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<TITLE>10-Q</TITLE>
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<H1 align=center><FONT SIZE=3>UNITED STATES<BR>SECURITIES AND EXCHANGE COMMISSION<BR>
Washington, D.C. 20549</FONT></H1>
<P align=center>____________ </P>
<H1 align=center><FONT SIZE=3>FORM 10-Q</FONT></H1>
<P>(Mark One)</P>
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<TD WIDTH=5%><B>[X]</B>
</TD>
<TD WIDTH=95%><P><B>QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.<BR>For the quarterly period
ended June 30, 1999.</B> </P></TD></TR></TABLE>
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<BR>
<P><B>OR</B></P>
<BR>
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<TD WIDTH=5%><B>[_]</B>
</TD>
<TD WIDTH=95%><P><B>TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.<BR>For the transition period from ________
to _________.</B> </P></TD></TR></TABLE>
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<H1 align=center><FONT SIZE=3>Commission File Number 0-26944</FONT></H1>
<P align=center><B>SILICON STORAGE TECHNOLOGY, INC.</B><BR>(Exact name of Company as
specified in its charter) </P>
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<TD ALIGN=LEFT WIDTH=50%><B>California</B><BR>(State or other jurisdiction of<BR>incorporation or organization)</TD>
<TD ALIGN=RIGHT WIDTH=50%><B>77-0225590</B><BR>(I.R.S. Employer Identification No.)</TD></TR>
<TR>
<TD ALIGN=LEFT WIDTH=50%> </TD>
<TD ALIGN=RIGHT WIDTH=50%> </TD></TR>
<TR valign=bottom>
<TD ALIGN=LEFT WIDTH=50%><B>1171 Sonora Court, Sunnyvale, CA</B><BR>(Address of principal executive offices)</TD>
<TD ALIGN=RIGHT WIDTH=50%><B>94086</B><BR> (Zip Code)</TD></TR>
<TR valign=bottom>
<TD ALIGN=LEFT WIDTH=50%> </TD>
<TD ALIGN=RIGHT WIDTH=50%> </TD></TR>
<TR valign=bottom>
<TD ALIGN=LEFT WIDTH=50%>Company’s telephone number, including area code:</TD>
<TD ALIGN=RIGHT WIDTH=50%><B>(408) 735-9110</B></TD></TR></TABLE>
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<P align=center>____________ </P>
<P>Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___.</P>
<P>Number of shares outstanding of the Company’s Common Stock, no par value, as
of the latest practicable date, July 31, 1999: 24,327,426. Total number of
pages in document: 20. Index to Exhibits is on page 18.</P>
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<H1 align=center><FONT SIZE=3> SILICON STORAGE TECHNOLOGY, INC.</FONT></H1>
<H1 align=center><FONT SIZE=3>FORM 10-Q: QUARTER ENDED JUNE 30, 1999<BR>TABLE OF
CONTENTS</FONT></H1>
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<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="600">
<TR VALIGN="BOTTOM">
<TD WIDTH="93%" ALIGN="LEFT"><FONT SIZE="-1"><B>Part I - FINANCIAL INFORMATION</B></FONT></TD>
<TD WIDTH="3%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="2%" ALIGN="RIGHT"><FONT SIZE="-1"></FONT></TD>
<TD WIDTH="2%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Item 1. Condensed Consolidated Financial Statements:</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Condensed Consolidated Statements of Operations</FONT></TD><TD ALIGN="LEFT">
<FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">3</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Condensed Consolidated Balance Sheets</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1">
</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">4</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Condensed Consolidated Statements of Cash Flows</FONT></TD><TD ALIGN="LEFT">
<FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">5</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Notes to Condensed Consolidated Financial Statements</FONT></TD><TD ALIGN="LEFT">
<FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">6</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Item 2. Management’s Discussion and Analysis of Financial Condition and</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Results of Operations</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT>
</TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">10</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Item 3. Quantitative and Qualitative Disclosures About Market Risk</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">17</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"><B>Part II - OTHER INFORMATION</B></FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Item 1. Legal Proceedings</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">17</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Item 2. Changes in Securities</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">18</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Item 6. Exhibits and Reports on Form 8-K</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">18</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
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<H1 align=center><FONT SIZE=3>PART I</FONT></H1>
<H2 ALIGN=LEFT><FONT SIZE=3>Item 1. Condensed Consolidated Financial Statements</FONT></H2>
<H1 align=center><FONT SIZE=4>SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY<BR>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS<BR>(in thousands, except per share
data)</FONT></H1>
</TD>
</TR>
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<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="600">
<TR VALIGN="BOTTOM">
<TH COLSPAN="2"><FONT SIZE="-2"></FONT></TH>
<TH COLSPAN="4"><FONT SIZE="-2"> Three months ended June 30, </FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH>
<TH COLSPAN="4"><FONT SIZE="-2">Six months ended June 30,</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH></TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN="2"><FONT SIZE="-2"></FONT></TH>
<TH COLSPAN="2"><FONT SIZE="-2">1999</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH>
<TH COLSPAN="2"><FONT SIZE="-2">1998</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH>
<TH COLSPAN="2"><FONT SIZE="-2">1999</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH>
<TH COLSPAN="2"><FONT SIZE="-2">1998</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH></TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN="2"><FONT SIZE="-2"></FONT></TH>
<TH COLSPAN="4"><FONT SIZE="-2"> (unaudited)</FONT></TH>
<TH COLSPAN="4"><FONT SIZE="-2">(unaudited)</FONT></TH></TR>
<TR VALIGN="BOTTOM">
<TD WIDTH="51%" ALIGN="LEFT"><FONT SIZE="-1">Net Revenues:</FONT></TD>
<TD WIDTH="3%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE="-1"></FONT></TD>
<TD WIDTH="4%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE="-1"></FONT></TD>
<TD WIDTH="4%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE="-1"></FONT></TD>
<TD WIDTH="4%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE="-1"></FONT></TD>
<TD WIDTH="2%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Product revenues</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 20,433</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 16,422</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 38,226</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 32,176</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> License revenues</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">2,558</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">402</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">3,093</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">1,013</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="10"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Total net revenues</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">22,991</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">16,824</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">41,319</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">33,189</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="10"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Costs and expenses:</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Cost of revenues</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">18,025</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">13,406</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">35,004</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">27,796</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Research and development</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">4,479</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">3,447</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">9,213</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">6,502</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Sales and marketing</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">2,268</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">1,716</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">4,465</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">3,335</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> General and administrative</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">39</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">1,768</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">1,245</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">2,935</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Other non-recurring charges</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">2,011</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">—</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">2,011</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">—</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="10"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">26,822</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">20,337</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">51,938</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">40,568</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="10"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Income (loss) from operations</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(3,831</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(3,513</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(10,619</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(7,379</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Interest and other income (expense), net</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">226</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">468</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">477</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">1,009</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="10"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Income (loss) before provision for</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> (benefit from) income taxes</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(3,605</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(3,045</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(10,142</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(6,370</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Provision for (benefit from) income taxes</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">25</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(1,803</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">65</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(2,803</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR>
<TD COLSPAN="10"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Net income (loss)</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($ 3,630</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($ 1,242</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($10,207</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($ 3,567</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR>
<TD COLSPAN="10"><HR NOSHADE SIZE="2"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Net income (loss) per share - basic and diluted</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($ 0.15</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($ 0.05</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($ 0.44</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($ 0.16</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR>
<TD COLSPAN="10"><HR NOSHADE SIZE="2"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Shares used in per share calculations</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">23,656</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">22,863</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">23,425</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">22,912</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="10"><HR NOSHADE SIZE="2"></TD></TR>
</TABLE>
<BR><BR><BR><BR>
<TABLE WIDTH=600>
<TR>
<TD>
<P align=center>The accompanying notes are an integral part of these condensed
consolidated financial statements. </P>
</TD>
</TR>
</TABLE>
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<TD>
<H1 align=center><FONT SIZE=3>SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY<BR>
CONDENSED CONSOLIDATED BALANCE SHEETS<BR>(in thousands)</FONT></H1>
</TD>
</TR>
</TABLE>
<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="600">
<TR VALIGN="BOTTOM">
<TH COLSPAN="2"><FONT SIZE="-2"></FONT></TH>
<TH COLSPAN="2"><FONT SIZE="-2">June 30,<BR>1999</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH>
<TH COLSPAN="2"><FONT SIZE="-2">December 31,<BR>1998</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH></TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN="2"><FONT SIZE="-2"></FONT></TH>
<TH COLSPAN="4"><FONT SIZE="-2">(unaudited)</FONT></TH></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> <B>ASSETS</B>
</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD WIDTH="70%" ALIGN="LEFT"><FONT SIZE="-1">Current assets:</FONT></TD>
<TD WIDTH="3%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE="-1"></FONT></TD>
<TD WIDTH="5%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE="-1"></FONT></TD>
<TD WIDTH="2%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Cash and cash equivalents</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 17,518</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 23,007</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Short-term investments</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">—</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">851</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Accounts receivable, net</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">13,314</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">9,249</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Accounts receivable from related parties</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">3,489</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">2,838</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Inventories, net</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">12,709</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">8,297</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Other current assets</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">2,686</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">2,615</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Total current assets</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">49,716</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">46,857</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Furniture, fixtures, and equipment, net</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">9,245</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">6,847</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Other assets</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">5,196</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">2,434</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Total assets</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 64,157</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 56,138</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="2"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> <B>LIABILITIES</B></FONT>
</TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Current liabilities:</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Trade accounts payable</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 21,374</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 10,309</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Accrued expenses and other current liabilities</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">4,544</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">5,309</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Deferred revenue</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">4,079</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">1,827</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Total current liabilities</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">29,997</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">17,445</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Other liabilities</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">587</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">663</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Total liabilities</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">30,584</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">18,108</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> <B>SHAREHOLDERS’ EQUITY</B></FONT></TD><TD
ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Common stock and deferred stock compensation</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">59,319</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">53,569</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Retained earnings (accumulated deficit)</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(25,746</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(15,539</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Total shareholders’ equity</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">33,573</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">38,030</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Total liabilities and shareholders’ equity</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 64,157</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 56,138</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="2"></TD></TR>
</TABLE>
<BR><BR><BR>
<TABLE WIDTH=600>
<TR>
<TD>
<P align=center>The accompanying notes are an integral part of these condensed
consolidated financial statements. </P>
</TD>
</TR>
</TABLE>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 29, page: 29" -->
<HR SIZE=5 NOSHADE>
<TABLE WIDTH=600>
<TR>
<TD>
<H1 align=center><FONT SIZE=3>SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY<BR>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS<BR>(in thousands)</FONT></H1>
</TD>
</TR>
</TABLE>
<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="600">
<TR VALIGN="BOTTOM">
<TH COLSPAN="2"><FONT SIZE="-2"></FONT></TH>
<TH COLSPAN="4"><FONT SIZE="-2">Six months ended June 30,</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH></TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN="2"><FONT SIZE="-2"></FONT></TH>
<TH COLSPAN="2"><FONT SIZE="-2">1999</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH>
<TH COLSPAN="2"><FONT SIZE="-2">1998</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH></TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN="2"><FONT SIZE="-2"></FONT></TH>
<TH COLSPAN="4"><FONT SIZE="-2">(unaudited)</FONT></TH></TR>
<TR VALIGN="BOTTOM">
<TD WIDTH="75%" ALIGN="LEFT"><FONT SIZE="-1"><B>Cash flows from operating activities:</B></FONT></TD>
<TD WIDTH="3%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE="-1"></FONT></TD>
<TD WIDTH="4%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE="-1"></FONT></TD>
<TD WIDTH="2%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Net income (loss)</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($10,207</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($ 3,567</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Adjustments to reconcile net income (loss) to net cash</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> provided by (used in) operating activities:</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Depreciation /amortization</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">2,268</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">2,193</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Provision for doubtful accounts receivable</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">32</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(475</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Provision for excess and obsolete inventories</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">24</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(807</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> (Gain) loss on sale of equipment</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">1</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">6</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Purchases in-process research and development</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">2,011</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">—</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Changes in operating assets and liabilities</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> (in 1999 net of effects of acquisition):</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Accounts receivable</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(3,774</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(3,201</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Accounts receivable from related parties</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(651</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(2,013</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Inventories</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(4,336</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(7,640</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Other current and noncurrent assets</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">291</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(6</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Trade accounts payable</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">10,552</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(4,859</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Accrued expenses and other liabilities</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(934</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">343</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Deferred revenue</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">2,140</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">726</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Net cash provided by (used in) operating activities</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(2,583</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(19,300</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"><B>Cash flows from investing activities:</B></FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Acquisition of furniture, fixtures and equipment</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(4,361</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(2,174</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Purchases of available-for-sale investments</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">—</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(24,313</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Sales and maturities of available-for-sale investments</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">851</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">37,160</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Cash acquired in acquisition</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">110</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">—</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Other</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">—</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(500</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Net cash provided by (used in) investing activities</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(3,400</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">10,173</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"><B>Cash flows from financing activities:</B></FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Payments on intellectual properties</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(76</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">—</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Issuance of shares of common stock</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">570</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">312</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Repurchase of common stock</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">—</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(1,584</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Net cash provided by (used in) financing activities</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">494</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(1,272</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Net increase (decrease) in cash and cash equivalents</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(5,489</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(10,399</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Cash and cash equivalents at beginning of period</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">23,007</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">26,743</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Cash and cash equivalents at end of period</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 17,518</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 16,344</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="2"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"><B>Supplemental Disclosure of Cash Flow Information:</B></FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Common stock issued on acquisition of Linvex</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 4,794</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">—</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Common stock issued on conversion of Linvex liabilities</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 476</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">—</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
</TABLE>
<BR><BR><BR>
<TABLE WIDTH=600>
<TR>
<TD>
<P align=center>The accompanying notes are an integral part of these condensed
consolidated financial statements. </P>
</TD>
</TR>
</TABLE>
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<H1 align=center><FONT SIZE=3> SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARY</FONT></H1>
<H2 ALIGN=LEFT><FONT SIZE=3>NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AT JUNE 30, 1999 (UNAUDITED)</FONT></H2>
<H2 ALIGN=LEFT><FONT SIZE=3>1. Basis of Presentation</FONT></H2>
<P>In the course of normal day to day activities we are commonly referred to by
our initials SST. Throughout this document we will refer to Silicon Storage
Technology, Inc. as “SST”.</P>
<P>In the opinion of management, the accompanying unaudited condensed interim
consolidated financial statements contain all adjustments (all of which are
normal and recurring in nature) necessary to fairly present our financial
position, results of operations and cash flows. The results of operations for
the interim periods presented are not necessarily indicative of the results
that may be expected for any future interim periods or for the full fiscal
year. These interim financial statements should be read in conjunction with the
financial statements in our Annual Report on Form 10-K for the year ended
December 31, 1998.</P>
<P>The year-end balance sheet at December 31, 1998 was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles.</P>
<P>Direct sales to customers are recognized upon shipment of product net of an
allowance for estimated returns. Sales to distributors are made primarily under
arrangements allowing price protection and the right of stock rotation on
merchandise unsold to distributors. Because of the uncertainty associated with
pricing concessions and future returns, SST defers recognition of such
revenues, related costs of revenues and related gross profit until the
merchandise is sold by the distributor to the end user.</P>
<P>Revenue from license or other technology arrangements is recognized upon the
delivery of all specified technology documentation and/or products if the fee
is fixed and determinable, collection of the fee is probable, and there are no
remaining obligations of SST. For license and other arrangements under which we
are obligated to provide unspecified upgrades, revenue is recognized over the
remaining estimated economic life of the technology beginning upon delivery of
all specified technology documentation or products. During the quarter ended
June 30, 1999, we examined the useful life of technologies relating to our
license agreements and determined that we no longer maintain or update certain,
older technologies for our licensees, resulting in a change in estimate of the
remaining economic life of these technologies. As a result of the change in
estimate, $500,000 of previously deferred up front license fee payments was
recognized as license revenue in the financial statements for the period ending
June 30, 1999.</P>
<P><I>Recent Accounting Pronouncements</I></P>
<P>In June, 1998, the Financial Accounting Standards Boards issued Statement of
Financial Accounting Standards No. 133, “Accounting for Derivative Instruments
and Hedging Activities” (SFAS 133). SFAS 133 established a new model for
accounting for derivative and hedging activities. In July, 1999, the Financial
Accounting Standard Boards issued SFAS No. 137 “Accounting for Derivative
Instruments and Hedging Activities – Deferral of the Effective Date of FASB
Statement No. 133” (SFAS 137). SFAS 137 deferred the effective date of SFAS 133
until the first fiscal quarter beginning after June 15, 2000. The impact of the
implementation of SFAS 133 on the consolidated financial statements of SST has
not yet been determined.</P>
<P>SST adopted Statement of Financial Accounting Standards No. 130, “Reporting
Comprehensive Income” (SFAS 130). SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. There was no difference between SST’s net income
(loss) and its total comprehensive income (loss) for the periods reported on in
these financial statements.</P>
<H2 ALIGN=LEFT><FONT SIZE=3>2. Computation of Net Income (Loss) Per Share</FONT></H2>
<P>Basic net income (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding for the period.
Diluted net income (loss) per share is computed by dividing net income (loss)
by the sum of the weighted average number of common shares outstanding and
potential common shares (when dilutive).</P>
</TD>
</TR>
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<P>A reconciliation of the numerator and the denominator of basic and diluted
income (loss) per share is as follows (in thousands, except per share amounts):</P>
<BR>
</TD>
</TR>
</TABLE>
<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="600">
<TR VALIGN="BOTTOM">
<TH COLSPAN="2"><FONT SIZE="-2"></FONT></TH>
<TH COLSPAN="4"><FONT SIZE="-2">Three months ended June 30,</FONT></TH>
<TH COLSPAN="4"><FONT SIZE="-2">Six months ended June 30,</FONT></TH></TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN="2"><FONT SIZE="-2"></FONT></TH>
<TH COLSPAN="2"><FONT SIZE="-2">1999</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH>
<TH COLSPAN="2"><FONT SIZE="-2">1998</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH>
<TH COLSPAN="2"><FONT SIZE="-2">1999</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH>
<TH COLSPAN="2"><FONT SIZE="-2">1998</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH></TR>
<TR VALIGN="BOTTOM">
<TD WIDTH="53%" ALIGN="LEFT"><FONT SIZE="-1">Numerator - Basic and Diluted:</FONT></TD>
<TD WIDTH="3%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE="-1"></FONT></TD>
<TD WIDTH="3%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE="-1"></FONT></TD>
<TD WIDTH="3%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE="-1"></FONT></TD>
<TD WIDTH="4%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE="-1"></FONT></TD>
<TD WIDTH="2%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Net income (loss)</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($ 3,630</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($ 1,242</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($10,207</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($ 3,567</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR>
<TD COLSPAN="10"><HR NOSHADE SIZE="2"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Denominator - Basic & Diluted:</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Weighted average common stock outstanding</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">23,656</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">22,863</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">23,425</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">22,912</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="10"><HR NOSHADE SIZE="2"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Net income (loss) per share - Basic and Diluted</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($ 0.15</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($ 0.05</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($ 0.44</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">($ 0.16</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR>
<TD COLSPAN="10"><HR NOSHADE SIZE="2"></TD></TR>
</TABLE>
<TABLE WIDTH=600>
<TR>
<TD>
<BR>
<P>Stock options to purchase 1,101,000 shares of common stock were outstanding
as of June 30, 1999 and 1,292,000 shares of common stock were outstanding as of
June 30, 1998. These stock options were not included in the computation of
diluted loss per share for either period because we had net losses for the six
months ended June 30, 1999 and June 30, 1998.</P>
<H2 ALIGN=LEFT><FONT SIZE=3>3. Inventories (in thousands):</FONT></H2>
<P>Inventories are stated at the lower of cost (first-in, first-out) or market
(estimated net realizable value). Inventories at June 30, 1999 and December 31,
1998 are as follows:</P>
</TD>
</TR>
</TABLE>
<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="600">
<TR VALIGN="BOTTOM">
<TH COLSPAN="2"><FONT SIZE="-2"></FONT></TH>
<TH COLSPAN="2"><FONT SIZE="-2">June 30,<BR>1999</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH>
<TH COLSPAN="2"><FONT SIZE="-2">December 31,<BR>1998</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH></TR>
<TR VALIGN="BOTTOM">
<TD WIDTH="42%" ALIGN="LEFT"><FONT SIZE="-1">Raw Material</FONT></TD>
<TD WIDTH="8%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="20%" ALIGN="RIGHT"><FONT SIZE="-1">$ 636</FONT></TD>
<TD WIDTH="8%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="20%" ALIGN="RIGHT"><FONT SIZE="-1">$ 311</FONT></TD>
<TD WIDTH="2%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Work in process</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">7,915</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">4,717</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Finished goods</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">4,158</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">3,269</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$12,709</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$8,297</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="6"><HR NOSHADE SIZE="2"></TD></TR>
</TABLE>
<TABLE WIDTH=600>
<TR>
<TD>
<H2 ALIGN=LEFT><FONT SIZE=3>4. Acquisition</FONT></H2>
<P>On June 4, 1999, we purchased all of the outstanding capital stock of Linvex
Technology, Corp. (“Linvex”), a privately held, memory design company located
in Sunnyvale, California, in exchange for 789,370 shares of SST common stock
with a fair market value of $4.7 million. The purchase price of $4.8 million,
which includes acquisition costs of $0.1 million, was accounted for using the
purchase method of accounting, which means that the purchase price was
allocated to the assets acquired and liabilities assumed based on the estimated
fair values at the date of the acquisition. The results of operations of Linvex
have been included with those of SST since June 4, 1999, the date that the
acquisition was consummated.</P>
<P>The fair value of the assets of Linvex, which was determined through
established valuation techniques used by an independent appraiser, and a
summary of the consideration exchanged for these assets is as follows (in
thousands):</P>
<BR>
</TD>
</TR>
</TABLE>
<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="600">
<TR VALIGN="BOTTOM">
<TD WIDTH="84%" ALIGN="LEFT"><FONT SIZE="-1">Total purchase price</FONT></TD>
<TD WIDTH="4%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE="-1">$ 4,794</FONT></TD>
<TD WIDTH="2%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="4"><HR NOSHADE SIZE="2"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Assets acquired:</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Tangible assets, primarily cash, accounts receivable,</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> and computer software</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 701</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Core technology</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">2,827</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Completed products</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">163</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Workforce</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">272</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> Purchased in-process research and development</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">2,011</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Liabilities assumed</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">(1,180</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR>
<TD COLSPAN="4"><HR NOSHADE SIZE="1"></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ 4,794</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR>
<TD COLSPAN="4"><HR NOSHADE SIZE="2"></TD></TR>
</TABLE>
<TABLE WIDTH=600>
<TR>
<TD>
<BR>
<P>The amount allocated to the core technology, the completed products, for
which technological feasibility had been established at the acquisition date,
and the workforce is amortized on a straight line basis over three years. At
June 30, 1999 accumulated amortization related to these items was $91,000. The
amount of the purchase price allocated to purchased in-process research and
development, which had no alternative future use and relates to a product for
which technological feasibility had not been established, was expensed at the
acquisition date.</P>
</TD>
</TR>
</TABLE>
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<TD>
<P>In addition, after the purchase, notes and deferred salary payable to
shareholders and employees of $476,000 were converted into an additional
106,436 shares of SST’s common stock.</P>
<P>Summarized below are the unaudited pro forma results of SST as though Linvex
had been acquired at the beginning of January 1, 1998. Adjustments have been
made for the estimated increases in amortization related to the purchased of
core technology, completed products and workforce, and other appropriate pro
forma adjustments.</P>
<BR>
</TD>
</TR>
</TABLE>
<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="600">
<TR VALIGN="BOTTOM">
<TH COLSPAN="2"><FONT SIZE="-2"></FONT></TH>
<TH COLSPAN="2"><FONT SIZE="-2">December 31,</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH>
<TH COLSPAN="2"><FONT SIZE="-2">June 30,</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH></TR>
<TR VALIGN="BOTTOM">
<TH COLSPAN="2"><FONT SIZE="-2"></FONT></TH>
<TH COLSPAN="2"><FONT SIZE="-2">1998</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH>
<TH COLSPAN="2"><FONT SIZE="-2">1999</FONT><HR WIDTH=95% SIZE=1 NOSHADE></TH></TR>
<TR VALIGN="BOTTOM">
<TD WIDTH="56%" ALIGN="LEFT"><FONT SIZE="-1">Revenue</FONT></TD>
<TD WIDTH="5%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="15%" ALIGN="RIGHT"><FONT SIZE="-1">$ 70,515</FONT></TD>
<TD WIDTH="7%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD WIDTH="15%" ALIGN="RIGHT"><FONT SIZE="-1">$ 41,836</FONT></TD>
<TD WIDTH="2%" ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Net income (loss)</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$(19,495</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ (9,428</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="-1">Net income (loss) per share</FONT></TD><TD ALIGN="LEFT"><FONT SIZE="-1"> </FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ (0.82</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD>
<TD ALIGN="RIGHT"><FONT SIZE="-1">$ (0.39</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="-1">)</FONT></TD></TR>
</TABLE>
<TABLE WIDTH=600>
<TR>
<TD>
<BR>
<P>The above amounts are based upon certain assumptions and estimates which we
believe are reasonable and do not reflect any benefit from economies which
might be achieved from combined operations. The pro forma financial information
presented above is not necessarily indicative of either the results of
operations that would have occurred had the acquisition taken place at the
beginning of fiscal 1998 or of future results of operations of the combined
companies. The charge for purchased in process research and development has not
been included in the pro forma results above because it is nonrecurring and
directly related to the acquisition.</P>
<H2 ALIGN=LEFT><FONT SIZE=3>5. Contingencies</FONT></H2>
<P>On January 3, 1996, Atmel Corporation (“Atmel”) sued us in the U.S. District
Court for the Northern District of California. Atmel’s complaint alleges that
by making, using and selling devices, we are willfully infringing on five U.S.
patents owned by or exclusively licensed to Atmel. Atmel later amended its
complaint to allege infringement of a sixth patent. Regarding each of these six
patents, Atmel seeks a judgment that the we 1) have infringed the patent, 2) an
injunction prohibiting future infringement and 3) treble the amount of damages
caused by the alleged infringement and attorney’s fees, costs and expenses. On
four of the six patents, the District court has granted in our favor a
judgement that we did not infringe. Atmel has appealed the decisions. The trial
on the remaining issues has been postponed until Atmel’s appeal is heard.</P>
<P>On February 17, 1997, Atmel filed an action with the International Trade
Commission (“ITC”) against two suppliers of our parts. The action involves
certain of the patents that Atmel has alleged we are infringing. We intervened
as a party to that investigation. Pursuant to indemnification agreements with
these suppliers, we have agreed to indemnify both to the extent that it is
required to do so under the agreements. On July 9, 1998, the ITC entered its
opinion of finding no violation by us. Atmel has appealed the decision. The
Federal Circuit has ordered the ITC to reconsider its decision on one of the
patents. No schedule has been set for the new hearing.</P>
<P>On September 14, 1998, Intel sued us in the U.S. District Court for the
Northern District of California, San Jose Division. Intel’s complaint alleged
that, by making, using and selling devices, we were willfully infringing four
U.S. patents owned by Intel. Regarding each of these four patents, Intel sought
1) a judgment that we infringed on the patent, 2) an injunction prohibiting
further infringement, and 3) an accounting of all damages caused by the alleged
infringement, treble the amount of damages caused by the alleged infringement
and attorney’s fees, costs and expenses. The Company denied infringement of any
of the Intel patents and counter-claimed for invalidity and non-infringement of
the Intel patents. Through a neutral mediation, a settlement of the pending
litigation was reached on May 13, 1999. The settlement was immaterial to the
Company’s financial statements.</P>
<P>On July 31, 1998, we filed suit against Winbond Electronics of Taiwan
(“Winbond”) in the U.S. District Court for the Northern District of California,
San Jose Division. We are suing for breach of contract and breach of covenant
of good faith and fair dealing. We are seeking 1) damages and an injunction
prohibiting Winbond from using any of the technology we licensed to them and 2)
a return of technical material transferred to them under the original license
agreement. Winbond has answered the complaint and has counter-claimed 1) for a
declaration that it is not in material breach of the agreement, 2) that the
Company has breached the agreement, 3) that the Company has breached the
covenant of good faith and fair dealing, 4) that the Company has interfered
with prospective economic advantage, 5) that the Company has engaged in
unlawful business practice in violation of the California Business and
Profession Code, 6) that the Company has committed acts of common law unfair
competition and 7) that it is not obligated to pay us under the agreement
and/or they own or jointly own the technology embodied in their products.
Winbond also seeks restitution of the payments made. We have replied by denying
these charges. We believe that the substantive allegations in the Winbond
counter-claim are without merit and intend to vigorously defend ourselves
against the action.</P>
</TD>
</TR>
</TABLE>
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<TD>
<P>From time to time, we are also involved in other legal actions arising in
the ordinary course of business. While we have accrued certain amounts for the
estimated legal costs associated with defending these matters, there can be no
assurance the Atmel complaint, the Winbond complaint or other third party
assertions will be resolved without costly litigation, in a manner that is not
adverse to the Company’s financial position, results of operations or cash
flows or without requiring royalty payments in the future which may adversely
impact gross margins. No estimate can be made of the possible loss or possible
range of loss associated with the resolution of these contingencies.</P>
<H2 ALIGN=LEFT><FONT SIZE=3>6. Share Purchase Rights Plan</FONT></H2>
<P>In May 1999, SST adopted a Share Purchase Rights Plan (the “Rights Plan”) 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. The effect will be to discourage acquisitions of more than 15
percent of SST’s common stock without negotiations with the Board of Directors.
The rights expire May 3, 2009.</P>
</TD>
</TR>
</TABLE>
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<TD>
<H2 ALIGN=LEFT><FONT SIZE=3>Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.</FONT></H2>
<P><I>The following discussion may be understood more fully by reference to the
condensed consolidated financial statements, notes to the condensed
consolidated financial statements, and management’s discussion and analysis of
financial condition and results of operations contained in SST’s Annual Report
on Form 10-K for the year ended December 31, 1998, as filed with the Securities
and Exchange Commission.</I></P>
<P><I>The following discussion contains forward-looking statements, which involve
risk and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors.
Factors that could cause or contribute to such differences include, but are
limited to</I>:</P>
</TD>
</TR>
</TABLE>
<BR>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>•
</TD>
<TD WIDTH=94%><P>the availability, timely
delivery and cost of wafers from our suppliers; </P></TD></TR></TABLE>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>•
</TD>
<TD WIDTH=94%><P>competitive pricing pressures
and related changes in average selling prices; </P></TD></TR></TABLE>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>•
</TD>
<TD WIDTH=94%><P>fluctuations in manufacturing
yields; </P></TD></TR></TABLE>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>•
</TD>
<TD WIDTH=94%><P>new product announcements and
introductions of competing products by us or our competitors; </P></TD></TR></TABLE>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>•
</TD>
<TD WIDTH=94%><P>changes in demand for, or in the
mix of, our products; </P></TD></TR></TABLE>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>•
</TD>
<TD WIDTH=94%><P>the gain or loss of significant
customers; </P></TD></TR></TABLE>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>•
</TD>
<TD WIDTH=94%><P>competitive payment terms
extended to customers; </P></TD></TR></TABLE>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>•
</TD>
<TD WIDTH=94%><P>market acceptance of products
utilizing our SuperFlash® technology; </P></TD></TR></TABLE>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>•
</TD>
<TD WIDTH=94%><P>changes in the channels through
which our products are distributed; </P></TD></TR></TABLE>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>•
</TD>
<TD WIDTH=94%><P>currency exchange rate
fluctuations; </P></TD></TR></TABLE>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>•
</TD>
<TD WIDTH=94%><P>economic changes in the Far East; </P></TD></TR></TABLE>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>•
</TD>
<TD WIDTH=94%><P>unanticipated research and
development expenses associated with new product introductions; </P></TD></TR></TABLE>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>•
</TD>
<TD WIDTH=94%><P>the timing of significant orders; </P></TD></TR></TABLE>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>•
</TD>
<TD WIDTH=94%><P>general economic conditions; and </P></TD></TR></TABLE>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>•
</TD>
<TD WIDTH=94%><P>a downturn in the market for
products which incorporate our products. </P></TD></TR></TABLE>
<TABLE WIDTH=600>
<TR>
<TD>
<BR>
<P><I>All of these factors, and other factors, are difficult to forecast and can
materially affect SST’s quarterly or annual operating results. Fluctuations in
revenues and operating results may cause volatility in SST’s stock price.
Please refer to the section entitled “Risk Factors” in our Form 10-K for the
year ended December 31, 1998 for additional discussion.</I></P>
<H2 ALIGN=LEFT><FONT SIZE=3>Results of Operations: Quarter and Six Months Ended
June 30, 1999</FONT></H2>
<P><I>Overview.</I> We were incorporated in California in 1989 and we design,
manufacture, and sell flash memory devices that address high volume
applications such as personal computers, or PCs, disk drives, modems, pagers
and cellular phones. Flash memory devices are semiconductor chips that store
program code or data and are electronically erasable and re-programmable in the
system. In-system programmable, or ISP, devices are more cost effective for
manufacturers to use than earlier technologies because ISP devices allow
manufacturers to make changes to program codes while the device is inside the
product, rather than having to remove the device from the system in order to
perform the reprogramming. ISPs can therefore simplify a system manufacturer’s
inventory management and manufacturing process by allowing the manufacturer to
respond faster to product cycles and changing market specifications.</P>
<P>Currently, we offer small sector, low and medium density devices that target
a broad range of existing and emerging applications in the personal computer
motherboards, PC peripheral, communications, consumer and industrial markets.
In addition, we design and are beginning to market a variety of high density
flash devices, 8 and 16 Megabit, and 8-bit flash microcontrollers, all of which
incorporate and are manufactured using our proprietary SuperFlash technology.
These higher density memory products address broader markets such as networking
systems, digital cellular phones, telecommunications, set-top boxes, personal
digital assistants (PDAs), pagers and printer font storage. Our memory products
are differentiated based upon certain attributes, such as density, voltage,
access speed, packaging and predicted reliability.</P>
<P>In addition, we manufacture and sell CompactFlash Cards which leverage SST’s
patented ATA controller technology and flash memory design expertise to offer
favorable data transfer rates, which results in better speed for users for
applications such as digital cameras, voice recorders, personal organizers and
PDSs.</P>
<P>In addition to designing, manufacturing and selling flash memory devices, we
license our technology to wafer foundries and other semiconductor companies to
manufacturer products for non-competing applications and receive license fees
and royalty payments from such arrangements.</P>
</TD>
</TR>
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<P>The average selling prices for our products are extremely volatile and for
the past two years has continued to significantly decline which has resulted in
losses. The semiconductor memory industry is very competitive and has in recent
years experienced severe product price erosion, rapid technological change and
product obsolescence. Historically, the selling prices for semiconductor memory
products fluctuate significantly with changes in the supply and demand for
these products. During 1998, industry overcapacity resulted in greater than
normal price declines in our markets, which unfavorably impacted our revenues,
gross margins, and profitability. We expect this price erosion may continue for
some time. Growth in worldwide supply outpaced growth in demand during 1998. To
respond to these pressures, we are attempting to accelerate our cost reduction
efforts. We are also developing new products to expand and diversify our
application and geographic base. However, we cannot assure you that these cost
reduction and new product development activities will be implemented quickly
enough to offset the impact of further declines in average selling prices on
gross margins and operating results.</P>
<P>In addition, we only have limited internal capability to manufacture our
products and we rely on third parties to perform substantially all of our
manufacturing. In addition, we only have very limited internal capacity to test
all of our products. We currently buy all of our wafers, an integral component
of our products, from a limited number of suppliers. During 1998, substantially
all of our wafers and sorted die were supplied by two foundries, Sanyo Electric
Co., Ltd. (Sanyo) in Japan and Taiwan Semiconductor Manufacturing Company
(TSMC) in Taiwan. If these suppliers fail to satisfy our requirements on a
timely basis and at competitive prices we could suffer manufacturing delays, a
possible loss of revenues or higher than anticipated cost of revenues, which
would affect operating results adversely.</P>
<P>As recently as June 30, 1999 we were unable to meet all of the demand for
our products, and have in the past failed to meet scheduled shipment dates, due
to our inability to obtain a sufficient supply of wafers and sorted die from
our foundries. Our current contract foundries, together with any additional
foundry at which capacity might be obtained, may not be willing or able to
satisfy all of our purchase and/or delivery requirements on a timely basis at
favorable prices. In addition, we have encountered delays at our subcontractors
in the process of qualifying new products and in the process of ramping new
product production. New product qualification and production ramp-up times at
any additional foundry, assuming an additional foundry could be found at all,
could take longer than anticipated. We are also subject to the risks of service
disruptions, raw material shortages and price increases by the foundries. Such
disruptions, shortages and price increases could have a material adverse effect
on our operating results.</P>
<P><I>Net Revenues.</I> Net revenues were $41.3 million for the six months ended June
30, 1999 as compared to $33.2 million for the six months ended June 30, 1998.
Net revenues of $23.0 million in the second quarter of 1999 represented a 37%
increase from $16.8 million in the second quarter of 1998.</P>
<P>Product revenues were $38.2 million in the first six months of 1999 compared
to $32.2 million for the same period of 1998. Product revenues increased to
$20.4 million in the second quarter of 1999 from $16.4 million in the second
quarter of 1998. Approximately 25% of product revenues in the second quarter of
1999 were from shipments of eighteen new products introduced since the second
quarter of 1998. While the weighted average selling price across all products
declined 30% between the second quarter of 1998 to the second quarter of 1999,
unit shipments increased 79%.</P>
<P>License, royalty and development revenues were $2.6 million in the second
quarter of 1999 compared to $400,000 in the second quarter of 1998. Current
quarter license revenues included $2.3 million in revenue from the recognition
of new and existing license agreements and $300,000 in royalty payments for the
use of our technology. Such license agreements or royalty payments may or may
not recur in future quarters. Most of SST’s license agreements require the
payment of a one-time up-front license fee that generally does not recur in the
future.</P>
<P>International sales comprised approximately 92% of shipment revenue dollars
for the six months ended June 30, 1999 and 1998. For the six months ended June
30, 1999, 33% of shipment dollars were from Taiwan, 17% from Japan and 22% from
China. International sales accounted for approximately 87% of world-wide
product revenues during the second quarter of 1999, compared to 91% during the
second quarter of 1998. Product revenues in Taiwan accounted for 34% of
world-wide product revenues in the second quarter of 1999 as compared to 19% in
the second quarter of 1998. Product revenues in Japan accounted for 18% of
world-wide product revenues in the second quarter of 1999 as compared to 16% in
the second quarter of 1998. Product revenues in China accounted for 19% of
world-wide product revenues in the second quarter of 1999 as compared to 25% in
the second quarter of 1998. We anticipate that international sales will account
for substantially all of our product revenues for the foreseeable future,
although percentages may vary.</P>
</TD>
</TR>
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<P>For the second quarter of 1999, product shipments for PC BIOS applications
increased to approximately 33% of total product revenue from 21% in the second
quarter of 1998. Shipment revenues for PC peripheral applications increased to
35% of total product revenue from 29%. Product shipment revenue in the second
quarter of 1999 for consumer products, such as toys, video games and electronic
organizers, decreased to 16% of total product revenue from 32% for second
quarter of 1998. Product shipment revenues in the second quarter of 1999 for
communication products, such as modems and cordless phones, increased to 11% of
total product revenue from 2% of total product revenue in the second quarter of
1998. While we intend to continue to diversify both the product applications
and customer base, we cannot assure you that such diversification will be
successful.</P>
<P><I>Gross Profit/Margin.</I> Gross profit was $6.3 million, or a gross margin of
15% of net revenues, for the six months ended June 30, 1999 as compared to $5.4
million, or 16% of net revenues, for the for the six months ended June 30,
1998. Gross profit margin increased to $5.0 million, or 22% gross margin, in
the second quarter of 1999 from $3.4 million, or 20% gross margin, for the
comparable quarter of the prior year. The increase in gross profit between the
two quarters is primarily due to the recognition of license fee revenue in the
current quarter.</P>
<P><I>Research and development.</I> Research and development expenses were $9.2
million, or 22% of net revenues, for the six months ended June 30, 1999 as
compared to $6.5 million, or 20% of net revenues, for the six months ended June
30, 1998. Research and development expenses were $4.5 million, or 20% of net
revenues, during the second quarter of 1999 as compared to $3.4 million, or 20%
of net revenues, during the comparable quarter of the prior year. The increase
in research and development expenses since last year is primarily a result of
hiring additional personnel, depreciation related to purchases of additional
engineering test equipment, increased prototyping, new product development and
product qualification costs and process and development efforts related to new
and future product introductions. As noted above, we have shipped eighteen new
products since the end of the second quarter of 1998. Research and development
expenses are expected to increase in absolute dollars but not necessarily as a
percentage of revenue over time.</P>
<P><I>Sales and marketing.</I> Sales and marketing expenses were $4.5 million, or 11%
of net revenues, for the six months ended June 30, 1999 as compared to $3.3
million, or 10% of net revenues, for the six months ended June 30, 1998. Sales
and marketing expenses were $2.3 million, or 10% of net revenues, during the
second quarter of 1999 as compared to $1.7 million, or 10% of net revenues,
during the second quarter of 1998. Sales and marketing expenses consist
primarily of sales commissions to manufacturer’s representatives, salaries of
our sales and marketing personnel and advertising and product literature
expenses. The increase in expense in absolute dollars from the comparable
period of 1998 relates primarily to increases in personnel costs,
advertising/collateral related spending and commission expense as a result of
higher revenues. Sales and marketing expense may fluctuate over time primarily
as a function of product revenue.</P>
<P><I>General and administrative.</I> General and administrative expenses were $1.2
million, or 3% of net revenues, for the six months ended June 30, 1999 as
compared to $2.9 million, or 9% of net revenues, for the six months ended June
30, 1998. General and administrative expenses were $39,000, or 0.2% of net
revenues, during the second quarter of 1999 as compared to $1.8 million or 11%
of net revenues for comparable quarter of the prior year. In the second quarter
of 1999, we reversed $1.2 million of legal accrual following the settlement of
the Intel lawsuit and re-evaluation of the status of other legal matters. In
the second quarter of 1998, we recorded a charge of $500,000 in connection with
the termination of a land purchase agreement. Without these non-recurring
events, general and administrative expenses would have been $2.4 million for
the six months ended June 30, 1999 and $2.4 million for the six months ended
June 30, 1998, and $1.2 million for the second quarter of 1999 and $1.3 million
for the second quarter of 1998. General and administrative expense primarily
consists of personnel and legal costs.</P>
<P><I>Amortization of intangibles.</I> As part of the June 1999 acquisition of Linvex,
we recorded $3.3 million of intangible assets. The intangible assets will be
amortized over 3 years.</P>
<P><I>Other non-recurring charges.</I> Also as part of the acquisition of Linvex, we
recorded a non-recurring charge of $2.0 million for in-process research and
development. Refer also to Note 4 of Notes To Consolidated Financial Statements.</P>
</TD>
</TR>
</TABLE>
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<P>The fair value of Linvex’ core technology, existing products, as well as the
technology currently under development was determined by an independent
appraiser using the income approach, which discounts expected future cash flows
to present value. The discount rates used in the present value calculations
were derived from a weighted average cost of capital analysis, adjusted upward
by a premium of 5% to reflect additional risks inherent in the development life
cycle. SST expects that the pricing model related to this acquisition will be
considered standard within the high-technology industry. However, SST does not
expect to achieve a material amount of expense reductions or synergies as a
result of integrating the acquired in-process technology. Therefore the
valuation assumptions do not include anticipated cost savings. In process
research and development valued at $2.0 million consisted of a single project
to combine flash and SRAM memory on a single chip (the Combo Memory chip). At
the time of the acquisition the estimated cost to complete the Combo Memory
chip was $1.1 million and was approximately 42% complete. The risk adjusted
discount rate relating to in-process technology was 40%. SST expects that the
Combo Memory chip will be completed and begin to generate cash flows within 6
to 9 months. However, development of the Combo Memory chip remains a
significant risk to SST due to the remaining effort to achieve technical
viability, rapidly changing customer markets, uncertain standards for new
products and significant competitive threats from numerous companies. The
nature of the efforts to develop the Combo Memory chip into a commercially
viable product consists principally of planning, designing and testing
activities necessary to determine that the Combo Memory chip can meet market
expectations, including functionality and technical requirements. Failure to
bring the Combo Memory chip to market in a timely manner could result in a lost
opportunity to capitalize on emerging markets. Failure to achieve the expected
levels of revenues and net income from the Combo Memory chip will negatively
impact the return on investment expected at the time of the acquisition and
potentially result in impairment of other assets related to the development
activities.</P>
<P>Recent actions and comments from the Securities and Exchange Commission have
indicated that they are reviewing the current valuation methodology of
purchased in-process research and development relating to acquisitions. The
Commission is concerned that some companies are writing off more of the value
of an acquisition than is appropriate. We believe that we are in compliance
with all of the rules and related guidance as they currently exist. However,
there can be no assurance that the Commission will not seek to reduce the
amount of purchased in-process research and development previously expensed by
SST. This would result in the restatement of previously filed financial
statements of SST and could have a material negative impact on the financial
results for the period subsequent to the acquisition.</P>
<P><I>Interest and other income (expense), net.</I> Interest and other income was
$477,000, or 1% of net revenues, for the six months ended June 30, 1999 as
compared to $1.0 million, or 3% of net revenues, for the six months ended June
30, 1998. Interest and other income was $226,000, or 1% of net revenues, during
the second quarter of 1999 as compared to $468,000, or 3% of net revenues,
during the second quarter of 1998. The decrease in interest and other income
from 1998 to 1999 is primarily due to lower cash, cash equivalent and short
term investment balances during the period.</P>
<P><I>Provision for (benefit from) income taxes.</I> The provision for income taxes
was $65,000 for the six months ended June 30, 1999 as compared to a benefit of
$2.8 million for the six months ended June 30, 1998. The provision for income
taxes was $25,000 during the second quarter of 1999 as compared to a benefit
from income taxes of $1.8 million for the second quarter of 1998. During 1998,
we determined that our cumulative net operating losses incurred exceeded the
amount of tax carry back available. For this reason, we recorded a full
valuation allowance against the deferred tax asset in the third quarter of
1998. The tax effect of the net operating loss incurred during the six months
ended June 30, 1999 was accrued as a deferred tax asset, offset by a valuation
allowance. The current quarter’s provision relates to foreign tax expense
withheld on royalty revenue.</P>
<P><I>Net income (loss) per share.</I> Our net loss per share for the six months ended
June 30, 1999 was ($0.44) as compared to a net loss of per share of ($0.16) for
the six months ended June 30, 1998. Our net loss per share was ($0.15) in the
second quarter of 1999 as compared to ($0.05) in the second quarter of 1998.
The increase in net loss is largely due to the increase in operating expenses
relating to new product introduction and development, the write-off of the
in-process research and development charge relating to the Linvex acquisition
and the effect of the net tax benefit recorded in the second quarter of 1998
and the six months ended June 30, 1998.</P>
</TD>
</TR>
</TABLE>
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<H2 ALIGN=LEFT><FONT SIZE=3>Liquidity and Capital Resources</FONT></H2>
<P>Principal sources of liquidity at June 30, 1999 consisted of $17.5 million
of cash and cash equivalents. We have an open line of credit of up to $25
million, limited to 80% of eligible world-wide accounts receivable, which as of
June 30, 1999 equaled $10.8 million, to secure sufficient working capital to
finance growth in operations and new product development efforts. As of June
30, 1999, there were no borrowings under this facility. However, future events
could require us to start and/or to increase borrowing under this credit
facility, sell additional shares of our stock or seek additional borrowings or
outside capital infusions. We cannot assure you that such financing events
options will be available on terms acceptable to us, if at all. We believe that
the cash and cash equivalents, the funds expected to be generated from
operations and the line of credit available will be sufficient to meet our
projected working capital and other cash requirements through at least the next
twelve months.</P>
<P><I>Operating activities.</I> Our operating activities used cash of $2.6 million for
the six month period ended June 30, 1999 as compared to $19.3 million for the
six month period ended June 30, 1998. The decrease in cash from operating
activities for the six month period ended June 30, 1999 consisted of our net
loss of $10.2 million, partially offset by net non-cash adjustments of $4.3
million and net changes in operating assets and liabilities of $3.3 million.
The decrease in cash from operating activities for the six month end June 30,
1998 consisted of our net loss of $3.6 million and net changes in operating
assets and liabilities of $16.7 million, partially offset by net non-cash
adjustments of $1.0 million. For the six month period ended June 30, 1999,
non-cash adjustments consisted primarily of depreciation and amortization
expense of $2.3 million and a non-recurring, in-process research and
development charge of $2.0 million. For the six month period ended June 30,
1998, non-cash adjustments consisted primarily of depreciation and amortization
expense of $2.2 million, offset by a $1.3 million increase in the provisions
for doubtful accounts receivable and for excess and obsolete inventory.
Although product revenues were higher for the six month period ended June 30,
1999 than for the comparable period of the prior year, accounts receivable and
accounts receivable from related parties only increased $4.4 million for the
current period, compared to an increase of $5.2 million for the same period of
1998. The lower increase in accounts receivable is primarily a result of a $1.5
million tax refund in second quarter of 1999 and more aggressive cash
collections. Inventories increased $4.3 million for the six month period ended
June 30, 1999, compared to an increase of $7.6 million for the six month period
ended June 30, 1998. The increase in inventory was higher for the six month
period ended June 30, 1998 due to a combination of lower shipment levels and
strategic purchasing of die at lower costs during the first quarter of 1998.
Currently, we are reducing levels of our older products while we continue to
build inventory of our newer products. Accounts payable increased $10.6 million
for the six month period ended June 30, 1999, compared to a $4.9 million
decrease for the six month period ended June 30, 1998. The large increase in
accounts payable activity related primarily to inventory purchases, increased
research and development expenses and the purchase of capital equipment
associated with the development and introduction of new products. The increase
in working capital generated by the increased accounts payable at June 30, 1999
is required to support the ramping of production on new products as the number
of products offered by SST has increased from thirteen revenue-generating
products at December 31, 1998 to twenty-two revenue-generating products at June
30, 1999. Additional new product introductions in 1999 will require additional
working capital. Deferred revenue increased $2.1 million for the six month
period ended June 30, 1999, compared to an increase of $726,000 for the six
month period ended June 30, 1998. The increase in deferred revenue for the six
month period ended June 30, 1999 related to new license agreements and to
increased sales to distributors in the second quarter of 1999. Accrued expenses
and other liabilities decreased $934,000 for the six month period ended June
30, 1999, compared to an increase of $343,000 for the six month period ended
June 30, 1998. The decrease in the current period related primarily to our
reversal of legal accruals following the Intel settlement.</P>
<P><I>Investing activities.</I> Our investing activities used cash of $3.4 million for
the six month period ended June 30, 1999. For the six month period ended June
30, 1998, investing activities provided cash of $10.2 million. Capital
expenditures were $4.4 million for the current period, compared to $2.2 million
for the same period of 1998. The increase in capital expenditures related
primarily to the purchase of design and engineering tools and production
equipment associated with the development and introduction of new and future
products. We are currently in the process of implementing a new ERP system. We
anticipate an additional $2.0 million in capital expenditures relating to this
project before the end of 1999. For the six month period ended June 30, 1999,
the net sale or maturity of short-term investments provided cash of
approximately $851,000, compared to $12.8 million for the six month period
ended June 30, 1998. Cash proceeds from the net sale of short term investments
is significantly lower in the current period as compared to the prior period
because investments are currently being made in securities that mature in less
than 90 days in order to meet our cash requirement needs.</P>
</TD>
</TR>
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<P><I>Financing activities.</I> Our financing activities provided cash of
approximately $494,000 during the six month period ended June 30, 1999. This
increase was primarily from the proceeds of the employee stock purchase plan
and the exercise of employee stock options. For the six month period ended June
30, 1998, our financing activities used cash of approximately $1.3 million. We
used $1.6 million to repurchase our common stock. These cash outflows were
partially offset by $312,000 from the proceeds of the employee stock purchase
plan and employee stock options.</P>
<H2 ALIGN=LEFT><FONT SIZE=3>Readiness For Year 2000</FONT></H2>
<P>Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. These systems, applications,
or devices could fail or produce incorrect data unless fixed so that they can
process data related to the year 2000. We rely on primary management
information and accounting systems (such as an integrated general ledger,
accounts receivable, accounts payable, sales order entry and purchasing
modules), ancillary information systems (such as payroll, human resource and
fixed asset tracking software), customer services infrastructure, embedded
computer chips, networks and telecommunications equipment, manufacturing test
equipment, reliability equipment, research and development software tools and
end products, electronic security systems and other systems that may provide
erroneous data as a result of the year 2000. We also rely on the systems of
other enterprises such as those of customers, suppliers, creditors, financial
institutions and organizations, and of governments, both domestically and
globally, directly and indirectly, for the accurate exchange of data and other
business-critical resources. A failure in any one of these systems can
negatively impact SST.</P>
<P>Our assessment of potential Year 2000 problems in our current and previously
sold products is: to the best of our knowledge and belief, at the time of
shipment, SST products do not contain date sensitive data or real time clocks;
thus, they are neither affected by nor will they directly cause “Year 2000”
problems.</P>
<P>We define Year 2000 compliant as meaning that the technology (including but
not limited to hardware, software, firmware, microchips, or other electronic
components, equipment, processes, or systems) shall provide the following
functions in a correct and consistent manner: (1) handle date information,
including 9/9/99, before, during, and after the 1st of January 2000, including
but not limited to: accepting date input, providing date output, and performing
calculations on dates, or portions of dates; (2) performance and functionality
are not affected by dates prior to, during, and after the 1st of January 2000;
(3) respond to two-digit year date input in a way that resolves the ambiguity
of which century in a disclosed, defined, and predetermined manner, i.e., a
date ending in “00” must return 2000; (4) store and provide output of date
information in ways that are unambiguous as to which century; and (5) Year 2000
is recognized as a leap year.</P>
<P><I>The Year 2000 Project.</I> Our Year 2000 Project informally began in 1997 within
the information technology (“IT”) department. The department began to upgrade
our management information systems and personal computer hardware and software
to be Year 2000 compliant. The Project’s mission and strategy became formalized
in August 1998. Currently, we are dedicating the equivalent of two full-time
resources to the Project through the year 2000. The Project consists of an
eight step approach; (1) awareness that no system is safe from Year 2000
problems, (2) categorize and classify our internal and external resources and
activities with potential Year 2000 issues, (3) assessment of every item in the
inventory for Year 2000 compliance to determine where the problems lie, (4)
plan a strategy for fixing the problems encountered, focussing first on the
most business-critical functions, (5) remediation of business-critical
processes followed by other processes, (6) testing of remedied processes, (7)
integration back into other functions within and outside of SST, and (8)
contingency planning to keep SST functional in case Year 2000 compliance
failures occur.</P>
<P><I>Awareness.</I> The awareness stage is 100% complete as it relates to both our IT
supported functions and to all other internal and external operations of SST.
The Project has full executive and Board-level sponsorship and support at the
appropriate levels of SST. Funding for the Project was reviewed and
incorporated into the 1999 planning and budgeting process. An internal
cross-functional Task Force was been established. This Task Force meets
approximately three times per month and develops strategies to assess the Year
2000 compliance of customers, vendors, and other significant corporate partners
as well as to categorize, classify, and to assess compliance of the systems and
equipment within SST. The awareness stage has been completed.</P>
<P><I>Categorization, Classification, and Assessment.</I> We have categorized and
classified our fixed assets, production equipment, computer hardware, software,
design hardware and software, reliability equipment, and other internal
resources and assessed Year 2000 compliance of these resources. This assessment
was completed as of the end of the second quarter of 1999, which is on
schedule. The assessment process will continue throughout the year as SST
purchases new assets, equipment, hardware and software and will also include
assets purchased in connection with the acquisition of Linvex.</P>
</TD>
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<P>We also are conducting surveys of systems supported by third party providers
(significant vendors and suppliers), such as our wafer fabrication, package
assembly, and test subcontractors, and we are surveying our active customers
with sales activity over $1 million in the past eighteen months, significant
vendors and other trading partners to assess Year 2000 compliance. All
significant vendors have been asked to complete a survey questionnaire and to
certify Year 2000 compliance. All of SST’s significant vendors prior to the
acquisition of Linvex have been contacted thus far and SST has received
responses from approximately 80% of its vendors and suppliers. Follow-up
telephone calls and letters are currently being sent to the non-respondents.
The survey responses received were reviewed and evaluated during the second
quarter of 1999. Many of SST’s significant vendors, including all of SST’s
overseas production subcontractors, were not compliant as of the date of their
survey response. Linvex-specific suppliers are being contacted during the third
quarter of 1999 in order to assess their Year 2000 compliance. Because Linvex’
most significant suppliers are also overseas production subcontractors, there
is a significant risk that these suppliers will also not yet be Year 2000
compliant.</P>
<P><I>Planning and Remediation.</I> We have already begun to strategize on how to best
fix the problems encountered. Decisions are made on a case by case basis, and
approximately 70% of the problems can be fixed by the replacement or purchase
of additional parts or software upgrades. The remaining 30% of the problems
require replacement of the entire system. Because SST does not use many
proprietary systems, much of the cost of upgrading our systems to ensure Year
2000 compliance is a part of our practice of routinely upgrading our systems as
new versions are released by vendors and is considered to be a normal cost of
doing business. In this respect, we have already upgraded all of our personal
computer hardware and operating systems, network switches, and primary
management information and accounting systems to Year 2000 compliant versions.
The cost incurred for this effort was approximately $250,000. We continually
receive hardware upgrade recommendations and “software patches” from our
vendors for new Year 2000 fixes discovered by those vendors and we implement
those patches throughout the company within the quarter that the patch is
received. All such IT-related upgrades and patches have been completed up to
July 31, 1999. Therefore, the planning and remediation stages are considered to
be virtually complete as they relate to IT supported functions.</P>
<P>For research and development software and hardware functions, called design
technology services, 95% of workstation hardware was Year 2000 compliant as of
July 31, 1999. The remaining hardware and all workstation software is on
schedule to be Year 2000 compliant by August 31, 1999.</P>
<P>For production equipment functions, upgrades to production test equipment
have been scheduled with the vendors on a semi-monthly basis through November
1999. Therefore, the planning and remediation stage is expected to complete by
the end of the fourth quarter of 1999 for production equipment. Other
facilities functions are considered to be Year 2000 compliant at the present
time.</P>
<P><I>Testing and Integration.</I> The testing and integration stages are virtually
completed for items related to IT supported functions, 50% complete for design
technology services, and 10% complete for production related functions. Testing
of vendor supplied survey data may include follow-up discussions of survey
data, site visits, and review of Year 2000 compliance project timelines. These
stages are expected to be completed by the end of the third quarter of 1999 for
all areas except for production equipment, which is scheduled for completion by
the end of November, 1999.</P>
<P>Based upon the information available at this time, the future costs related
to Year 2000 compliance are not expected to exceed $500,000. The cost estimate
is based on our current assessment of the projects identified and is subject to
change as the projects progress. The estimate does not include potential costs
related to any customer or other claims.</P>
<P><I>Contingency Planning.</I> The contingency planning stage will be performed in
conjunction with the planning and remediation stages and the testing and
integration stages. For each mission critical vendor or trading partner that
has not responded on Year 2000 compliance to our satisfaction by June 30, 1999,
a contingency plan which includes an alternative vendor source will be
developed. If, during a follow-up contact with the vendor scheduled for the
third quarter of 1999, it appears that compliance is behind schedule or
problematic, the contingency plan will be implemented and an alternative vendor
will be qualified to provide service from late 1999 through the early part of
year 2000. This stage is expected to be complete by the middle of the fourth
quarter of 1999.</P>
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<P>Despite our efforts to address the Year 2000 impact on our internal systems,
we are not sure that we have fully identified all possible scenarios and that
we can resolve all such scenarios without disruption of our business and
without incurring significant expense. In addition, even if our internal
systems are not materially affected by the Year 2000 issue, we could be
materially affected through disruption in the operation of the enterprises,
financial institutions, or governmental entities with which we interact. A
failure to identify and or correct a material Year 2000 problem could result in
an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect our results of
operations, liquidity and financial condition. Specifically, if we do not
adequately identify and correct Year 2000 problems in our information systems
we could experience interruptions in its operations, including manufacturing,
order processing, receivables collections and accounting, such that there would
be delays in product shipments, lost data and a consequential impact on
revenues, expenditures and financial reporting. If we do not adequately
identify and correct Year 2000 problems in our design technology systems we
could lose valuable product design information and records. If we do not
adequately identify and correct Year 2000 problems in our production area we
could experience interruptions in its manufacturing and related operations,
such that there would be delays in product shipments and a consequential impact
on revenues. If we do not adequately identify and correct Year 2000 problems
with significant third parties, we could experience interruptions in the supply
of key components or services from those parties, such that there would be
delays in product shipments or services and a consequential impact on revenues.
In addition, given the inherent complexity of the Year 2000 problem, there can
be no assurance that actual costs will not be higher than currently anticipated
or that corrective actions will not take longer than currently anticipated to
complete. There is also a risk that our plans for achieving Year 2000
compliance may not be completed on time.</P>
<H2 ALIGN=LEFT><FONT SIZE=3>Item 3. Quantitative and Qualitative Disclosures
About Market Risk</FONT></H2>
<P>We are exposed to risks associated with foreign exchange rate fluctuations
due to our international sales and manufacturing. These exposures may change
over time as business practices evolve and could have a material adverse effect
on our operating results and financial condition. All of our sales are
denominated in U.S. dollars. An increase in the value of the U.S. dollar
relative to foreign currencies could make our products more expensive, reducing
the demand for our products. A decline in the demand for our products could
have a material adverse effect on our operating results and financial position.
In addition, a downturn in the Japanese economy could impair the value of our
investment in our Japanese affiliate.</P>
<P>We maintain an investment portfolio of various issuers, types and
maturities. Our portfolio consists of municipal securities and commercial
papers, which are classified as available-for-sale and recorded on the balance
sheet at their fair market value. The securities all mature within 120 days. At
any time, fluctuations in interest rates could effect interest earnings on our
cash, cash equivalents and short-term investments. Currently, we do not hedge
these interest rate exposures.</P>
<H2 ALIGN=LEFT><FONT SIZE=3>PART II</FONT></H2>
<H2 ALIGN=LEFT><FONT SIZE=3>Item 1. Legal Proceedings</FONT></H2>
<P>On January 3, 1996, Atmel Corporation (“Atmel”) sued us in the U.S. District
Court for the Northern District of California. Atmel’s complaint alleges that
by making, using and selling devices, we are willfully infringing on five U.S.
patents owned by or exclusively licensed to Atmel. Atmel later amended its
complaint to allege infringement of a sixth patent. Regarding each of these six
patents, Atmel seeks a judgment that the we 1) have infringed the patent, 2) an
injunction prohibiting future infringement and 3) treble the amount of damages
caused by the alleged infringement and attorney’s fees, costs and expenses. On
four of the six patents, the District court has granted in our favor a
judgement that we did not infringe. Atmel has appealed the decisions. The trial
on the remaining issues has been postponed until Atmel’s appeal is heard.</P>
<P>On February 17, 1997, Atmel filed an action with the International Trade
Commission (“ITC”) against two suppliers of our parts. The action involves
certain of the patents that Atmel has alleged we are infringing. We intervened
as a party to that investigation. Pursuant to indemnification agreements with
these suppliers, we have agreed to indemnify both to the extent that it is
required to do so under the agreements. On July 9, 1998, the ITC entered its
opinion of finding no violation by us. Atmel has appealed the decision. The
Federal Circuit has ordered the ITC to reconsider its decision on one of the
patents. No schedule has been set for the new hearing.</P>
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<P>On September 14, 1998, Intel sued us in the U.S. District Court for the
Northern District of California, San Jose Division. Intel’s complaint alleged
that, by making, using and selling devices, we were willfully infringing four
U.S. patents owned by Intel. Regarding each of these four patents, Intel sought
1) a judgment that we infringed on the patent, 2) an injunction prohibiting
further infringement, and 3) an accounting of all damages caused by the alleged
infringement, treble the amount of damages caused by the alleged infringement
and attorney’s fees, costs and expenses. The Company denied infringement of any
of the Intel patents and counter-claimed for invalidity and non-infringement of
the Intel patents. Through a neutral mediation, a settlement of the pending
litigation was reached on May 13, 1999. The settlement was immaterial to the
Company’s financial statements.</P>
<P>On July 31, 1998, we filed suit against Winbond Electronics of Taiwan
(“Winbond”) in the U.S. District Court for the Northern District of California,
San Jose Division. We are suing for breach of contract and breach of covenant
of good faith and fair dealing. We are seeking 1) damages and an injunction
prohibiting Winbond from using any of the technology we licensed to them and 2)
a return of technical material transferred to them under the original license
agreement. Winbond has answered the complaint and has counter-claimed 1) for a
declaration that it is not in material breach of the agreement, 2) that the
Company has breached the agreement, 3) that the Company has breached the
covenant of good faith and fair dealing, 4) that the Company has interfered
with prospective economic advantage, 5) that the Company has engaged in
unlawful business practice in violation of the California Business and
Profession Code, 6) that the Company has committed acts of common law unfair
competition and 7) that it is not obligated to pay us under the agreement
and/or they own or jointly own the technology embodied in their products.
Winbond also seeks restitution of the payments made. We have replied by denying
these charges. We believe that the substantive allegations in the Winbond
counter-claim are without merit and intend to vigorously defend ourselves
against the action.</P>
<P>From time to time, we are also involved in other legal actions arising in
the ordinary course of business. While we have accrued certain amounts for the
estimated legal costs associated with defending these matters, there can be no
assurance the Atmel complaint, the Winbond complaint or other third party
assertions will be resolved without costly litigation, in a manner that is not
adverse to the Company’s financial position, results of operations or cash
flows or without requiring royalty payments in the future which may adversely
impact gross margins. No estimate can be made of the possible loss or possible
range of loss associated with the resolution of these contingencies.</P>
<H2 ALIGN=LEFT><FONT SIZE=3>Item 2. Changes in Securities.</FONT></H2>
<P>On June 4, 1999, SST issued 787,370 shares of SST common stock to the
shareholders of Linvex in exchange for all of the outstanding capital stock of
Linvex for a purchase price of $4.8 million. Also on June 4, 1999, SST issued
106,436 shares of SST common stock to certain shareholders and employees of
Linvex in lieu of cash payment for deferred salary and notes payable of
$476,000. No underwriter or placement agent was involved in the transaction.
SST filed a registration statement on Form S-3 relating to 816,867 of the
shares on July 29, 1999 with the Securities and Exchange Commission . The sale
of the shares was made in reliance on Rule 506 promulgated under the Securities
Act of 1933, as amended. The Stock Purchase Agreement is attached as Exhibit
2.1 to the registration statement on Form S-3.</P>
<H2 ALIGN=LEFT><FONT SIZE=3>Item 6. Exhibits and Reports on Form 8-K.</FONT></H2>
</TD>
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<TR VALIGN=TOP>
<TD WIDTH=5%>(a)
</TD>
<TD WIDTH=95%><P><I>Exhibits.</I> We incorporate by reference
all exhibits filed in connection with our annual report on Form 10-K for the
year ended December 31, 1998. </P></TD></TR></TABLE>
<BR>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=Bottom>
<TD WIDTH=20%><B>Exhibit<BR>Number</B>
</TD>
<TD WIDTH=80%><P> <B>Description</B> </P></TD></TR></TABLE>
<BR>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=20%>10.21
</TD>
<TD WIDTH=80%><P>0.25 Micron Agreement between
Motorola, Inc. and Silicon Storage Technology, Inc. dated May 5, 1999.
Confidential treatment has been requested for certain potions of this Exhibit. </P></TD></TR></TABLE>
<TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=20%>27
</TD>
<TD WIDTH=80%><P>Financial Data Schedule </P></TD></TR></TABLE>
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<TD WIDTH=5%>(b)
</TD>
<TD WIDTH=95%><P>Reports on Form 8-K filed during the
quarter ended June 30, 1999: </P></TD></TR></TABLE>
<P><TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>1.
</TD>
<TD WIDTH=94%><P>On April 14, 1999, we filed a
report on Form 8-K announcing the summary judgement granted in our favor in an
action filed by Atmel Corporation v. SST in January of 1996, that we do not
infringe the claims of U.S. patent 4,233,673. </P></TD></TR></TABLE>
<P><TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>2.
</TD>
<TD WIDTH=94%><P>On May 14, 1999, we filed a
report on Form 8-K announcing the settlement of pending litigation between us
and Intel Corporation that began in November of 1997. </P></TD></TR></TABLE>
<P><TABLE WIDTH=600 CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=3%></TD>
<TD WIDTH=3%>3.
</TD>
<TD WIDTH=94%><P>On May 18, 1999, we filed a
report on Form 8-K announcing the adoption of a Share Purchase Rights Plan,
which was approved by the Board of Directors on May 4, 1999. </P></TD></TR></TABLE>
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<H1 align=center><FONT SIZE=3> SIGNATURES</FONT></H1>
<P> Pursuant to the requirements of the Securities
Act of 1934, the Company has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Sunnyvale, County of
Santa Clara, State of California, on the 16th day of August, 1999. </P>
</TD>
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<BR><BR>
<TABLE CELLPADDING=0 CELLSPACING=0 BORDER=0 WIDTH=600>
<TR>
<TD WIDTH=50%> </TD>
<TD WIDTH=50% align=left>SILICON STORAGE TECHNOLOGY, INC.</TD>
</TR>
<TR>
<TD WIDTH=50%> </TD>
<TD WIDTH=50% align=left> </TD>
</TR>
<TR>
<TD WIDTH=50%> </TD>
<TD WIDTH=50% align=left>By:</TD>
</TR>
<TR>
<TD WIDTH=50%> </TD>
<TD WIDTH=50% align=left> </TD>
</TR>
<TR>
<TD WIDTH=50%> </TD>
<TD WIDTH=50% align=left><U>/s/ BING YEH </U><BR>Bing Yeh<BR>President, Chief Executive Officer<BR> and Director (Principal Executive Officer)</TD>
</TR>
<TR>
<TD WIDTH=50%> </TD>
<TD WIDTH=50% align=left> </TD>
</TR>
<TR>
<TD WIDTH=50%> </TD>
<TD WIDTH=50% align=left><U>/s/ JEFFREY L. GARON </U><BR>Jeffrey L. Garon<BR>Vice President Finance & Administration,<BR> Chief Financial Officer and Secretary<BR>(Principal
Financial and Accounting Officer)</TD>
</TR>
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<P>CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
<H1 align=center><FONT SIZE=3>0.25 Micron Agreement</FONT></H1>
<P>THIS Agreement is entered into as of the Effective Date, between Motorola,
Inc. with a principal place of business located at 3501 Ed Bluestein Boulevard,
Austin, Texas, USA, a Texas corporation (“MOTOROLA”), and Silicon
Storage Technology, Inc. located at 1171 Sonora Court, Sunnyvale, California,
USA a California corporation (“SST”).</P>
<P>WHEREAS, SST has designed and developed SST Technology (as defined
hereinafter),</P>
<P>WHEREAS, SST is the owner of SST Intellectual Property Rights (as defined
hereinafter),</P>
<P>WHEREAS, MOTOROLA desires to obtain from SST a non-exclusive, personal,
non-transferable, without the right to sublicense, a world-wide license to
design, make, have made, sell, and distribute Licensed Products (as defined
hereinafter), SST agrees to grant to MOTOROLA a license in accordance with the
terms and conditions set forth in this Agreement,</P>
<P>NOW THEREFORE, the parties hereto agree as follows:</P>
<H1 align=center><FONT SIZE=3>Article I - Definitions</FONT></H1>
<P>1. “SST Technology” shall mean SST’s 0.25um flash memory
technology, including Flash Cell design with minimum bit cell area of [ * ],memory
array architecture, process design rules, product testing, circuit design and
physical layout, including without limitation the SST deliverables of Exhibit
A. SST Technology shall not include circuit designs relating to Subsystems,
microcontroller architecture, or Memory Only Products.</P>
<P>2. “Subsystem” shall mean a group of interconnected integrated
circuit chips forming a subsystem that performs well-defined transfer functions
with respect to interface signals (i.e. inputs and outputs) within a system.</P>
<P>3. “Embedded Memory” shall mean a nonvolatile electrically
programmable memory cell or an array of non-volatile electrically programmable
memory cells, each capable of single bit of storage per cell, designed or
manufactured using SST Technology and embedded within other logic circuitry so
as to be capable of providing at least one dedicated, application-specific
function (such as, by way of example and not as a limitation, communications,
set-top box, and automotive) fixed in a semiconductor material.</P>
<P>4. “Memory Only Product” shall mean a memory product which is a
combination of array Flash Cell alone or combined with SRAM, DRAM, EEPROM or
ROM, or any other product the sole function of which is for the storage and
retrieval of data or information and used as a standalone memory.</P>
<BR>
<P ALIGN=CENTER>Page 1</p>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
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<P>5. “Licensed Product” shall mean an integrated circuit product
including a functioning Embedded Memory connected to other portions of the
product which was designed by MOTOROLA or its authorized subcontractor under
non-disclosure agreement with MOTOROLA to safeguard SST Confidential
Information, for MOTOROLA and according to MOTOROLA’s specification, and
incorporate substantial elements of the SST Technology. Licensed Products shall
not include:</P>
<P>5.1. a Memory Only Product, or</P>
<P>5.2 an integrated circuit which does not have a significant function or
feature other than memory storage.</P>
<P>6. “Flash Cell” shall mean a nonvolatile memory cell for storage
of single bit based upon the split-gate, source side injection, SuperFlash
technology used in SST Technology.</P>
<P>7. “SST Intellectual Property Rights” shall mean all patents,
copyrights, mask work rights, and trade secrets subsisting in or covering the
SST Technology, which are owned by SST or to which SST has the right to grant
the rights and license granted herein, now or hereafter during the term of the
Agreement. SST Intellectual Property Rights include, but are not limited to,
patents covering Flash Cells and memory circuits, and methods of operation and
manufacturing thereof, mask work rights in the layout of the Flash Cells and
memory circuits, copyrights in the net list, and confidential information in
cell design layout, design rules, and process flow architecture.</P>
<P>8. “Sales” shall mean the sales revenue based on selling price of
Licensed Products by MOTOROLA less discounts, returns, shipping charges and
taxes. In the event the Licensed Product is consumed by MOTOROLA Group, the
actual price paid by MOTOROLA Group, other than the Semiconductor Product
Sector, for the Licensed Products shall be used as a Price basis for
calculating internal sales. In the event sales are transacted based on a non-US
currency, the sales will be converted to US currency according to the MOTOROLA
currency exchange policy which is provided in Exhibit F.</P>
<P>9. “Confidential Information” shall mean any information
controlled by a party hereto identified as proprietary and confidential and
disclosed to the other party according to this Agreement. Written Confidential
Information shall be clearly marked “CONFIDENTIAL” and shall also
include the terms and conditions of this Agreement, except where required to be
disclosed by law or otherwise approved by the non-disclosing Party in writing.
Oral disclosures of Confidential Information shall be confirmed in writing, or
email, by the disclosing party within thirty (30) days of the oral disclosure.
In case of disagreement, the receiving party must make a written objection
thereto within thirty (30) days after receipt of the information. The
Confidential Information shall not include information that:</P>
<BR>
<P ALIGN=CENTER>Page 2</p>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
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<P>(I) is now or subsequently in the public domain or otherwise becomes
available to the public other than by breach of this Agreement by the receiving
party;</P>
<P>(II) has been rightfully in the receiving party’s possession prior to
receipt from the disclosing party with the receiving party having the burden of
proof;</P>
<P>(III) is rightfully received by the receiving party from a third party; or</P>
<P>(IV) is independently developed by the receiving party without use of any
proprietary information or trade secrets of disclosure with the receiving party
having the burden of proof.</P>
<P>10. “Effective Date” shall mean the last date when this Agreement
is signed by both parties.</P>
<P>11. “Subsidiary(ies)” shall mean any corporation, company or other
entity which is presently or at any time during the term of this Agreement
controlled by, controlling, or under common control with, either party hereto
(a current list of Subsidiaries is shown in Exhibit E). As used herein, the
term “control” means ownership or control, direct or indirect, now or
hereafter during the term of this Agreement, of at least fifty percent (50%) of
the outstanding shares of interest entitled to vote for the election of
directors (other than any shares or stock whose voting rights are subject to
restriction) of such corporation, company or other entity. Any corporation,
company or other entity which would at any time be a Subsidiary of SST or
MOTOROLA, as the case may be, by reason of the foregoing shall be considered a
Subsidiary for the purpose of this Agreement only so long as such control
exists. With respect to the MOTOROLA subsidiary Tohoku listed in Exhibit E,
MOTOROLA agrees to have a written confidentiality agreement at least as
restrictive as the obligations of Article IX with Tohoku which protects all SST
Technology utilized by Tohoku in the exercise of the license grants of Section
20 and which names SST as a third party beneficiary.</P>
<P>12. “MOTOROLA Subcontractors” are work-for-hire individuals or
service companies who are contracted with MOTOROLA to design for MOTOROLA
Licensed Products and who are bound by a non-disclosure agreement with MOTOROLA
to keep SST Technology and SST Intellectual Property Rights confidential to at
least the same standard of confidentiality SST and MOTOROLA have agreed to in
this Agreement. The right to enforce the non-disclosure agreement is assigned
to SST.</P>
<P>13. “MOTOROLA Improvements” shall mean improvements made by
employees of MOTOROLA, MOTOROLA Subsidiaries and MOTOROLA subcontractors to the
SST Technology including the Flash Cell or to circuits specifically related to
such SST Technology (“Necessary Circuits”) after such employees have
had access to such SST Technology. A circuit shall be deemed related to such
SST Technology for purposes of this Paragraph if such circuit is specific to
such Flash Cell and would not function properly if such Flash Cell were
replaced with another memory cell not utilizing the SST Technology.
Improvements shall also include incremental improvements made after an employee
has had access to SST Confidential Information and that are specific to </P>
<BR>
<P ALIGN=CENTER>Page 3<P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
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<P>circuit
designs included within the SST Technology and provided in the Deliverables or
any SST Confidential Information passed on to MOTOROLA during the term of this
Agreement. If SST and MOTOROLA disagree as whether an improvement made by
MOTOROLA is a “MOTOROLA Improvement,” the Parties will in good faith
negotiate to reach agreement as to the status of such improvement.</P>
<P>14. “SST Improvements” shall mean improvements made by SST to the
SST Technology including the Flash Cell or improvements to Necessary Circuits.
A circuit shall be deemed related to such SST Technology if such circuit is
specific to such Flash Cell and would not function properly if such Flash Cell
were replaced with another memory cell not utilizing the SST Technology.
Improvements shall also include incremental improvements to circuit designs
included within the SST Technology and provided in the Deliverables or any SST
Confidential Information passed on to MOTOROLA during the term of this
Agreement. If SST and MOTOROLA disagree as to whether an improvement made by
SST is a “SST Improvement,” the Parties will in good faith negotiate
to reach agreement as to the status of such improvement.</P>
<P>15. “Party Improvement” shall mean either SST Improvement or
MOTOROLA Improvement as the case may be.</P>
<P>16. “MOTOROLA Group” shall mean MOTOROLA, its Subsidiaries, parent
company, sister companies or affiliated entities.</P>
<P>17. “Joint Invention” shall mean any idea, design, concept,
technique, discovery, or improvement, whether or not patentable, made jointly
by one or more employees of MOTOROLA with one or more employees of SST, during
the term or renewed term of this Agreement and in the performance hereunder,
provided that either the conception or actual reduction to practice occurs
during the term or renewed term of this Agreement and in the performance
hereunder.</P>
<P>18. “Sole Invention” shall mean any idea, design, concept,
technique, discovery, or improvement, whether or not patentable, made solely by
one or more employees of MOTOROLA, or made solely by one or more employees of
SST, during the term or renewed term of this Agreement in the performance
hereunder, provided that either the conception or actual reduction to practice
occurs during the term or renewed term of this Agreement and in the performance
hereunder.</P>
<P>19. “Licensed Foundry” shall mean an SST approved wafer
manufacturing facility where SST has installed the SST Technology.</P>
<H1 align=center><FONT SIZE=3>Article II - Grant</FONT></H1>
<P>20. Subject to the terms and conditions of this Agreement, and during the
term of such Agreement, SST grants MOTOROLA and MOTOROLA’s Subsidiary
under SST Intellectual Property Rights, a world wide, non-exclusive, personal,
non-transferable, irrevocable (subject to breach by MOTOROLA of Article II,
III, V, IX or Paragraph 50), </P>
<BR>
<P ALIGN=CENTER>Page 4</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
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<P>royalty bearing license and right (without the
right to sublicense) to design and have designed by MOTOROLA Subcontractors,
make or have made at SST authorized Licensed Foundries (subject to restriction
of 20.1 herein), and sell or offer to sell the Licensed Products. Use of the
license granted herein, shall not constitute a right to sublicense the
technology to any party for manufacturing of Licensed Products, or any other
products using SST Technology.</P>
<P>20.1 The have made rights of paragraph 20 can only be exercised after first
commercial production volume shipment of Licensed Products from MOTOROLA
factories. In consideration of the license set forth in paragraph 21, MOTOROLA
shall pay the license fee and royalty described in Article III pursuant to the
terms therein.</P>
<P>21. This Agreement is only for 0.25um of SST Technology and not for use on a
Flash Cell size for its Licensed Products less than the minimum Flash Cell size
described in Article I/Paragraph 1. For development and licensing of technology
geometry below 0.25um, both parties shall negotiate in good faith to reach a
separate agreement.</P>
<P>22. Subject to the terms and conditions of this Agreement, and during the
term of such Agreement, SST grants MOTOROLA and MOTOROLA’s Subsidiary
under SST Improvements, without additional royalty, a world wide,
non-exclusive, irrevocable (subject to breach by MOTOROLA of Article II, III,
V, IX or Paragraph 50), personal, non-transferable and right (without the right
to sublicense) to design and have designed by MOTOROLA Subcontractors, make or
have made at SST authorized Licensed Foundries, sell and offer to sell Licensed
Products.</P>
<P>23. [ * ]</P>
<P>23.1. [ * ]</P>
<P>23.2. [ * ]</P>
<P>24. SST shall provide MOTOROLA with the deliverables and technical
assistance as specified in Exhibit “A.”.</P>
<P>25. In the event that SST’s
authorized Licensed Foundries [ * ] are unable or
unwilling to provide MOTOROLA requested capacity for SST Technology, SST agrees
to negotiate in good </P>
<BR>
<P ALIGN=CENTER>Page 5</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
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<P>faith with another foundry recommended by MOTOROLA (“Additional
Foundry”), [ * ], subject to a commercially
reasonable arrangement to allow MOTOROLA to “have made” Licensed
Products that include SST Technology in the Additional Foundry. </P>
<P>26. MOTOROLA and SST each agree to timely and fully disclose to each other
all Party Improvements as defined herein and any third party improvements
thereto which can be disclosed. For the purpose of this paragraph, the word
“timely” shall mean the earlier of the preparation of a patent
application disclosing the Party Improvement, a commercial shipment of products
containing such Party Improvement, or licensing of such Party Improvement.</P>
<P>27. SST shall transfer the SST Deliverables specified in Exhibit A to
MOTOROLA within the time specified and future updates, if any, to the Flash
Cell design [ * ] when made available by SST to any other
licensee of SST.</P>
<H1 align=center><FONT SIZE=3>Article III – License Fees and Royalty</FONT></H1>
<P>28. [ * ]</P>
<P >28.1. [ * ]</P>
<P >28.2. [ * ]</P>
<P >28.3. [ *</P>
<BR>
<P ALIGN=CENTER>Page 6</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
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<P> ]</P>
<P>28.4. [ * ]</P>
<P>28.5. [ * ]</P>
<P>29. [ * ]</P>
<P>29.1. [ * ]</P>
<P>29.2. [ * ]</P>
<P>29.3. [ * ]</P>
<P>29.4. [ * ]</P>
29.5. [ * ]
<P>30. [ *</P>
<BR>
<P ALIGN=CENTER>Page 7</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
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<P> ]</P>
<P>[ * ]</P>
<H1 align=center><FONT SIZE=3>Article IV – Joint Marketing Program</FONT></H1>
<P>In consideration of the licensing terms granted herein, the following
relationships shall be established between SST and MOTOROLA.</P>
<P>31. A mutually agreed upon joint press release and/or a joint press
conference, announcing this licensing relationship, outlining major benefits to
both parties shall be held at a mutually agreed time and place, no later than
two months after the Effective Date,</P>
<P>32. MOTOROLA shall include the attribution “This product incorporates
SuperFlash® technology licensed From SST” in newly printed Licensed
Product literature, data sheets, application notes, reference manuals, and
major related announcements of this license with style and font size solely
determined by MOTOROLA, however it shall be readable by a naked eye of a
typical person and displayed at a prominent location. Previously existing
literature associated with an earlier version of a MOTOROLA product which
becomes a Licensed Product may be used without the attribution until such
quantities are exhausted. Exceptions to the attribution requirement may be
requested by MOTOROLA and will be reasonably considered by SST.</P>
<P>33. There shall be an Internet link from a MOTOROLA SPS web site to SST’s
web site home page during the term of this Agreement. The MOTOROLA SPS web site
shall mention SST technology and MOTOROLA’s licensing relationship.</P>
<P>34. MOTOROLA will at a minimum mention SST Technology on MOTOROLA’s NVM
Technology Center internal company web site and will include a web link to SST’s
web site therefrom. Further, when and if external access is available to a
MOTOROLA SPS NVM web site, MOTOROLA will make good faith efforts to include a
web link from such a site to SST’s web site.</P>
<BR>
<P ALIGN=CENTER>Page 8</p>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
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<P>35. [ * ]</P>
<P>36. MOTOROLA shall provide a semi-annual demand forecast to SST by name,
product type and density of the MOTOROLA Semiconductor Products Sector products
using SST Technology.</P>
<H1 align=center><FONT SIZE=3>Article V – Intellectual Property Rights</FONT></H1>
<P>37. Title to all intellectual property rights relating to SST Improvements
under this Agreement shall be owned by SST, and all expenses incurred in
obtaining and maintaining such rights shall be borne by SST.</P>
<P>38. Title to all intellectual property rights relating to MOTOROLA
Improvements under this Agreement shall be owned by MOTOROLA, and all expenses
incurred in obtaining and maintaining such rights shall be borne by MOTOROLA.</P>
<P>39. Each party shall have and retain the sole and exclusive ownership of
their respective Sole Inventions.</P>
<P>40. Joint Inventions shall be jointly owned, title to all patents issued
thereon shall be joint, all expenses incurred in obtaining and maintaining such
patents, except as provided herein, shall be borne by the filing party, and
each party shall have the unrestricted right to license third parties
thereunder without accounting. Each party agrees to equally divide the number
of Joint Inventions filed for Joint Inventions in which both parties want to
seek patent protection. In the event that one party elects not to seek patent
protection for any Joint Invention in any particular country or not to share
equally in the expense thereof with the other party, the other party shall have
the right to seek or maintain such protection at its own expense in such a
country and shall have full control over the prosecution and maintenance
thereof even though title to any patent issuing therefrom shall be jointly
owned.</P>
<P>41. Each party shall give the other party all reasonable assistance in
obtaining Joint Invention patent protection and in preparing and prosecuting
any patent application filed by the other party, and shall cause to be executed
assignments and all other instruments and documents as the other party may
consider necessary or appropriate to carry out the intent of this paragraph 43.</P>
<H1 align=center><FONT SIZE=3>Article VI - WARRANTY</FONT></H1>
<P>42. SST warrants and represents that it has the right and authority to
convey and grant the license as set forth herein.</P>
<P>43. SST represents that the SST Technology including the deliverables
provided hereunder to MOTOROLA is the most up-to-date technology available to
SST at the time of delivery to MOTOROLA.</P>
<BR>
<P ALIGN=CENTER>Page 9</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
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<P>44. MOTOROLA warrants and represents that it has the right and authority to
enter into this Agreement and uphold its obligations as set forth herein.</P>
<P>45. SST represents that to the best of its knowledge, except as described in
Exhibit “D” there are no actions for infringement against SST or, to
SST’s knowledge, its licensees or their subsidiaries, with respect to
items it or any of them makes or sells embodying SST Intellectual Property
Rights anywhere in the world.</P>
<P>46. SST agrees to defend at its expense any suits against MOTOROLA based
upon a claim that the Flash Cell design furnished hereunder infringes a U.S.,
Japanese, Taiwanese, Singapore, Korean, German, French or U.K. patent,
copyright or trade secret (including those suits referenced in Exhibit D) and
to pay any costs and damages awarded in any such suit, provided that SST is
notified promptly in writing of the suit and, at SST’s request and at its
expense, is given control of said suit and all requested reasonable assistance
for defense of same. If the use or sale of the Flash Cell design furnished
hereunder is enjoined as a result of such suit, then SST, at its option and at
no expense to MOTOROLA, shall obtain for MOTOROLA the right to use and sell the
Flash Cell design or shall substitute an equivalent article acceptable to
MOTOROLA and extend this indemnity thereto. This indemnity does not extend to
any suit based upon any infringement or alleged infringement of any patent or
copyright by the combination of the Flash Cell design furnished by SST with
other elements if such infringement would have been avoided by the use of the
Flash Cell design alone, nor does it extend to any infringement necessitated by
SST’s compliance with MOTOROLA’s specification or formulae.</P>
<P>47. MOTOROLA agrees to defend at its expense any suits against SST based
upon a claim that the Licensed Product excluding SST Technology infringes a
U.S., Japanese, Taiwanese, Singapore, Korean, German, French or U.K. patent,
copyright or trade secret and to pay any costs and damages awarded in any such
suit, provided that MOTOROLA is notified promptly in writing of the suit and,
at MOTOROLA’s request and at its expense, is given control of said suit
and all requested reasonable assistance for defense of same. This indemnity
does not extend to any suit based upon any infringement or alleged infringement
of any patent or copyright by the combination of any Licensed Product excluding
SST Technology with other elements if such infringement would have been avoided
by the use of the Licensed Product alone, nor does it extend to any
infringement necessitated by MOTOROLA’s compliance with SST’s
specification or formulae.</P>
<P>48. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INCIDENTAL, INDIRECT,
SPECIAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH
AGREEMENT. In no event shall either party be liable to the other for damages in
connection with this Agreement, in the aggregate, greater than [ * ].</P>
<H1 align=center><FONT SIZE=3>Article VII - TERM AND TERMINATION</FONT></H1>
<BR>
<P ALIGN=CENTER>Page 10</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
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<P>49. This Agreement shall remain in full force and effect for ten (10) years
from the Effective Date, unless earlier terminated as provided elsewhere
herein. If MOTOROLA does not gives six (6) months prior written notice of
termination before the expiration date of this Agreement, then this Agreement
shall be extended for one (1) year each time. Upon termination, all tangible
Confidential Information shall be returned or destroyed according to the
instruction of the disclosing party.</P>
<P>50. This Agreement may be terminated by MOTOROLA for its convenience with
five (5) months advance written notice. This Agreement may be terminated by SST
if MOTOROLA breaches any material provision of Article II, III, V or IX and
does not cure or remedy such breach within thirty (30) days after receipt of
the notice of breach from SST. This Agreement may also be terminated by
MOTOROLA if SST breaches any material provision of this Agreement and does not
cure or remedy such breach within thirty (30) days after receipt of the notice
of breach from MOTOROLA. This Agreement may be terminated by either Party if
the other Party becomes the subject of a voluntary or involuntary petition in
bankruptcy or any proceeding relating to insolvency, receivership, liquidation,
or composition for the benefit of creditors if such petition or proceeding is
not dismissed with prejudice within sixty (60) days after filing. Termination
of this Agreement shall be effective thirty (30) days after issuance of a
written notice of termination to the other party by the non-defaulting party.
In the event SST becomes bankrupt, or a trustee is otherwise appointed for SST,
MOTOROLA shall have the right to maintain the rights and licenses provided for
in this Agreement, provided it continues to make the royalty payments provided
for herein.</P>
<P>51. After effective termination of this Agreement by either party in
accordance with Section VII hereof, MOTOROLA shall cease and desist all use of
the license except for the performance of its obligations to customers, which
are incurred before termination of this Agreement. The obligation and duties of
both parties under this Agreement for existing products at the time of
termination shall survive the termination of this Agreement.</P>
<P>52. Upon the breach by either party to this Agreement of any provision of
this Agreement, the non-breaching party shall have the right to pursue all
available remedies at law or in equity it may elect, in order to obtain the
benefits provided pursuant to this Agreement, or to obtain adequate resource or
compensation.</P>
<P>53. The termination of the license granted under this Agreement, by
expiration or otherwise, shall not release one party from any of its
obligations or liabilities therefore incurred, or rescind or give any rights to
rescind, anything done or any payment made or other consideration given
theretofore to the other party under this Agreement, provided that MOTOROLA
will have such rights, under such license, after any such termination or
expiration, as are necessary for MOTOROLA to (a) supply replacement products
for any defective Licensed Product units sold by MOTOROLA on or prior to the
date of such termination or expiration, and (b) supply Licensed Products under,
and pursuant to the terms of, commitments of MOTOROLA to third parties, for a
period of one year </P>
<BR>
<P ALIGN=CENTER>Page 11</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
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<P>thereafter, and (c) dispose of inventory of Licensed
Products under MOTOROLA’s control as of the date of such termination or
expiration. In no event shall MOTOROLA have the right to commit to supply
Licensed Products to new product design. For the purpose of sub-paragraph(c)
herein, new product designs do not include products which have been taped out,
masking plates have been made for them, and such proof of existence is provided
by MOTOROLA to SST no later than thirty (30) days after termination of the
Agreement. MOTOROLA will provide SST a statement of inventory at this point in
time, as well as an estimate of time required to dispose of said inventory.
MOTOROLA shall cause to be issued an irrevocable letter of credit issued by a
commercial bank equal to the amount of royalty based upon the inventory.
MOTOROLA will fulfill all royalty obligations for material described in (a),
(b) and (c). No failure or delay on the part of a non-breaching party in
exercising its right to terminate for any one or more default shall be
construed to prejudice its rights of termination for such or for any other or
subsequent default.</P>
<P>54. The provisions of Articles II, III, V, VI, provisions of Paragraph 10
and Article IX of this Agreement shall survive any termination or expiration of
this Agreement for any reason.</P>
<H1 align=center><FONT SIZE=3>Article VIII - MISCELLANEOUS</FONT></H1>
<P>55. MOTOROLA and SST may mutually decide to schedule management review
meetings once a year to assess the progress of the relationship, deal with any
unresolved problems, and develop strategic plans for continued joint effort.
Topics as required and topics to be proposed by either party shall be discussed
for continued achievement of the business objectives represented by this
Agreement.</P>
<P>56. Neither party shall be responsible for any failure to perform under this
Agreement if such failure is caused by unforeseen circumstances or due to
causes beyond its control, including but not limited to acts of God, riot,
labor stoppages, acts of civil and military authorities, fire, floods or
accidents.</P>
<P>57. This Agreement shall be governed by and construed in accordance with the
laws of the state of California.</P>
<P>58. NO MODIFICATION, ALTERATION OR AMENDMENT OF THIS AGREEMENT SHALL BE
EFFECTIVE UNLESS IN WRITING AND DULY SIGNED BY BOTH PARTIES. THE TERMS AND
CONDITIONS OF THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT AND UNDERSTANDING
OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND SUPERSEDE ALL
PREVIOUS COMMUNICATION, AGREEMENT, UNDERSTANDING, WHETHER ORAL OR WRITTEN,
BETWEEN THE PARTIES REGARDING THE SAME.</P>
<P>59. No waiver of any breach or failure by either party to enforce any
provision of this Agreement shall be deemed a waiver of any other or subsequent
breach or a waiver of future enforcement of that or any other provision.</P>
<BR>
<P ALIGN=CENTER>Page 12</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
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<P>60. Neither party can assign this Agreement without the prior written
consent of the other party.</P>
<P>61. This Agreement shall not be construed as creating a partnership between
the parties hereto or to create any other form of legal association which would
impose liability upon one party for the act or failure to act of the other
party.</P>
<P>62. No remedy conferred by any of the specific provisions of this Agreement
is intended to be exclusive of any other remedy, and each and every remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or nor or hereafter existing at law or in equity or by statue or
otherwise. The election of one or more remedies by either party shall not
constitute a waiver of the right to pursue other available remedies.</P>
<P>63. If any clause or provision of this Agreement is declared illegal,
invalid or unenforceable under present or future laws effective during the term
hereof, it is the intention of the parties hereto that the remainder of this
Agreement shall not be affected hereby and shall remain in force and effect.</P>
<P>64. The parties understand and acknowledge the violation of the respective
covenants and agreements contained herein may cause the other irreparable harm
and damage, which may not be recovered by law, and each agrees that the other’s
remedies for a breach hereof may be in equity by way of injunctive relief, as
well as for damages and any other relief available to the non-breaching party,
whether in law or in equity.</P>
<P>65. MOTOROLA agrees to comply with all laws relating to export control with
regard to all goods and information transferred by SST to MOTOROLA hereunder,
including but not limited to the information transferred pursuant to Exhibit
“A” hereof, and agrees to hold SST harmless and indemnify it from any
breach thereof. SST agrees to comply with all laws relating to export control
with regard to all goods and information transferred by MOTOROLA to SST
hereunder, including but not limited to the information relating to the
MOTOROLA Improvement, and agrees to hold MOTOROLA harmless and indemnify it
from any breach thereof.</P>
<P>66. Any notice between the parities shall be made, by fax or mail, to the
corespondent as follows:</P>
<P>to MOTOROLA</P>
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<P><TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%>
</TD>
<TD WIDTH=90%><P>Mr. Gene Mullinnix </P></TD></TR>
<TR VALIGN=TOP>
<TD WIDTH=10%>Address
</TD>
<TD WIDTH=90%><P>3501 Ed Bluestin Blvd. MD K13 </P></TD></TR>
<TR VALIGN=TOP>
<TD WIDTH=10%>
</TD>
<TD WIDTH=90%><P>Austin, Texas 78721 </P></TD></TR>
<TR VALIGN=TOP>
<TD WIDTH=10%>tel:
</TD>
<TD WIDTH=90%><P>(512) 933-3476 </P></TD></TR>
<TR VALIGN=TOP>
<TD WIDTH=10%>fax:
</TD>
<TD WIDTH=90%><P>(512) 933-3837 </P></TD></TR>
</TABLE>
<BR>
<TABLE WIDTH=600>
<TR VALIGN=TOP>
<TD>
<P ALIGN=CENTER>Page 13</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
</TD>
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<TR VALIGN=TOP>
<TD WIDTH=10%>to SST
</TD>
<TD WIDTH=90%><P> Mr. Sohrab Kianian </P></TD></TR>
<TR VALIGN=TOP>
<TD WIDTH=10%>Address
</TD>
<TD WIDTH=90%><P>1171 Sonora Court, Sunnyvale,
California 94086 </P></TD></TR>
<TR VALIGN=TOP>
<TD WIDTH=10%>tel:
</TD>
<TD WIDTH=90%><P>(408) 523-7748 </P></TD></TR>
<TR VALIGN=TOP>
<TD WIDTH=10%>fax:
</TD>
<TD WIDTH=90%><P>(408) 720-0840 </P></TD></TR>
</TABLE>
<TABLE WIDTH=600>
<TR VALIGN=TOP>
<TD WIDTH>
<H1 align=center><FONT SIZE=3>Article IX - Confidential Information</FONT></H1>
<P>67. Except as MOTOROLA exercises its license and rights hereunder, both
parties agree to maintain Confidential Information in confidence, not to make
use thereof other than for the performance of this Agreement, to release it
only to employees of SST or MOTOROLA, and MOTOROLA customers who have a
reasonable need to know the same, and not to release or disclose it to any
third party, without the prior written consent of the disclosing party. SST
will consider in good faith any reasonable written request from MOTOROLA or a
Licensed Foundry to permit MOTOROLA and the Licensed Foundry to mutually share
limited and specifically identified SST Confidential Information which is
necessary to share in order to permit MOTOROLA to exercise its ‘have made’ license
rights granted in this Agreement. When such disclosures are requested, SST
agrees to provide MOTOROLA and the Licensed Foundry with timely written notice
of its decision.</P>
<P>68. All Confidential Information and any copies thereof shall remain the
property of the disclosing party. Upon expiration or termination of this
Agreement, the receiving party shall return the original and all copies of
tangible Confidential Information at the request of the disclosing party. Each
Party may keep an archieval copy to be used only for dispute resolution
purposes.</P>
<P>69. Provisions of Article IX, herein, shall survive the termination or
expiration of this Agreement for a period of five (5) years.</P>
<BR>
<P align=center>Page 14</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
</TD>
</TR>
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<TR>
<TD>
<P>70. The terms and conditions of the Non-disclosure Agreement dated June 9,
1998 between the parties shall remain effective. In the event the terms and
conditions conflicts with this Agreement, this Agreement shall prevail. </P>
<P>IN
WITNESS WHEREOF, the parties have caused this Agreement to be executed by
respective duly authorized representatives as the date and year hereinabove
written above.</P>
</TD>
</TR>
</TABLE>
<TABLE CELLPADDING=0 CELLSPACING=0 BORDER=0 WIDTH=600>
<TR Valign=bottom>
<TD Align=left width=50%>Signed:<BR>Motorola, Inc.<BR>_______________________________<BR>By Scott Anderson<BR>
Title TSG Senior VP & General Manager<BR>Date 5/5/99</TD>
<TD Align=left width=50%>Silicon Storage Technology, Inc.<BR>_______________________________<BR>By Bing Yeh<BR>
Title President & CEO<BR> Date 5/3/99</TD>
</TR>
</TABLE>
<TABLE WIDTH=600>
<TR VALIGN=TOP>
<TD>
<BR><BR>
<P>By Jon Meyer<BR>Corp. VP & Assistant General Counsel<BR>Dir. Patents, Trade Marks,
and Licensing<BR>Date 5/5/99</P>
<BR>
<P align=center>Page 15</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
</TD>
</TR>
</TABLE>
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<TABLE WIDTH=600>
<TR>
<TD>
<H1 align=center><FONT SIZE=3>Exhibit “A”<BR>SST Deliverables:</FONT></H1>
<P>[ * ]</P>
<BR>
<P align=center>Page 16</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
</TD>
</TR>
</TABLE>
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<!-- MARKER LABEL="sheet: 14, page: 15" -->
<HR SIZE=5 NOSHADE>
<TABLE WIDTH=600>
<TR>
<TD>
<P>[ * ]</P>
<BR>
<P align=center>Page 17</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
</TD>
</TR>
</TABLE>
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<HR SIZE=5 NOSHADE>
<TABLE WIDTH=600>
<TR>
<TD>
<P>[ * ]</P>
<BR>
<P align=center>Page 18</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
</TD>
</TR>
</TABLE>
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<TABLE WIDTH=600>
<TR>
<TD>
<H1 align=center><FONT SIZE=3>Exhibit “B”</FONT></H1>
<P>[ * ]</P>
<BR>
<P align=center>Page 19</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
</TD>
</TR>
</TABLE>
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<TABLE WIDTH=600>
<TR>
<TD>
<H1 ALIGN=center><FONT SIZE=3>Exhibit “C”</FONT></H1>
<P>[ * ]</P>
<BR>
<P align=center>Page 20</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
</TD>
</TR>
</TABLE>
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<TABLE WIDTH=600>
<TR>
<TD>
<H1 align=center><FONT SIZE=3>Exhibit “D”</FONT></H1>
<P>1. [ * ]</P>
<P>2. [ * ]</P>
<P>3. [ * ]</P>
<P>4. [ * ]</P>
<P>5. [ * ]</P>
<BR>
<P align=center>Page 21</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
</TD>
</TR>
</TABLE>
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<!-- MARKER LABEL="sheet: 17, page: 18" -->
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<TABLE WIDTH=600>
<TR>
<TD>
<P>6. [ * ]</P>
<BR>
<P align=center>Page 22</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
</TD>
</TR>
</TABLE>
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<!-- MARKER LABEL="sheet: 17, page: 18" -->
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<TABLE WIDTH=600>
<TR>
<TD>
<H1 align=center><FONT SIZE=3>Exhibit “E”<BR>MOTOROLA Subsidiaries:</FONT></H1>
<P>Codex<BR>Tohoku<BR>White Oak<BR>Pico Design</P>
<BR>
<P align=center>Page 23</P>
<BR>
<P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
</TD>
</TR>
</TABLE>
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<TABLE WIDTH=600>
<TR>
<TD>
<H1 align=center><FONT SIZE=3>Exhibit F</FONT></H1>
<H1 align=center><FONT SIZE=3>MOTOROLA Currency Exchange Policy</FONT></H1>
<P>The Tuesday prior to each fiscal month end, MOTOROLA SPS publishes its
revised foreign exchange rates. These rates are based upon the spot market, and
are used to value any new sales or expenses during the upcoming fiscal month.
In other words, any sales during a given fiscal month are recognized on the
income statement at a constant rate, regardless of intra-month changes in the
spot rate.</P>
<BR>
<P align=center>Page 24</P>
<BR><P>[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED</P>
</TD>
</TR>
</TABLE>
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</BODY>
</HTML>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The condensed consolidated balance sheets and the condensed consolidated
statement of operations found in the company's Form 10-Q for the six
months ended June 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 17,518
<SECURITIES> 0
<RECEIVABLES> 17,534
<ALLOWANCES> 731
<INVENTORY> 12,709
<CURRENT-ASSETS> 49,716
<PP&E> 24,313
<DEPRECIATION> 15,068
<TOTAL-ASSETS> 64,157
<CURRENT-LIABILITIES> 29,997
<BONDS> 0
0
0
<COMMON> 59,319
<OTHER-SE> (25,746)
<TOTAL-LIABILITY-AND-EQUITY> 64,157
<SALES> 38,226
<TOTAL-REVENUES> 41,319
<CGS> 35,004
<TOTAL-COSTS> 51,938
<OTHER-EXPENSES> 528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51
<INCOME-PRETAX> (10,142)
<INCOME-TAX> 65
<INCOME-CONTINUING> (10,207)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,207)
<EPS-BASIC> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
