
revenue of $1.0 million and non-cash related adjustments of $37.9 million.
Non-cash adjustments related to $7.7 million of depreciation and amortization, $6.7
million of inventory valuation adjustments, $22.3 million decrease in net
deferred tax assets and $1.3 million of tax benefit from employee stock plans,
offset by a $228 thousand charge to expense for provision for doubtful accounts.
Working capital uses of cash included a net loss of $65.2 million, increases in
trade accounts receivable from related and non-related parties of $19.9 million
due to increased revenue at the end of 2003 compared to 2002 and increased
activity through our logistic center which has extended payment terms and
decreases in accrued expenses and other liabilities of $6.5 million.  In 2002,
cash provided by operations was $23.4 million and related primarily to non-cash
adjustments of $42.4 million, including depreciation and amortization of $9.8
million, provision for doubtful accounts of $3.0 million, provision for sales
returns of $2.8 million, inventory valuation adjustments of $10.4 million,
changes in deferred income taxes of $7.0 million, impairment of equity
investments of $7.8 million and tax benefit from employee stock plans of $1.5
million.  Further, cash provided from operations relates to decreases in
accounts receivable from unrelated parties of $3.3 million and inventories of
$16.0 million and increases in accounts payable to unrelated parties of $4.3
million and accrued expenses and other liabilities of $1.6 million.  Cash
provided from operating activities was reduced by increases in accounts
receivable from related parties of $4.5 million and other current and
non-current assets of $21.3 million and decreases in accounts payable to related
parties of $564 thousand and deferred revenue of $2.8 million.

Investing activities.  Our investing activities provided cash of $9.0
million during 2003, primarily due to a total of $10.8 million cash from the
excess sales and maturities of available-for-sale investments and restricted
cash over the purchases of such investments, offset by $1.8 million invested in
capital expenditures.  Cash used in investing activities was $17.0 million
during 2002.  Investing activities in 2002 were primarily related to capital
expenditures of $4.3 million and net purchases of available-for-sale investments
and restricted cash of $11.1 million.  In addition, during 2002 we invested $964
thousand in Insyde Software Corporation, a Taiwanese company that completed an
initial public offering on the Taiwan Stock Exchange in January 2003, made
additional investments of $179 thousand in PCT and $181 thousand in Apacer and
$333 thousand in another investment.  We plan to continue to invest in capital
equipment to be used primarily for test equipment and design engineering tools
for research and development, information systems infrastructure, and leasehold
improvements.

Financing activities. Our financing activities provided cash of $4.3
million in 2003 and $3.8 million in 2002.  During 2003, cash provided was from
$4.5 million of common stock issued under our employee stock purchase plan and
the exercise of employee stock options, offset by $250 thousand in loan
repayments.  During 2002, the cash provided was primarily from $4.1 million of
common stock issued under our employee stock purchase plan and the exercise of
employee stock options, offset by $316 thousand in loan repayments.  We
terminated our line of credit on July 12, 2002.

Principal sources of liquidity at December 31, 2003 consisted of $210.2
million of cash, cash equivalents, and short-term and long-term available-for-sale investments.

Purchase Commitments. As of December 31, 2003, we had outstanding
purchase commitments with our foundry vendors of $72.8 million for delivery in
2004.  We have recorded a liability of $538 thousand for adverse purchase
commitments.

Lease Commitments. We have long-term, non-cancelable building lease
commitments.  We are currently seeking subtenants for our unused office space.
During the third quarter of 2001, we recorded a period charge to other operating
expense of $756 thousand relating to an operating lease for an abandoned
building.  This charge represents the estimated difference between the total
non-discounted future sublease income and our non-discounted lease commitments
relating to this building.  The charge was an estimate and may be adjusted if we
obtain a sublease for the building and the actual sublease income is
significantly different from the estimate.  We may be unable to secure
subtenants for such space due to the recent decrease in demand for commercial
rental space in Silicon Valley.  At December 31, 2002 and 2003, payments made
have reduced the recorded liability to $473 thousand and $270 thousand,
respectively.

23

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Future payments due under building lease, purchase commitments and other
contractual obligations as of December 31, 2003 (in thousands):

`Less than                             More than
                                                 Total         1 year      1-3 years   3-5 years    5 years
                                              ------------  ------------  -----------  ----------  ---------
Notes payable............................... $        871  $        393  $       478  $       --  $      --
Operating leases............................       20,217         5,376        6,165       5,167      3,509
Purchase commitments........................       72,791        72,791           --          --         --
Other long-term liability...................          151            --          151          --         --
                                              ------------  ------------  -----------  ----------  ---------
Total....................................... $     94,030  $     78,560  $     6,794  $    5,167  $   3,509
                                              ============  ============  ===========  ==========  =========`

In addition to our commitments in the above table, in March 2004, we
committed to an additional $33.2 investment in GSMC during 2004.

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

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

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

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board, or FASB,
issued FIN No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51."  FIN No. 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties.  FIN No. 46 was effective immediately for all new variable
interest entities created or acquired after January 31, 2003.  In December 2003,
the FASB issued a revision of FIN No. 46 that delays the implementation date for
certain interests created or acquired prior to January 31, 2003 until the first
interim or annual period ending after March 15, 2004.  Accordingly, we will
implement FIN No. 46 during the quarter ended March 31, 2004.  We are currently
reviewing our equity investments and associated relationships to determine if
they are variable interest entities as defined by the revised FIN No. 46.  It is
reasonably possible that we are the primary beneficiary of or hold a significant
variable interest in a variable interest entity.  The nature, purpose and
activities of the potential variable interest entities are outlined in Note 11
of our Notes to the Consolidated Financial Statements.  Our maximum exposure to
loss as a result of our involvement with the potential variable interest
entities is our investment in each such entity plus amounts receivable from
these entities as we are not obligated to provide any entity with any additional
financing.

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Business Risks

Risks Related to Our Business

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

We incurred net losses for 2001, 2002 and 2003. Our operating results
have fluctuated significantly and our past financial performance should not be
used to predict future operating results. Our recent quarterly and annual
operating results have fluctuated, and may continue to fluctuate, due to the
following factors, all of which are difficult to forecast and many of which are
out of our control:

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

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

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

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

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

In addition, political or economic events beyond our control
can suddenly result in increased operating costs.  For example, the terrorist
attacks of September 11, 2001 have resulted in a substantial increase to our
business insurance costs.  In addition, under a current proposed standard, we
would be required to record compensation expense on stock

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option grants and on
shares purchased under our employee stock purchase program, which would
substantially increase our operating costs and impact our earnings (loss) per
share.

We incurred significant inventory valuation adjustments in 2001, 2002 and
2003 and we may incur additional significant inventory valuation adjustments in
the future.

We typically plan our production and inventory levels based on internal
forecasts of customer demand, which are highly unpredictable and can fluctuate
materially. The value of our inventory is dependent on our estimate of future
average selling prices, and, if our projected average selling prices are over
estimated, we may be required to adjust our inventory value to reflect the lower
of cost or market.  As of December 31, 2003, we had $46.1 million of inventory
on hand, a decrease of $36.9 million, or 44.5%, from December 31, 2002.  Total
valuation adjustments to inventory were $72.2 million in 2001, $9.2 million in
2002 and $6.7 million in 2003.  Due to the large number of units in our
inventory, even a small change in average selling prices could result in a
significant adjustment and could harm our financial results.  Some of our
customers have requested that we ship them product that has a finished goods
date of manufacture that is less than one year old.  As of December 31, 2003,
our allowance for excess and obsolete inventories includes an allowance for our
on hand finished goods inventory with a date of manufacture of greater than two
years old and for certain products with a date of manufacture of greater than
one year old.  In the event that this becomes a common requirement, it may be
necessary for us to provide for an additional allowance for our on hand finished
goods inventory with a date of manufacture of greater than one year old, which
could result in a significant adjustment and could harm our financial results.

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

Due to possible customer changes in delivery schedules and cancellations
of orders, our backlog at any particular date is not necessarily indicative of
actual sales for any succeeding period.  A reduction of backlog during any
particular period, or the failure of our backlog to result in future revenue,
could harm our business in the future.  We began to experience a sharp downturn
in several of our markets late in the fourth quarter of 2000, as our customers
reacted to weakening demand for their products.  Although we had improvements in
total units shipped in 2003 compared to 2001 and 2002 and our revenues increased
in 2003, we experienced decreased average selling prices.  Our business could be
harmed by industry-wide fluctuations in the future.

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

During 2001, 2002 and 2003, our export product and licensing revenues
accounted for 90.3%, 92.0% and 92.9% of our net revenues, respectively.  Our
international business activities are subject to a number of risks, each of
which could impose unexpected costs on us that would harm our operating results.
These risks include:

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

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

We derived 80.7%, 88.5% and 90.0% of our net product revenues from Asia
during 2001, 2002 and 2003, respectively.  Additionally, substantially all of
our wafer suppliers and packaging and testing subcontractors are located in
Asia.  Any kind of economic, political or environmental instability in this
region of the world can have a severe negative impact on our operating results
due to the large concentration of our production and sales activities in this
region.  For example, during 1997 and 1998, several Asian countries where we do
business, such as Japan, Taiwan and Korea, experienced severe currency
fluctuation and economic deflation, which negatively impacted our

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

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

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

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

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

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

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

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

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

Since March 2001, we have been increasing our out-sourcing activities with
our customer service logistics to support our customers.  Currently SPT supports
our customers in Taiwan, China and other Southeast Asia countries.  SPT provides
planning, warehousing, delivery, billing, collection and other logistic
functions for us in these regions.  SPT is a wholly owned subsidiary of one of
our stocking representatives in Taiwan, PCT.  During 2001, 2002 and 2003, SPT
serviced end customer shipments accounted for 29.7%, 57.4% and 64.2% of our net
product revenues recognized, respectively.  As of December 31, 2001, 2002, and
2003, SPT accounted for 48.8%, 68.5% and 73.4%, respectively, of our net
accounts receivable.  For further description of our relationships with PCT and
SPT, please refer to "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation - Related Party Transactions."

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

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

We outsource substantially all of our manufacturing and testing
activities.  We currently buy all of our wafers and sorted die from a limited
number of suppliers.  Substantially all of our products are manufactured by five
foundries, TSMC in Taiwan, Sanyo, Seiko-Epson and Yasu in Japan, and Samsung in
Korea. In March 2001, we invested $50.0 million in GSMC, a Cayman Islands
company, for a wafer foundry project located in Shanghai, China.  In March 2004,
we committed to an additional $33.2 million investment in GSMC during 2004.
Grace, a wholly owned subsidiary or GSMC, began manufacturing some of our
products early in the fourth quarter of 2003.  We anticipate that these
foundries, together with Shanghai Hua Hong NEC Electronic Company Limited, or
HHNEC and Vanguard in Taiwan will manufacture substantially all of our products
in 2004.  If these suppliers fail to satisfy our requirements on a timely basis
at competitive prices we could suffer manufacturing delays, a possible loss of
revenues or higher than anticipated costs of revenues, any of which could harm
our operating results.

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

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

In order to grow, we need to increase our present manufacturing capacity.
We currently believe that the existing capacity plus additional future capacity
from Grace, HHNEC and Vanguard available to us will be sufficient through 2004.
However, events that we have not foreseen could arise which would limit our
capacity.  Similar to our $50.0 million investment in GSMC, we may determine
that it is necessary to invest substantial capital in order to secure
appropriate production capacity commitments.  If we cannot secure additional
manufacturing capacity on acceptable terms, our ability to grow will be impaired
and our operating results will be harmed.

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

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

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

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

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

The fabrication of our products requires wafers to be produced in a
highly controlled and ultra-clean environment. Semiconductor companies that
supply our wafers have, from time to time, experienced problems achieving
acceptable wafer manufacturing yields.  Semiconductor manufacturing yields are a
function of both our design

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technology and the foundry's manufacturing process
technology.  Low yields may result from marginal design or manufacturing process
drift.  Yield problems may not be identified until the wafers are well into the
production process, which often makes them difficult, time consuming and costly
to correct.  Furthermore, we rely on independent foundries for our wafers which
increases the effort and time required to identify, communicate and resolve
manufacturing yield problems.  If our foundries fail to achieve acceptable
manufacturing yields, we will experience higher costs of revenues and reduced
product availability, which could harm our operating results.

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

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

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

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

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

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

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

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

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

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

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

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

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

The markets for our products are characterized by:

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

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

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

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

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

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

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

We rely on a combination of patent, trade secrets, copyrights, mask work
rights, nondisclosure agreements and other contractual provisions and technical
measures to protect our intellectual property rights.  Policing unauthorized use
of our products, however, is difficult, especially in foreign countries.
Litigation may continue to be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity.  Litigation could result in substantial
costs and diversion of resources and could harm our business, operating results
and financial condition regardless of the outcome of the litigation.  We own 78
patents in the United States relating to our products and processes, with
expiration dates ranging from 2010 to 2023, and have filed for several more.  In
addition, we hold

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several patents in Europe and Canada, and have filed several
foreign patent applications in Europe, Japan, Korea, Taiwan and Canada.  We
cannot assure you that any pending patent application will be granted.  Our
operating results could be harmed by the failure to protect our intellectual
property.

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

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

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

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

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

Our litigation may be expensive, may be protracted and confidential
information may be compromised. On April 8, 2002, a jury found that we
willfully infringed Atmel's '811 and '829 patents, and awarded Atmel $20.0
million in actual damages.  On May 7, 2002, the court entered judgment in the
total amount of $36.5 million, which includes the original $20.0 million.  The
'811 and '829 patents expired in February 2002.  Therefore, we are not precluded
from selling any of our products. On December 12, 2003, we paid Atmel $37.8
million to satisfy the judgement plus statutory interest accrued during the
appeal.  The '903 patent case still remains open.  The court found that we
infringed the '903 patent but the jury was unable to unanimously decide whether
the '903 is valid and a mistrial was declared.  A settlement conference is
scheduled for April 14, 2004.  If we are not able to reach a settlement
agreement, the court may set a date for a new trial.  If we are not successful
in reaching a settlement, litigation may continue to consume substantial amounts
of our financial and managerial resources.  We have incurred certain costs
associated with defending this matter, and at any time Atmel may file additional
claims against us, which could increase the risk, expense and duration of the
litigation.  Further, because of the substantial amount of discovery required in
connection with this type of litigation, there is a risk that some of our
confidential information could be compromised by disclosure.  For more
information with respect to our litigation, please also see "Part I, Item 3 -
Legal Proceedings."

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

Our corporate headquarters are located in California near major
earthquake faults.  In addition, some of our suppliers are located near fault
lines.  In the event of a major earthquake or other natural disaster near our
headquarters, our operations could be harmed.  Similarly, a major earthquake or
other natural disaster such as typhoon near one or more of our major suppliers,
like the earthquakes in September 1999 and March 2002 or the typhoon in
September 2001 that occurred in Taiwan, could potentially disrupt the operations
of those suppliers, which could then limit the supply

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of our products and harm
our business.

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

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

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

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

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

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

Risks Related to Our Industry

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

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

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

The semiconductor industry has historically been cyclical, characterized
by periodic changes in business conditions caused by product supply and demand
imbalance.  When the industry experiences downturns, they often occur in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions.  These downturns are characterized by weak product
demand, excessive inventory and accelerated declines of average selling prices.
In some cases, downturns, such as the one we experienced from late 2000 through
2002, have lasted for more than a year.  Our business could be further harmed by
industry-wide prolonged downturns in the future.  The flash memory products
portion of the semiconductor industry, from which we derive substantially all of
our revenues, suffered from excess capacity in 2001, 2002 and 2003, which
resulted in greater than normal declines in our markets, which unfavorably
impacted our revenues, gross margins and profitability.  While these conditions
began to improve during the third quarter of 2003, deteriorating market
conditions at the end of 2000 through the first part 2003 have resulted in the
decline of our selling prices and harmed our operating results.

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

Sales of our products in the consumer electronics applications market are
subject to seasonality.  As a result, sales of

32

---

these products are impacted by
seasonal purchasing patterns with higher sales generally occurring in the second
half of each year.  In the past we have been able to mitigate such seasonality
with the introduction of new products throughout the year.  If we fail to
continue to introduce new products, our business may suffer and the seasonality
of a portion of our sales may become more pronounced.

Item 7A. Quantitative and Qualitative Disclosures
about Market Risk

We are exposed to risks associated with foreign exchange rate
fluctuations due to our international manufacturing and sales activities.  These
exposures may change over time as business practices evolve and could negatively
impact our operating results and financial condition.  Currently, we do not
hedge these foreign exchange rate exposures.  All of our sales are denominated
in U.S. dollars.  An increase in the value of the U.S. dollar relative to
foreign currencies could make our products more expensive and therefore reduce
the demand for our products.  Such a decline in the demand could reduce revenues
and/or result in operating losses.  In addition, a downturn in the economies of
China, Japan or Taiwan could impair the value of our equity investments in
companies with operations in these countries.  If we consider the value of these
companies to be impaired, we will write off, or expense, some or all of our
investments.  In the fourth quarter of 2001, we wrote down our investment in KYE
by $3.3 million to $1.3 million due to an other than temporary decline in its
market value.  As of December 31, 2003, the recorded value of our KYE investment
was $3.2 million based on the quoted market price.  In the third quarter of
2002, we wrote down our investment in Apacer, a privately held memory module
manufacturer located in Taiwan, by $7.8 million due to an other than temporary
decline in its value.  As of December 31, 2003, the recorded value of our Apacer
investment was $4.4 million.  In addition, we have equity
investments in companies with operations in China, Japan, Taiwan and United
States with recorded values at December 31, 2003 of $50.0 million, $0.9 million,
$19.8 million and $0.3 million, respectively.

At any time, fluctuations in interest rates could affect interest earnings on
our cash, cash equivalents and short-term investments, or the fair value of our
investment portfolio.  A 10% move in interest rates as of December 31, 2003
would have an immaterial effect on our financial position, results of operations
and cash flows.  Currently, we do not hedge these interest rate exposures.
 As of December 31, 2003, the carrying value of our
available-for-sale investments approximated fair value.  The table below presents the
carrying value and related weighted average interest rates for our unrestricted
and restricted cash, cash equivalents and available-for-sale investments as of
December 31, 2003 (in thousands):

`Carrying     Interest
                                                                               Value        Rate
                                                                            -----------  -----------
Short-term available-for-sale investments - fixed rate.................... $    60,569          1.2%
Long-term available-for-sale investments (1 to 2 years) - fixed rate......      12,046          1.4%
Cash and cash equivalents - variable rate.................................     124,625          0.6%
                                                                            -----------
                                                                           $   197,240          1.0%
                                                                            ===========`

33

---



Item 8. Consolidated Financial Statements and Supplementary Data

The consolidated financial statements are included in a separate section
of this Annual Report.

Supplementary Data: Selected Consolidated Quarterly Data

The following table presents our unaudited consolidated statements of
operations data for each of the eight quarters in the period ended December 31,
2003.  In our opinion, this information has been presented on the same basis as
the audited consolidated financial statements included in a separate section of
this report, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts below to present fairly the
unaudited quarterly results when read in conjunction with the audited
consolidated financial statements and related notes.  The operating results for
any quarter should not be relied upon as necessarily indicative of results for
any future period.  We expect our quarterly operating results to fluctuate in
future periods due to a variety of reasons, including those discussed in
"Business Risks."

`Quarter Ended
                                        ----------------------------------------------
                                        March 31,  June 30,   September 30, December 31,
                                          2003       2003        2003         2003
                                        ---------  ---------  -----------  -----------
                                            (in thousands, except per share data)
Net revenues:
    Product revenues.................. $  53,921  $  54,860  $    65,397  $    82,351
    License revenues..................     7,788      9,320        8,538       12,866
                                        ---------  ---------  -----------  -----------
      Total net revenues.............. $  61,709  $  64,180  $    73,935  $    95,217
Gross profit (loss)................... $   9,208  $  16,247  $    18,341  $    32,470
Income (loss) from operations......... $ (11,083) $  (3,739) $   (37,390) $    10,815
Net income (loss)..................... $ (10,665) $  (4,589) $   (59,018) $     9,105
Net income (loss) per share-basic..... $   (0.11) $   (0.05) $     (0.62) $      0.10
Net income (loss) per share-diluted... $   (0.11) $   (0.05) $     (0.62) $      0.09


                                                       Quarter Ended
                                        ----------------------------------------------
                                        March 31,  June 30,   September 30, December 31,
                                          2002       2002        2002         2002
                                        ---------  ---------  -----------  -----------
                                            (in thousands, except per share data)
Net revenues:
    Product revenues.................. $  66,295  $  61,480  $    59,445  $    56,801
    License revenues..................     8,287      7,997        8,311        6,042
                                        ---------  ---------  -----------  -----------
      Total net revenues.............. $  74,582  $  69,477  $    67,756  $    62,843
Gross profit (loss)................... $  24,080  $  19,242  $    18,356  $     6,734
Income (loss) from operations......... $   1,387  $  (7,050) $    (1,768) $   (13,821)
Net income (loss)..................... $   1,558  $  (4,222) $    (4,768) $    (7,663)
Net income (loss) per share-basic..... $    0.02  $   (0.05) $     (0.05) $     (0.08)
Net income (loss) per share-diluted... $    0.02  $   (0.05) $     (0.05) $     (0.08)`

We recorded impairment of an equity investments of $7.8 million in the third
quarter of 2002.

We recorded settlement fees of $36.5 million and interest of $1.3 million
related to the Atmel lawsuit in the third and fourth quarter of 2003,
respectively.  In the third quarter of 2003, we recorded a full valuation of our
deferred tax assets and associated adjustments to income tax payable, resulting
in a tax expense of $22.9 million.

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

Not applicable.

34

---

Item 9A.  Controls and Procedures

Based on their evaluation as of December 31, 2003, our chief executive
officer and chief financial officer, have concluded that our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) were sufficiently effective to ensure that the
information required to be disclosed by us in this annual report on Form 10-K
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and Form 10-K.
There were no changes in our internal control over financial reporting during
the quarter ended December 31, 2003 that have materially affected, or are
reasonably likely to materially affect our internal control over financial
reporting.

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

35

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PART III



Item 10. Directors and Executive Officers of the Registrant

The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Shareholders under the
captions "Election of Directors," "Security Ownership of Certain Beneficial
Owners and Management - Compliance with the Reporting Requirement of Section
16(a)," and "Code of Conduct," and are incorporated by reference into this report.  The information
relating to our executive officers is contained in Part I, Item 1 of this
report.

Item 11. Executive Compensation

The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Shareholders under the
caption "Compensation - Compensation of Officers," and is incorporated by
reference into this report.

Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters

The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Shareholders under the
captions "Security Ownership of Certain Beneficial Owners and Management" and
"Compensation - Equity Compensation Plan Information," and are incorporated by
reference into this report.

Item 13. Certain Relationships and Related Transactions

The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Shareholders under the
caption "Certain Transactions," and is incorporated by reference into this
report. Please also see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Related Party Transactions."



Item 14.  Principal Accountant Fees and Services

The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Shareholders under the
caption "Ratification of Selection of Independent Accountants" and is
incorporated by reference into this report.

36

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PART IV

Item 15. 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 41 of this Report.

(2) Financial Statement
Schedule. Financial statement schedule Number II is included.

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

(b) Reports on Form 8-K.

On October 22, 2003, we filed a current report on Form 8-K in
connection with the issuance of a press release dated October 22, 2003
announcing our financial results for the third quarter of 2003.  The press
release was furnished under Item 9.

On December 12, 2003, we filed a current report on Form 8-K
in connection with the Federal Circuit Court of Appeals decision upholding the
jury verdict of infringement of the '811 and '829 patents in favor of Atmel
Corp.  The disclosure was filed under Item 5.



(c) Index to Exhibits.

|Exhibit Number | Description of
Document                                                                                           
|-------------- | ------------------------------------------------------------------------------------------------------------------
|3.1 (1)        | Bylaws of SST.                                                                                                    
|3.2 (2)        | Restated Articles of Incorporation of SST, dated
November 3, 1995.                                                
|3.3 (3)        | Certificate of Amendment of the Restated
Articles of Incorporation of SST, dated June 30, 2000.                   
|3.4 (4)        | Certificate of Designation of Series A Junior
Participating Preferred Stock.                                      
|4.1            | Reference is made to Exhibits 3.1 to 3.4.                                                                         
|4.2 (5)        | Specimen Stock Certificate of SST.                                                                                
|4.3 (6)        | Rights Agreement between SST and American Stock
Transfer and Trust Co., dated May 4, 1999.                        
|4.4 (7)        | Amendment No. 1 to Rights Agreement between SST
and American Stock Transfer and Trust Co., dated October 28, 2000.
|10.1 (8)       | Equity Incentive Plan and related agreements.                                                                     
|10.2 (9)       | Employee Stock Purchase Plan.                                                                                     
|10.3 (10)      | 1995 Non-Employee Director's Stock Option Plan.                                                                   
|10.4 (11)      | Profit Sharing Plan.                                                                                              
|10.5 (12)      | Lease Agreement between SST and Sonora Court
Properties, dated May 4, 1993, as amended.                           
|10.6 (13)      | Lease Agreement between SST and Coast
Properties, dated May 4, 1995, as amended.                                  
|10.8 (14)      | Lease amendment, dated March 4, 1998, between
SST and Sonora Court Properties.                                    
|10.9 (15)      | Lease Amendment, dated March 4, 1998, between
SST and Coast Properties.                                           
|10.11 (16)     | Second Amendment to Lease, dated September 13,
1999, between SST and Coast Properties.                            

37

---

|10.12 (17) | Lease Agreement between SST and Bhupinder S.
Lehga and Rupinder K. Lehga, dated November 15, 1999.                                                                                                                     
|---------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.13 (18) | Lease Agreement between SST and The Irvine
Company, dated November 22, 1999.                                                                                                                                           
|10.14 (19) | Sunnyvale Industrials Net Lease Agreement, dated
June 26, 2000.                                                                                                                                                        
|21.1       | Subsidiaries of SST.                                                                                                                                                                                                   
|23.1       | Consent of PricewaterhouseCoopers LLP,
Independent Accountants.                                                                                                                                                        
|24.1       | Power of Attorney is contained on the signature
page.                                                                                                                                                                  
|31.1       | Certification required by Rule 13a-
14(a).                                                                                                                                                                             
|31.2       | Certification required by Rule 13a-
4(a).                                                                                                                                                                              
|32.1       | Certification of President and Chief Executive
Officer, as required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. 1350).*                                          
|32.2       | Certification of Vice President Finance &
Administration, Chief Financial Officer and Secretary, as required by Rule 13a-14(b)
 and Section 1350 of Chapter 63 of Title 18 of the United States Code (18
U.S.C. 1350).*

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

________

1. Filed as Exhibit 3.2 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
2. Filed as Exhibit 3.4 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
3. Filed as Exhibit 3.5 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, filed on August 7, 2000, and incorporated by reference
herein.
4. Filed as Exhibit 99.3 to our Current Report on Form 8-K filed on May 18,
1999, and incorporated by reference herein.
5. Filed as Exhibit 4.2 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on November 3, 1995, and incorporated by reference
herein.
6. Filed as Exhibit 99.2 to our Current Report on Form 8-K filed on May 18,
1999, and incorporated by reference herein.
7. Filed as Exhibit 3.6 to our Annual Report on Form 10-K for the year ended
December 31, 2000, as amended, filed on March 30, 2001, and incorporated by
reference herein.
8. Filed as amended as Exhibit 99.1 to our Registration Statement on Form S-8,
File No. 333-98135, filed on August 15, 2002, and incorporated by reference
herein.
9. Filed as amended as Exhibit 99.2 to our Registration Statement on Form S-8,
File No. 33-33130, filed on March 23, 2000, and incorporated by reference
herein.
10. Filed as amended as Exhibit 99.2 to our Registration Statement on Form S-8
File No. 33-98135, filed on August 15, 2002, and incorporated by reference
herein.
11. Filed as Exhibit 10.5 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
12. Filed as Exhibit 10.6 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
13. Filed as Exhibit 10.7 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
14. Filed as Exhibit 10.17 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, filed on August 14, 1998, and incorporated by reference
herein.
15. Filed as Exhibit 10.18 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, filed on August 14, 1998, and incorporated by reference
herein.
16. Filed as Exhibit 10.23 to our Annual Report on Form 10-K for the year ended
December 31, 1999, as amended, filed on February 24, 2000, and incorporated by
reference herein.
17. Filed as Exhibit 10.24 to our Annual Report on Form 10-K for the year ended
December 31, 1999, as amended, filed on February 24, 2000, and incorporated by
reference herein.
18. Filed as Exhibit 10.25 to our Annual Report on Form 10-K for the year ended
December 31, 1999, as amended, filed on February 24, 2000, and incorporated by
reference herein.
19. Filed as Exhibit 10.28 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, filed on August 7, 2000, and incorporated by reference
herein.

39

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange 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 15th day of March,
2004.

| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | SILICON STORAGE TECHNOLOGY, INC.
By: /s/ BING YEH 
Bing Yeh
President and Chief Executive Officer
(Principal Executive Officer)

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

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Bing Yeh and  Jack K. Lai, and each or
any one of them, his true and lawful attorney-in-fact and agent, with full power
of substitution and re-substitution, for him and in his name, place and stead,
in any and all capacities, to sign any and all amendments to this report, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.

|Signature                               | Title                                                                                                                       | Date          
|--------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | --------------
|/s/ BING YEH
Bing Yeh                   | President, Chief Executive Officer and Director (Principal
Executive Officer)                                               | March 15, 2004
|/s/ JACK K. LAI
Jack K. Lai             | Vice President Finance & Administration, Chief Financial
Officer and Secretary (Principal Financial and Accounting Officer) | March 15, 2004
|/s/ YAW WEN HU
Yaw Wen Hu               | Director                                                                                                                    | March 15, 2004
|/s/ TSUYOSHI TAIRA
Tsuyoshi Taira       | Director                                                                                                                    | March 15, 2004
|/s/ RONALD CHWANG
Ronald Chwang         | Director                                                                                                                    | March 15, 2004
|/s/ YASUSHI CHIKAGAMI
Yasushi Chikagami | Director                                                                                                                    | March 15, 2004

40

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

|Item                                                                   | Page
|---------------------------------------------------------------------- | ----
|Report of Independent Auditors                                         | 42  
|Consolidated Balance Sheets                                            | 43  
|Consolidated Statements of Operations                                  | 44  
|Consolidated Statements of Shareholders' Equity
and Comprehensive Loss | 45  
|Consolidated Statements of Cash Flows                                  | 46  
|Notes to Consolidated Financial Statements                             | 47  
|Schedule II                                                            | 68  

41

---





REPORT OF INDEPENDENT AUDITORS

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

In our opinion, the consolidated statements listed in the accompanying index
appearing under Item 15 (a) (1) on page 37 present fairly, in all material
respects, the financial position of Silicon Storage Technology, Inc. and its
subsidiaries at December 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2003 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index appearing under Item 15 (a) (2) on
page 37 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 8, 2004, except for Note 11, 
which is as of March 8, 2004

42

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                 (in thousands)

`December 31,
                                                                      --------------------
                                                                        2002       2003
                                                                      ---------  ---------
                               ASSETS
Current assets:
    Cash and cash equivalents....................................... $ 103,751  $ 124,625
    Short-term available-for-sale investments.......................    41,252     60,569
    Trade accounts receivable-unrelated parties, net of allowance
      for doubtful accounts of $4,420 as of December 31, 2002 and
      $1,118 as of December 31, 2003................................    10,723     14,110
    Trade accounts receivable-related parties.......................    25,248     41,220
    Inventories, net................................................    83,040     46,120
    Deferred tax asset..............................................    17,154         --
    Other current assets............................................    29,671     13,232
                                                                      ---------  ---------
       Total current assets.........................................   310,839    299,876
Equipment, furniture and fixtures, net..............................    16,989     11,325
Equity investments..................................................    60,910     58,077
Long-term available-for-sale investments............................     5,862     24,969
Restricted cash and cash equivalents................................    11,976         --
Restricted available-for-sale investments...........................    24,873         --
Deferred tax asset..................................................     5,164         --
Other assets........................................................     3,993      2,114
                                                                      ---------  ---------
           Total assets............................................. $ 440,606  $ 396,361
                                                                      =========  =========

                            LIABILITIES
Current liabilities:
    Notes payable, current portion.................................. $     352  $     393
    Trade accounts payable-unrelated parties........................    28,408     37,342
    Trade accounts payable-related parties..........................     6,689     10,165
    Accrued expenses and other liabilities..........................    18,783     11,911
    Deferred revenue................................................     2,650      3,630
                                                                      ---------  ---------
       Total current liabilities....................................    56,882     63,441
Other liabilities...................................................     1,873      1,423
                                                                      ---------  ---------
       Total liabilities............................................    58,755     64,864
                                                                      ---------  ---------
Commitments (Note 5) and Contingencies (Note 6).

                        SHAREHOLDERS' EQUITY
Preferred Stock, no par value
    Authorized: 7,000 shares
    Series A Junior Participating Preferred Stock, no par value
    Designated: 450 shares
    Issued and outstanding: none....................................        --         --
Common stock, no par value:
    Authorized: 250,000 shares
    Issued and outstanding: 93,295 shares in 2002
    and 95,328 shares in 2003.......................................   339,598    345,384
Accumulated other comprehensive income..............................       151      9,178
Retained earnings (accumulated deficit).............................    42,102    (23,065)
                                                                      ---------  ---------
       Total shareholders' equity...................................   381,851    331,497
                                                                      ---------  ---------
           Total liabilities and shareholders' equity............... $ 440,606  $ 396,361
                                                                      =========  =========`

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

43

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

`Year Ended December 31,
                                                                 -------------------------------
                                                                   2001       2002       2003
                                                                 ---------  ---------  ---------
Net revenues:
    Product revenues - unrelated parties....................... $ 168,593  $ 100,620  $  86,549
    Product revenues - related parties.........................    90,025    143,401    169,980
    License revenues...........................................    35,412     30,637     38,512
                                                                 ---------  ---------  ---------
         Total net revenues....................................   294,030    274,658    295,041
Cost of revenues...............................................   248,161    206,246    218,775
                                                                 ---------  ---------  ---------
Gross profit...................................................    45,869     68,412     76,266
                                                                 ---------  ---------  ---------
Operating expenses:
    Research and development...................................    50,380     47,069     43,144
    Sales and marketing........................................    26,794     25,498     22,272
    General and administrative.................................    17,855     17,097     14,398
    Other (Note 5 and Note 7)..................................     1,346         --     37,849
                                                                 ---------  ---------  ---------
         Total operating expenses..............................    96,375     89,664    117,663
                                                                 ---------  ---------  ---------
Loss from operations...........................................   (50,506)   (21,252)   (41,397)
Interest and other income......................................     7,350      3,197      2,784
Interest expense...............................................      (338)      (214)      (138)
Impairment of equity investments...............................    (3,274)    (7,757)        --
                                                                 ---------  ---------  ---------
Loss before provision for (benefit from) income taxes..........   (46,768)   (26,026)   (38,751)
Provision for (benefit from) income taxes......................   (17,772)   (10,931)    26,416
                                                                 ---------  ---------  ---------
         Net loss.............................................. $ (28,996) $ (15,095) $ (65,167)
                                                                 =========  =========  =========

Net loss per share - basic and diluted......................... $   (0.32) $   (0.16) $   (0.69)
                                                                 =========  =========  =========

Shares used in per share calculation - basic and diluted.......    91,084     92,667     94,723
                                                                 =========  =========  =========`

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

44

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
                                 (in thousands)

`Retained     Accumulated
                                       Common Stock        Earnings        Other
                                   --------------------  (Accumulated  Comprehensive
                                    Shares     Amount      Deficit)        Income        Total
                                   ---------  ---------  ------------  --------------  ---------
Balances, December 31, 2000.......   90,118  $ 330,310  $     86,193  $          132  $ 416,635
    Issuance of shares of
       common stock under
       employees' stock
       purchase and
       option plans...............    1,467      3,679            --              --      3,679
    Net loss......................       --         --       (28,996)             --
    Unrealized gain on
       available for sale
       securities, net of tax.....       --         --            --              93
    Comprehensive loss............       --         --            --              --    (28,903)
                                   ---------  ---------  ------------  --------------  ---------
Balances, December 31, 2001.......   91,585    333,989        57,197             225    391,411
    Issuance of shares of
       common stock under
       employees' stock
       purchase and
       option plans...............    1,710      4,076            --              --      4,076
    Tax benefit from exercise
       of stock options...........       --      1,533            --              --      1,533
    Net loss......................       --         --       (15,095)             --
    Unrealized loss on
       available for sale
       securities, net of tax.....       --         --            --             (74)
    Comprehensive loss............       --         --            --              --    (15,169)
                                   ---------  ---------  ------------  --------------  ---------
Balances, December 31, 2002.......   93,295    339,598        42,102             151    381,851
    Issuance of shares of
       common stock under
       employees' stock
       purchase and
       option plans...............    2,033      4,535            --              --      4,535
    Tax benefit from exercise
       of stock options...........       --      1,251            --              --      1,251
    Net loss......................       --         --       (65,167)             --
    Unrealized gain on
       available for sale
       securities, net of tax.....       --         --            --           9,027
    Comprehensive loss............       --         --            --              --    (56,140)
                                   ---------  ---------  ------------  --------------  ---------
Balances, December 31, 2003.......   95,328  $ 345,384  $    (23,065) $        9,178  $ 331,497
                                   =========  =========  ============  ==============  =========`

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

45

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

`Year Ended December 31,
                                                                    -------------------------------
                                                                      2001       2002       2003
                                                                    ---------  ---------  ---------
Cash flows from operating activities:
      Net loss.................................................... $ (28,996) $ (15,095) $ (65,167)
      Adjustments to reconcile net loss to net cash
         provided by (used in) operating activities:
      Depreciation and amortization...............................     9,799      9,847      7,696
      Provision for doubtful accounts receivable..................     2,251      3,046        228
      Provision for sales returns.................................    32,227      2,842        316
      Provision for excess and obsolete inventories, write down
         of inventory to market and adverse purchase commitments..    73,932     10,441      6,670
      Deferred income taxes.......................................   (19,863)     7,036     22,318
      (Gain) loss on disposition of equipment.....................        72        (92)       114
      Gain on sale of equity investments..........................        --         --       (649)
      Other expenses..............................................     1,346         --         --
      Impairment of equity investments............................     3,274      7,757         --
      Tax benefit from employee stock plans.......................        --      1,533      1,251
      Changes in operating assets and liabilities:
           Trade accounts receivable from unrelated parties.......    55,109      3,263     (3,931)
           Trade accounts receivable from related parties.........    (3,999)    (4,452)   (15,972)
           Inventories............................................  (108,866)    16,024     29,507
           Other current and noncurrent assets....................     3,355    (21,269)    18,318
           Trade accounts payable to unrelated parties............   (15,086)     4,310      8,934
           Trade accounts payable to related parties..............       (86)      (564)     3,476
           Accrued expenses and other liabilities.................   (17,226)     1,588     (6,535)
           Deferred revenue.......................................    (9,775)    (2,849)       980
                                                                    ---------  ---------  ---------
            Net cash provided by (used in) operating activities...   (22,532)    23,366      7,554
                                                                    ---------  ---------  ---------
Cash flows from investing activities:
      Restricted cash.............................................    12,490         --         --
      Repayment of restricted cash................................   (12,490)        --         --
      Acquisition of equipment, furniture and fixtures............   (13,700)    (4,315)    (1,806)
      Proceeds from sale of equipment.............................        75        118         --
      Purchases of available-for-sale investments and
         restricted cash..........................................  (166,538)   (74,272)   (54,958)
      Sales and maturities of available-for-sale investments......   234,928     63,156     65,799
      Investment in equity securities.............................   (52,211)    (1,660)        --
      Cash used in acquisition....................................      (498)        --         --
                                                                    ---------  ---------  ---------
            Net cash provided by (used in) investing activities...     2,056    (16,973)     9,035
                                                                    ---------  ---------  ---------
Cash flows from financing activities:
      Borrowings..................................................     1,800         --         --
      Repayments..................................................      (261)      (316)      (250)
      Issuance of shares of common stock..........................     3,679      4,076      4,535
      Other.......................................................      (230)        --         --
                                                                    ---------  ---------  ---------
            Net cash provided by financing activities.............     4,988      3,760      4,285
                                                                    ---------  ---------  ---------
Net increase (decrease) in cash and cash equivalents..............   (15,488)    10,153     20,874
Cash and cash equivalents at beginning of year....................   109,086     93,598    103,751
                                                                    ---------  ---------  ---------
Cash and cash equivalents at end of year.......................... $  93,598  $ 103,751  $ 124,625
                                                                    =========  =========  =========
Supplemental disclosure of cash flow information:
Cash received for interest........................................ $   8,760  $   3,449  $   2,813
Cash paid for interest............................................ $     356  $     221  $     127
Net cash paid for (received from) income taxes.................... $  12,965  $  (3,189) $  (8,224)`

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

46

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SILICON STORAGE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Operations and Summary of Significant Accounting Policies:

Nature of Operations:

Silicon Storage Technology, Inc. ("SST" or "us" or "we") supplies
flash memory semiconductor devices for digital consumer, networking, wireless
communications and Internet computing markets.  Flash memory is nonvolatile
memory that does not lose data when the power source is removed and is capable
of electronically erasing selected blocks of data.  We license our SuperFlash
technology to other companies for non-competing applications.  Our products are
used in personal computers, personal computer peripheral devices, consumer
electronics and communications devices.  Our products are sold to manufacturers
located primarily in Asia.

Use of Estimates in Preparation of the Financial Statements:

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us 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, Uncertainties and Concentrations:

Our 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 our
operating results adversely.  We currently buy all wafers and die, an integral
component of our products, from outside suppliers and we are dependent on third
party subcontractors to assemble and test our products.  Failure by these
suppliers to satisfy our requirements on a timely basis at competitive prices
could cause us to suffer manufacturing delays, a possible loss of revenues, or
higher than anticipated costs of revenues, any of which could severely adversely
affect operating results.

Since March 2001, we have been increasing our out-sourcing activities for our
end customer service logistics to support our customers.  Currently Silicon
Professional Technology Ltd., or SPT, supports our customers in Taiwan, China
and other Southeast Asia countries.  SPT provides planning, warehousing,
delivery, billing, collection and other logistic functions for us in these
regions.  SPT is a wholly-owned subsidiary of one of our stocking
representatives in Taiwan, Professional Computer Technology Limited, or PCT.
Products shipped to SPT are accounted for as our inventory held at our logistics
center, and revenue is recognized when the products have been delivered and are
considered as a sale to our end customers by SPT.  For the years ended December
31, 2001, 2002 and 2003, SPT serviced end customer sales accounting for 29.7%,
57.4% and 64.2% of our net product revenues recognized.  Further description of
our relationships with PCT and SPT are in Note 11 of these Notes to the
Consolidated Financial Statements.

We ship products to, and have accounts receivable from, original equipment
manufacturers, or OEMs, original design manufacturers, or ODMs, contract
electronic manufacturers, or CEMs, stocking representatives, distributors, and
our logistics center.  Our stocking representatives, distributors and logistics
center reship our products to our end customers, including OEMs, ODMs, CEMs and
end users.  Shipments, by us or our logistic center, to our top three stocking
representatives for reshipment accounted for 10.9%, 16.9% and 29.9% of our
product shipments in 2001, 2002 and 2003, respectively.  In addition, the same
three stocking representatives solicited sales, for which they received a
commission, for 27.5%, 41.3% and 32.8% of our shipments to end users in 2001,
2002 and 2003, respectively.  Our stocking representatives and distributors
could discontinue their relationship with us or discontinue selling our products
at any time.  The loss of our relationship with any of our stocking
representatives or distributors could harm our operating results by impairing
our ability to sell our products to our end customers.  Our logistics center,
SPT, may cease providing services to us at any time.  If SPT were to terminate
their relationship with us we would experience a delay in reestablishing
warehousing, logistics and distribution functions, which could impair our
ability to collect accounts receivable from SPT and may harm our business.

We derived 80.7%, 88.5% and 90.0% of our net product revenues from Asia
during 2001, 2002 and 2003, respectively. In addition, substantially all of our
wafer suppliers and packaging and testing subcontractors are located

47

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in Asia.
Any kind of economic, political or environmental instability in this region of
the world can have a severe negative impact on our operating results due to the
large concentration of our production and sales activities in this region.

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

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

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

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

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

Our corporate headquarters are located in California near major earthquake
faults.  In addition, some of our suppliers are located near fault lines.  In
the event of a major earthquake or other natural disaster near our headquarters,
our operations could be harmed.  Similarly, a major earthquake or other natural
disaster, such as a typhoon, near one or more of our major suppliers, like the
earthquakes in September 1999 and March 2002 or the typhoon in September 2001
that occurred in Taiwan, could potentially disrupt the operations of those
suppliers, which could then limit the supply of our products and harm our
business.

Basis of Consolidation:

The consolidated financial statements include the accounts of SST and
our wholly-owned subsidiaries after elimination of inter-company balances and
transactions. The functional currency of SST and its subsidiaries is the United
States dollar.

Foreign Currency Transactions:

Monetary accounts maintained in currencies other than the United
States dollar are re-measured using the foreign exchange rate at the balance
sheet date. Operational accounts and non-monetary balance sheet accounts are
measured and recorded at the rate in effect at the date of the transactions. The
effects of foreign currency re-measurement are reported in current operations.
The effect of foreign currency re-measurement was not significant in fiscal
years 2001, 2002 or 2003.

Financial Instruments:

Cash equivalents are highly liquid investments with original or
remaining maturities of three months or less as of the dates of purchase.
Highly liquid investments included in cash equivalents are classified as
available-for-sale and are carried at cost, which approximates fair value.  Cash
equivalents present insignificant risk of changes in value

48

---

because of interest
rate changes.  We maintain substantially all of our cash balances with three
major financial and/or brokerage institutions domiciled in the United States and
we have not experienced any material losses relating to these investment
instruments.

Short and long-term investments, which are comprised of federal, state and
municipal government obligations,  foreign and public corporate debt securities
and listed equity 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 as other comprehensive
income.  The cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity, both of which are included in interest
income.  Realized gains and losses are recorded on the specific identification
method.  Realized gains in 2003 were $649 thousand.  Realized gains and losses
were not material in 2001 and 2002.

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.  The
fair value of available-for-sale investments is in Note 2 of these Notes to the
Consolidated Financial Statements.

Financial instruments that potentially subject us to concentrations of credit
risks comprise, principally, cash, cash equivalents, investments and trade
accounts receivable.  We invest our excess cash in accordance with our
investment policy, which has been approved by our Board of Directors and
reviewed periodically.  We perform credit evaluations of new customers and
require those without positive, established histories to pay in advance, upon
delivery or through letters of credit.  Otherwise, we do not require collateral
of our customers, and maintain allowances for potential credit losses.  As of
December 31, 2002 and 2003, SPT represented 68.5% and 73.4% of our net accounts
receivable, respectively.

We have acquired interests in Japanese and Taiwanese companies and a Cayman
Islands company operating in China.  See Note 11 of these Notes to the
Consolidated Financial Statements.  Some of these companies are privately held
and it was not practicable to estimate the fair value of the investments in the
issued untraded common stock.  Investments in privately held companies are
included in "Equity investments" in the balance sheet and are carried at their
original cost.  When a decline in value is other than temporary the securities
are reduced to their estimated fair value.  Some of the Taiwanese companies are
public companies and their stock is traded on the Taiwan Stock Exchange.  Three
of these companies completed initial public offerings in Taiwan during 2003.
Under Taiwan security regulations, a certain number of shares must be held in
central custody subsequent to an initial public offering and are restricted from
sale for a period of time.  Shares required to be held in custody for greater
than a one year period are carried at cost and recorded as equity investments.
The unrestricted shares and the shares available for sale within one year from
the balance sheet date are carried at quoted market price and included in
long-term available for sale investments, with unrealized gains and losses reported
as a separate component of shareholders' equity.  If a loss is other than
temporary, it is reported as an "Impairment of equity investments."  See Note 8
of these Notes to the Consolidated Financial Statements.  Cash dividends and
other distributions of earnings from the investees, if any, are included in
other income when declared.

Inventories:

Inventories are stated at the lower of cost (determined on a
first-first-in, first-out basis) or market value. We typically plan our production and
inventory levels based on internal forecasts of customer demand, which are
highly unpredictable and can fluctuate substantially.  The value of our
inventory is dependent on our estimate of future average selling prices, and, if
our projected average selling prices are not realized, we may be required to
adjust our inventory value to reflect the lower of cost or market.  Due to the
large number of units in our inventory, even a small change in average selling
prices could result in a significant adjustment and have a significant impact on
our financial position and results of operations.  Our inventories include high
technology parts and components that are specialized in nature or subject to
rapid technological obsolescence.  Some of our customers have requested that we
ship them product that has a finished goods date of manufacture that is less
than one year old.  In the event that this becomes a common requirement, it may
be necessary for us to provide for an additional allowance for our on hand
finished goods inventory with a date of manufacture of greater than one year
old, which could result in a significant adjustment and could harm our financial
results.  As of December 31, 2003,

49

---

have a significant impact on our financial
position and results of operations.

Inventory valuation adjustments to cost of sales and adverse purchase
commitments amounted to $72.2 million in 2001, $10.4 million in 2002 and $6.7
million in 2003.  In 2001, 2002 and 2003, $24.5 million, $5.9 million and $3.3
million, respectively, of the adjustment related to lower of cost or market with
the balance due to excess or obsolete inventory.

Equipment, Furniture and Fixtures:

Equipment, furniture and fixtures are stated at cost and depreciated
using the straight-line method over estimated useful lives of three to seven
years.  See Note 3 of these Notes to the Consolidated Financial Statements.

Intangible Assets:

Intangible assets include technology acquired in acquisitions and
technology acquired under licensing arrangements. These amounts are included in
other assets and amortized over estimated lives of three to five years.

Long-Lived Assets:

Long-lived assets include equipment, furniture and fixtures, equity
investments and intangible assets.  Whenever events or changes in circumstances
indicate that the carrying amounts of long-lived assets may not be recoverable,
we estimate the future cash flows, undiscounted and without interest charges,
expected to result from the use of those assets and their eventual disposition.
If the sum of the expected future cash flows is less than the carrying amount of
those assets, we recognize an impairment loss based on the excess of the
carrying amount over the fair value of the assets.

Revenue Recognition:

Sales to direct customers and foreign stocking representatives are
recognized net of an allowance for estimated returns.  When product is shipped
to direct customers or stocking representatives, or by our distributors or SPT
to end users, prior to recognizing revenue, we require that evidence of the
arrangement exists, the price is fixed or determinable and collection is
reasonably assured.  Sales to distributors are made primarily under arrangements
allowing price protection and the right of stock rotation on merchandise unsold.
Because of the uncertainty associated with pricing concessions and future
returns, we defer recognition of such revenues, related costs of revenues and
related gross profit until the merchandise is sold by the distributor.  Products
shipped to SPT are accounted for as our inventory held at our logistics center
and revenue is recognized when the products have been delivered and are
considered as a sale to our end customers by SPT.

For license and other arrangements for technology that we are continuing to
enhance and refine and under which we are obligated to provide unspecified
enhancements, revenue is recognized over the lesser of the estimated period that
we have historically enhanced and developed refinements to the technology,
approximately two to three years (the upgrade period), or the remaining portion
of the upgrade period from the date of delivery, provided all specified
technology and documentation has been delivered, the fee is fixed or
determinable and collection of the fee is reasonably assured.  From time to
time, we re-examine the estimated upgrade period relating to licensed technology
to determine if a change in the estimated upgrade period is needed.  Revenue
from license or other technology arrangements where we are not continuing to
enhance and refine technology or are not obligated to provide unspecified
enhancements is recognized upon delivery, if the fee is fixed or determinable
and collection of the fee is reasonably assured.

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

Research and Development:

Research and development expenses are charged to operations as
incurred.

50

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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 Loss Per Share:

We have computed and presented net loss per share under two methods,
basic and diluted. Basic net loss per share is computed by dividing net loss by
the weighted average number of common shares outstanding for the period.
Diluted net loss per share is computed by dividing net loss by the sum of the
weighted average number of common shares outstanding and potential common shares
(when dilutive).

Stock Compensation:

We account for stock-based compensation using the intrinsic value
method. No compensation cost has been recognized for the stock option plans or
the employee stock purchase plan. Had compensation cost for these plans been
determined based on the fair value at the grant date for the awards, our net
loss and net loss per share for 2001, 2002 and 2003 would have been increased to
the pro forma amounts indicated below (in thousands):

`Year Ended December 31,
                                                        -------------------------------
                                                          2001       2002       2003
                                                        ---------  ---------  ---------
Net loss, as reported................................. $ (28,996) $ (15,095) $ (65,167)
Deduct: total stock-based employee compensation
   expense determined under fair value based method
   for all awards, net of related tax effects.........   (16,677)   (12,112)    (7,601)
                                                        ---------  ---------  ---------
Pro forma net loss.................................... $ (45,673) $ (27,207) $ (72,768)
Pro forma net loss per share - basic and diluted...... $   (0.50) $   (0.29) $   (0.77)`

The fair value of each option grant for both the stock option plans is
estimated on the date of grant using the Black-Scholes multiple options pricing
model with the following weighted average assumptions by year:

`Year Ended December 31,
                                                   -------------------------------
                                                     2001       2002       2003
                                                   ---------  ---------  ---------
Risk-free interest rate..........................   3.9-5.0%   2.8-4.9%   2.4-3.1%
Expected term of option..........................    3 years    6 years    5 years
Expected volatility..............................       100%       100%       100%
Expected dividend yield..........................         0%         0%         0%`

The weighted average fair value of options granted under the Equity Incentive
Plan and the Directors' Plan during 2001, 2002 and 2003 was $4.01, $4.01 and
$6.45, respectively, per share.

The fair value of each stock purchase right is estimated using the Black-
Scholes model with the following weighted average assumptions by year:

`Year Ended December 31,
                                                   -------------------------------
                                                     2001       2002       2003
                                                   ---------  ---------  ---------
Risk-free interest rate..........................   3.6-5.3%   2.1-2.3%   1.0-1.4%
Expected term of right...........................   1/2 year   1/2 year   1/2 year
Expected volatility..............................       100%       100%       100%
Expected dividend yield..........................         0%         0%         0%`

Option grants and Purchase Plan rights 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 weighted average valuation of right grants under the Purchase Plan during
2001, 2002 and 2003 was $7.00, $3.81 and $1.82, respectively, per share.

51

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Comprehensive Loss:

Comprehensive loss is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources.  Comprehensive loss includes unrealized gains and losses
on available-for-sale investments, net of tax.  Other comprehensive gain (loss)
is presented in the statement of shareholders' equity and comprehensive loss.

Reclassifications:

Certain amounts in our prior years consolidated financial statements
have been reclassified to conform to the current year presentation.  These
reclassifications have no impact on our previously reported net loss.

Recent Accounting Pronouncements:

In January 2003, the Financial Accounting Standards Board, or FASB,
issued FIN No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51."  FIN No. 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties.  FIN No. 46 was effective immediately for all new variable
interest entities created or acquired after January 31, 2003.  In December 2003,
the FASB issued a revision of FIN No. 46 that delays the implementation date for
certain interests created or acquired prior to January 31, 2003 until the first
interim or annual period ending after March 15, 2004.  Accordingly, we will
implement FIN No. 46 during the quarter ended March 31, 2004.  We are currently
reviewing our equity investments and associated relationships to determine if
they are variable interest entities as defined by the revised FIN No. 46.  It is
reasonably possible that we are the primary beneficiary of or hold a significant
variable interest in a variable interest entity.  The nature, purpose and
activities of the potential variable interest entities are outlined in Note 11
of our Notes to the Consolidated Financial Statements.  Our maximum exposure to
loss as a result of our involvement with the potential variable interest
entities is our investment in each such entity plus amounts receivable from
these entities as we are not obligated to provide any additional financing.

2. Available-for-Sale Investments:

The fair value of available-for-sale investments, including restricted
available-for-sale investments, as of December 31, 2003 were as follows (in
thousands):

`Amortized  Unrealized   Unrealized     Fair
                                                                   Cost        Gain         Loss        Value
                                                                 ---------  -----------  -----------  ---------
Corporate bonds and notes...................................... $     184  $        --  $        --  $     184
Government bonds and notes.....................................   158,382           14           --    158,396
Foreign listed equity securities...............................     3,759        9,265         (101)    12,923
                                                                 ---------  -----------  -----------  ---------
Total bonds, notes and equity securities....................... $ 162,325  $     9,279  $      (101)   171,503
                                                                 =========  ===========  ===========
Less amounts classified as cash equivalents.............................................               (85,965)
                                                                                                      ---------
     Total short and long-term available-for-sale investments...........................             $  85,538
                                                                                                      =========
Contractual maturity dates for investments in bonds and notes:
     Less than 1 year...................................................................             $  60,569
     1 to 5 year........................................................................                12,046
                                                                                                      ---------
                                                                                                     $  72,615
                                                                                                      =========`

The unrealized gain as of December 31, 2003 is recorded in accumulated other
comprehensive income, net of tax of zero amount.

52

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

`Amortized  Unrealized   Unrealized     Fair
                                                                   Cost        Gain         Loss        Value
                                                                 ---------  -----------  -----------  ---------
Corporate bonds and notes...................................... $     359  $        --  $        --  $     359
Government bonds and notes.....................................   123,763          107           --    123,870
Foreign listed equity securities...............................     1,299          138           --      1,437
                                                                 ---------  -----------  -----------  ---------
Total bonds, notes and equity securities....................... $ 125,421  $       245  $        --    125,666
                                                                 =========  ===========  ===========
Less amounts classified as cash equivalents.............................................               (53,679)
                                                                                                      ---------
     Total short and long-term available-for-sale investments...........................             $  71,987
                                                                                                      =========`

The unrealized gain as of December 31, 2002 is recorded in accumulated other
comprehensive income, net of tax of $94 thousand.  At December 31, 2002, $24.8
million of available-for-sale investments were restricted as security for a bond
associated with a legal contingency.

3. Balance Sheet Detail (in thousands):

Accounts receivables comprise:

`December 31,
                                                                 ----------------------
                                                                   2002        2003
                                                                 ---------  -----------
Trade Accounts Receivable...................................... $  42,178  $    57,749
Allowance for sales returns....................................    (1,787)      (1,301)
Allowance for doubtful accounts................................    (4,420)      (1,118)
                                                                 ---------  -----------
                                                                $  35,971  $    55,330
                                                                 =========  ===========`



Inventories comprise:

`December 31,
                                                                 ----------------------
                                                                   2002        2003
                                                                 ---------  -----------
Raw materials.................................................. $  40,036  $    20,735
Work in process................................................     8,923       11,265
Finished goods.................................................    28,608        9,579
Consigned inventory............................................     5,473        4,541
                                                                 ---------  -----------
                                                                $  83,040  $    46,120
                                                                 =========  ===========`

Other current assets comprise:

`December 31,
                                                                 ----------------------
                                                                   2002        2003
                                                                 ---------  -----------
Refundable income tax.......................................... $  22,744  $     5,533
Other current assets...........................................     6,927        7,699
                                                                 ---------  -----------
                                                                $  29,671  $    13,232
                                                                 =========  ===========`

53

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Equipment, furniture and fixtures comprise:

`December 31,        Estimated
                                                                 ----------------------    Useful
                                                                   2002        2003         Lives
                                                                 ---------  -----------  -----------
Equipment...................................................... $  15,142  $    13,533   Four years
Computer and design hardware...................................     7,937       11,900   Three years
Software.......................................................     8,625        9,768   Three years
Vehicles........................................................       --           12   Five years
Furniture and fixtures.........................................    10,490        9,213   Seven years
                                                                 ---------  -----------
                                                                   42,194       44,426
Less accumulated depreciation..................................    25,762       33,392
                                                                 ---------  -----------
                                                                   16,432       11,034
Construction in progress.......................................       557          291
                                                                 ---------  -----------
                                                                $  16,989  $    11,325
                                                                 =========  ===========`

Depreciation expense was $8.4 million, $9.3 million and $7.7 million for
2001, 2002 and 2003, respectively.

Accrued liabilities comprise:

`December 31,
                                                                 ----------------------
                                                                   2002        2003
                                                                 ---------  -----------
Accrued compensation and related............................... $   5,070  $     4,911
Accrued income tax payable.....................................     6,782          659
Accrued liabilities-related parties............................       473          569
Accrued warranty...............................................       492          187
Other accrued liabilities......................................     5,966        5,585
                                                                 ---------  -----------
                                                                $  18,783  $    11,911
                                                                 =========  ===========`

Accrued warranty:

`Balance at December 31, 2001................................... $   2,883
Accruals for warranties issued during the period...............       460
Settlements made...............................................    (2,851)
                                                                 ---------
Balance at December 31, 2002................................... $     492
Accruals for warranties issued during the period...............       485
Settlements made...............................................      (790)
                                                                 ---------
Balance at December 31, 2003................................... $     187
                                                                 =========`

Our products are generally subject to warranty and we provide for the
estimated future costs of repair, replacement or customer accommodation upon
shipment of the product in the accompanying statements of operations.  Our
warranty accrual is estimated based on historical claims compared to historical
revenues and assumes that we have to replace products subject to a claim.  For
new products, we use our historical percentage for the appropriate class of
product.  Warranty expense has decreased from 2002 to 2003 due to lower return
rates.

Our technology license agreements generally include an indemnification clause
that indemnifies the licensee against liability and damages (including legal
defense costs) arising from any claims of patent, copyright, trademark or trade
secret infringement by our proprietary technology.  The terms of these
guarantees approximate the terms of the technology license agreements, which
typically range from five to ten years.  Our current license agreements expire
from 2004 through 2014.  The maximum possible amount of future payments we could
be required to make, if such indemnifications were required on all of these
agreements, is $36.7 million. We have not recorded any liabilities as of
December 31, 2003 related to these indemnities as no such claims have been made
or asserted.

4. Commitments:

We lease our corporate facilities under non-cancelable operating leases
that expire in 2004 through 2012.  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, we are
responsible for maintenance costs, including real property taxes, utilities and
other costs.  Rent expense was, $5.3 million, $5.4 million and $5.5 million in
2001, 2002 and 2003, respectively.

54

---

During the third quarter of 2001, we recorded a period charge to other
operating expense of $756 thousand relating to an operating lease for an
abandoned building.  This charge represented the estimated difference between
the total non-discounted future sublease income and our non-discounted lease
commitments relating to this building.  The charge was an estimate and may be
adjusted if we obtain a sublease for the building and the actual sublease income
is significantly different from the estimate.  We may be unable to secure
subtenants for such space due to the recent decrease in demand for commercial
rental space in Silicon Valley.  At December 31, 2001, 2002 and 2003, payments
made have reduced the recorded liability to $662 thousand, $473 thousand and
$270 thousand, respectively.

Future minimum rental payments at December 31, 2003 are as follows (in
thousands):

`2004........................................................... $   5,376
2005...........................................................     3,677
2006...........................................................     2,488
2007...........................................................     2,546
2008...........................................................     2,621
Thereafter.....................................................     3,509
                                                                 ---------
                                                                $  20,217
                                                                 =========`

Purchase Commitments:

As of December 31, 2003, we had outstanding purchase commitments with
our foundry vendors of $72.8 million for delivery in 2004.  We have recorded a
liability of $538 thousand for adverse purchase commitments.

5. Contingencies:

In January 1996, Atmel Corporation filed suit against SST alleging that
we infringed six U.S. patents.  We successfully moved for summary judgment on
two of the six asserted patents in September 1997.  In January 2001, Atmel
withdrew its allegation that we infringed another patent.  On May 7, 2002, a
judgment was entered against the us in the amount of $36.5 million.  We appealed
the judgment on July 16, 2002.  On September 12, 2003 the Court of Appeals
upheld the jury's verdict.  On November 18, 2003 the Court of Appeals denied our
request for a rehearing, and in December 2003 we paid Atmel $37.8 million to
satisfy the judgment plus statutory interest accrued during the appeals.  The
payment was recorded as other operating expense in the year ending December 31,
2003.

The other patent remaining in the case, the '903 patent, expired in September
2001.  The trial court has held that, if it is found to be valid, certain of our
products infringed that patent. The trial to determine whether the '903 patent
is invalid began on July 29, 2002.  On August 5, 2002 the jury announced that it
was unable to reach a verdict on our invalidity defense, and a mistrial was
declared.  Atmel requested a new trial, but the Court stayed the matter until
after our appeal of the earlier judgment is resolved.  At Atmel's request, the
Court has directed the parties to conduct a settlement conference before a
Magistrate Judge.  That settlement conference is scheduled for April 14, 2004.
If the parties are unable to reach a settlement agreement, the Court may set a
date for a new trial.  The impact related to the outcome of the remaining patent
is undeterminable at this time.

From time to time, we are also involved in other legal actions arising in the
ordinary course of business.  We have accrued certain costs associated with
defending these matters.  There can be no assurance the remaining Atmel
complaint or other third party assertions will be resolved without costly
litigation, in a manner that is not adverse to our financial position, results
of operations or cash flows or without requiring royalty payments in the future
which may adversely impact gross margins. No estimate can be made of the
possible loss or possible range of loss associated with the resolution of these
contingencies.  As a result, no losses have been accrued in our financial
statements as of December 31, 2003.

6. Shareholders' Equity:

Authorized Capital Shares:

Our authorized capital shares consist of 250.0 million shares of
common stock and 7.0 million shares of preferred stock. Of the preferred stock,
450 thousand shares have been designated as series A junior participating
preferred stock. All of our capital shares have no par value.

55

---



Share Purchase Rights Plan:

We have a Share Purchase Rights Plan, adopted in May 1999 and
subsequently amended, in which preferred stock rights were distributed as a
rights dividend at a rate of one right for each share of common stock held as of
the close of business on May 27, 1999.  Preferred stock rights will also be
issued with any new issuance of common shares. Each Right entitles the
registered holder under certain circumstances to purchase from us one
three-hundredth (one-third of one one-hundredth) of a share of series A junior
participating preferred stock.  Until the occurrence of certain events the
preferred stock rights will be transferable with and only with the Common
Shares.  The effect will be to discourage acquisitions of more than 15 percent
of our common stock without negotiations with our Board of Directors.  The
rights expire May 3, 2009.

Net Loss Per Share:

A reconciliation of the numerator and the denominator of basic and
diluted net loss per share are as follows (in thousands except for per share
data):

`Year Ended December 31,
                                                                 -----------------------------------
                                                                   2001        2002         2003
                                                                 ---------  -----------  -----------
Numerator - Basic and diluted
  Net loss..................................................... $ (28,996) $   (15,095) $   (65,167)
                                                                 =========  ===========  ===========
Denominator - Basic and diluted
  Weighted average common stock outstanding....................    91,084       92,667       94,723
                                                                 =========  ===========  ===========

Basic and diluted net loss per share........................... $   (0.32) $     (0.16) $     (0.69)
                                                                 =========  ===========  ===========`

Stock options to purchase 10.9 million, 10.7 million and 10.1 million shares
of common stock with weighted average price of $7.13, $7.46 and $7.79 were
outstanding at December 31, 2001, 2002 and 2003, respectively, but were not
included in the computation of diluted net loss per share because we had a net
loss in 2001, 2002 and 2003, and inclusion of the shares would be anti-dilutive.

Equity Incentive Plan:

Our 1995 Equity Incentive Plan, or the Equity Incentive Plan, as
amended, has 31.8 million shares of common stock reserved for issuance upon the
exercise of stock options to our employees, directors, consultants and
affiliates.

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 thereafter over periods
ranging from four to five years from the date of grant. The term of any options
issued may not exceed ten years from the date of grant.

Directors' Option Plan:

Our 1995 Non-Employee Directors' Stock Option Plan, or the Directors'
Plan, as amended, provides for the automatic initial grant of options to
purchase 45 thousand shares of our common stock to our non-employee directors.
The Directors' Plan also provides for the grant of options to purchase up to an
additional 18 thousand shares annually thereafter. Options under the Directors'
Plan become exercisable immediately upon date of grant, and the exercise price
of options granted must equal or exceed the fair market value of our common
stock on the date of grant. The options expire ten years after the date of
grant. As of December 31, 2003, we have reserved 950 thousand shares of common
stock for issuance upon the exercise of stock options under the Directors' Plan.

56

---

Activity under the Equity Incentive Plan and Directors' Plan are as
follows (in thousands, except per share data):

`Available           Options Outstanding           Weighted
                                  for    --------------------------------------   Average
                                 Grant    Shares    Price Per Share    Amount      Price
                               --------- --------- -----------------  ---------  ---------
Balances, December 31, 2000...    3,318    10,603 $  0.05 - $ 29.44  $  71,428  $    6.74
     Granted..................   (1,878)    1,878    4.46 -   18.56     11,639       6.20
     Exercised................       --    (1,220)   0.05 -   10.29     (1,294)      1.06
     Terminated...............      374      (374)   0.68 -   29.44     (4,128)     11.02
     Authorized...............    2,000        --         -                 --         --
                               --------- ---------                    ---------
Balances, December 31, 2001...    3,814    10,887    0.05 -   29.44     77,645       7.13
     Granted..................   (1,377)    1,377    3.65 -   10.80      7,133       5.16
     Exercised................       --    (1,193)   0.05 -    8.63     (1,227)      1.03
     Terminated...............      417      (417)   0.68 -   29.44     (4,038)      9.68
     Authorized...............    2,200        --         -                 --         --
                               --------- ---------                    ---------
Balances, December 31, 2002...    5,054    10,654    0.05 -   29.44     79,513       7.46
     Granted..................   (1,337)    1,337    2.30 -   13.57     11,460       8.57
     Exercised................       --    (1,102)   0.05 -   10.29     (2,305)      2.09
     Terminated...............      741      (741)   0.95 -   26.02     (9,523)     12.98
     Authorized...............    1,650        --         -                 --         --
                               --------- ---------                    ---------
Balances, December 31, 2003...    6,108    10,148 $  0.07 - $ 29.44  $  79,145  $    7.79
                               ========= =========                    =========`

At December 31, 2001, 2002 and 2003, 5.4 million, 6.6 million and 6.9 million
options were exercisable at a weighted-average exercise price per share of
$5.06, $6.62 and $7.96, respectively.

Employee Stock Purchase Plan:

Our 1995 Employee Stock Purchase Plan, or the Purchase Plan, as
amended, has 6.0 million shares reserved for issuance. 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 our common stock on the date of the
option grant, or, if lower, 85% of the fair market value of our common stock six
months after the option grant, by withholding up to 10 percent of their annual
base earnings. At December 31, 2003, 2.4 million shares were available for
purchase under the Purchase Plan.  Shares issued under the Purchase Plan in
2001, 2002 and 2003 were 247 thousand, 517 thousand and 931 thousand,
respectively.

The options outstanding and currently exercisable by exercise price
under the Equity Incentive Plan and the Directors' Plan at December 31, 2003 are
as follows:

`Options Outstanding            Options Exercisable
                         ------------------------------------- --------------------------
                                        Weighted-
                                         Average    Weighted-                  Weighted-
                                        Remaining    Average                    Average
    Range of                 Number     Contractual  Exercise      Number       Exercise
 Exercise Prices          Outstanding      Life       Price     Outstanding      Price
------------------------ -------------- ----------  ---------- --------------  ----------
$     0.07 - $     1.04      1,691,720       4.04  $     0.92      1,691,720  $     0.92
$     1.08 - $     2.36      1,109,153       5.14  $     2.00      1,069,083  $     2.00
$     2.54 - $     4.42      1,212,560       8.10  $     3.69        311,106  $     3.80
$     4.46 - $     4.96      1,198,525       7.38  $     4.60        570,576  $     4.72
$     5.00 - $     9.00      1,018,959       7.73  $     7.67        600,751  $     7.64
$     9.28 - $     9.85      1,153,090       8.31  $     9.50        398,086  $     9.83
$     9.92 - $    11.82      1,040,044       5.58  $    11.13        773,359  $    11.09
$    11.85 - $    18.60      1,017,065       6.62  $    17.51        812,022  $    17.88
$    19.96 - $    28.35        690,353       6.45  $    24.11        625,308  $    24.11
$    29.44 - $    29.44         17,160       6.50  $    29.44         14,265  $    29.44
                         --------------                        --------------
$     0.07 - $    29.44     10,148,629       6.48  $     7.79      6,866,276  $     7.96
                         ==============                        ==============`

57

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7. Other Operating Expenses:

Other operating expenses comprised (in thousands):

`Year ended December 31,
                                              ---------------------------------------
                                                  2001          2002         2003
                                              ------------  ------------  -----------
Operating lease impairment.................. $        756  $         --  $        --
Patent impairment...........................          590            --           --
Atmel Settlement............................           --            --       37,849
                                              ------------  ------------  -----------
                                             $      1,346  $         --  $    37,849
                                              ============  ============  ===========`

Operating lease impairment. During the third quarter of 2001,
we recorded a period charge to other operating expense of $756 thousand relating
to an operating lease for an abandoned building.  This charge represents the
estimated difference between the total non-discounted future sublease income and
our non-discounted lease commitments relating to this building.  The charge was
an estimate and may be adjusted if we obtain a sublease for the building and the
actual sublease income is significantly different from the estimate.  We may be
unable to secure subtenants for such space due to the recent decrease in demand
for commercial rental space in Silicon Valley.  At December 31, 2001, 2002 and
2003, payments made have reduced the recorded liability to $662 thousand,  $473
thousand and $270 thousand, respectively.

Patent impairment. During the quarter ended December 31, 2001,
due to the delays in completing the first flash memory device using the Agate
technology, we recorded an expense for impairment of intangible assets of $590
thousand. The assets related to patents acquired as part of the acquisition of
Agate Semiconductor Inc. in December 2000.  We reviewed the recoverability of
the recorded amounts based on expected future cash flows (undiscounted and
before interest) from use of these assets and then determined the impairment
loss of $590 thousand based on the difference between the net book value of the
assets and the estimated fair value of the assets.

Atmel Settlement. In September 2003, the Federal Circuit Court
issued a decision upholding the trial court verdict that we infringed on the
'811 and '829 patents in our lawsuit with Atmel.  As a result of that decision,
we accured the judgement of $36.5 million.  In October 2003, the court denied
our petition to reconsider its decision.  In December 2003, we recorded an
additional $1.3 million in settlement fees related to the interest on the
judgement from the time the judgement was entered in May 2002 to the payment
date of the judgement in December 2003.  The total judgement and interest of
$37.8 million was paid to Atmel in December 2003.

8. Impairment of Equity Investments:

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

During 2001, KYE, a company in which we have an investment, completed an
initial public offering on the Taiwan Stock Exchange.  Since the initial public
offering there had been a significant decline in the market value of the
investment. We had concluded that the decline in value is "other-than-temporary"
and a write down of $3.3 million was necessary as of December 31, 2001.  The
investment was written down to $1.3 million based on the quoted market price as
of December 31, 2001.  The recorded value of our KYE investment was $3.2 million
based on the quoted market price as of December 31, 2003.

58

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9. Income Taxes:

The provision for income taxes reflected in the statements of operations
for the years ended December 31, 2001, 2002 and 2003 are as follows (in
thousands):

`Year Ended December 31,
                                       ---------------------------------
                                         2001        2002        2003
                                       ---------  -----------  ---------
Current:


      Federal                         $   2,078  $    (3,912) $   2,516
      State..........................         1            1          2
      Foreign........................        12           16      1,580
                                       ---------  -----------  ---------
                                          2,091       (3,895)     4,098
                                       ---------  -----------  ---------
Deferred:
      Federal........................   (16,518)      (5,874)    16,818
      State..........................    (3,345)      (1,162)     5,500
                                       ---------  -----------  ---------
                                        (19,863)      (7,036)    22,318
                                       ---------  -----------  ---------
                                      $ (17,772) $   (10,931) $  26,416
                                       =========  ===========  =========`

Our effective tax rate (benefit)/provision differs from the statutory federal
income tax rate as shown in the following schedule:

`Year Ended December 31,
                                       ----------------------------------
                                          2001        2002        2003
                                       ---------- ------------ ----------
United States statutory rate.........     (35.0)%      (35.0)%    (35.0)%
State taxes, net of federal benefit..      (3.0)        (4.5)        --
Foreign taxes, net...................       0.2           --        4.0
Research and development credit......      (3.0)        (5.9)      (4.8)
Tax exempt interest..................        --         (2.5)      (2.0)
Capital loss carried forward and not
   benefitted........................        --         10.4         --
Change in estimated tax contingency..        --         (4.3)        --
Change in valuation allowance........        --           --      106.1
Other................................       2.8         (0.2)      (0.1)
                                       ---------- ------------ ----------
                                          (38.0)%      (42.0)%     68.2 %
                                       ========== ============ ==========`

59

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As of December 31, 2002 and 2003 our deferred tax assets and liabilities
consisted of (in thousands):

`December 31,
                                                  ----------------------
                                                     2002        2003
                                                  -----------  ---------
Allowance for excess and obsolete inventory..... $     6,096  $   2,552
Allowance for sales returns.....................         691        457
Allowance for doubtful accounts.................       1,709        419
Deferred revenue................................       1,546         --
Other...........................................         803      2,803
Capitalized research and development............          --      2,052
Net operating loss carry-forwards...............       1,731     10,516
Depreciation....................................         648        803
Tax credits.....................................       9,094     21,512
                                                  -----------  ---------
Total deferred tax asset........................ $    22,318  $  41,114
Valuation allowance.............................          --    (41,114)
                                                  -----------  ---------
Net deferred tax asset                           $    22,318  $      --
                                                  ===========  =========

Current portion................................. $    17,154  $      --
Long-term portion...............................       5,164         --
                                                  -----------  ---------
                                                 $    22,318  $      --
                                                  ===========  =========`

Our provision for taxes included a charge recorded during the third quarter of
2003 to establish a full valuation allowance against our deferred tax assets
offset by a reduction in income tax payable as a result of a reassessment of
expected liabilities for 2003 and certain exposures.  Accordingly, for 2003 we
recorded a net charge of $26.4 million.  During the fourth quarter of 2003, we
maintained a full valuation allowance on our net deferred tax assets. The
valuation allowance was determined in accordance with the provisions of
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes," which requires an assessment of both
positive and negative evidence when determining whether it is more likely than
not that deferred tax assets are recoverable; such assessment is required on a
jurisdiction by jurisdiction basis. Cumulative losses incurred in the U.S. in
recent years represented sufficient negative evidence under SFAS No. 109 and
accordingly, a full valuation allowance was recorded against U.S. deferred tax
assets. We intend to maintain a full valuation allowance on the U.S. deferred
tax assets until sufficient positive evidence exists to support reversal of the
valuation allowance.

At December 31, 2003, we had available $27.5 million for federal
and $35.8 million for state net operating loss carry-forwards.  These net
operating losses, if not utilized, expire in 2023 and 2024. $2.0 million of net
operating losses relates to stock options, which when realized will be credited
to equity.  At December 31, 2003 we also had available research and development
credit carry-forwards for federal and state income tax purposes of $10.6 million
and $5.5 million, respectively.  The federal carry-forwards expire between 2017
and 2024.  In addition, we have $4.6 million of foreign tax credit
carry-forwards which will expire in 2009.

10. Segment Reporting:

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

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

SMPG includes our three standard flash memory product families: the
Multi-Purpose Flash, or MPF, family, the Multi-Purpose Flash Plus, or MPF+, family and
the Many-Time Programmable, or MTP, family.  These families allow us to produce
products optimized for cost, functionality and quality to support a broad range
of mainstream applications that use nonvolatile memory products.  Effective
January 1, 2003, we transferred certain MTP products

60

---

from SMPG to SPG.
Effective July 1, 2003, we transferred the Small Sector Flash, or SSF, family
from SMPG to SPG.  Accordingly, our segment revenues and gross profit
information have been reclassified for presentation purposes as if the transfer
occurred as of January 1, 2001.

ASPG includes Concurrent SuperFlash, Serial Flash, Firmware Hub, or FWH, and
Low Pin Count, or LPC, flash products. These products are designed to address
specific applications such as cellular phones, hard disk drives and PCs.  ASPG
also includes flash embedded controllers such the ATA flash disk controller to
consumer, industrial and mass data storage applications.  Effective January 1,
2003, we transferred FlashFlex51 microcontroller products from ASPG to SPG.
Accordingly, our segment revenue and gross margin information have been
reclassified for presentation purposes as if the transfer occurred as of January
1, 2001.

SPG includes ComboMemory, ROM/RAM Combos, the Small Sector Flash, or SSF,
family, certain Multi-Time Programmable, or MTP, family, FlashFlex51
microcontrollers and other special flash products.   These products are used in
applications requiring low power and a small form factor such as cellular
phones, wireless modems, MP3 players, pagers and digital organizers.  Effective
January 1, 2003, we transferred certain MTP products from SMPG to SPG and
FlashFlex51 microcontroller products from ASPG to SPG.  Effective July 1, 2003,
we transferred the SSF family from SMPG to SPG.  Accordingly, our segment
revenue and gross margin information have been reclassified for presentation
purposes as if the transfer occurred as of January 1, 2001.

Technology licensing includes both up front license fees and royalties.

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

`Year Ended December 31, 2003
                                          --------------------------
                                                           Gross
                                            Revenues    Profit (Loss)
                                          ------------  ------------
SMPG.................................... $    173,126  $     23,047
ASPG....................................       60,481        11,723
SPG.....................................       22,922         2,984
Technology Licensing....................       38,512        38,512
                                          ------------  ------------
                                         $    295,041  $     76,266
                                          ============  ============


                                         Year Ended December 31, 2002
                                          --------------------------
                                                           Gross
                                            Revenues    Profit (Loss)
                                          ------------  ------------
SMPG.................................... $    147,037  $      6,803
ASPG....................................       67,792        24,138
SPG.....................................       29,192         6,834
Technology Licensing....................       30,637        30,637
                                          ------------  ------------
                                         $    274,658  $     68,412
                                          ============  ============


                                         Year Ended December 31, 2001
                                          --------------------------
                                                           Gross
                                            Revenues    Profit (Loss)
                                          ------------  ------------
SMPG.................................... $    118,831  $    (25,101)
ASPG....................................       89,643        35,953
SPG.....................................       50,144          (395)
Technology Licensing....................       35,412        35,412
                                          ------------  ------------
                                         $    294,030  $     45,869
                                          ============  ============`

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Our net revenues are all denominated in U.S. dollars and are summarized as
follows (in thousands):

`Year ended December 31,
                                              ---------------------------------------
                                                  2001          2002         2003
                                              ------------  ------------  -----------
United States............................... $     28,592  $     21,871  $    19,600
Europe......................................       21,332        10,599        9,957
Japan.......................................       23,549        28,465       27,575
Korea.......................................       22,039        30,321       25,214
Taiwan......................................      110,847        91,219      109,254
China (including Hong Kong).................       57,146        70,609       76,107
Other Asian countries.......................       28,157        21,574       27,334
Rest of world...............................        2,368            --           --
                                              ------------  ------------  -----------
                                             $    294,030  $    274,658  $   295,041
                                              ============  ============  ===========`

Foreign revenue is based on the country to which the product
is shipped by us or our logistics center.

The locations and net book value of long-lived assets
follows:

`December 31,
                                              --------------------------
                                                  2002          2003
                                              ------------  ------------
United States............................... $     15,747  $     10,052
China.......................................          752           855
Taiwan......................................          378           299
Other.......................................          112           119
                                              ------------  ------------
                                             $     16,989  $     11,325
                                              ============  ============`

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11. Equity Investments and Related Party Reporting:

Equity investments comprise (in thousands):

`December 31, 2003
                                                  ----------------------------------------------
                                                     Equity     Available for Sale     Total
                                                  Investments     Investments at      Equity
                                                    at Cost     Fair Market Value   Investment
                                                  ------------  ------------------  -----------
Apacer Technology, Inc.......................... $      4,358  $               --  $     4,358
Grace Semiconductor Manufacturing Corporation...       50,000                  --       50,000
Insyde Software Corporation.....................          466                 397          863
King Yuan Electronics Company, Limited..........           --               3,218        3,218
Powertech Technology, Incorporated..............        1,206               5,498        6,704
Professional Computer Technology Limited........          775               3,810        4,585
Silicon Technology Co., Ltd.....................          939                  --          939
Other...........................................          333                  --          333
                                                  ------------  ------------------  -----------
                                                 $     58,077  $           12,923  $    71,000
                                                  ============  ==================  ===========

                                                               December 31, 2002
                                                  ----------------------------------------------
                                                     Equity     Available for Sale     Total
                                                  Investments     Investments at      Equity
                                                    at Cost     Fair Market Value   Investment
                                                  ------------  ------------------  -----------
Apacer Technology, Inc.......................... $      4,358  $               --  $     4,358
Grace Semiconductor Manufacturing Corporation...       50,000                  --       50,000
Insyde Software Corporation.....................          964                  --          964
King Yuan Electronics Company, Limited..........           --               1,437        1,437
Powertech Technology, Incorporated..............        2,532                  --        2,532
Professional Computer Technology Limited........        1,784                  --        1,784
Silicon Technology Co., Ltd.....................          939                  --          939
Other...........................................          333                  --          333
                                                  ------------  ------------------  -----------
                                                 $     60,910  $            1,437  $    62,347
                                                  ============  ==================  ===========`

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The following table is a summary of our related party revenues and purchases
(in thousands):

`Year Ended
                                                          December 31, 2003
                                                  --------------------------------
                                                    Revenues         Purchases
                                                  ------------  ------------------
Silicon Technology Co., Ltd..................... $      3,615  $               --
Apacer Technology, Inc and related entities.....        1,555               2,361
Silicon Professional Technology Ltd.............      164,810                  --
Grace Semiconductor Manufacturing Corporation...           --                  12
King Yuan Electronics Company, Limited..........           --              19,659
Powertech Technology, Incorporated..............           --               9,280
                                                  ------------  ------------------
                                                 $    169,980  $           31,312
                                                  ============  ==================

                                                             Year Ended
                                                          December 31, 2002
                                                  --------------------------------
                                                    Revenues         Purchases
                                                  ------------  ------------------
Silicon Technology Co., Ltd..................... $      2,089  $               --
Acer and related entities (1)...................          269                  --
Apacer Technology, Inc and related entities.....          899                 588
Professional Computer Technology Limited........          141                  --
Silicon Professional Technology Ltd.............      140,003                  --
King Yuan Electronics Company, Limited..........           --              18,163
Powertech Technology, Incorporated..............           --               8,378
                                                  ------------  ------------------
                                                 $    143,401  $           27,129
                                                  ============  ==================

                                                             Year Ended
                                                          December 31, 2001
                                                  --------------------------------
                                                    Revenues         Purchases
                                                  ------------  ------------------
Silicon Technology Co., Ltd..................... $      3,728  $               --
Acer and related entities (1)...................        5,129                 290
Apacer Technology, Inc and related entities.....          280                 626
Ocean Contract Manufacturing Ltd................        4,019                  --
Professional Computer Technology Limited........       76,869                  --
King Yuan Electronics Company, Limited..........           --              21,827
Powertech Technology, Incorporated..............           --               9,031
                                                  ------------  ------------------
                                                 $     90,025  $           31,774
                                                  ============  ==================`

(1) Excludes Apacer Technology, Inc. balances.

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The following table is a summary of our related party accounts receivable and
accounts payable and accruals (in thousands):

`December 31, 2002         December 31, 2003
                                              --------------------------  -----------------------
                                                              Accounts                  Accounts
                                                Accounts    Payable and    Accounts    Payable and
                                               Receivable     Accruals    Receivable    Accruals
                                              ------------  ------------  -----------  ----------
Silicon Technology Co., Ltd................. $        459  $         --  $       232  $       --
Ambit Microsystems Corp.....................           --            --           --           4
Apacer Technology, Inc and related entities.          141           119          400         736
Professional Computer Technology Limited....           --            73           --          15
Silicon Professional Technology Ltd.........       24,648           432       40,588         550
King Yuan Electronics Company, Limited......           --         4,285           --       6,896
Powertech Technology, Incorporated..........           --         2,253           --       2,533
                                              ------------  ------------  -----------  ----------
                                             $     25,248  $      7,162  $    41,220  $   10,734
                                              ============  ============  ===========  ==========`

In 1996, we acquired a 14% interest in Silicon Technology Co., Ltd., or
Silicon Technology, a privately held Japanese company, for $939 thousand in
cash.  Bing Yeh, our president, CEO and Board Director, is also a member of
Silicon Technology's board of directors.  We acquired the interest in Silicon
Technology in order to provide a presence for our products in Japan.  We now
have our own office in Japan, although Silicon Technology continues to sell our
products to smaller customers.  At December 31, 2003, our investment, which is
carried at cost, represented  9% of the outstanding equity of Silicon
Technology.  Our sales to Silicon Technology were made at prevailing market
prices and the payment terms are consistent with the payment terms extended to
our other customers.  We are not obligated to provide Silicon Technology with
any additional financing.

Dr. Ronald Chwang, a member of our Board of Directors, is also a director of
Ambit Microsystems Corp., which is a related entity of Acer Incorporated, or
Acer.

In 2000, we acquired a 10% interest in Apacer Technology, Inc, or Apacer, for
$9.9 million in cash.  Apacer, a privately held Taiwanese company and a related
entity of Acer, is a memory module manufacturer.  Bing Yeh, our president, CEO
and Board Director, is also a member of Apacer's board of directors.  In 2001,
we invested an additional $2.1 million in Apacer.  In August 2002, we made an
additional investment of $181 thousand.  The investment was written down to $4.4
million during 2002, refer to Note 8 of these Notes to the Consolidated
Financial Statements.  At December 31, 2003, our investment represented  10% of
the outstanding equity of Apacer.

In 2000, we acquired a 15% interest in Professional Computer Technology
Limited, or PCT, a privately held Taiwanese company, for $1.5 million in cash.
Bing Yeh, our president, CEO and Board Director, is also a member of PCT's board
of directors.  PCT is one of our stocking representatives.  In May 2002, we made
an additional investment of $179 thousand in PCT.  During 2003, PCT completed an
initial public offering on the Taiwan Stock Exchange and we sold a portion of
our holdings.  Under Taiwan security regulations, certain numbers of shares must
be held in a central custody and are restricted from sale for a period of time.
The shares available for sale within one year are carried at the quoted market
price and included in long-term available-for-sale investments in the balance
sheet as of December 31, 2003.  Shares required to be held in custody for
greater than a one year period are carried at cost and included in equity
investments.  At December 31, 2003 our investment represented 13% of the
outstanding equity of PCT.  February 2004, we purchased $1.7 million of PCT's
European convertible bonds.

PCT and its subsidiary, Silicon Professional Alliance Corporation, or SPAC,
earn commissions for point-of-sales transactions to its customers.  Commissions
to PCT and SPAC are paid at the same rate as all of our other stocking
representatives in Asia.  In 2001, 2002 and 2003 we paid sales commissions of
$1.7 million, $2.5 million and $1.2 million, respectively, to PCT and SPAC.
Shipments, by us or our logistics center, to PCT and SPAC for reshipment
accounted for 8.5%, 10.3% and 27.3% of our product shipments in 2001, 2002 and
2003.  In addition, PCT and SPAC solicited sales, for which they earned a
commission, for 13.4%, 19.5% and 12.0% of our shipments to end users in 2001,
2002 and 2003, respectively.

In March 2001, PCT established a separate company and wholly-owned
subsidiary, Silicon Professional Technology Ltd., or SPT, to provide planning,
warehousing, delivery, billing, collection and other logistic functions for us
in Taiwan.  SPT now services substantially all of our end customers based in
Taiwan, China and other Southeast Asia

65

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countries.  Product shipped to SPT is
accounted for as our inventory held at our logistics center, and revenue is
recognized when the products have been delivered and are considered as a sale to
our end customers by SPT.  We pay SPT a fee based on a percentage of revenue for
each product sold through SPT to our end customers.  The fee paid to SPT covers
the cost of warehousing and insuring inventory and accounts receivable,
personnel costs required to maintain logistics and information technology
functions and the costs to perform billing and collection of accounts
receivable.  SPT receives extended payment terms and must pay us whether or not
they have collected the accounts receivable.

In 2000, we acquired a 1% interest in King Yuan Electronics Company Limited,
or KYE, a publicly held Taiwanese company, which is a production subcontractor,
for $4.6 million in cash.  A member of our management team holds one supervisor
position at KYE.  The role and responsibilities of a supervisor are defined and
governed by Corporate Law in Taiwan.  The investment was made in KYE in order to
strengthen the relationship between us and KYE.  During 2001, KYE completed an
initial public offering on the Taiwan Stock Exchange.  Accordingly, the
investment has been included in long-term available-for-sale investments in the
balance sheet as of December 31, 2002 and 2003.  The investment was written down
to $1.3 million during 2001, refer to Note 8 of these Notes to the Consolidated
Financial Statements, and is valued at $3.2 as of December 31, 2003 based on the
quoted market price.  At December 31, 2003, our investment represented 0.5% of
the outstanding equity of KYE.

In 2000, we acquired a 3% interest in Powertech Technology, Inc., or PTI, a
privately held Taiwanese company, which is a production subcontractor, for $2.5
million in cash.  During 2003, PTI completed an initial public offering on the
Taiwan Stock Exchange and we sold a portion of our holdings.  Under Taiwan
security regulations, certain numbers of shares must be held in a central
custody and are restricted from sale for a period of time.  The shares available
for sale within one year are carried at the quoted market price and included in
long-term available-for-sale investments in the balance sheet as of December 31,
2003.  Shares required to be held in custody for greater than a one year period
are carried at cost and included in equity investments.  At December 31, 2003,
our investment represented 3% of the outstanding equity of PTI.

In 2001, we acquired a 9% interest in Grace Semiconductor Manufacturing
Corporation, or GSMC, a privately held Cayman Islands company for $50.0 million
cash.  Bing Yeh, our president, CEO and Board Director, is also a member of
GSMC's board of directors.  In addition, a member of our management team holds
one supervisor position at GSMC.  The role and responsibilities of a supervisor
are defined and governed by Corporate Law in the Cayman Islands.  This
investment is carried at cost.  GSMC has a wholly owned subsidiary, Shanghai
Grace Semiconductor Manufacturing Corporation, or Grace, which is a wafer
foundry company with operations in China.  At December 31, 2003, our investment
represented 7% of the outstanding equity of GSMC.  In March 2004, we committed
to invest an additional $33.2 million in GSMC.

In 2002, we acquired a 6% interest in Insyde Software Corporation, or Insyde,
a privately held Taiwanese company, for $964 thousand in cash.  Bing Yeh, our
president, CEO and Board Director, is also a member of Insyde's board of
directors.  During 2003, Insyde completed an initial public offering on the
Taiwan Stock Exchange.  Under Taiwan security regulations, certain numbers of
shares must be held in a central custody and are restricted from sale for a
period of time.  The shares available for sale within one year are carried at
the quoted market price and included in long-term available-for-sale investments
in the balance sheet as of December 31, 2003.  Shares required to be held in
custody for greater than a one year period are carried at cost and included in
equity investments.  At December 31, 2003, our investment represented 6% of the
outstanding equity of Insyde.

12. Employee Benefit Plans:

Profit Sharing Plan:

We have a Profit Sharing Plan under which employees may collectively
earn up to 10% of our operating profit, provided that both net earnings before
interest income (expense), net 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 net 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.  We
plan to pay profit sharing sums, when available, to employees twice a year.  No
profit sharing was paid in relation to 2001, 2002 or 2003.

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401(k) Plan:

We have adopted the SST 401(k) Tax Sheltered Savings Plan and Trust,
or 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.  At
our discretion, we may make additional contributions on behalf of employees.
All employee contributions are 100% vested.  During 2001, 2002 and 2003, we
matched the first $1,000 of each employees' contribution, for a total of $436
thousand, $405 thousand and $384 thousand, respectively.

67

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SCHEDULE II

SILICON STORAGE TECHNOLOGY, INC.

                        VALUATION AND QUALIFYING ACCOUNTS

                                 (in thousands)

`Balance at  Charged to    Write-off   Balance at
                                                   Beginning    Costs and   of Accounts    End of
Description                                        of Period    Expenses      /Other       Period
-------------------------------------------------  ----------  -----------  -----------  ----------
Year ended December 31, 2001
  Allowance for doubtful accounts................ $      783  $     2,251  $       220  $    2,814
  Allowance for sales returns.................... $    8,207  $    32,227  $    35,936  $    4,498
  Allowance for excess and obsolete inventories.. $    2,516  $    73,932  $    28,701  $   47,747
  Valuation allowance on deferred tax assets..... $       --  $        --  $        --  $       --


Year ended December 31, 2002
  Allowance for doubtful accounts................ $    2,814  $     3,046  $     1,440  $    4,420
  Allowance for sales returns.................... $    4,498  $     2,842  $     5,553  $    1,787
  Allowance for excess and obsolete inventories.. $   47,747  $     9,160  $    29,466  $   27,441
  Valuation allowance on deferred tax assets..... $       --  $        --  $        --  $       --


Year ended December 31, 2003
  Allowance for doubtful accounts................ $    4,420  $       228  $     3,530  $    1,118
  Allowance for sales returns.................... $    1,787  $       316  $       802  $    1,301
  Allowance for excess and obsolete inventories.. $   27,441  $     6,670  $    22,894  $   11,217
  Valuation allowance on deferred tax assets..... $       --  $    41,114  $        --  $   41,114`