UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(MARK ONE)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2008~~2009

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

FOR THE TRANSITION PERIOD FROM TO

Commission file number 0-26944

~~Silicon~~SILICON ~~Storage~~STORAGE ~~Technology~~TECHNOLOGY, ~~Inc~~INC.

(Exact name of Registrant as Specified in its Charter)

LOGO

California

77-0225590

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification Number)

~~1171~~1020 ~~Sonora~~Kifer ~~Court~~Road

Sunnyvale, California 94086

(Address of Principal Executive Offices including Zip Code)

(408) 735-9110

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Common Stock, no par value

The NASDAQ Stock Market LLC

(NASDAQ Global Market)

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ¨	Accelerated filer x	Non-accelerated filer ¨	Smaller reporting company ¨
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, ~~2008~~2009 was $~~225~~147,~~740~~122,~~147~~772 based on the adjusted closing price of the registrant’s common stock as reported on the NASDAQ Global Market. Shares of the registrant’s common stock held by each officer and director and affiliated entities who own 5% or more of the outstanding common stock of the registrant have been excluded in that such persons and entities may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. This calculation does not exclude shares held by persons or entities whose ownership exceeds 5% of the registrant’s common stock that have represented to the registrant that they are registered investment advisers or investment companies registered under Section 8 of the Investment Company Act of 1940.

Number of shares outstanding of SST’s Common Stock, no par value, as of the latest practicable date, ~~February~~March 288, ~~2009~~2010: 95115,~~690~~395,~~561~~609

Documents Incorporated by Reference

The registrant has incorporated by reference portions of its definitive Proxy Statement for its 2009 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission by April 30, 2009.

Silicon Storage Technology, Inc.

Form 10-K

For the Year Ended December 31, ~~2008~~2009

TABLE OF CONTENTS

		Page
Part I.
Item 1.	Business	3
Item 1A.	Risk Factors	1314
Item 1B.	Unresolved Staff Comments	2628
Item 2.	Properties	2628
Item 3.	Legal Proceedings	2628
Item 4.	~~Submission~~(Removed ofand ~~Matters to a Vote of Security Holders~~Reserved)	2830
Part II.
Item 5.	Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities	2931
Item 6.	Selected Consolidated Financial Data	3133
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3234
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	5760
Item 8.	Financial Statements and Supplementary Data	5860
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	5961
Item 9A.	Controls and Procedures	5961
Item 9B.	Other Information	6063
Part III.
Item 10.	Directors, Executive Officers and Corporate Governance	6264
Item 11.	Executive Compensation	6264
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	6264
Item 13.	Certain Relationships and Related Transactions, and Director Independence	6264
Item 14.	Principal Accountant Fees and Services	6264
Part IV.
Item 15.	Exhibits and Financial Statement Schedules	6365
Index to Consolidated Financial Statements		6365
Index to Exhibits		6365
Signatures		6668

PART I

Item 1.

Business

Forward Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Annual Report on Form 10-K in greater detail in Part I, Section 1A “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Annual Report on Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

~~Overview~~Recent Developments

~~Silicon~~On ~~Storage~~February 2, 2010, we entered into a definitive agreement, or Merger Agreement, to be acquired by Microchip Technology Incorporated, ~~Inc~~ or Microchip, for $2.85 ~~(SST~~per share. On February 22, us2010, we entered into an amendment to the Merger Agreement, or Amendment No. 1, to be acquired by Microchip, for $3.00 per share. On March 8, 2010, we) isentered ainto ~~leading~~an ~~supplier~~amendment ofto ~~NOR~~the Merger ~~flash~~Agreement, ~~memory~~or ~~semiconductor~~Amendment ~~devices~~No. 2, to be acquired by Microchip, for ~~the~~$3.05 ~~digital~~per ~~consumer~~share. In connection with Amendment No. 2, ~~networking~~on March 8, ~~wireless~~2010, ~~communications~~we issued to Microchip 19,148,149 newly issued shares of our common stock, or 19.9 percent of our outstanding shares, for a price of $3.05 per share in cash. Amendment No. 1 and ~~Internet~~Amendment ~~computing~~No. 2 ~~markets~~are referred to together as the Amendments. WePursuant ~~also~~to ~~produce~~the Merger Agreement and ~~sell other~~Amendments, ~~semiconductor~~SST ~~products~~will ~~including~~merge ~~NAND~~with ~~flash~~Sun ~~controllers~~Acquisition Corporation, a California corporation and ~~NAND~~a ~~Controller-based~~wholly ~~modules;~~owned ~~smart~~subsidiary ~~card~~of ~~integrated~~Microchip, ~~circuits~~a Delaware corporation, or ~~ICs~~the Merger. Each outstanding share of our common stock, ~~and~~other ~~modules;~~than ~~flash~~shares ~~microcontrollers;~~as ~~and~~to ~~radio~~which ~~frequency~~dissenters’ ~~ICs~~rights ~~and~~have ~~modules~~been properly exercised, will be converted into the right to receive $3.05, without interest.

~~NOR~~The ~~flash~~Strategic ~~memory~~Committee isof aour ~~form~~Board of ~~nonvolatile~~Directors, ~~memory~~or the Strategic Committee, consisting of all three of the independent members of the Board of Directors, approved the Merger Agreement and Amendments, and determined that ~~allows~~the ~~electronic~~Merger ~~systems~~Agreement, Amendments and Merger are advisable and both fair to ~~retain~~and in ~~information~~the ~~when~~best interest of our shareholders. The Merger Agreement contains representations, warranties and covenants including among others, covenants by us concerning the ~~system~~conduct isof ~~turned~~our ~~off~~business in the ordinary course during the interim period between the execution of the Merger Agreement and the consummation of the Merger. ~~NOR~~The ~~flash~~closing ~~memory~~of the Merger is subject to closing conditions, including approval of the Merger by the holders of a majority of our outstanding common stock represented and ~~used~~voting inat ~~hundreds~~a special meeting to be held to approve the principal terms of ~~millions~~the Merger and adoption of ~~consumer~~the ~~electronics~~Merger Agreement and ~~computing~~Amendments. ~~products~~The ~~annually~~Merger Agreement and Amendments contain certain termination rights and further provide that upon termination of the Merger Agreement under specified circumstances we may be required to pay Microchip a termination fee of $10.3 million. Under specified circumstances, we may also be required to reimburse certain of Microchip’s expenses incurred in connection with the Merger, up to $2.0 million.

We produce and sell many products based on our SuperFlash design and manufacturing process technology. Our products are incorporated into products sold by many well-known companies including Apple, Asustek, BenQ, Cisco, Dell, First International Computer, or FIC, Gigabyte, Haier, Huawei, Infineon, Intel, IBM, Inventec, Legend Lenovo, LG Electronics, Freescale Semiconductor, NEC, Nintendo, Panasonic, Philips, Quanta, Samsung, Sanyo, Seagate, Sony, Sony Ericsson, Toshiba, Texas Instruments, VTech and ZTE.

We license our SuperFlash technology for applications in semiconductor devices that integrate flash memory with other functions on a monolithic chip to leading semiconductor companies including X-Fab, Analog Devices, IBM, Freescale Semiconductor, Inc., National Semiconductor Corporation, NEC Corporation, Samsung Electronics Co. Ltd., Sanyo Electric Co., Ltd., or Sanyo, Seiko Epson Corporation, Shanghai Grace Semiconductor Manufacturing Corporation, or Grace, Shanghai Hua Hong NEC Electronics Co., Ltd., or HHNEC, Taiwan Semiconductor Manufacturing Co., Ltd., or TSMC, Toshiba Corporation, Vanguard International Semiconductor Corporation, Powerchip Semiconductor Corporation and Winbond Electronics Corporation.

~~contain~~For ~~our~~a ~~intellectual~~description ~~property~~of ~~and~~our ~~technology.~~proposed ~~These~~transaction ~~wafers~~with ~~are~~Microchip, ~~electrically~~please ~~tested~~refer ~~and~~to ~~then~~our ~~subdivided~~definitive proxy ~~into~~statement ~~many~~for ~~small~~our ~~rectangular~~Special ~~chips,~~Meeting orof ~~die.~~Shareholders Weto ~~work with~~be ~~leading~~held ~~semiconductor~~on ~~assembly~~April 8, ~~and~~2010, ~~test~~which ~~companies~~is toon ~~finish~~file ~~our~~with ~~products~~the bySecurities ~~encapsulating them in a package~~ and ~~testing~~Exchange ~~them.~~Commission, Weor ~~are~~the ~~working with Grace~~SEC, ~~Powerchip Semiconductor Corporation~~ and ~~TSMC,~~is ~~among~~available ~~others,~~through tothe ~~develop~~SEC’s ~~new~~website ~~technology~~at ~~for manufacturing our products~~www.sec.gov.

~~The~~On ~~semiconductor~~November 13, ~~industry has historically been cyclical~~2009, ~~characterized~~we byentered ~~periodic~~into ~~changes~~a indefinitive ~~business conditions~~agreement, ~~caused~~or ~~by product supply and demand imbalance. When~~ the ~~industry~~TRH ~~experiences~~Merger ~~downturns~~Agreement, ~~they~~to ~~often~~be ~~occur~~acquired inby ~~connection~~Prophet ~~with,~~Equity orLP inand members ~~anticipation~~ of, ~~maturing~~our ~~product~~management ~~cycles~~team ~~and~~for ~~declines~~$2.10 inper ~~general economic conditions~~share. ~~These~~Pursuant ~~downturns~~to ~~are characterized~~the bydefinitive ~~weak~~agreement ~~product~~SST ~~demand,~~would ~~excessive~~be ~~inventory~~merged with and ~~accelerated~~into ~~decline~~Technology ofResources ~~selling~~Merger ~~prices~~Sub, Inc., ~~The~~a ~~average~~California ~~selling~~corporation ~~price~~and ofa ~~our~~wholly ~~products~~owned ~~remained~~subsidiary ~~relatively~~of ~~stable~~Technology inResources Holdings, ~~2006~~Inc., ~~2007~~a ~~and~~Delaware ~~the~~corporation. ~~first~~On ~~half~~February 2, ~~of 2008. However~~2010, inwe terminated the ~~fourth~~TRH ~~quarter~~Merger ~~of 2008,~~Agreement in ~~conjunction~~order ~~with~~to ~~the~~enter ~~rapid~~into ~~slowdown in~~ the ~~global~~Merger ~~economy~~Agreement, weas ~~experienced~~described ~~a significant weakening in demand for our products~~above. ~~During~~In ~~this~~connection ~~downturn,~~with ~~further~~the ~~deterioration~~termination of ~~demand~~the ~~and~~TRH ~~decline~~Merger ~~in average selling prices is likely~~Agreement, ~~and~~ we paid ~~cannot~~Technology ~~predict~~Resources ~~the~~Holdings, ~~extent or duration of the downturn~~Inc. ~~Our~~a ~~business~~termination ~~could~~fee beof ~~further harmed by industry-wide prolonged downturns in the future~~$4,025,875.

~~The~~For ~~consumer~~additional ~~electronics~~information ~~manufacturing~~regarding ~~industry~~potential isrisks ~~concentrated in Asia. We manufacture virtually all of our products in Asia~~ and uncertainties weassociated ~~sell~~with ~~most~~the ofproposed ~~our~~transactions ~~products~~described ~~in Asia. We derived 87.7%~~above, ~~88.8%~~please ~~and~~see ~~87.3%~~Item 1A of“Risk ~~our net product revenues during 2006, 2007 and 2008, respectively, from product shipments to Asia~~Factors.”

Overview

Silicon Storage Technology, Inc. (SST, us or we) is a leading supplier of NOR flash memory semiconductor devices for the digital consumer, networking, wireless communications and Internet computing markets. We also produce and sell other semiconductor products including NAND flash controllers and NAND Controller-based modules; flash microcontrollers; and radio frequency ICs and modules.

NOR flash memory is a form of nonvolatile memory that allows electronic systems to retain information when the system is turned off. NOR flash memory is used in billions of consumer electronics and computing products annually.

We produce and sell many products based on our SuperFlash design and manufacturing process technology. Our products are incorporated into products sold by many well-known companies including Apple, Asustek, BenQ, Cisco, Dell, First International Computer, or FIC, Gigabyte, Haier, Huawei, Infineon, Intel, IBM, Inventec, Legend, Lenovo, LG Electronics, Freescale Semiconductor, NEC, Nintendo, Panasonic, Philips, Quanta, Samsung, Sanyo, Seagate, Sony, Sony Ericsson, Toshiba, Texas Instruments, VTech and ZTE.

We license our SuperFlash technology for applications in semiconductor devices that integrate flash memory with other functions on a monolithic chip to leading semiconductor companies including X-Fab, Analog Devices, IBM, Freescale Semiconductor, Inc., National Semiconductor Corporation, NEC Corporation, Samsung Electronics Co. Ltd., or Samsung, Sanyo Electric Co., Ltd., or Sanyo, Omron Corporation, Shanghai Grace Semiconductor Manufacturing Corporation, or Grace, Shanghai Hua Hong NEC Electronics Co., Ltd., or HHNEC, Taiwan Semiconductor Manufacturing Co., Ltd., or TSMC, Toshiba Corporation, Vanguard International Semiconductor Corporation, Powerchip Semiconductor Corporation and Winbond Electronics Corporation.

We have installed our semiconductor manufacturing processes at several leading wafer foundries and semiconductor manufacturers including Advanced Wireless Semiconductor, Grace, Samsung, Omron Corporation, HHNEC and TSMC. These companies produce semiconductor wafers for us that contain our intellectual property and technology. These wafers are electrically tested and then subdivided into many small rectangular chips, or die. We work with leading semiconductor assembly and test companies to finish our products by encapsulating them in a package and testing them. We are working with Grace, TSMC, Powerchip Semiconductor Corporation and Semiconductor Manufacturing International Corporation, or SMIC, among others, to develop new technology for manufacturing our products.

conditions. These downturns are characterized by weak product demand, excessive inventory and accelerated decline of selling prices. The average selling price of our products remained relatively stable in 2007 and the first half of 2008. However, in the fourth quarter of 2008, in conjunction with the rapid slowdown in the global economy, we experienced a significant weakening in demand for our products and corresponding significant decline in sales and gross profit. Although prices stabilized again in 2009, our business could be further harmed by industry-wide prolonged downturns in the future.

The consumer electronics manufacturing industry is concentrated in Asia. We manufacture virtually all of our products in Asia and we sell most of our products in Asia. We derived 88.8%, 87.3% and 91.7% of our net product revenues during 2007, 2008 and 2009, respectively, from product shipments to Asia.

Flash Memory Industry Background

Semiconductor integrated circuits are critical components used in an increasingly wide variety of applications, such as computers and computer systems, communications equipment, consumer products and industrial automation and control systems. As integrated circuit performance has improved and physical size and costs have decreased, the use of semiconductors in many applications has grown significantly.

Historically, the demand for semiconductors has been driven by the personal computer, or PC, market. In recent years, growth in demand for semiconductors relating to PCs has been outpaced by growth in demand for semiconductors that are used in digital electronic devices for communication and consumer applications. Communications applications include digital subscriber line modems, cable modems, networking equipment, wireless local area network, or WLAN, devices, cellular phones and Global Positioning Systems, or GPS. Consumer oriented digital electronic devices include digital cameras and camcorders, DVD and Blu-Ray players, MP3 players, personal media players, or PMPs, set-top boxes, digital TVs and video games.

In order to function correctly, PCs and other digital electronic devices require program code. The program code defines how devices function and affects how they are configured. Nonvolatile memory devices were originally used by the PC industry to provide the BIOS (basic input/output system) to give the PC sufficient information to start up (boot) and to facilitate its access to its high volume nonvolatile memory stored in magnetic media including hard disk drives. In PCs, the code stored in the nonvolatile memory or BIOS, initiates the loading of the PC’s operating system, which is then read from the disk drive. In the case of other digital electronic devices, the program code is stored in its entirety in nonvolatile memory, generally flash memory. As a result, virtually every digital electronic system that uses a processor or controller for computing, consumer electronics, communications and industrial applications requires nonvolatile memory. The predominant forms of nonvolatile memory include Read-Only Memory (ROM), Programmable Read-Only Memory (PROM) and flash memory.

System manufacturers generally prefer nonvolatile memory devices that can be reprogrammed efficiently in the system in order to achieve several important advantages. With reprogrammable memory, manufacturers can cost effectively change program codes in response to faster product cycles and changing market specifications. This in turn greatly simplifies inventory management and manufacturing processes. Reprogrammable memory also allows the manufacturer to reconfigure or update a system either locally or through a network connection. In addition, in-system reprogrammable devices can be used for data storage functions, such as storage of phone numbers for speed dialing in a cellular phone or captured images in a digital camera. Flash memory provides these features better than other forms of nonvolatile memory.

4Flash memory is the predominant reprogrammable nonvolatile memory device used to store program code and data. Flash memory can electrically erase select blocks of data on the device much faster and more simply than alternative solutions, such as Erasable Programmable Read-Only Memory, or EPROM. Moreover, flash memory is significantly less expensive than other reprogrammable solutions, such as Electrically Erasable Programmable Read-Only Memory, or EEPROMs. There are two types of flash memories; NOR and NAND, in

~~also~~terms ~~allows~~of ~~the~~memory ~~manufacturer~~cell toarray ~~reconfigure~~architecture. orNOR ~~update~~flash amemories ~~system~~are ~~either~~typically ~~locally~~used orfor ~~through~~storing aprogram ~~network~~code ~~connection.~~and InNAND ~~addition,~~flash ~~in-system~~memories ~~reprogrammable~~are ~~devices can~~typically be used for data storage. ~~functions,~~The ~~such~~rapid asgrowth ~~storage~~ of ~~phone~~flash memory ~~numbers~~has ~~for~~been ~~speed~~fueled ~~dialing~~by inthe aexplosive ~~cellular~~growth ~~phone~~of ordigital ~~captured~~electronic ~~images~~devices inthat aadopted ~~digital~~flash ~~camera. Flash~~ memory ~~provides~~as ~~these~~the ~~features~~main ~~better~~storage ~~than~~medium ~~other~~for ~~forms~~code ofand ~~nonvolatile memory~~data.

Flash memory is the predominant reprogrammable nonvolatile memory device used to store program code and data. Flash memory can electrically erase select blocks of data on the device much faster and more simply than alternative solutions, such as Erasable Programmable Read-Only Memory, or EPROM. Moreover, flash memory is significantly less expensive than other reprogrammable solutions, such as Electrically Erasable Programmable Read-Only Memory, or EEPROMs. There are two types of flash memories; NOR and NAND, in terms of memory cell array architecture. NOR flash memories are typically used for storing program code and NAND flash memories are typically used for data storage. The rapid growth of flash memory has been fueled by the explosive growth of digital electronic devices that adopted flash memory as the main storage medium for code and data.

Our Flash Memory Solution

We are a leading supplier of NOR flash memory semiconductor devices. We believe our proprietary flash memory technology, SuperFlash, offers superior performance, high reliability and a fast, fixed erase time. We further believe that our SuperFlash technology can be scaled to use the semiconductor industry’s most advanced technology nodes and can employ the industry’s lowest cost manufacturing processes.

Our NOR flash devices have densities ranging from 256,000 bits (256 Kb) to 64 million bits (64 Mb). These products are generally used to store the instruction set used by the microprocessor or controller in the electronic system product to direct its function. NOR memory can also be used to store mass data in a system, but it is generally less expensive to use NAND memory for this purpose. While NOR memory can be used to store data, NAND memory is generally not useful for the storage of execute-in-place instruction code due to its block data access and existence of defective memory cells that require special error detection and correction management. As a result, electronic systems often use NOR alone or NOR (with RAM, or controller) and NAND together, but usually not NAND memory alone.

Our Corporate Strategy

Product Strategy

Our product strategy is two fold: to continue to develop and grow our core NOR flash memory and embedded flash technology licensing business, while diversifying our business by expanding into new markets and pursuing growth opportunities through the development of new NAND Controller-based module and radio frequency IC and module products. In the NOR flash market, our goals are to be ~~the~~a leading worldwide supplier of low-density NOR flash memory devices and to maintain our position as the world’s number one embedded flash licensor by growing both upfront fees and per unit royalties. In our new business markets, our objectives are to leverage our core competencies in NAND Controller design into ~~systems~~system solutions as the adoption of solid state memory technology grows, and to leverage our radio frequency wireless technology and systems expertise as development continues on a multitude of electronic devices ~~which~~that are enabled for wireless communication. We intend to carry out our strategy by:

Maintaining a leading position in the program code storage market. We believe that program code storage is an attractive segment of the flash memory market. The number, variety and performance of digital electronic applications continue to increase. Virtually all of these devices need some sort of nonvolatile memory to direct the function of the product’s microprocessor or controller. We believe that our proprietary SuperFlash technology is superior because it offers higher reliability and better performance at a lower cost than competing solutions and is the foundation of our strong licensing business. In addition, our core competencies in advanced packaging and low-power design enable us to develop products with non-commodity features such as the smallest and thinnest packages for flash memory in the industry. These ultra-thin packages support the trend of manufacturers developing smaller, more compact electronic devices. Developing state of the art small and thin package technology is very expensive and thus we have partnered with other companies who are not direct competitors through strategic investments. We also offer a full portfolio of low-voltage serial flash products, which are particularly desirable for portable battery powered electronic systems.

5Continuing to enhance our leading flash memory technology. We believe that our proprietary SuperFlash technology is less complicated, more reliable, more scalable and more cost-effective than competing NOR flash memory technologies. Our ongoing research and development efforts are focused on enhancing our leading flash

~~smallest~~memory ~~and~~technology ~~thinnest~~by ~~packages~~working ~~for~~closely ~~flash~~with ~~memory~~technology inpartners ~~the~~who ~~industry~~operate wafer fabrication facilities with advanced lithographic and other manufacturing equipment. ~~These~~We ~~ultra-thin~~are ~~packages~~a ~~support~~fabless ~~the~~semiconductor manufacturer, ~~trend~~while many of ~~manufacturers~~our ~~developing~~competitors ~~smaller~~own and operate fabrication facilities, or fabs. Being fabless can provide advantages during economic downturns, as it has allowed us to downsize more rapidly and we do not have the debt which is often ~~compact~~associated ~~electronic~~with ~~devices~~constructing large fabs. ~~Developing~~However, ~~state~~there are competitive disadvantages in terms of ~~the~~capacity ~~art~~constraints, ~~small~~as we saw in 2007, and ~~thin~~development ~~package~~time for new technology, isas ~~very~~our ~~expensive~~fab ~~and~~partners ~~thus~~do not necessarily share our priorities. In response to these factors, we have ~~partnered~~pursued ~~with~~a ~~other~~strategy ~~companies~~of ~~who~~making ~~are~~financial ~~not~~investments ~~direct~~in ~~competitors~~fab ~~through~~and ~~strategic~~assembly ~~investments~~partners, ~~most~~the ~~notably~~largest ~~ACET~~of which is Grace, a subsidiary of Grace Semiconductor Manufacturing Corporation, or GSMC. WeThrough ~~are~~this ~~also~~strategy we hope ~~one~~to retain involvement in the timing of new fab and assembly development, while avoiding the ~~only~~considerable cost of ownership borne by our competitors. As consumer electronics companies produce more complex and more compact products, we intend to ~~offer~~meet their aneeds ~~full~~through ~~portfolio~~what we believe is the lowest cost business model, with the goal of ~~low-voltage~~producing ~~serial~~the ~~flash~~lowest ~~products~~cost, ~~which~~smallest ~~are~~and ~~particularly~~most ~~desirable~~energy ~~for~~efficient ~~portable~~semiconductor ~~battery~~products ~~powered~~in ~~electronic~~the ~~systems~~world.

~~Continuing~~Emphasizing tothe ~~enhance~~development ~~our~~of ~~leading flash memory technology. We believe that our proprietary SuperFlash technology is less complicated, more reliable, more scalable and more cost~~non-~~effective~~commodity ~~than competing NOR flash~~ memory ~~technologies.~~products ~~Our~~to ~~ongoing~~enhance research and development efforts are focused on enhancing our leading flash memory technology by working closely with technology partners who operate wafer fabrication facilities with advanced lithographic and other manufacturing equipmentgrowth. We ~~are~~offer a ~~fabless~~selection ~~semiconductor manufacturer, while many~~ of our ~~competitors~~products ~~own~~in wafer and ~~operate fabrication facilities, or fabs~~die form. ~~Being~~This ~~fabless~~allows ~~can~~our ~~provide advantages~~customers ~~during economic downturns, as it has allowed us~~ to ~~downsize~~develop ~~more~~multi-chip ~~rapidly~~module ~~and~~products wefor doextremely ~~not~~small ~~have~~form ~~the~~factor ~~debt~~products ~~which~~such ~~is often associated with constructing large fabs. However, there are competitive disadvantages in terms of capacity constraints,~~ as we ~~saw~~Bluetooth inmodules ~~2007,~~for headsets and ~~development~~GPS ~~time~~modules for ~~new~~cell ~~technology,~~phone ~~as our fab partners do not necessarily share our priorities~~applications. InWe ~~response~~also toprovide ~~these~~multi-chip ~~factors,~~module weproducts ~~have pursued a strategy of making financial investments in fab and assembly partners, the largest~~that ofincorporate ~~which~~die isfrom ~~Grace,~~other asemiconductor ~~subsidiary of Grace Semiconductor Manufacturing Corporation, or GSMC~~manufacturers. ~~Through~~We ~~this~~intend ~~strategy~~to wecontinue ~~believe~~to wedevelop ~~can retain involvement in the timing of~~ new ~~fab~~products and ~~assembly~~leverage ~~development, while avoiding the considerable cost of ownership borne by~~ our ~~competitors.~~supply Aschain ~~consumer electronics companies produce more complex and more compact products, we intend~~ to ~~meet~~take ~~their~~advantage ~~needs~~of ~~through~~the ~~what~~significant wegrowth ~~believe~~opportunities isin the ~~lowest~~wireless ~~cost~~applications ~~business~~market ~~model,~~ with ~~the~~specific ~~goal~~focus ofon cellular ~~producing~~phone, ~~the lowest cost~~GPS, ~~smallest~~WLAN and ~~most~~Bluetooth ~~energy efficient semiconductor products in the world~~applications.

~~Emphasizing~~Continuing ~~the~~to ~~development~~expand ofour ~~non-commodity~~embedded ~~memory products~~flash tolicensing ~~enhance growth~~business. We believe ~~offer~~that aour ~~selection~~proprietary ofSuperFlash ~~our~~technology ~~products~~is inwell-suited ~~wafer~~for both embedded memory applications and ~~die~~the ~~form.~~licensing ~~This~~business ~~allows~~model. ~~our~~Many ~~customers~~electronic tosystem ~~develop~~manufacturers ~~multi-chip~~have ~~module~~incorporated ~~products~~our ~~for~~technology ~~extremely~~into ~~small~~the ~~form~~semiconductor ~~factor~~devices ~~products~~that ~~such~~are at asthe ~~Bluetooth~~heart ~~modules~~of ~~for~~their ~~headset~~products. ~~and~~To ~~GPS modules~~date, ~~for~~more ~~cell~~than ~~phone~~fourteen ~~applications.~~billion Wedevices ~~also~~incorporating ~~provide~~SuperFlash ~~multi-chip~~technology ~~module~~have ~~products~~been ~~that~~shipped ~~incorporate~~accumulatively ~~die~~by ~~from~~us ~~other~~and ~~semiconductor~~our ~~manufacturers~~licensees. We ~~intend~~plan to ~~continue~~expand toour ~~develop~~licensing ~~new~~of ~~products~~SuperFlash technology to additional and existing ~~leverage~~licensees ~~our~~at ~~supply~~ever ~~chain~~finer technology nodes for embedded flash applications to ~~take~~enhance ~~advantage~~the value of ~~the significant~~our ~~growth~~technology ~~opportunities~~to inelectronic ~~the~~system ~~wireless~~manufacturers. ~~applications~~We ~~market~~also ~~with~~plan ~~specific~~to ~~focus~~add onother ~~cellular~~product ~~phone~~applications, ~~GPS,~~thereby ~~WLAN~~expanding our licensing business by first developing an application for our direct product sales model and ~~Bluetooth~~then ~~applications~~offering it to our licensees under our licensing model.

Continuing to expand our embedded flash licensing business. We believe that our proprietary SuperFlash technology is well-suited for both embedded memory applications and the licensing business model. Many electronic system manufacturers have incorporated our technology into the semiconductor devices that are at the heart of their products. To date, approximately thirteen billion devices incorporating SuperFlash technology have been shipped accumulatively by us or our licensees. We plan to expand our licensing of SuperFlash technology to additional and existing licensees at ever finer technology nodes for embedded flash applications to enhance the value of our technology to electronic system manufacturers. We also plan to add other product applications, thereby expanding our licensing business by first developing an application for our direct product sales model and then offering it to our licensees under our licensing model as we did with flash memory products for the smart card industry.

Leveraging our technology, sales channel and supply chain to become a premier provider of NAND Controller-based modules and radio frequency IC products. Many electronic products in the digital consumer, networking, wireless communications and Internet computing markets incorporate our flash memory products. We are expanding our product line beyond NOR flash to include additional devices that these manufacturers need for their products. We provide radio frequency power amplifier and front-end module products for wireless applications such as cellular phones, WLAN, WiMAX, and notebook and netbook PCs.

6We are expanding our product offerings to include NAND Controllers and highly integrated NAND Controller-based modules that we believe give electronic systems manufacturers superior flexibility in the design and manufacture of their products. Many digital electronic devices currently being introduced, such as smartphones, personal media players, and digital cameras and camcorders, require high-density NAND flash memory for storing music, pictures and other data that require large data storage capacities in addition to the NOR memory required to operate the system’s controller. We believe that the application market for high-density NAND flash memory is attractive based on its potential size and growth. Because of the inherent defects in NAND flash, the NAND Controller component plays a critical role in managing the NAND flash defects and ensuring product reliability and performance. We have more than nineteen years of experience in NAND Controller design, which will enable us to create innovative NAND Controller-based modules that meet manufacturers’ demands for quality, reliability and performance. We believe demand for high-density code storage applications may be better addressed by an integrated system solution than by pure high-density NOR memory.

We are expanding our product offerings to include NAND Controllers and highly integrated NAND Controller-based modules that we believe give electronic systems manufacturers superior flexibility in the design and manufacture of their products. Many digital electronic devices currently being introduced, such as Smartphones, personal media players, and digital cameras and camcorders, require high-density NAND flash memory for storing music, pictures and other data that require large data storage capacities in addition to the NOR memory required to operate the system’s controller. We believe that the application market for high-density NAND flash memory is attractive based on its potential size and growth. Because of the inherent defects in NAND flash, the NAND Controller component plays a critical role in managing the NAND flash defects and ensuring product reliability and performance. We have more than 18 years of experience in NAND Controller design, which will enable us to create innovative NAND Controller-based modules that meet manufacturers’ demands for quality, reliability and performance. We believe demand for high-density code storage applications may be better addressed by an integrated system solution than by pure high-density NOR memory.

Operating Strategy

In 2004 we began a diversification strategy to invest in: the development of smaller and thinner package technology for portable applications, ~~the development of~~ smaller manufacturing geometries to reduce costs, ~~the development of~~ lower voltage technology for battery applications, ~~the development of~~ new fab relationships to provide additional capacity, and ~~the development of~~ non-memory products to expand our revenue base. As part of this strategy, we ~~have~~ incurred higher operating costs for several years with the goal of increasing revenues and gross profit. During 2008, we began to re-evaluate our level of investment in these objectives and to focus our efforts toward making our diversification program more effective. To that end, and in response to the developing worldwide economic recession, we decided to restructure our operations in the fourth quarter of 2008, including a significant reduction in headcount and operating expenses as well as the realignment of our development priorities. This refined strategy continues the essential elements of diversification by focusing on a reduced number of projects in the areas of non-commodity NOR products, NAND Controllers and modules and radio frequency IC products which are synergistic with our memory ~~markets~~business. We believe this focus on a smaller set of projects, along with the reduction in operating expenses, will ultimately make our company more profitable ~~and enhance shareholder value~~.

Most of our competitors are larger in size, and have greater financial resources available for development of fabrication and assembly facilities. While this model can allow quicker time-to-market and lower variable costs, it can reduce flexibility and ability to adapt to changes in market conditions. While our fabless model does not require us to assume debt, in order to remain competitive we have to continue to innovate. Our strategic investment program focuses on partners who are making large capital investments across a range of markets, in addition to the flash memory market. In this way we ~~can~~attempt to effectively share costs with other investors in the strategic partner, often receiving exclusive use of their technology for the flash memory market. Although we cannot directly control our partners’ development processes and the allocation of their facilities’ capacity, we can adapt more easily to economic downturns in order to minimize adverse impact to our business. We have utilized this investment strategy in other areas such as software and systems development, logistic facilities, distributors and marketing representatives. We continually review both the strategic and financial returns on these investments and we may decide to sell any investment at any time. In addition, certain factors may require us to review the value of these investments and we may be required to record impairments to the carrying value of these investments.

Our Products

Currently, we offer low- to medium-density NOR flash devices (256 Kbit to 64 Mbit) and other products that target a broad range of existing and emerging applications in the digital consumer, networking, wireless communications and Internet computing markets. Our products are segmented largely based upon attributes such as density, voltage, access speed, package and target application. We divide our products into two reportable segments: Memory Products and Non-Memory Products.

7Our Memory Product segment, which is comprised of NOR flash memory products, includes the Multi-Purpose Flash or MPF family, the Multi-Purpose Flash Plus or MPF+ family, the Advanced Multi-Purpose Flash Plus or Advanced MPF+ family, the Concurrent SuperFlash or CSF family, the Firmware Hub or FWH family, the SPI serial flash family, the Serial Quad I/O or SQI flash family, the ComboMemory family, the Many-Time Programmable or MTP family, and the Small Sector Flash or SSF family.

~~Table~~Our Non-Memory Product segment is comprised of ~~Contents~~all other semiconductor products including flash microcontrollers, smart card ICs and modules, radio frequency ICs and modules, NAND Controllers and NAND Controller-based modules.

Our Memory Product segment, which is comprised of NOR flash memory products, includes the Multi Purpose Flash, or MPF, family, the Multi Purpose Flash Plus, or MPF+ family, the Advanced Multi-Purpose Flash Plus, or Advanced MPF+ family, the Concurrent SuperFlash, or CSF family, the Firmware Hub, or FWH family, the SPI serial flash family, the Serial Quad Interface, or SQI, flash family, the ComboMemory family, the Many-Time Programmable, or MTP, family, and the Small Sector Flash, or SSF, family.

Our Non-Memory Product segment includes other semiconductor products including NAND Controllers and NAND Controller-based modules, flash microcontrollers, smart card ICs and modules, and radio frequency ICs and modules.

Technology Licensing

We license our SuperFlash technology to semiconductor manufacturers for use in embedded flash applications. We intend to increase our market share by entering into additional license agreements for our SuperFlash process and memory cell technology with leading wafer foundries and semiconductor manufacturers. ~~We expect to continue to receive licensing fees and royalties from these agreements. We design our products using our patented memory cell technology and fabricate them using~~ our patented process technology. As of December 31, 2008, we held 261 patents in the United States relating to certain aspects of our products and processes, with expiration dates ranging from 2010 to 2028 and have filed for several more. In addition, we hold several patents in Europe, Japan, Korea, Taiwan and China.

We expect to continue to receive licensing fees and royalties from these agreements. We design our products using our patented memory cell technology and fabricate them using our patented process technology. As of December 31, 2009, we held 278 patents in the United States relating to certain aspects of our products and processes, with expiration dates ranging from 2010 to 2029 and have filed for several more. In addition, we hold several patents in Europe, Japan, Korea, Taiwan and China.

Customers

We provide high-performance flash memory solutions and other products to customers in four major markets: digital consumer, networking, wireless communications and Internet computing. Our customers benefit by obtaining products that we believe are highly reliable, technologically advanced and have attractive cost structures. As a result of these highly desirable benefits, we have developed relationships with many of the industry’s leading companies.

In digital consumer products, we provide products for consumer electronics companies including LG, Hon Hai, Micronas, Apple, Samsung, Lite-On, NEC, Funai, Sony, Orion, BenQ, Sigma Design, ALCO, Inventec, Pioneer, Nintendo, BBK, Toshiba, JVC, Mattel, Panasonic (Matsushita), Sanyo, Konka, Canon, Hisense, Creative, Daewoo, Thomson, Sharp, Reigncom, Olympus, TiVO, and Haier.

In networking, we provide products for Broadcom, Atheros, Conexant, Alpha Networks, Gemtek, Gongjin, Hon Hai, Edimax, Avocent, TP-Link, ZTE, Senao, Cameo Communications, Sagem Orga, Adtran, Askey, Intel, Asustek, Global Sun, Thomson, Huawei, TCL, Comtrend, Buffalo, Tecom, Mitsumi, Arris, Cybertan and Samsung.

In wireless communications, we provide products for companies including Syscom, Samsung, Crestfounder, USI, GN Netcom, Sagem Orga, Alps, Gemalto, ZTE, Hon Hai, Cambridge Silicon Radio, Watchdata System, Pansun Infotech, Haier, CCT, Wuhan Tienyu Information Industry, Magnificent Mile, Taiyo Yuden, Mitsumi, Ningbo Bird, Logitech, VTech, and Garmin.

In Internet computing, we provide a wide array of products for companies including Asustek, Seagate, Western Digital, TPV Technology, Hon Hai, Quanta, Intel, Giga-Byte, Quanta, ECS, Inventec, Titanic, Lenovo, Matsushita, Sharp, Fujitsu-Siemens, Wistron, Mitac, Microstar, Fujitsu, Epson, Buffalo, Samsung, Brother, USI, Canon, Lite-On, NEC, IBM and Toshiba.

The following tables illustrate revenue by geographic region. Revenue by geographic region is determined based on where product is shipped to by us or our logistics center or where license revenue is generated. Our net revenues are all denominated in U.S. dollars and are summarized as follows (in thousands):

	Year Ended December 31,
	2006		2007		2008
	2007		2008		2009
United States	$	2423,~~173~~349	$	2322,~~349~~463	$	2214,~~463~~214
Europe		3226,~~381~~802		2619,~~802~~742		198,~~742~~936
Japan		40,~~752~~303		4033,~~303~~722		3334,~~722~~634
Korea		3037,~~734~~487		3725,~~487~~804		2521,~~804~~225
Taiwan		9745,~~552~~350		~~112~~48,~~930~~789		~~106~~38,~~007~~397
China (including Hong Kong)		~~193~~212,~~674~~417		~~138~~143,~~761~~621		82114,~~809~~974
Other Asian Countries		3326,~~243~~040		3221,~~116~~394		2420,~~987~~045
	$	~~452~~411,~~509~~748	$	~~411~~315,~~748~~535	$	~~315~~252,~~535~~425

See Note 1513 “Segment and Geographic Reporting” to our consolidated financial statements for further information regarding our revenue by geographic region and location of our long-lived assets.

Sales and Distribution

We sell a majority of our products to customers in Asia through our representatives and we distribute a majority of our products through our logistics center. We also sell and distribute our products in North America and Europe through manufacturers’ representatives and distributors. Our manufacturer representative and distributor relationships are generally cancelable, with reasonable notice, by either party.

Backlog

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

Applications

As the digital consumer, networking, wireless communications and Internet computing industries continue to expand and diversify, new applications are likely to be developed. We believe our products are designed to address this expanding set of applications:


Digital Consumer		Networking	Wireless Communications	Internet Computing
Digital Video Recorder (DVR)	Set-top Box	VoIP	Cellular Phone	Information Appliance
Digital TV	CD-ROM Drive	DSL Modem	Cordless Telephone	Notebook PC
Digital Camera	CD-RW Drive	Cable Modem	GPS on Cellular Phone	Desktop PC
Digital Camcorder	DVD-ROM Drive	Wireless LAN	Bluetooth Applications	Hard Disk Drive
DVD Player	DVD-RAM Drive	Network Interface Card	Wireless Modems	LCD Monitor
DVD Recorder	DVD-RW Drive	Router/Switch		Server
Blu-Ray DVD Player	Web Browser			Graphics Card
MP3 Player	Hand-held GPS			Printer
Video Game Systems	Electronic Toys			Copier/Scanner
PDA	Portable Media Player			Bar Code Scanner
Electronic Book	Memory Cards			Thin Client System
Remote Controller	Electronic Organizer			Mobile Internet Device (MID)
				Netbook PC

Manufacturing

We purchase wafers and sorted die from semiconductor manufacturing foundries, have these products shipped directly to subcontractors for packaging, testing, and finishing, and then ship the final product to our customers. Virtually all of our subcontractors are located in Asia.

Wafer and Sorted Die. During ~~2008~~2009, our major wafer fabrication foundries were ~~TSMC,~~ Grace, ~~HHNEC~~TSMC and ~~Seiko-Epson~~Maxchip Electronics Corporation, or Maxchip. In ~~2008~~2009, wafer sort, which is the process of testing individual die on silicon wafer, was performed at King Yuan Electronics Company, Limited, or KYE, Lingsen, HHNEC, Sanyo, ~~Seiko-Epson~~Omron Corporation and TSMC. In order to obtain, on an ongoing basis, an adequate supply of wafers, we have considered and will continue to consider various possible options, including equity investments in foundries in exchange for secure production volumes, the formation of joint ventures to own and operate foundries and the licensing of our proprietary technology. We hold an equity investment in GSMC, a Cayman Islands company. Grace is GSMC’s wafer foundry subsidiary and is located in Shanghai, ~~People’s Republic of~~ China.

Packaging, Testing and Finishing. In the assembly process, the individual dies are separated and assembled into packages. Following assembly, the packaged devices require testing and finishing to segregate conforming from nonconforming devices and to identify devices by performance levels. Currently, all devices are tested and inspected pursuant to our quality assurance program at our international subcontracted test facilities before ~~shipment to customers. Certain facilities currently perform consolidated assembly, packaging, test and finishing operations all at the same location. During 2008,~~ most subcontracted facilities performing the substantial majority of our operations were in Taiwan. The subcontractors with the largest amount of our activity were KYE, Lingsen, and Powertech Technology, Incorporated, or PTI. We hold equity investments in three subcontractors: Apacer Technology, Inc., or Apacer, KYE and PTI.

Research and Development

We believe that our future success will depend in part on the development of next generation technologies with reduced feature size. During 2006, 2007 and 2008, we spent $52.0 million, $56.7 million and $59.0 million, respectively, on research and development. Our research efforts are focused on process development and product development. Our research strategy is to collaborate with our partners to advance our technologies. We work simultaneously with several partners on the development of multiple generations of technologies. In addition, we allocate our resources and personnel into category-specific teams to focus on new product development. From time to time we invest in, jointly develop with, and license or acquire technology from other companies in the course of developing products.

Competition

The semiconductor industry is intensely competitive and has been characterized by price erosion, rapid technological change and product obsolescence. We compete with major domestic and international semiconductor companies, many of whom have substantially greater financial, technical, marketing, distribution, manufacturing and other resources than us. Our low-density memory products, sales of which presently account for the majority of our product revenues, compete against products offered by Macronix, PMC, EON and Winbond. Our medium-density memory products compete with products offered by Spansion, Macronix, Winbond, Samsung and Numonyx. If we are successful in developing our high-density products, these products will compete principally with products offered by Spansion, Numonyx and Samsung, as well as any new companies who may enter the market. On March 1, 2009 Spansion filed for protection under Chapter 11 of the federal bankruptcy code. Spansion could operate under Chapter 11 protection for an extended period and could improve its competitive position while under such protection. In addition, competition may come from alternative technologies such as phase change memory technology.

~~market.~~shipment Weto ~~may,~~customers. inCertain ~~the~~facilities ~~future,~~currently ~~also~~perform ~~experience~~consolidated ~~direct~~assembly, ~~competition~~packaging, ~~from~~test ~~our~~and ~~foundry~~finishing ~~partners.~~operations Weall ~~have~~at ~~licensed to our foundry partners~~ the ~~rights~~same tolocation. ~~fabricate certain~~During ~~products based on our proprietary technology and circuit design~~2009, ~~and~~most tosubcontracted ~~sell~~facilities performing ~~such~~the ~~products~~substantial ~~worldwide,~~majority ~~subject~~of toour ~~royalty~~operations ~~payments~~were ~~back~~in ~~to us~~Taiwan. ~~Our~~The ~~smart~~subcontractors ~~card products compete~~ with ~~Masked~~the ~~ROM~~largest ~~and~~amount ~~flash~~of orour ~~EEPROM~~activity ~~offerings~~were ~~primarily from Infineon~~KYE, ~~Renesas,~~Lingsen ~~Samsung~~ and ~~STMicroelectronics.~~Powertech ~~For~~Technology, ~~radio frequency IC products~~Incorporated, ~~the~~or ~~competition in the existing markets is also extremely intense~~PTI. ~~Our~~We ~~radio~~hold ~~frequency~~equity ICinvestments ~~products~~in ~~compete~~four ~~primarily~~subcontractors, including ~~with~~Apacer ~~Microsemi~~Technology, Inc., RFor ~~Micro Devices~~Apacer, ~~Richwave and ANADIGICS~~KYE, ~~especially~~PTI ~~in the WLAN markets. For our NAND Controller~~ and ~~NAND~~Aptos ~~Controller-based~~Design ~~module~~Lab, ~~products~~Inc., weor ~~compete primarily with Intel~~ADL, ~~Phison,~~which ~~Samsung,~~is ~~SanDisk,~~the ~~STEC~~parent ~~and~~company ~~Toshiba~~of ACET.

Research and Development

We believe that our future success will depend in part on the development of next generation technologies with reduced feature size. During 2007, 2008 and 2009 we spent $56.7 million, $59.0 million and $43.2 million, respectively, on research and development. Our research efforts are focused on process development and product development. Our research strategy is to collaborate with our partners to advance our technologies. We work simultaneously with several partners on the development of multiple generations of technologies. In addition, we allocate our resources and personnel into category-specific teams to focus on new product development. From time to time we invest in, jointly develop technology with, and license or acquire technology from other companies in the course of developing products.

Competition

The semiconductor industry is intensely competitive and has been characterized by price erosion, rapid technological change and product obsolescence. We compete with major domestic and international semiconductor companies, many of whom have substantially greater financial, technical, marketing, distribution, manufacturing and other resources than us. Our low-density memory products, sales of which presently account for the majority of our product revenues, compete against products offered by Macronix, PMC, EON and Winbond. Our medium-density memory products compete with products offered by Spansion, Macronix, Winbond, Samsung and Numonyx. If we are successful in developing our high-density products, these products will compete principally with products offered by Spansion, Numonyx and Samsung, as well as any new companies who may enter the market. In addition, competition may come from alternative technologies such as phase change memory technology.

The competition in the existing markets for some of our other product families, such as the FlashFlex microcontroller product family, is extremely intense. We compete principally with major companies such as Atmel, Microchip Technology, Freescale Semiconductor, Inc., Philips and Winbond in the microcontroller market. We may, in the future, also experience direct competition from our foundry partners. We have licensed to our foundry partners the rights to fabricate certain products based on our proprietary technology and circuit design, and to sell such products worldwide, subject to royalty payments back to us. For radio frequency IC products, the competition in the existing markets is also extremely intense. Our radio frequency IC products compete primarily with Microsemi, RF Micro Devices, Richwave and ANADIGICS, especially in the WLAN markets. For our NAND Controller and NAND Controller-based module products, we compete primarily with Intel, Phison, Samsung, SanDisk, STEC and Toshiba.

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

Employees

As of December 31, ~~2008~~2009, we employed ~~614~~571 individuals on a full-time basis, ~~282~~249 of whom reside in the United States. Of these ~~614~~571 employees, 92 89 were employed in manufacturing support, ~~286~~265 in engineering, ~~112~~101 in ~~sales and marketing and 124 in administration, finance and information technology. Our employees are not represented by a collective bargaining agreement, nor have we ever~~ ~~experienced any work stoppage related to strike activity. We believe that our relationship with our employees is good.~~

Executive Officers

The following table lists the names, ages and positions of our executive officers as of January 1, 2009. There are no family relationships between any executive officer. Executive officers serve at the discretion of our Board of Directors.

Name	Age	Position
Bing Yeh	58	President, Chief Executive Officer and Chairman of the Board
Yaw Wen Hu	59	Executive Vice President, Chief Operating Officer and Director
Derek J. Best	57	Senior Vice President, Sales and Marketing
Chen Tsai	56	Senior Vice President, Worldwide Backend Operations
Paul S. Lui	58	Senior Vice President, NSP Business Unit
James B. Boyd	56	Senior Vice President, Finance and Chief Financial Officer

Bing Yeh, one of our co-founders, has served as our President and Chief Executive Officer and has been a member of our board of directors since our inception in 1989. Prior to that, Mr. Yeh served as a senior research and development manager of Xicor, Inc., a nonvolatile memory semiconductor company. From 1981 to 1984, Mr. Yeh held program manager and other positions at Honeywell Inc. From 1979 to 1981, Mr. Yeh was a senior development engineer of EEPROM technology of Intel Corporation. He was a Ph.D. candidate in Applied Physics and earned an Engineer Degree in Electrical Engineering at Stanford University. Mr. Yeh holds a M.S. and a B.S. in Physics from National Taiwan University.

Yaw Wen Hu, Ph.D., joined us in July 1993 as Vice President, Technology Development. In 1997, he was given the additional responsibility of wafer manufacturing and, in August 1999, he became Vice President, Operations and Process Development. In January 2000, he was promoted to Senior Vice President, Operations and Process Development. In April 2004, he was promoted to Executive Vice President and Chief Operating Officer. Dr. Hu has been a member of our board of directors since September 1995. From 1990 to 1993, Dr. Hu served as deputy general manager of technology development of Vitelic Taiwan Corporation. From 1988 to 1990, he served as FAB engineering manager of Integrated Device Technology, Inc. From 1985 to 1988, he was

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Executive Officers

The following table lists the names, ages and positions of our executive officers as of January 1, 2010. There are no family relationships between any executive officer. Executive officers serve at the discretion of our Board of Directors.


Name	Age	Position
Bing Yeh	59	Chief Executive Officer and Chairman of the Board
Bertrand F. Cambou	54	President
Yaw Wen Hu	60	Executive Vice President, Chief Operating Officer and Director
Derek J. Best	58	Senior Vice President, Sales and Marketing
Chen Tsai	57	Senior Vice President, Worldwide Backend Operations
Paul S. Lui	59	Senior Vice President, NSP Business Unit
James B. Boyd	57	Senior Vice President, Finance and Chief Financial Officer

Bing Yeh co-founded SST in 1989 and is our Executive Chairman and CEO. Prior to co-founding SST, Mr. Yeh served as a senior research and development manager at Xicor, Inc., a nonvolatile memory semiconductor company. From 1981 to 1984, Mr. Yeh held program manager and other positions at Honeywell Inc. From 1979 to 1981, Mr. Yeh was a senior development engineer of EEPROM technology at Intel Corporation. He was a Ph.D. candidate in Applied Physics and earned an Engineer degree in Electrical Engineering at Stanford University. Mr. Yeh also holds M.S. and B.S. degrees in Physics from National Taiwan University.

Bertrand Cambou, Ph.D., joined us as President in June 2009. Before joining SST, Dr. Cambou spent three years as President & CEO of Spansion Inc., a joint venture of AMD and Fujitsu. Prior to leading the joint venture, he was EVP, Memory Group for AMD. Dr. Cambou held leadership positions with Ingenico, a company developing terminals for secure e-transactions and with Gemplus, a company in the smart card industry. Dr. Cambou spent fifteen years with Motorola in various management positions, including SVP and GM, Networking & Computing Systems Group and CTO, Semiconductor Sector. Dr. Cambou holds an engineering degree from Supelec, Paris, a Master’s in Physics from Toulouse University and a Doctorate Degree in Electrical Engineering from Paris XI University.

Yaw Wen Hu, Ph.D., joined us in July 1993 as Vice President, Technology Development. In 1997, he was given the additional responsibility of wafer manufacturing and, in August 1999, he became Vice President, Operations and Process Development. In January 2000, he was promoted to Senior Vice President, Operations and Process Development. In April 2004, he was promoted to Executive Vice President and Chief Operating Officer. Dr. Hu has been a member of our Board of Directors since September 1995. From 1990 to 1993, Dr. Hu served as deputy general manager of technology development of Vitelic Taiwan Corporation. From 1988 to 1990, he served as FAB engineering manager of Integrated Device Technology, Inc. From 1985 to 1988, he was the director of technology development at Vitelic Corporation. From 1978 to 1985, he worked as a senior development engineer in Intel Corporation’s Technology Development Group. Dr. Hu holds a B.S. in Physics from National Taiwan University and a M.S. in Computer Engineering and a Ph.D. in Applied Physics from Stanford University.

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

Chen Tsai joined us in August 1996 as Senior Manager, Yield Enhancement and became Director, Product and Test Engineering the same year. In 1999, he became Director of Worldwide Backend Operations and in 2000 he was promoted to Vice President of Worldwide Backend Operations. In October 2004, Mr. Tsai was appointed Senior Vice President of Worldwide Backend Operations. From 1992 to 1996, Mr. Tsai was Manager of Process Development at Atmel Corporation, a manufacturer of semiconductors, where he was also a staff engineer of E2PROM from 1989 to 1992. From 1988 to 1989, he was vice president of technology at Tristar Technology, Inc., a wireless systems company. From 1980 to 1988 he held various positions at Xicor, Inc. and Teledyne Semiconductor. Mr. Tsai holds a B.S. in Physics from Show Chu University and a M.S. in both Physics and Electrical Engineering from Florida Institute of Technology.

Paul S. Lui joined us as Vice President and General Manager of the Linvex Product Line in June 1999 and became Vice President, Special Product Group in June 2001. In May 2006, he was promoted to Senior Vice President, Standard and Special Product Group. From 1994 to 1999, he was the president and founder of Linvex Technology Corporation. From 1987 to 1994, he was the president and chief executive officer of Macronix, Inc. From 1981 to 1985, he served as group general manager at VLSI Technology, Inc. where he was responsible for transferring that company’s technology to Korea. In addition, Mr. Lui has held senior engineering positions at the Synertek Division of Honeywell and McDonnell Douglas. Mr. Lui holds an M.S.E.E. degree from University of California, Berkeley and a B.S. in Electrical Engineering and Mathematics from California Polytechnic State University, San Luis Obispo.

James B. Boyd joined us as Chief Financial Officer and Senior Vice President, Finance in June 2007. From 2000 to 2007, Mr. Boyd served as chief financial officer for ESS Technology, a manufacturer of DVD and image sensor chips, where he was responsible for all financial and legal functions. Prior to that, he was chief financial officer for Gatefield Corp., a manufacturer of nonvolatile reprogrammable FPGAs. Mr. Boyd has also held finance positions at companies ranging in size from Fortune 100 firms to start-ups. Mr. Boyd holds a B.S. and an M.B.A from the University of Wisconsin and a J.D. from Golden Gate University School of Law.

Available Information

We were incorporated in California in 1989. Additional information is available free of charge electronically through our Internet website, www.sst.com. This information includes our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Additionally, these filings may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330, by sending an electronic message to the SEC at publicinfo@sec.gov or by sending a fax to the SEC at 1-202-777-1027. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically.

1213

Item 1A.

Risk Factors

Risks Related to Our Business and Industry

If the Merger is not completed, our business could be harmed and our stock price could decline.

On February 2, 2010, we entered into a definitive agreement, or Merger Agreement, to be acquired by Microchip Technology Incorporated, or Microchip, for $2.85 per share. On February 22, 2010, we entered into an amendment to the Merger Agreement, or Amendment No. 1, to be acquired by Microchip, for $3.00 per share. On March 8, 2010, we entered into an amendment to the Merger Agreement, or Amendment No. 2, to be acquired by Microchip, for $3.05 per share. In connection with Amendment No. 2, on March 8, 2010, we issued to Microchip 19,148,149 newly issued shares of our common stock, or 19.9 percent of our outstanding shares, for a price of $3.05 per share in cash. Amendment No. 1 and Amendment No. 2 are referred to together as the Amendments. Pursuant to the Merger Agreement and Amendments, SST will merge with Sun Acquisition Corporation, a California corporation and a wholly owned subsidiary of Microchip, a Delaware corporation, or the Merger. Each outstanding share of our common stock, other than shares as to which dissenters’ rights have been properly exercised, will be converted into the right to receive $3.05, without interest. The closing of the Merger is subject to closing conditions, including approval of the Merger by the holders of a majority of our outstanding common stock represented and voting at a special meeting to be held to approve the principal terms of the Merger and adoption of the Merger Agreement and Amendments, as well as other customary closing conditions. Therefore, the Merger may not be completed in a timely manner, if at all. We have incurred and may continue to incur significant expenses related to the Merger that will not be recovered if the Merger is not completed. The Merger Agreement and Amendments contain certain termination rights and further provide that upon termination of the Merger Agreement under specified circumstances we may be required to pay Microchip a termination fee of $10.3 million. Under specified circumstances, we may also be required to reimburse certain of Microchip’s expenses incurred in connection with the Merger, up to $2.0 million. If the Merger Agreement is terminated, our Board of Directors may not be able to find another party willing to pay an equivalent or better price than the price to be paid under the Merger Agreement and Amendments, and the market price of our stock may decline.

The fact that there is a merger pending could harm our business, revenue and results of operations.

While the Merger is pending, it creates uncertainty about our future. As a result of this uncertainty, customers may decide to delay, defer, or cancel purchases of our products pending completion of the Merger or termination of the Merger Agreement. If these decisions represent a significant portion of our anticipated revenue, our results of operations and quarterly revenues could be substantially below the expectations of investors. In addition, while the Merger is pending, we are subject to a number of risks that may harm our business, revenue and results of operations, including:

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the diversion of management and employee attention and the unavoidable disruption to our relationships with customers and vendors may detract from our ability to grow revenues and minimize costs;

•

we have and will continue to incur significant expenses related to the Merger prior to its closing;

•

the diversion of management and employee attention may make it difficult for us to respond effectively to competitive pressures, industry developments and future opportunities; and

•

our current and prospective employees may be uncertain about their future roles and relationships with SST following completion of the Merger. This uncertainty may adversely affect our ability to attract and retain key management, sales, marketing and operational personnel.

We have been named as a party in several lawsuits arising from our proposed transactions with Technology Resources Holdings.

We have been named as a party in several lawsuits arising from our prior proposed merger with Technology Resources Holdings, Inc., which are filed against SST, our officers, and current directors. The complaints are

substantially similar and allege, among other things, that such proposed merger was the product of a flawed process and that the consideration to be paid to our shareholders in connection with such proposed merger was unfair and inadequate. The complaints further allege, among other things, that our officers and directors breached their fiduciary duties by, among other things, taking actions designed to deter higher offers from other potential acquirers and failing to maximize the value of SST to our shareholders. The complaints further allege that Prophet Equity LP and SST aided and abetted the actions of our officers and directors in breaching their fiduciary duties. The complaints seek, among other relief, an injunction preventing consummation of the proposed merger, an order rescinding the proposed merger or any of its terms to the extent already implemented, costs and disbursements of the lawsuits, including attorneys’ and experts’ fees, and such other relief as the court might find just and proper. On February 9, 2010, the court entered an order consolidating the six actions and ordering plaintiffs to inform the court no later than March 2, 2010 which of the complaints filed to date should be deemed the operative pleading in the consolidated action. Plaintiffs have informed the court that they intend to file a consolidated, amended complaint, but have not yet done so. We believe these lawsuits are without merit and plan to defend against them vigorously.

The expenses associated with such litigation and other related litigation may be significant and may harm our operating results. The amount of time to resolve these lawsuits is unpredictable and defending SST, our officers and our current directors may divert management’s attention from the day-to-day operations of our business, which could adversely affect our business. We also have certain indemnification obligations to officers and current directors arising out of such litigation.

Global economic conditions have reduced demand for our products, adversely impacted our customers and suppliers and harmed our business.

Our operations and performance depend significantly on worldwide economic conditions. Uncertainty about current global economic conditions poses a continuing risk to our business as consumers and businesses have postponed spending in response to tighter credit, negative financial news and/or declines in income or asset values, which have reduced the demand for our products. Other factors that could depress demand for our products in the future include conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors affecting consumer spending behavior. These and other economic factors have reduced demand for our products and could further harm our business, financial condition and operating results.

The current financial turmoil affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out of business have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets. There could be a number of follow-on effects from the credit crisis on our business, including insolvency of key suppliers resulting in product delays; inability of customers, including stocking representatives, distributors and other channel partners, to obtain credit to finance the operations of their businesses and/or customer, including channel partner, insolvencies; and failure of financial institutions, which may negatively impact our treasury operations. Other income and expense could also vary materially from expectations depending on gains or losses realized on the sale or exchange of financial instruments; impairment charges related to debt securities as well as equity and other investments; interest rates; and cash, cash equivalent and marketable securities balances.

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

We have incurred net losses in each year since 2005. Our operating results have fluctuated significantly and our past financial performance should not be used to predict future operating results. Our recent quarterly and annual operating results have fluctuated, and may continue to fluctuate, due to the following factors, all of which are difficult to forecast and many of which are out of our control:

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the availability, timely delivery and cost of wafers or other manufacturing and assembly services from our suppliers;

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competitive pricing pressures and related changes in selling prices;

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fluctuations in manufacturing yields and significant yield losses;

•

new product announcements and introductions of competing products by us or our competitors;

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product obsolescence;

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lower of cost or market, obsolescence or other inventory adjustments;

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changes in demand for, or in the mix of, our products;

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changes in demand for, or in the mix of, our licensees’ business as well as the mix between upfront fees and per unit royalties;

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the gain or loss of significant customers;

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market acceptance of products utilizing our SuperFlash^® technology;

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changes in the channels through which our products are distributed and the timeliness of receipt of distributor resale information;

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exchange rate fluctuations;

•

general economic, political and environmental-related conditions, such as natural disasters;

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changes in our allowance for doubtful accounts;

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valuation allowances on deferred tax assets based on changes in estimated future taxable income;

•

difficulties in forecasting, planning and management of inventory levels;

•

unanticipated research and development expenses associated with new product introductions;

•

the timing of significant orders and of license and royalty revenue;

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valuation of investments and long-term assets; and

•

the impact of the sub-prime mortgage crisis on our cash and other investments.

If our reorganization and expense reduction efforts are not successful, our business will be harmed.

We have incurred net losses in each year since 2005. As a result of negative global economic conditions and market instability, we are continuing to undertake actions to reduce our expenses. In December 2008, as a result of weakening demand caused by the rapid slowdown in the global economy, we announced the implementation of a global reorganization designed to reflect changes in anticipated levels of business. This action was taken to reduce costs of operations, to streamline the organization going forward, and to improve our focus on accelerating time-to-market of select new products. WeThese efforts to reduce expenses and accelerate time-to-market may not be ~~able~~successful toin ~~successfully~~returning ~~achieve~~our ~~anticipated~~company ~~expense~~to ~~reductions~~profitability or ~~streamline~~sustaining ~~our~~profitability ~~operations~~over time. If our expense reduction efforts are unsuccessful, our operating results and business will be harmed. ~~In addition, the time-to market of our products is lengthy and we may not be able to successfully accelerate the development of new products.~~

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

The semiconductor industry has historically been cyclical, characterized by periodic changes in business conditions caused by product supply and demand imbalance. When the industry experiences downturns, they often occur in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. These downturns are characterized by weak product demand, excessive inventory and accelerated decline of selling prices. ~~We are currently facing such a downturn and we cannot predict the extent or duration of the downturn.~~ Continued downward price pressure in the industry may reduce our operating results and harm our financial and competitive position.

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

Our operating expenses are relatively fixed, and we therefore have limited ability to reduce expenses quickly in response to any revenue shortfalls. InWe ~~the~~have ~~fourth~~experienced ~~quarter~~such periods of ~~2008,~~revenue ~~our~~shortfalls ~~revenue~~in ~~fell~~the ~~36.8%~~past, ~~from~~including in the ~~third~~fourth quarter of 2008, and we were not able to reduce our operating expenses sufficiently to offset the revenue ~~decline~~declines we experienced. Our future operating results will be harmed if our revenues do not meet our projections. We may experience revenue shortfalls for the following reasons:

• sudden drops in consumer demand, such as we experienced in the fourth quarter of 2008 and first quarter of 2009, may cause customers to cancel backlog, push out shipment schedules, or reduce new orders, possibly due to a slowing economy or inventory corrections among our customers;

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significant declines in selling prices that occur because of competitive price pressure during an over-supply market environment;

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sudden shortages of raw materials for fabrication, test or assembly capacity constraints that lead our suppliers to allocate available supplies or capacity to other customers which, in turn, harm our ability to meet our sales obligations; and

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the reduction, rescheduling or cancellation of customer orders.

In addition, political or economic events beyond our control can suddenly result in increased operating costs. In addition, we are required to record compensation expense on stock option grants and purchases under our employee stock purchase plan which substantially increases our operating costs and impacts our earnings (loss) per share.

We incurred significant inventory valuation and adverse purchase commitment adjustments in ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, and we may incur additional significant inventory valuation adjustments in the future.

We typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate materially. The current negative worldwide economic conditions and market instability make it increasingly difficult for us to accurately forecast future product demand trends. The value of our inventory is dependent on our estimate of future average selling prices, and, if our projected average selling prices are over estimated, we may be required to adjust our inventory value to reflect the lower of cost or market. As of December 31, ~~2008~~2009, we had $5436.29 million of inventory on hand, ana ~~increase~~decrease of $417.03 million, or 731.9%, from December 31, ~~2007~~2008. Total valuation adjustments to inventory and adverse purchase commitments were $8.5 million in 2007 ~~and~~ , $14.2 million in 2008 and $11.4 million in 2009. Due to the large number of units in our inventory, even a small change in average selling prices could result in a significant adjustment, to the extent that the carrying value of the inventory exceeds the average selling price, and could harm our financial results. For excess inventory analysis, we compare the inventory on hand with the forecasted demand. Demand is based on one year for packaged products and two years for products in die form. For the obsolete inventory analysis, we review inventory items in detail and consider date code, customer base requirements, planned or recent product revisions, end of life plans, diminished market demand and other factors that may be appropriate during a particular period. In the event that customer requirements cause us to change this methodology, it may be necessary for us to provide for an additional allowance, which could result in a significant adjustment and could harm our financial results.

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

Due to possible customer changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. ~~During~~We ~~the~~have ~~fourth quarter of 2008, we~~ experienced a significant push out of customer delivery schedules and significant order cancellations. Ain ~~reduction of backlog during any particular period, or~~ the ~~failure of our backlog to result in future revenue~~past, ~~could~~including ~~harm our business~~ in ~~the future. We have~~ historically experienced a decrease in the average selling prices of our products during periods of industry-wide oversupply and excessive inventory. We have experienced price erosion in selected areas in 2008 and our business could be further harmed by a continued industry-wide prolonged downturn.

~~There~~17 ~~is seasonality in our business and if we fail to continue to introduce new products this seasonality may become more pronounced.~~

the fourth quarter of 2008. A reduction of backlog during any particular period, or the failure of our backlog to result in future revenue, could harm our business in the future. We have historically experienced a decrease in the average selling prices of our products during periods of industry-wide oversupply and excessive inventory. We have experienced price erosion in selected areas in 2008 and 2009 and our business could be further harmed by a continued industry-wide prolonged downturn.

There is seasonality in our business, and its pattern may be difficult to predict in any year or from quarter to quarter.

Sales of our products in the consumer electronics applications market are subject to seasonality. As a result, sales of these products are impacted by seasonal purchasing patterns with higher sales generally occurring in the second half of each year. However, due to negative global economic conditions and market instability, we did not experience this historical increase in sales in the second half of 2008, and experienced only a limited increase in the second half of 2009. Seasonal patterns may not materialize in any year and the decline or increase in any one quarter may be greater or less than historical patterns may indicate. In addition, changes in the competitiveness of our product offerings or changes in demand for our products in any particular market segment may completely negate seasonal revenue swings. In some years we have been able to mitigate such seasonality with the introduction of new products. If we fail to continue to introduce new products, our business may suffer and the seasonality of a portion of our sales may become more pronounced.

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

During ~~2006~~2007, ~~2007~~2008, and ~~2008,~~2009 our international product and licensing revenues accounted for 94.73%, 9492.39% and 9294.94% of our net revenues, respectively. Our international business activities are subject to a number of risks, each of which could impose unexpected costs on us that would harm our operating results. These risks include:

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difficulties in complying with regulatory requirements and standards;

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tariffs and other trade barriers;

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costs and risks of localizing products for foreign countries;

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reliance on third parties to distribute our products;

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extended accounts receivable payment cycles;

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potentially adverse tax consequences;

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limits on repatriation of earnings; and

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burdens of complying with a wide variety of foreign laws.

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

We derived 87 88.78%, 8887.83% and 8791.37% of our net product revenues from Asia during ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, respectively. Additionally, substantially all of our wafer suppliers and packaging and testing subcontractors are located in Asia. Any kind of economic, political or environmental instability in this region of the world can have a severe negative impact on our operating results due to the large concentration of our production and sales activities in this region. If countries where we do business experience severe currency fluctuation and economic deflation, it can negatively impact our revenues and also negatively impact our ability to collect payments from customers. In this event, the lack of capital in the financial sectors of these countries may make it difficult for our customers to open letters of credit or other financial instruments that are guaranteed by foreign banks. Finally, the economic situation can exacerbate a decline in selling prices for our products as our competitors reduce product prices to generate needed cash.

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

We invest in companies for strategic reasons and may not realize a return on our investments.

We make investments in companies around the world to further our strategic objectives and support our key business initiatives. Such investments include investments in equity securities of public companies and investments in non-marketable equity and debt securities of private companies, which range from early-stage companies that are often still defining their strategic direction to more mature companies whose products or technologies may directly support our products or initiatives. The success of these companies is dependent on product development, market acceptance, operational efficiency and other key business success factors. The private companies in which we invest may fail because they may not be able to secure additional funding, obtain favorable investment terms for future financings, or take advantage of liquidity events such as initial public offerings, mergers, and private sales. If any of these private companies fail, we could lose all or part of our investment in that company. If we determine that an other-than-temporary decline in the fair value exists for the equity securities of the public and private companies in which we invest, we write down the investment to its fair value and recognize the related write-down as an investment loss. For 2007, 2008 and 2009, we recorded impairments on our investments of $22.4 million, $21.8 million and $0.5 million, respectively. Furthermore, when the strategic objectives of an investment have been achieved, or if the investment or business diverges from our strategic objectives, we may decide to dispose of the investment. Our investments in non-marketable equity securities of private companies are not liquid, and we may not be able to dispose of these investments on favorable terms or at all. The occurrence of any of these events could negatively affect our results of operations.

offerings, mergers, and private sales. If any of these private companies fail, we could lose all or part of our investment in that company. If we determine that an other-than-temporary decline in the fair value exists for the equity securities of the public and private companies in which we invest, we write down the investment to its fair value and recognize the related write-down as an investment loss. For 2006, 2007 and 2008, we recorded impairments on our investments of $44.1 million, $22.4 million and $21.8 million, respectively. Furthermore, when the strategic objectives of an investment have been achieved, or if the investment or business diverges from our strategic objectives, we may decide to dispose of the investment. Our investments in non-marketable equity securities of private companies are not liquid, and we may not be able to dispose of these investments on favorable terms or at all. The occurrence of any of these events could negatively affect our results of operations.

Our investment portfolio may be impaired by further deterioration of the capital markets.

Our cash and cash equivalents and short-term and long-term investment portfolio as of December 31, ~~2008~~2009 consists of money market funds, ~~federal,~~domestic ~~state~~government and ~~municipal government obligations,~~ foreign ~~and public~~ corporate debt securities, and foreign listed equity securities. We follow an established investment policy and set of guidelines to monitor, manage and limit our exposure to interest rate fluctuations and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer. As a result of current adverse financial market conditions, some financial instruments, such as structured investment vehicles, sub-prime mortgage-backed securities and collateralized debt obligations, may pose risks arising from liquidity and credit concerns. As of December 31, ~~2008~~2009, we had no direct holdings in these categories of investments and our exposure to these financial instruments through our indirect holdings in money market mutual funds was not material to total cash, cash equivalents and short-term investments. ~~Also,~~As as a result of ~~current~~ market conditions, the value of our investments in publicly held companies in Taiwan, a component of our long-term investment portfolio, ~~have~~may ~~declined~~fluctuate significantly from quarter to quarter. ~~During~~The value of these investments declined significantly in the fourth quarter of 2008 and we recorded an impairment charge of $231,000 associated with our investment in KYE. Please see Note 1615, “~~Equity~~ Investments ~~and Related Party Reporting~~” to our consolidated financial statements for more information on our investment in KYE. InWe ~~2008, we~~ did not record any ~~other~~ impairments associated with our investments in publicly held companies during 2009. However, we cannot predict future market conditions or market liquidity and our investment portfolio may be impaired by future events.

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

We do not typically enter into long-term contracts with our customers. In addition, we cannot be certain as to future order levels from our customers. In the past, when we have entered into a long-term contract, the contract has generally been terminable at the convenience of the customer. ~~The~~However, we do lose and obtain major customer accounts from time to time and the loss of a major customer could harm our business.

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

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

We depend on Silicon Professional Technology Ltd., or SPT, our logistics center, to support many of our customers in Asia.

We out-source our end customer service logistics in Asia to Silicon Professional Technology Ltd., or SPT, which supports our customers in Taiwan, China and other Southeast Asia countries. SPT provides forecasting, planning, warehousing, delivery, billing, collection and other logistic functions for us in these regions. SPT is a wholly-owned subsidiary of one of our stocking representatives in Taiwan, Professional Computer Technology Limited, or PCT. Products shipped to SPT are accounted for as our inventory held at our logistics center, and revenue is recognized when the products have been delivered and are considered as a sale to our end customers by SPT. During 2007, 2008 and 2009, SPT serviced end customer sales accounting for 60.1%, 56.2% and 59.5%, respectively, of our net product revenues recognized. As of December 31, 2007, 2008 and 2009, SPT represented 65.3%, 50.9% and 66.1%, respectively, of our net accounts receivable. For further description of our relationships with PCT and SPT, please refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Related Party Reporting.”

Limited, or PCT. Products shipped to SPT are accounted for as our inventory held at our logistics center, and revenue is recognized when the products have been delivered and are considered as a sale to our end customers by SPT. During 2006, 2007 and 2008, SPT serviced end customer shipments accounting for 59.1%, 60.1% and 56.2%, respectively, of our net product revenues recognized. As of December 31, 2006, 2007 and 2008, SPT accounted for 68.9%, 65.3% and 50.9%, respectively, of our net accounts receivable. For further description of our relationships with PCT and SPT, please refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Related Party Transactions.”

We do not have any long-term contracts with SPT, PCT or Silicon Professional Alliance Corporation, or SPAC, another subsidiary of PCT. SPT, PCT or SPAC may cease providing services to us at any time. If SPT, PCT or SPAC were to terminate their relationship with us we would experience a delay in reestablishing warehousing, logistics and distribution functions, and it could impair our ability to collect accounts receivable from SPT and may harm our business. In addition if SPT were to experience financial difficulty, our collection of our accounts receivable could be adversely affected and our business could be harmed.

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

We outsource substantially all of our manufacturing and testing activities. We currently buy all of our wafers and sorted die from a limited number of suppliers. The majority of our products are manufactured by four foundries, Grace and HHNEC in China, TSMC in Taiwan, and ~~Seiko-Epson Corporation~~SMIC. We have an equity investment in GSMC, a Cayman Islands company, which owns a wafer foundry subsidiary, Grace, in Shanghai, China. We anticipate that these foundries, together with Samsung Corporation in Korea and ~~Powerchip~~Maxchip ~~Semiconductor Corporation, or PSC,~~ in Taiwan will continue to manufacture substantially all of our products in the foreseeable future. If these suppliers fail to satisfy our requirements on a timely basis at competitive prices we could suffer manufacturing delays, a possible loss of revenues or higher than anticipated costs of revenues, any of which could harm our operating results. Purchases from our top three suppliers accounted for 52.1% and 36.3% of our costs of revenues in 2008 and 2009, respectively.

Our revenues may be impacted by our ability to obtain adequate wafer supplies from our foundries. and NAND memory chips from our suppliers. The foundries with which we currently have arrangements, together with any additional foundry at which capacity might be obtained, may not be willing or able to satisfy all of our manufacturing requirements on a timely basis at favorable prices. In addition, we have encountered delays in qualifying new products and in ramping-up new product production and we could experience these delays in the future. ~~During the first quarter of 2006, we experienced fabrication issues with one of our wafer foundries and capacity constraints for certain package types at one of our backend suppliers.~~ We are also subject to the risks of service disruptions, raw material shortages and price increases by our foundries. Such disruptions, shortages and price increases could harm our operating results.

~~Manufacturing~~20 ~~capacity has in the past been difficult to secure and if capacity constraints arise in the future our revenues may decline.~~

In order to grow, we need to increase our present manufacturing capacity. The existing capacity from Grace, HHNEC and TSMC available were insufficient during 2007. We subsequently contracted for additional manufacturing capacity and do not expect capacity constraints in the forseeable future. However, events that we have not foreseen could arise which would further limit our capacity. Similar to our investment in GSMC, we may determine that it is necessary to invest substantial capital in order to secure appropriate production capacity commitments. If we cannot secure additional manufacturing capacity on acceptable terms, our ability to grow will be impaired and our operating results will be harmed.

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

In order to grow, we need to increase our present manufacturing capacity. The existing available capacity from Grace, HHNEC and TSMC was insufficient during 2007. We subsequently contracted for additional manufacturing capacity and do not expect capacity constraints in the near future. However, events that we have not foreseen could arise which would further limit our capacity. Similar to our investment in GSMC, we may determine that it is necessary to invest substantial capital in order to secure appropriate production capacity commitments. If we cannot secure additional manufacturing capacity on acceptable terms, our ability to grow will be impaired and our operating results will be harmed.

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

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

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

The fabrication of our products requires wafers to be produced in a highly controlled and ultra-clean environment. Semiconductor companies that supply our wafers have, from time to time, experienced problems achieving acceptable wafer manufacturing yields. Semiconductor manufacturing yields are a function of both our design technology and the foundry’s manufacturing process technology. Low yields may result from marginal design or manufacturing process drift. Yield problems may not be identified until the wafers are well into the production process, which often makes them difficult, time consuming and costly to correct. Furthermore, we rely on independent foundries for our wafers which increases the effort and time required to identify, communicate and resolve manufacturing yield problems. If our foundries fail to achieve acceptable manufacturing yields, we will experience higher costs of revenues and reduced product availability, which could harm our operating results.

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

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

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

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

•

disruption or complete shut down of supply to customers due to fire, earthquake, flood or other natural disaster;

•

reduced control over delivery schedules and quality;

•

the potential lack of adequate capacity during periods of strong demand;

•

difficulties selecting and integrating new subcontractors;

•

limited warranties on the service they provide to us;

•

potential increases in prices due to capacity shortages and other factors; and

•

potential misappropriation of our intellectual property.

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

19Because our flash memory, radio frequency IC and NANDrive products typically have lengthy sales cycles, we may experience substantial delays between incurring expenses related to research and development and the generation of revenues.

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

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

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

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

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

We compete with major domestic and international semiconductor companies, many of which have substantially greater financial, technical, marketing, distribution, and other resources than we do. Many of our competitors have their own facilities for the production of semiconductor memory or non-memory components and have recently added significant capacity for such production. Our low-density memory products, medium-density memory products, and high-density memory products, as well as our radio frequency IC and NANDrive products, if we are successful in developing these products, face substantial competition. In addition, we may in the future experience direct competition from our foundry partners.

We have licensed to our foundry partners the right to fabricate products based on our technology and circuit design, and to sell such products worldwide, subject to our receipt of royalty payments. Competition may also come from alternative technologies such as ferroelectric random access memory devices, or FRAM, magneto-resistive random access memory, or MRAM, orphase change memory, or PCM, or other developing technologies.

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

The markets for our products are characterized by:

•

rapidly changing technologies;

•

evolving and competing industry standards;

•

changing customer needs;

•

frequent new product introductions and enhancements;

•

increased integration with other functions; and

•

rapid product obsolescence.

To develop new products for our target markets, we must develop, gain access to and use leading technologies in a cost-effective and timely manner and continue to expand our technical and design expertise. In addition, we must have our products designed into our customers’ future products and maintain close working relationships with key customers in order to develop new products that meet their changing needs. In addition, products for communications applications are based on continually evolving industry standards. Our ability to compete will depend on our ability to identify and ensure compliance with these industry standards. As a result, we could be required to invest significant time and effort and incur significant expense to redesign our products and ensure compliance with relevant standards. We believe that products for these applications will encounter intense competition and be highly price sensitive. While we are currently developing and introducing new products for these applications, we cannot assure you that these products will reach the market on time, will satisfactorily address customer needs, will be sold in high volume, or will be sold at profitable margins.

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

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

The high level of complexity and integration of our products increases the risk of latent defects, which could damage customer relationships and increase our costs.

Our products are based upon evolving technology and are highly complex. The integration of additional functions into already complex products could result in a greater risk that customers or end users could discover latent defects or subtle faults after we have already shipped significant quantities of a product. Although we test our products, we may in the future encounter defects or errors. Delivery of products with defects or reliability, quality or compatibility problems may damage our reputation and ability to retain existing customers and attract new customers. In addition, product defects and errors could result in additional development costs, diversion of technical resources, delayed product shipments, increased product returns, product warranty costs for recall and replacement and product liability claims against us which may not be fully covered by insurance.

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

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

~~Our~~23 ~~ability to compete successfully depends, in part, on our ability to protect our intellectual property rights.~~

We rely on a combination of patent, trade secrets, copyrights, mask work rights, nondisclosure agreements and other contractual provisions and technical measures to protect our intellectual property rights. Policing unauthorized use of our products, however, is difficult, especially in foreign countries. Litigation may continue to be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Litigation could result in substantial costs and diversion of resources and could harm our business, operating results and financial condition regardless of the outcome of the litigation. As of December 31, 2008, we held 261 patents in the United States relating to certain aspects of our products and processes, with expiration dates

~~ranging~~Our ~~from~~ability ~~2010~~ to ~~2028~~compete ~~and~~successfully ~~have filed for several more. In addition~~depends, ~~we hold several patents~~ in ~~Europe~~part, ~~Japan,~~on ~~Korea,~~our ~~Taiwan~~ability ~~and China. We cannot assure you that any pending patent application will be granted. Our operating results could be harmed by the failure~~ to protect our intellectual property rights.

We rely on a combination of patent, trade secrets, copyrights, mask work rights, nondisclosure agreements and other contractual provisions and technical measures to protect our intellectual property rights. Policing unauthorized use of our products, however, is difficult, especially in foreign countries. Litigation may continue to be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Litigation could result in substantial costs and diversion of resources and could harm our business, operating results and financial condition regardless of the outcome of the litigation. As of December 31, 2009, we held 278 patents in the United States relating to certain aspects of our products and processes, with expiration dates ranging from 2010 to 2029 and have filed for several more. In addition, we hold several patents in Europe, Japan, Korea, Taiwan and China. We cannot assure you that any pending patent application will be granted. Our operating results could be harmed by the failure to protect our intellectual property.

The matters relating to the review of our historical stock option granting practices and the restatement of our consolidated financial statements has resulted in litigation, which could harm our financial results.

In March 2007, our Board of Directors determined to conduct a voluntary review of our historical stock option grant practices covering the time ~~from~~since our initial public offering in 1995 ~~through 2007~~. The review was led by the Chairman of the Audit Committee of the Board of Directors with the assistance of outside independent legal counsel, and began on or about March 15, 2007. As described further in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2006, the Chairman of the Audit Committee reached the conclusion that incorrect measurement dates were used for financial accounting purposes for stock option grants made in certain prior periods. As a result, we recorded additional non-cash ~~stock~~share-based compensation expense, and related tax effects, related to stock option grants and restated our historical financial statements. The review of our historical stock option granting practices required us to incur substantial expenses for legal, accounting, tax and other professional services, totaling $12.0 million for 2007. In addition, the review diverted management’s attention from our business, and could in the future harm our business, financial condition, results of operations and cash flows.

We are engaged in derivative suits, which may become time consuming, costly and divert management resources and could impact our stock price.

Securities class action law suits are often brought against companies, particularly technology companies, following periods of volatility in the market price of their securities. Irrespective of the validity or the successful assertion of such claims, we could incur significant costs and management resources in defending against such claims. Our historical stock option granting practices and the restatement of our prior financial statements have exposed us to greater risks associated with litigation. As described in Item 3. “Legal Proceedings,” several derivative complaints have been filed against our directors and certain of our executive officers pertaining to allegations relating to stock option grants.

The complaints were brought purportedly on behalf of SST against certain of our current and former officers and directors and allege, among other things, that the named officers and directors: (a) breached their fiduciary duties as they colluded with each other to backdate stock options, (b) violated Rule 10b-5 of the Securities Exchange Act of 1934, and (c) were unjustly enriched by their receipt and retention of such stock options. These or future similar complaints, or any future litigation may not result in the same conclusions reached by the Chairman of the Audit Committee. The conduct and resolution of these matters or other litigation will be time consuming, expensive and may distract management from the conduct of our business.

Former employees may also bring lawsuits against us or engage us in arbitration relating to their stock options and other matters. These lawsuits may be time consuming and expensive, and cause further distraction from the operation of our business. The adverse resolution of any specific lawsuit could harm our business, financial condition and results of operations.

~~From~~24 time to time, we are also involved in other legal actions arising in the ordinary course of business. There can be no assurance that the shareholder class action complaints, the shareholder derivative complaints or other third party assertions will be resolved without costly litigation, in a manner that is not adverse to our financial position, results of operations or cash flows or without requiring payments in the future which may adversely impact gross margins. No estimate can be made of the possible loss or possible range of loss associated with the resolution of these contingencies. As a result, no losses have been accrued in our financial statements as of December 31, 2008.

From time to time, we are also involved in other legal actions arising in the ordinary course of business. There can be no assurance that the shareholder class action complaints, the shareholder derivative complaints or other third party assertions will be resolved without costly litigation, in a manner that is not adverse to our financial position, results of operations or cash flows or without requiring payments in the future which may adversely impact gross margins.

During the course of these lawsuits there may be public announcements of the results of hearings, motions, and other interim proceedings or developments in the litigation. If securities analysts or investors perceive these results to be negative, it could harm the market price of our stock. We have incurred certain costs associated with defending these matters, and at any time, additional claims may be filed against us, which could increase the risk, expense and duration of the litigation. Further, because of the amount of discovery required in connection with this type of litigation, there is a risk that some of our confidential information could be compromised by disclosure. For more information with respect to our litigation, please also see Item 3. “Legal Proceedings.”

On February 25, 2010, we announced that we had reached a proposed settlement of federal and state derivative litigation originally filed in 2005 and 2006 relating to certain prior option grant practices. The proposed settlement has been preliminarily approved by the United States District Court for the Northern District of California, or the Federal Court, subject to final approval at a hearing scheduled for April 9, 2010. Under the terms of the settlement, if the settlement is approved by the Federal Court, the state cases will be voluntarily dismissed. The settlement agreement does not contain any admission of wrongdoing or fault on the part of SST, our Board of Directors or executive officers. While we expect the Federal Court to approve the settlement agreement, there can be no assurance that it will approved. If the settlement agreement is not approved, we may be required to continue litigating the cases or pay damages or penalties, and we may have other remedies imposed on us that could harm our business. We have accrued what we believe to be probable costs in connection with the potential settlement of the shareholder class action complaints and the shareholder derivative complaints. As a result, approximately $0.7 million is included in Accrued expenses and other liabilities in our financial statements as of December 31, 2009.

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

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

We receive from time to time, letters or communications from other companies stating that such companies have patent rights that involve our products. Since the design of most of our products is based on SuperFlash technology, any legal finding that the use of our SuperFlash technology infringes the patent of another company would have a significantly negative effect on our entire product line and operating results. Furthermore, if such a finding were made, there can be no assurance that we could license the other company’s technology on commercially reasonable terms or that we could successfully operate without such technology. Moreover, if we are found to infringe, we could be required to pay damages to the owner of the protected technology and could be prohibited from making, using, selling, offering to sell or importing into the United States any products that infringe the protected technology.

In addition, the management attention consumed by and legal cost associated with any litigation could harm our operating results. During the course of these lawsuits there may be public announcements of the results of hearings, motions, and other interim proceedings or developments in the litigation. If securities analysts or investors perceive these results to be negative, it could harm the market price of our stock.

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

Our corporate headquarters are located in California near major earthquake faults. In addition, some of our suppliers are located near fault lines. In the event of a major earthquake or other natural disaster near our headquarters, our operations could be harmed. Similarly, a major earthquake or other natural disaster such as typhoon near one or more of our major suppliers, like the earthquakes in April 2006 and December 2006 or the typhoons in September 2001 and July 2005 that occurred in Taiwan, could potentially disrupt the operations of those suppliers, which could then limit the supply of our products and harm our business.

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

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

23A virus or viral outbreak in Asia or elsewhere could harm our business.

~~Table~~We derive substantially all of ~~Contents~~our revenues from Asia and our logistics center is located in Taiwan. A virus or viral outbreak in Asia, such as the SARS outbreak in early 2003 or threat of the Avian or Swine flu, could harm the operations of our suppliers, distributors, logistics center and those of our end customers, which could harm our business.

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

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

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

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

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

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

If26 we determine that we have a material weakness in our internal control over financial reporting, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.

Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to evaluate and determine the effectiveness of our internal control over financial reporting. We have dedicated a significant amount of time and resources to ensure compliance with this legislation for the year ended December 31, 2008 and will continue to do so for future fiscal periods. We may encounter problems or delays in completing the review, evaluation, and the implementation of improvements. Additionally, management’s assessment of our internal control over financial reporting may identify deficiencies that need to be addressed in our internal control over financial reporting or other matters that may raise concerns for investors.

The restatement of financial statements for the years ended December 31, 1997 through December 31, 2005 in prior filings with the SEC is a strong indicator of the existence of a material weakness in the design or operation of internal control over financial reporting. We concluded that the control deficiencies that resulted in the restatement of the previously issued consolidated financial statements were remediated, and thus concluded that the control deficiencies relating to our historical stock option grant practices that resulted in the restatement of the previously-issued financial statements did not constitute a material weakness as of December 31, 2006. Additionally, as of December 31, 2006 and 2007 and the quarter and nine months ended September 30, 2008, we did not maintain effective controls over the completeness, accuracy, valuation and presentation and disclosure of inventory and the related cost of revenue accounts. Specifically, our controls over the recording of inventory

~~adjustments~~If ~~resulting~~we ~~from~~determine ~~physical~~that ~~inventory~~we ~~observations,~~have ~~capitalization~~a ofmaterial ~~production~~weakness ~~variances into inventory and valuation of inventory related reserves~~ in ~~accordance~~our ~~with~~internal ~~generally~~control ~~accepted~~over ~~accounting~~financial ~~principles in the United States~~reporting, current ~~were~~and ~~not~~potential ~~effective.~~shareholders ~~These~~could ~~control~~lose ~~deficiencies~~confidence ~~resulted~~ in ~~audit~~our ~~adjustments to the 2006 and 2007 consolidated annual~~ financial ~~statements and to the interim financial statements for the quarters ended March 31~~reporting, ~~2008~~which ~~and~~would ~~September 30,~~harm ~~2008,~~our ~~that~~business ~~required remediation. Management implemented a remediation plan~~ and ~~remediated~~ the ~~material~~trading ~~weaknesses~~price as of ~~December 31,~~our ~~2008~~stock.

Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to evaluate and determine the effectiveness of our internal control over financial reporting. We have dedicated a significant amount of time and resources to ensure compliance with this legislation for the year ended December 31, 2009 and will continue to do so for future fiscal periods. We may encounter problems or delays in completing the review, evaluation, and the implementation of improvements. Additionally, management’s assessment of our internal control over financial reporting may identify deficiencies that need to be addressed in our internal control over financial reporting or other matters that may raise concerns for investors.

During the second quarter of 2009, we identified an error related to the recording of the income tax provision. Despite having engaged third party tax experts to assist us, in calculating our tax provision for the quarter ended March 31, 2009, we incorrectly calculated our reserve for foreign tax withholding on license revenue. We concluded that our disclosure controls and procedures were not effective as of June 30 and September 30, 2009, as a result of a material weakness in our internal control over financial reporting, specifically the controls which ensure the accuracy of the provision for income taxes. Management implemented a remediation plan and remediated the material weaknesses as of December 31, 2009.

Should we determine in future fiscal periods that we have additional material weaknesses in our internal controls over financial reporting, the reliability of our financial reports may be impacted, and our results of operations or financial condition may be harmed and the price of our common stock may decline.

Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse unexpected revenue fluctuations and affect our reported results of operations.

A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect reporting of transactions completed before the change is effective. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, we adopted SFAS No. 123(R) in the first quarter of 2006 which requires us to record charges to earnings for the stock options we grant and purchases of our common stock under our employee stock purchase plan.

Evolving regulation of corporate governance and public disclosure may result in additional expenses and continuing uncertainty.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, SEC regulations and NASDAQ Marketplace rules are creating uncertainty for public companies. We continually evaluate and monitor developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs. These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we have invested resources to comply with evolving laws, regulations and standards, and this investment has resulted in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and we may be harmed.

~~Acquisitions~~27 ~~could result in operating difficulties, dilution and other harmful consequences.~~

In the past five years we have acquired Emosyn, LLC, a fabless semiconductor manufacturer specializing in the design and marketing of smart card ICs for SIM applications, G-Plus, Inc., a semiconductor manufacturer specializing in the design and marketing of radio frequency ICs and monolithic microwave ICs and Actrans Systems Inc., a fabless semiconductor company that designs flash memory and EEPROMs. We expect to continue to evaluate and consider a wide array of potential strategic transactions, including business combinations, acquisitions and dispositions of businesses, technologies, services, products and other assets, including interests in our existing subsidiaries and joint ventures. At any given time we may be engaged in discussions or negotiations with respect to one or more of such transactions. Any such transactions could be

~~material~~Acquisitions tocould ~~our financial condition and results of operations. There is no assurance that any such discussions or negotiations will~~ result in ~~the consummation of any transaction. The process of integrating any acquired business may create unforeseen~~ operating difficulties, ~~and~~dilution ~~expenditures~~ and isother ~~itself~~harmful ~~risky~~consequences. ~~The areas where we may face difficulties include:~~

In 2005 we acquired Actrans Systems Inc., a fabless semiconductor company that designs flash memory and EEPROMs and completed our acquisition of Emosyn, LLC, a fabless semiconductor manufacturer specializing in the design and marketing of smart card ICs for SIM applications. We expect to continue to evaluate and consider a wide array of potential strategic transactions, including business combinations, acquisitions and dispositions of businesses, technologies, services, products and other assets, including interests in our existing subsidiaries and joint ventures. At any given time we may be engaged in discussions or negotiations with respect to one or more of such transactions. Any such transactions could be material to our financial condition and results of operations. There is no assurance that any such discussions or negotiations will result in the consummation of any transaction. The process of integrating any acquired business may create unforeseen operating difficulties and expenditures and is itself risky. The areas where we may face difficulties include:

•

diversion of management time, as well as a shift of focus from operating the businesses to issues of integration and future products;

•

declining employee morale and retention issues resulting from changes in compensation, reporting relationships, future prospects, or the direction of the business;

•

the need to integrate each company’s accounting, management information, human resource and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented;

•

the need to implement controls, procedures and policies appropriate for a public company at companies that prior to acquisition had lacked such controls, procedures and policies; and

•

in some cases, the need to transition operations onto our technology platforms.

International acquisitions involve additional risks, including those related to integration of operations across different cultures and languages, currency risks, and the particular economic, political, and regulatory risks associated with specific countries. Moreover, we may not realize the anticipated benefits of any or all of our acquisitions. As a result of future acquisitions or mergers, we might need to issue additional equity securities, spend our cash, or incur debt, contingent liabilities, or amortization expenses related to intangible assets, any of which could reduce our profitability and harm our business.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

As of December 31, ~~2008~~2009, ~~we occupied three major facilities totaling approximately 132,000 square feet in Sunnyvale, California which is where~~ our executive offices, research and development, and principal manufacturing engineering ~~and testing~~ facilities are located. Ofin ~~the~~an ~~three major~~approximately ~~facilities occupied~~92,000 wesquare ~~own~~foot ~~one~~leased facility ~~totaling~~in Sunnyvale, California. In addition, we lease an approximately 20,000 square ~~feet~~foot facility and weown ~~lease~~an ~~two facilities totaling~~ approximately ~~112~~20,000 square feet facility in Sunnyvale, both of which are currently unoccupied. The leases on the two facilities in Sunnyvale expire in 2010. Asand 2011, and as part of our restructuring plan to reduce expenses, we vacated the owned facility in January 2009. We also have approximately ~~130~~109,000 square feet of office space in various domestic and international sites with expiration ranging from ~~2009~~2010 to 2027. We believe these facilities and any others we may lease in the future are adequate to meet our needs for at least the next 12twelve months.

Item 3.

Legal Proceedings

On July 13, 2006, a shareholder derivative complaint was filed in the United States District Court for the Northern District of California (the “Federal Court”) by Mike Brien under the caption Brien v. Yeh, et al., Case No. C06-04310 JF (N.D. ~~Cal.).~~ On July 18, 2006, a second shareholder derivative complaint was filed in the ~~United~~Federal ~~States District~~ Court ~~for the Northern District of California~~ by Behrad Bazargani under the caption Bazargani v. Yeh, et al., Case No. C06-04388 HRL (N.D. ~~Cal.).~~ Both complaints were brought purportedly on behalf of SST against certain of our current and former officers and directors and ~~allege among other things, that the named officers and directors: (a) breached their fiduciary duties as they colluded with each other to backdate~~ stock options, (b) violated Rule 10b-5 of the Securities Exchange Act of 1934, and (c) were unjustly enriched by their receipt and retention of such stock options. The Brien and Bazargani cases were consolidated into one case: In re Silicon Storage Technology, Inc. Derivative Litigation, Case No. C06-04310 JF (or the “Federal Derivative Litigation”)and plaintiffs filed a consolidated amended shareholder derivative complaint on October 30, 2006.

2628

allege among other things, that the named officers and directors breached their fiduciary duties as they colluded with each other to backdate stock options; violated Rule 10b-5 of the Securities Exchange Act of 1934; and were unjustly enriched by their receipt and retention of such stock options. The Brien and Bazargani cases were consolidated into one case: In re Silicon Storage Technology, Inc. Derivative Litigation, Case No. C06-04310 JF (“Federal Derivative Litigation”) and plaintiffs filed a consolidated amended shareholder derivative complaint on October 30, 2006. The parties initiated settlement discussions and filed several stipulations to extend the defendants’ deadline to respond to the consolidated amended shareholder derivative complaint, which the Federal Court granted. On March 15, 2007, we announced that the Chair of our Audit Committee, with the assistance of independent outside counsel and outside accounting experts, would be conducting a voluntary review of our historical stock option grant practices covering the time from our initial public offering in 1995 through the current fiscal year. On April 27, 2007, the ~~court~~Federal Court granted the parties’ stipulation staying this action until after we SST publicly announced the results of the investigation into the historical stock option grant practices. On January 16, 2008, weSST filed our Annual Report on Form 10-K for the year ended December 31, 2006, containing the results of such investigation. Plaintiffs in the Federal Derivative Litigation filed an amended complaint on May 9, 2008. Defendants filed a motion to dismiss on October 17, 2008, ~~which~~and isthe ~~scheduled~~motion towas be heard on April 24, 2009. WeOn ~~are~~July 7, ~~currently~~2009, the Federal Court granted defendants’ motion and dismissed the federal securities claims with leave to amend. Federal plaintiffs filed a third amended complaint on August 21, 2009. The newest complaint asserted state-law fiduciary duty claims based on diversity jurisdiction; no federal securities claims were alleged. On September 24, 2009, defendants moved to dismiss the third amended complaint with prejudice. Following the filing of this motion, the parties in the Federal Derivative Litigation, together with the parties in the related state court derivative litigation discussed below, reached a tentative agreement to settle all ~~ongoing~~of these matters. On or about February 1, 2010, the parties in all of these matters entered into a stipulation and agreement of settlement ~~discussions~~and submitted the same to the Federal Court. Among other things, the settlement provides for the dismissal with prejudice and release of all claims alleged in the ~~above~~Federal ~~referenced~~Derivative ~~matter~~Litigation and related state court derivative litigation (discussed below), implementation of certain corporate governance reforms by SST, and the payment of attorneys fees and costs to plaintiffs’ counsel in an amount not to exceed $2,810,000, subject to Federal Court approval, of which SST has agreed to pay $680,000 and SST’s insurers have agreed to pay $2,130,000. Our estimated liability of $680,000, which was accrued during the quarter ended September 30, 2009, is included in Accrued expenses and other liabilities on our consolidated Balance Sheets at December 31, 2009. On February 5, 2010, the Federal Court held a hearing at which it granted preliminary approval of the settlement, ordered that notice of the settlement be provided to SST’s shareholders, and set a final approval hearing for April 9, 2010.

On October 31, 2006, a similar shareholder derivative complaint was filed in the Superior Court of the State of California for the County of Santa Clara by Alex Chuzhoy under the caption Chuzhoy v. Yeh, et al., Case No. 1-06-CV-074026. This complaint was brought purportedly on behalf of SST against certain ~~of our~~ current and former officers and directors and alleges among other things, that the named officers and directors breached their fiduciary duties as they colluded with each other to backdate stock options and were allegedly unjustly enriched by their actions. The Chuzhoy complaint also alleges that certain defendants violated section 25402 of the California Corporations Code by selling shares of our common stock while in possession of material non-public adverse information. The parties initiated settlement discussions and filed several stipulations to extend defendants’ deadline to respond to the shareholder derivative complaint, which the court granted. On April 13, 2007, the court granted the parties’ stipulation staying this action until after we publicly announced the results of the investigation into the historical stock option grant practices. On January 16, 2008, we filed our Annual Report on Form 10-K for the year ended December 31, 2006, containing the results of such investigation. On January 25, 2008, the court and parties in the Chuzhoy matter agreed to postpone the filing of the amended complaint pending settlement discussions. WeAs ~~are~~discussed ~~currently~~above, the stipulation of settlement in the Federal Derivative Litigation, if ~~ongoing~~approved, ~~settlement~~would ~~discussions~~result in the ~~above~~dismissal ~~referenced~~with ~~matter~~prejudice and release of all claims asserted in this action on the terms described above.

In January and February 2005, multiple shareholder derivative complaints were filed in California Superior Court for the County of Santa Clara, purportedly on behalf of SST against certain ~~of our~~ current and former officers and directors. The derivative complaints asserted claims for, among other things, breach of fiduciary duty and violations of the California Corporations Code. These derivative actions were consolidated under the caption In Re Silicon ~~Storage Technology, Inc. Derivative Litigation, Lead Case No. 1:05CV034387. On April 28,~~ 2005, pursuant to a joint stipulation, the derivative action was stayed by court order. On October 19, 2007, following the dismissal with prejudice of certain federal putative class actions, the court lifted this stay. On December 6, 2007, plaintiffs filed a consolidated amended complaint reiterating some of the previous claims and asserting claims substantially identical to those contained in the Chuzhoy v. Yeh, et al., Case No. 1-06-CV-074026 and the Federal Derivative Litigation. Defendants filed a motion to stay the action on March 28, 2008, and a demurrer on May 12, 2008. On October 31, 2008, the court sustained the demurrer, in part, with leave to amend. The court also granted the motion to stay, staying all further proceedings in favor of the Chuzhoy matter. We are currently in ongoing settlement discussions in the above referenced matter.

On29 or about July 13, 2007, a patent infringement suit was brought by OPTi Inc. in the United States District Court for the Eastern District of Texas alleging infringement of two United State patents related to a “Compact ISA-bus Interface”. The plaintiff sought a permanent injunction, and damages for alleged past infringement, as well as any other relief the court may grant that is just and proper. On January 1, 2009, OPTi and SST resolved our differences and the suit was dismissed with prejudice.

From time to time, we are also involved in other legal actions arising in the ordinary course of business. We have accrued certain costs associated with defending these matters. There can be no assurance that the shareholder class action complaints, the shareholder derivative complaints or other third party assertions will be resolved without costly litigation, in a manner that is not adverse to our financial position, results of operations or

~~cash~~Storage ~~flows~~Technology, orInc. ~~without~~Derivative ~~requiring~~Litigation, ~~payments~~Lead inCase No. 1:05CV034387. On April 28, 2005, the ~~future~~derivative ~~which~~action ~~may~~was ~~adversely~~stayed ~~impact~~by ~~net~~court ~~income~~order. NoOn ~~estimate~~October 19, ~~can~~2007, befollowing the ~~made~~dismissal with prejudice of certain federal putative class actions, the ~~possible~~court ~~loss~~lifted orthis ~~possible~~stay. ~~range~~ On December 6, 2007, plaintiffs filed a consolidated amended complaint reiterating some of ~~loss~~the ~~associated~~previous ~~with~~claims and asserting claims substantially identical to those contained in the ~~resolution~~Chuzhoy ofv. ~~these~~Yeh, ~~contingencies~~et al., AsCase No. 1-06-CV-074026 and the Federal Derivative Litigation. Defendants filed a ~~result~~demurrer on May 12, no2008. ~~losses~~On ~~associated~~October 31, ~~with~~2008, ~~these~~the orcourt ~~other~~sustained ~~litigation~~the demurrer ~~have~~and ~~been~~gave ~~accrued~~plaintiffs inleave ~~our~~to ~~financial~~amend. ~~statements~~As asdiscussed above, the stipulation of ~~December 31~~settlement in the Federal Derivative Litigation, ~~2008~~if approved, would result in the dismissal with prejudice and release of all claims asserted in this action on the terms described above.

~~Item~~Beginning 4on November 16, 2009, six purported class action lawsuits were filed in the California Superior Court for the County of Santa Clara against SST, certain of our current and former officers and directors, Technology Resources Holdings, Inc. ~~Submission~~and Prophet Equity LP, in connection with a proposed merger between Technology Resources Holdings, Inc. and SST. The lawsuits were subsequently consolidated into a single action entitled In re Silicon Storage Technology, Inc. Shareholder Litigation, No. 109CV157437, The complaints in the six lawsuits, or the original complaints, were substantially similar and alleged, among other things, that such proposed merger was the product of ~~Matters~~a flawed process; that the consideration to be paid to SST’s shareholders in connection with such proposed merger was unfair and inadequate; that our officers and directors breached their fiduciary duties by, among other things, taking actions designed to deter higher offers from other potential acquirers and failing to maximize the value of SST to our shareholders; and that Prophet Equity LP and SST aided and abetted the actions of our officers and directors in breaching their fiduciary duties. The complaints sought, among other relief, an injunction preventing consummation of the proposed merger, an order rescinding the proposed merger or any of its terms to the extent already implemented, costs and disbursements of the lawsuits, including attorneys’ and experts’ fees, and such other relief as the court might find just and proper. On February 9, 2010, the court entered an order consolidating the six actions and directing plaintiffs to inform the court which of the complaints filed to date should be deemed the operative complaint. On March 16, 2010, plaintiffs filed a ~~Vote~~consolidated amended complaint, or the CAC. The CAC contains similar allegations as those contained in the original complaints, now concerning alleged breaches of ~~Security~~fiduciary ~~Holders~~duties by certain of our current officers and directors in connection with the proposed acquisition of SST by Microchip Technology Incorporated, or Microchip, and the process leading up to our Board’s decision to recommend the Microchip acquisition, and requests similar relief as the relief requested in the original complaints. The CAC no longer asserts claims against Technology Resources Holding, Inc. and Prophet Equity LP, but now asserts similar claims against Microchip and Sun Acquisition Corporation. We believe the consolidated lawsuit is without merit and plan to defend against it vigorously. Additional lawsuits pertaining to a strategic transaction involving SST could be filed in the future and if so, will likely be consolidated with the consolidated lawsuit.

NoFrom time to time, we are also involved in other legal actions arising in the ordinary course of business. We have accrued certain costs associated with defending these matters. ~~were~~There ~~submitted~~can ~~during~~be no assurance that the ~~fourth~~shareholder ~~quarter~~class action complaints, the shareholder derivative complaints or other third party assertions will be resolved without costly litigation, in a manner that is not adverse to our financial position, results of ~~2008~~operations or cash flows or without requiring payments in the future which may adversely impact net income. We have accrued what we believe to abe ~~vote~~probable costs in connection with the potential settlement of ~~security~~the ~~holders~~shareholder class action complaints and the shareholder derivative complaints.

28Item 4. (Removed and Reserved)

PART II

Item 5.

Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock

The principal U.S. market for our common stock is the NASDAQ Global Market. The only class of our securities that is traded is our common stock. Our common stock has traded on the NASDAQ Global Market since November 21, 1995, under the symbol SSTI. The following table sets forth the quarterly high and low sales prices of our common stock for the period indicated, as reported by the NASDAQ Global Market. These prices do not include retail mark-ups, markdowns or commissions. The adjusted closing sales price of our common stock on December 31, ~~2008~~2009, the last trading day in ~~2008~~2009, was $2.2956.

2007		High		Low
First Quarter:	January 1 - March 31, 2007	$	5.81	$	4.35
Second Quarter:	April 1 - June 30, 2007	$	5.17	$	3.57
Third Quarter:	July 1 - September 30, 2007	$	4.07	$	2.61
Fourth Quarter:	October 1 - December 31, 2007	$	3.83	$	2.61
2008		High		Low
First Quarter:	January 1 - March 31, 2008	$	3.01	$	2.58
Second Quarter:	April 1 - June 30, 2008	$	3.30	$	2.74
Third Quarter:	July 1 - September 30, 2008	$	3.50	$	2.72
Fourth Quarter:	October 1 - December 31, 2008	$	3.25	$	2.05
2009		High		Low
First Quarter:	January 1 - March 31, 2009	$	2.54	$	1.30
Second Quarter:	April 1 - June 30, 2009	$	2.13	$	1.60
Third Quarter:	July 1 - September 30, 2009	$	2.50	$	1.67
Fourth Quarter:	October 1 - December 31, 2009	$	2.56	$	1.86

2931

Comparison of Five Year Cumulative Total Return(1)

The following graph compares the total cumulative stockholder return on our common stock with the total cumulative return of the NASDAQ Composite Index and the RDG Semiconductor Composite Index for the five year period from December 31, ~~2003~~2004 through December 31, ~~2008~~2009.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Silicon Storage Technology, Inc., The NASDAQ Composite Index

And The RDG Semiconductor Composite Index

LOGO

* $100 invested on 12/31/0304 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

Approximate Number of Equity Security Holders

As of December 31, ~~2008~~2009, there were approximately ~~423~~411 record holders of our common stock.

Dividends

We have never paid a cash dividend on our common stock and we may continue to retain earnings, if any, to finance future growth. We continuously evaluate our ability to pay dividends.

Equity Compensation Plan Information

~~Information~~The ~~regarding~~information ~~our~~required ~~equity~~by ~~compensation~~this ~~plans~~item iswill ~~contained~~be included in ~~Item 12.~~Form ~~“Security~~10-K/A, ~~Ownership~~to ofbe ~~Certain~~filed ~~Beneficial~~no ~~Owners~~later ~~and~~than ~~Management~~120 ~~and Related~~days ~~Stockholder~~after ~~Matters”~~the end ~~under~~of the ~~caption~~reporting ~~“Executive~~period, ~~Compensation—Equity~~in ~~Compensation~~the ~~Plan~~event ~~Information,”~~that ~~and~~we isare ~~incorporated~~subject ~~herein~~to bysuch ~~reference~~requirements at that time.

(1)

This stock performance chart shall not be deemed to be “soliciting material” or be deemed “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

3032

Issuer Purchases of Equity Securities

In January 2008, our Board of Directors approved a stock repurchase program of up to $30.0 million of our common stock at any time ~~commencing~~ commencing February 11, 2008. ~~The~~We ~~program~~repurchased ~~does~~an ~~not~~aggregate ~~obligate~~of us9,518,000 ~~to acquire~~ shares at ~~any~~an ~~particular~~average price per share ~~and~~of ~~may~~$3.04 bein 2008. At December 31, 2008, the program was suspended. atWe ~~any~~made ~~time~~no ~~and~~repurchases atunder ~~our~~the ~~discretion~~program in 2009. As of December 31, 2009, $1.1 million remained available for repurchase under the existing repurchase authorization.

During 2008, we repurchased an aggregate of 9,518,000 shares at an average price per share of $3.04. As of December 31, 2008, the program has been suspended and no further repurchases under the program are contemplated at this time.

The following table shows purchases of our common stock and the available funds to purchase additional common stock for each month in the quarter ended December 31, 2008 (in thousands, except per share data):

Period	Total Numberof SharesPurchased	Average PricePaid per Share(1)		Total Number ofShares PurchasedAs Part of PubliclyAnnounced Plan	Approximate DollarValue That MayYet be PurchasedUnder the Plan
October 1, 2008 to October 31, 2008	2,752	$	3.05	2,752	$	1,078
November 1, 2008 to November 30, 2008	—	$	—	—	$	1,078
December 1, 2008 to December 31, 2008	—	$	—	—	$	1,078
Total	2,752	$	3.05	2,752

(1) Includes broker commissions.

Item 6.

Selected Consolidated Financial Data

The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K.

	Year Ended December 31,
	Year ended December 31,
	2004(1)			2005(1)				2006(2)				2007(3)				2008(4)
	2005(1)				2006(2)				2007(3)				2008(4)				2009
	(in thousands, except per share data)
Consolidated Statements of Operations Data:
Net revenues	$	~~449~~430,~~198~~899		$	~~430,899~~$	452,509		$	~~452,509~~$	411,748		$	~~411,748~~$	315,535		$	~~315,535~~$	252,327
Cost of revenues		~~322~~352,~~059~~417			~~352,417~~	333,643			~~333,643~~	291,332			~~291,332~~	218,304			~~218,304~~	177,087
Gross profit		~~127~~78,~~139~~482			~~78,482~~	118,866			~~118,866~~	120,416			~~120,416~~	97,231			~~97,231~~	75,240
Total operating expenses		97102,~~726~~615			~~102,615~~	102,745			~~102,745~~	144,475			~~144,475~~	114,405			~~114,405~~	84,539
Income (loss) from operations		29(24,~~413~~133	)		~~(24,133~~	)16,121			~~16,121~~	(24,059	)		~~(24,059~~	)(17,174	)		~~(17,174~~	)(9,299	)
Net income (loss)	$	26,656		$	(26,624	)		$	(20,777	)		$	(48,957	)		$	(39,815	)
Net loss	$	(26,624	)		$	(20,777	)		$	(48,957	)		$	(39,815	)		$	(10,237	)
Net income (loss) per share—basic	$	0.28		$	(0.26	)		$	(0.20	)		$	(0.47	)		$	(0.40	)
Net loss per share—basic and diluted	$	(0.26	)		$	(0.20	)		$	(0.47	)		$	(0.40	)		$	(0.11	)
Net income (loss) per share—diluted	$	0.27		$	(0.26	)		$	(0.20	)		$	(0.47	)		$	(0.40	)
Consolidated Balance Sheet Data:
Consolidated Balance Sheet Data:
Total assets	$	478,212			$	465,978			$	403,465			$	288,483			$	324,607
Total assets	$	501,440		$	478,212			$	465,978			$	403,465			$	288,483
Long-term obligations	$	2,627			$	2,030			$	7,548			$	8,082			$	10,057
Long-term obligations	$	1,307		$	2,627			$	2,030			$	7,548			$	8,082
Shareholders’ equity	$	375,944			$	365,715			$	322,553			$	243,214			$	260,127
Shareholders’ equity	$	368,315		$	375,944			$	365,715			$	322,553			$	243,214

(1) Results of operations include the effects of the ~~acquisitions of Emosyn LLC and G-Plus, Inc. in 2004 and the~~ acquisition of Actrans Systems Inc. in 2005.

31(2) Results for 2006 include an aggregate $44.0 million impairment of equity investments and a $12.2 million gain on the sale of a portion of an equity investment.

(2) Results for 2006 include the impairment of our equity investments in Grace Semiconductor Manufacturing Corporation, or GSMC, of $40.6 million and Nanotech Inc. of $3.5 million and a gain on the sale of a portion of our investment in Powertech Technology, Incorporated of $12.2 million.

(3)

Results for 2007 include the impairment of our equity investments in GSMC of $19.4 million and EoNex Technologies, Inc. of $3.0 million. Loss from operations includes $19.0 million of impairment of goodwill and long-lived assets and $12.0 million of expenses related to our voluntary independent review of our historical stock option granting practices and financial restatement.

(4)	Results for 2008 include the impairment of our equity investments in GSMC of $11.6 million and Advanced Chip Engineering Technology, Inc. of $9.7 million. Loss from operations includes a $2.5 million restructuring charge.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a leading supplier of NOR flash memory semiconductor devices for the digital consumer, networking, wireless communications and Internet computing markets. NOR flash memory is a form of nonvolatile memory that allows electronic systems to retain information when the system is turned off. NOR flash memory is now used in ~~hundreds~~ ofbillions ~~millions~~ of consumer electronics and computing products annually.

We produce and sell many products based on our SuperFlash design and manufacturing process technology. Our products are incorporated into products sold by many well-known companies including Apple, Asustek, BenQ, Cisco, Dell, First International Computer, Gigabyte, Haier, Huawei, Infineon, Intel, IBM, Inventec, Legend, Lenovo, LG Electronics, Freescale Semiconductor, NEC, Nintendo, Panasonic, Philips, Quanta, Samsung, Sanyo, Seagate, Sony, Sony Ericsson, Toshiba, Texas Instruments, VTech and ZTE.

We also produce and sell other semiconductor products including flash microcontrollers, ~~smart card ICs and modules,~~ radio frequency ICs and modules, NAND Controllers and NAND Controller-based modules.

One of our goals is diversification through the active development of our non-memory business. Our objective is to transform SST from a pure play in flash memory to a multi-product line semiconductor company and a leading licensor of embedded flash technology. We continue to execute on our plan to derive a significant portion of our revenue from non-memory products, which includes flash microcontrollers, NAND Controller-based modules, ~~smart card ICs~~ and radio frequency ICs and modules. We believe non-memory products represent an area in which we have significant competitive advantages and also an area that, in the long run, can yield profitable revenue with higher and more stable gross margins than our memory products. ~~We may also explore strategic alternatives such as acquisitions or investments in other businesses.~~

Our ~~product~~business strategy is two fold: to continue to develop and grow our core NOR flash memory and embedded flash technology licensing business, while diversifying our business by expanding into new markets and pursuing growth opportunities through the development of new NAND Controller-based module and radio frequency IC products. In the NOR flash market, our goals are to be ~~the~~a leading worldwide supplier of low-density NOR flash memory devices and to maintain our position as the world’s number one embedded flash licensor by growing both upfront fees and per unit royalties. In our ~~new~~non-memory business markets, our ~~objectives~~ objectives are to leverage our core competencies in NAND Controller design into systems solutions as adoption of solid state memory technology grows, and to leverage our radio frequency wireless technology and systems expertise as development continues on a multitude of electronic devices ~~which~~that are enabled for wireless communication.

The ~~Board~~semiconductor ofindustry ~~Directors~~ has historically ~~appointed~~been acyclical, ~~Strategic~~characterized ~~Committee to~~by ~~review~~periodic ~~our~~changes ~~investments~~in ~~and~~business toconditions ~~investigate~~caused ~~strategic~~by ~~alternatives,~~product ~~including~~supply ~~acquisitions~~ and ~~divestitures~~demand imbalance. ~~The~~When ~~Strategic~~the ~~Committee~~industry isexperiences ~~working~~downturns, ~~closely~~they ~~with~~often ~~management~~occur ~~and~~in anconnection ~~outside~~with, ~~consultant~~or toin ~~evaluate~~anticipation ~~our operations and products~~of, ~~and~~maturing ~~identify~~product ~~potential~~cycles ~~new~~and ~~business~~declines ~~opportunities.~~in ~~This~~general ~~evaluation~~economic ~~involves~~conditions. ~~all~~These ~~aspects~~downturns ofare ~~our~~characterized ~~business~~by inweak ~~order~~product todemand, ~~drive~~excessive ~~value~~inventory ~~for our shareholders~~ and ~~position~~accelerated ~~SST~~decline ~~for~~of ~~future~~selling ~~growth~~prices.

32Recent Developments

The Board of Directors appointed a Strategic Committee to review our investments and to investigate strategic alternatives, including acquisitions and divestitures, in order to drive value for our shareholders and position SST for future growth. The Strategic Committee has worked closely with management and an outside consultant to evaluate our operations and products, and identify potential new business opportunities.

~~Market~~ to ~~Conditions~~Microchip 19,148,149 newly issued shares of our common stock, or 19.9 percent of our outstanding shares, for a price of $3.05 per share in cash. Amendment No. 1 and ~~Global~~Amendment ~~Reorganization~~No. 2 are referred to together as the Amendments. Pursuant to the Merger Agreement and Amendments, SST will merge with Sun Acquisition Corporation, a California corporation and a wholly owned subsidiary of Microchip, a Delaware corporation, or the Merger. Each outstanding share of our common stock, other than shares as to which dissenters’ rights have been properly exercised, will be converted into the right to receive $3.05, without interest.

~~The~~For ~~unprecedented~~a ~~sudden~~description ~~decrease in demand for semiconductor products during the fourth quarter~~ of ~~2008,~~our ~~resulting~~proposed ~~from~~transaction ~~the~~with ~~deepening global financial crisis~~Microchip, ~~has~~please ~~caused~~refer ato ~~significant decline in~~ our ~~revenues.~~definitive ~~This~~proxy ~~decline~~statement infor ~~demand is evident in~~ our ~~results,~~Special ~~with~~Meeting ~~revenue from nearly all application segments down significantly in the fourth quarter~~ of ~~2008, as compared with the third quarter. The~~ ~~digital~~Shareholders ~~consumer~~to ~~segment~~be ~~saw~~held ~~especially~~on ~~sharp~~April 8, ~~declines~~2010, ~~with~~which ~~fourth~~is ~~quarter~~on ~~2008~~file ~~revenues~~with ~~decreasing more than 50% from~~ the ~~third~~SEC ~~quarter. This persistent difficult economic environment necessitated that we accelerate certain planned changes to our business~~ and ~~focus.~~is Weavailable ~~took~~through ~~important~~the ~~steps~~SEC’s towebsite ~~reduce~~at ~~our inventory, streamline our organizational structure and reduce our expenses by focusing our efforts on our most strategic initiatives~~www.sec.gov.

InOn ~~December~~November 13, ~~2008~~2009, we ~~announced~~entered ~~the~~into ~~implementation of~~ a ~~global~~definitive ~~reorganization~~agreement, ~~designed~~or tothe ~~reflect~~TRH ~~changes~~Merger inAgreement, ~~anticipated demand for our products. This action was taken~~ to ~~reduce~~be ~~costs~~acquired ofby ~~operations,~~Prophet ~~realign~~Equity ~~our~~LP ~~development priorities,~~ and tomembers ~~improve~~of our ~~focus~~management onteam ~~accelerating~~for ~~time-to-market~~$2.10 ofper ~~select new products~~share. ~~This~~Pursuant ~~refined~~to ~~strategy continues~~ the ~~essential elements of diversification by focusing~~ ondefinitive aagreement ~~reduced~~SST ~~number~~would ofbe ~~projects~~merged inwith ~~the~~and ~~areas~~into ofTechnology ~~non-commodity~~Resources ~~NOR~~Merger ~~products~~Sub, ~~NAND~~Inc., ~~Controllers~~a ~~and~~California ~~modules~~corporation and ~~radio frequency products which are synergistic with our memory markets. We believe this focus on~~ a ~~smaller~~wholly ~~set~~owned subsidiary of ~~projects,~~Technology ~~along~~Resources ~~with the reduction in operating expenses~~Holdings, ~~will ultimately make our company more profitable and enhance shareholder value~~Inc., ~~The reorganization included~~ a ~~reduction~~Delaware incorporation. ~~overall~~On ~~headcount of approximately 120~~February 2, ~~or 17 percent of our global workforce~~2010, ~~most of which~~we ~~was~~terminated ~~completed by~~ the ~~end~~TRH ofMerger ~~2008.~~Agreement Wein ~~incurred~~order ato ~~restructuring~~enter ~~charge~~into ~~of $2.5 million in~~ the ~~fourth~~Merger ~~quarter of 2008~~Agreement, ~~all~~as ofdescribed ~~which~~above. isIn ~~related~~connection ~~to severance costs associated~~ with the ~~workforce~~termination ~~reduction, and we expect to incur an additional restructuring charge~~ of ~~approximately $0.4 million in~~ the ~~first~~TRH ~~quarter~~Merger ofAgreement, ~~2009.~~we ~~The~~paid ~~workforce~~Technology ~~reduction~~Resources ~~and~~Holdings, ~~other~~Inc. ~~restructuring~~a ~~actions~~termination ~~took~~fee ~~place worldwide and in all functional areas~~ of ~~the company, and are expected to reduce payroll-related expenses by approximately~~ $~~13 million in 2009~~4,025,875.

~~2008~~2009 in Review

~~Over~~In ~~the~~response ~~past~~to 19the ~~years,~~challenging wemarket ~~have~~conditions ~~established~~of ~~ourselves~~the aspast ancouple ~~industry leader with our superior SuperFlash technology~~years, ~~deep~~we ~~customer~~began ~~relationships~~taking ~~and~~ a ~~talented~~fresh ~~team~~look ofat ~~employees~~every ~~dedicated~~aspect ~~to a common goal~~ of ~~excellence.~~ ~~Several years ago, with the recognition that~~ our ~~core memory~~ business; ~~will~~focusing ~~continue~~our toresources ~~experience~~on ~~average~~areas ~~selling~~that ~~price~~we ~~pressure~~believe ~~that~~will ~~would~~yield ~~limit~~the ~~our~~most impact ~~revenue~~over ~~growth potential~~time, wewhile ~~began~~creating aadditional ~~diversification~~opportunities ~~plan~~without ofincurring ~~investing~~significant inadditional ~~products~~research and ~~technologies~~ ~~that~~development ~~are~~expense ~~expected~~in tothe ~~yield~~near ~~average~~term. ~~selling~~These ~~prices,~~efforts orinclude ~~ASPs,~~a ~~that~~targeted ~~are~~approach ~~higher~~to ~~than~~product ~~our~~development ~~current memory products. We believe~~ that aemphasizes ~~strategy~~non-commodity applications ofthrough ~~diversification~~differentiated ~~will~~features, ~~allow~~as ~~for~~well ~~better~~as ~~growth~~new ~~opportunities~~programs ~~and~~to ~~higher~~enhance ~~return~~our ~~for~~licensing ~~our shareholders~~business. We have ~~invested~~made ~~internally~~progress, and ~~externally~~execution onof ~~new~~these ~~technologies~~objectives, ~~designed~~combined towith ~~enhance~~an ~~our~~improved ~~competitive~~demand ~~position~~environment, ~~and~~resulted ~~have~~in ~~received~~solid ~~strong~~financial ~~initial~~performance in ~~market~~the ~~response~~second tohalf ~~many~~ of ~~our~~2009, ~~initiatives.~~as Inwell ~~the~~as ~~fourth~~yielding ~~quarter~~several ofkey ~~2008,~~achievements ~~our~~in ~~non-memory products~~product ~~contributed~~development ~~19%~~and oftechnology ~~overall~~licensing ~~product~~which ~~revenue~~we ~~and~~believe ~~45%~~will ofhelp ~~product~~drive ~~gross~~future ~~profit~~growth.

~~Through~~After reaching a low point during the month of January, our ~~recent~~product ~~focus~~shipments onrebounded ~~executing~~in ~~this~~the first quarter of 2009. The end-market demand recovery that began in the second quarter continued through the ~~diversification~~third ~~strategy~~and fourth quarters, wewith ~~have~~total ~~achieved~~unit ~~important~~shipments ~~milestones~~for on2009 ~~several~~down ~~new~~only ~~products~~4% from 2008. Unit shipments to the Internet computing segment increased 25% in 2009 from 2008, showing strength in notebook and ~~technologies~~desktop PC, ~~including:~~hard disk drive and PC monitor applications. Unit shipments to the networking segment increased 50% year over year, driven primarily by shipment increases in DSL modem and wireless LAN applications. Unit shipments to the digital consumer and wireless communications segments were down 30% and 24%, respectively, in 2009, primarily as a result of the weakness in demand in the early part of the year.

•We have ~~NANDrive,~~begun ato ~~high-performance,~~see ~~small~~stabilization ~~form-factor solid state drive. Our NANDrive products contain an integrated ATA Controller and NAND memory~~ in athe ~~multichip~~pricing ~~package~~environment, ~~and are used~~ as athe ~~basic~~rate ~~building block for storage in a wide variety~~ of ~~applications.~~price ~~During~~decline ~~2008,~~for welike ~~expanded~~products ~~our~~has ~~NANDrive~~slowed ~~family~~significantly offrom ~~products~~earlier ~~with~~in the ~~addition~~year. ofCoupled ~~512~~with ~~MByte,~~strong 1unit ~~GByte~~shipments, 2this ~~GByte~~stabilization ~~and~~contributed 4to ~~GByte~~a ~~products,~~healthy ~~capable~~growth ~~of operating at industrial temperature ranges, making them compelling storage options~~ in revenue ~~harsh~~across ~~environments~~all ~~including~~application ~~medical~~segments ~~equipment,~~during ~~factory~~the ~~automation~~second ~~and~~half ~~automotive~~of ~~electronics~~2009. ~~Since~~Our ~~introduction,~~blended ~~our~~average ~~customer~~selling ~~base~~price ~~for~~decreased ~~the~~approximately ~~NANDrive~~18% ~~family~~in ~~has~~2009 ~~continued to grow, with early success coming~~ from ~~applications such as IP set top boxes, mobile Internet devices and industrial applications. In~~ 2008, wepartly ~~saw~~due ~~the~~to ~~first~~changes ~~meaningful~~in ~~revenue from~~ our ~~NANDrive~~product ~~devices~~mix, with ~~total~~strong ~~shipments~~revenue growth in ~~excess~~serial offlash ~~600,000 units,~~ and weradio frequency ~~continue~~power toamplifier ~~work on many design-in opportunities. As we ramp up production at this early stage of product cycle~~products, wewhich ~~expect~~have torelatively ~~see~~lower ~~significant~~average ~~fluctuations~~selling ~~both in quarterly revenue and unit shipments~~prices.

33Non-Memory Products

Over the past 20 years, we have established ourselves as an industry leader with our superior SuperFlash technology, deep customer relationships and a talented team of employees dedicated to a common goal of excellence. Several years ago, with the recognition that our core memory business will continue to experience average selling price pressure that would limit our revenue growth potential, we began a diversification plan of investing in products and technologies that are expected to yield higher average selling prices and gross margins

• than ~~Radio~~our ~~Frequency~~current ~~power~~memory ~~amplifiers~~products. ~~Using~~We ~~advanced~~believe ~~technologies,~~that ~~these~~a ~~devices~~strategy ~~feature~~of adiversification ~~highly-efficient,~~will ~~low-power,~~allow ~~small-footprint~~for ~~design~~better ~~that~~growth ~~supports~~opportunities ~~802.11~~and ~~wireless~~higher ~~standard~~return for our shareholders. WeIt ~~are~~has ~~beginning~~taken more time than we anticipated to ~~see~~establish ~~traction~~this innew ~~the~~business, ~~adoption~~as ofwe ~~our~~faced ~~radio~~difficulties ~~frequency~~in ~~ICs~~penetrating new markets and ~~modules,~~in ~~targeted~~an atenvironment awhere ~~wide~~customers ~~range~~are ofscaling ~~wireless~~back ~~and~~new ~~multimedia~~product ~~applications~~development. In 2009, ~~including~~our ~~cell~~non-memory ~~phones.~~business Wecontributed ~~shipped~~20% ~~nearly~~of 40product ~~million~~revenue ~~units~~and 46% inof ~~2008~~product gross profit, up from 14% of product revenue and ~~expect~~20% ~~continued~~of ~~growth~~gross profit in ~~2009~~2008.

~~Due~~We continue to ~~the~~experience ~~complexity~~good traction ofwith ~~these~~our ~~new~~NAND ~~product~~Controllers ~~families~~and modules, ~~the~~including ~~design~~NANDrive, our embedded flash solid-instate drive product family, and our customer base for the NANDrive product line includes more than 90 customers. Our engineering teams are designing new ~~qualification~~controllers ~~cycle~~with isnew ~~expected~~interfaces to beexpand ~~long~~our addressable market into applications such as mobile Internet devices, automotive and weindustrial ~~further~~equipment, ~~expect~~camcorders and IP set-top boxes. We believe our ~~near~~growing ~~term~~portfolio ~~results~~of todesign wins is indicative of an emerging business and that we are in front of a positive revenue cycle for this product family. However, significant and sustained development effort will be ~~significantly~~required ~~impacted~~to byrealize ~~the~~meaningful ~~challenging~~revenue ~~overall~~growth ~~economic~~from ~~environment~~this business.

~~Despite~~Our ~~the~~radio ~~current~~frequency ~~economic~~power ~~and~~amplifier ~~competitive~~products ~~challenges,~~targeting wethe ~~continued~~embedded toWi-Fi ~~develop~~market ~~our~~showed ~~core~~strong ~~flash~~growth ~~memory~~in ~~business~~2009, ~~and~~with weshipments ~~believe~~in weexcess ~~are~~of 50 million ~~well~~units. ~~positioned~~Using inadvanced ~~our~~technologies, ~~memory~~these ~~product~~devices ~~business~~feature asa ~~well~~highly-efficient, aslow-power, ~~our~~small-footprint asdesign ~~well~~that assupports ~~our complementary~~802.11 ~~technology~~wireless ~~licensing business~~standard. AsWe anrecently ~~increasing~~announced ~~number~~the availability of ~~electronic~~our ~~products~~newest ~~have~~radio ~~been~~frequency ~~designed~~power amplifier, ~~around~~which ~~microprocessors~~supports ~~and~~an ~~microcontrollers,~~operating ~~virtually~~voltage ~~all~~up ofto ~~these~~5V, ~~products~~resulting ~~incorporate~~in ~~some low~~ultra-~~density~~high ~~NOR~~linear ~~flash~~output ~~memory~~power ~~for code storage~~capability. InThis ~~many~~new ~~cases,~~device ~~the~~helps ~~code~~increase ~~size~~the ~~for~~transmission ~~each~~range ~~product~~and isdata ~~also~~rate ~~increasing~~of aswireless ~~consumers~~access ~~demand~~points ~~more~~and ~~features~~routers ~~and~~to ~~functionality.~~better ~~Further~~support broadband applications, such as ~~the~~streaming ~~definition~~video ofand ~~low~~other multimedia-~~density~~rich ~~continues~~content. toThese ~~expand~~products ~~into~~are ~~16,~~winning 32designs ~~and~~with 64major ~~Mbit~~chipset ~~densities,~~manufacturers wefor ~~believe~~use ~~this~~in ~~creates an~~smart ~~opportunity~~phone ~~for~~applications, us and ~~gives~~we ~~strong~~expect ~~evidence~~the ~~that~~ramp ~~our~~up ~~core~~of ~~business~~these ~~will~~chipsets ~~benefit~~to ~~from~~drive ~~market~~volume ~~growth~~shipments of inour ~~the~~power ~~future.~~amplifier Weproducts ~~address~~in ~~this~~2010. ~~market~~In ~~with feature-rich~~addition, ~~cost-effective~~design ~~products~~wins ~~which~~with ~~allow~~our usradio tofrequency ~~support~~power aamplifier ~~very~~chipset ~~broad~~partners ~~range~~expand ofopportunities ~~applications.~~for ~~For applications~~our ~~requiring~~NOR ~~smaller~~ memory, weand ~~offer~~NANDrive ~~embedded SuperFlash technology through licensing agreements~~products.

~~Our~~Due ~~investment in producing innovative solutions continues~~ to ~~build on~~ the ~~success~~complexity of ~~our~~these ~~memory~~new ~~business,~~product ~~and during 2008 we announced three developments in NOR flash memory products. First~~families, ~~we announced~~ the ~~26 Series Serial Quad I/O (SQI) family of 4~~design-~~bit~~in ~~multiplexed I/O serial interface flash memory devices. The 26 Series’ high data rate, combined with low pin count~~ and ~~enhanced~~qualification ~~serial~~cycle interface architecture, provide an ideal code storage solution for applications such as ultra low-cost handsets, Bluetooth headsets, optical disk drives and GPS devices. The second was a new addition to our 1.8V SPI serial flash product family; a 4 Mbit, small form factor product which is ~~ideal for battery-powered~~long, space-constrained mobile applications. Third, we announced a collaboration with Freescale Semiconductor, in which our SPI serial flash devices enable Freescale’s latest products to deliver dramatically enhanced battery life. Also, in the area of memory technologies, we are continuing to reduce manufacturing costs through the transition to more advanced process technologies that generally carry a lower cost per die. During 2008 we successfully brought up our 120nm technology at both Grace and ~~PowerChip; foundries which~~ we expect ~~to produce a majority of~~ our ~~products~~near interm ~~2009.~~results ~~Five products have been released~~ to ~~production from these lines and four more are under verification and qualification. These products include the 16, 32 and 64 Mbit parallel and serial family of products,~~ ~~which~~be weimpacted ~~believe~~by ~~will provide~~ the ~~proper~~current ~~cost~~overall ~~structure~~economic ~~to remain competitive in the broader commodity memory market~~environment.

Memory Products and Technology Licensing

Despite the economic and competitive challenges of the past year, we continue to develop our core flash memory business and we believe we are well positioned in our memory product and complementary technology licensing businesses. As an increasing number of electronic products have been designed around microprocessors and microcontrollers, virtually all of these products incorporate some low-density NOR flash memory for code storage. In many cases, the code size for each product is also increasing as consumers demand more features and functionality. Further, as the definition of low-density continues to expand into 16, 32 and 64 Mbit densities, we believe this creates an opportunity for us and gives strong evidence that our core business will benefit from market growth in the future. We address this market with feature-rich, cost-effective products which allow us to support a very broad range of applications. For applications requiring smaller memory, we offer embedded SuperFlash technology through licensing agreements.

Our focus on product innovation and technology advancement is essential to sustaining growth in challenging market conditions. As we refine our roadmap, we are putting special emphasis on development of innovative products with differentiated features that expand our addressable market. In November, 2009, we announced a new family of high-speed quad-bit serial flash memory with our proprietary execute-in-place feature, which builds upon the success of our innovative and award-winning SQI flash products. In order to take advantage of significant cost savings, over the past several years, electronics device manufacturers have been transitioning from parallel flash to serial flash for use in certain applications. However, serial flash has historically not offered the performance level required for use in applications requiring very high speed memory access, such as mobile handsets, Bluetooth headsets and GPS devices. Our high speed SQI serial flash achieves a breakthrough combination of the high performance level typically associated with parallel flash memory and the low pin count and space savings of serial flash memory, as well as extremely low power consumption, which is

critical for the design of next-generation devices. We continue work on next generation designs which offer significant performance, power efficiency and footprint advantages over previous generations, in addition to cost advantages. Although the ramp of our 120nm technology products at Grace and Maxchip has been slower than anticipated, we are also making progress on 90nm and 70nm technology nodes and recently taped out our first 70nm product vehicle on a 12” fab. We believe these innovative products will provide the features and cost structure to support our targeted application segments in upcoming years.

Our licensing revenue improved notably in the second half of 2009, reflecting the general improvement in the semiconductor industry. Our licensing business represents considerable opportunity for us and we are placing enhanced emphasis in several areas we believe will foster growth. In addition to growing our licensee base with new accounts in wafer foundries, integrated device manufacturers and design houses, we are also working with current licensees to expand to more advanced technology nodes.

Global Reorganization

In December 2008, we announced the implementation of a global reorganization designed to reflect changes in anticipated demand for our products. This action was taken to reduce costs of operations, realign our development priorities, and improve our focus on accelerating time-to-market of select new products. This refined strategy continues the essential elements of diversification by focusing on a reduced number of projects in the areas of non-commodity NOR products, NAND Controllers and modules and radio frequency IC products which are synergistic with our memory markets. We believe this focus on a smaller set of projects, along with the reduction in operating expenses, will ultimately make our company more profitable and enhance shareholder value.

As a result of our global reorganization, our operating expenses decreased substantially in 2009, as compared to 2008. Our restructuring efforts have been conducted in a manner that we believe will best enable us to support the current and future requirements of our customer base and invest appropriately in our technology roadmap in order to enhance both our shorter and longer term competitive position.

Outlook

WeBeginning in ~~have~~September 2008, we experienced a ~~rapid~~sharp ~~deterioration~~decline in ~~our~~ booking ~~activities since September 2008~~activity, as our customers delayed their purchase orders in response to the sudden slowdown in consumer demand., ~~Booking~~and booking activities remained weak ~~through~~into ~~the~~2009. ~~fourth~~Although ~~quarter~~we ofsaw ~~2008~~a ~~and~~recovery in ~~early~~end-market ~~2009.~~demand ~~Our~~throughout ~~customers~~the ~~continue~~year, toour ~~report~~product arevenues ~~lack~~for of2009 ~~demand~~remained ~~visibility~~at low levels, as compared with 2007 and we2008. ~~believe~~Although ~~there~~product isrevenues ~~still~~have ~~inventory~~been historically lower in the ~~sales~~first ~~channels that~~half ~~will~~of ~~need~~the year due to beseasonal ~~absorbed~~trends ~~before~~in ~~bookings~~demand, ~~will~~we expect ~~accurately~~product ~~reflect~~revenues ~~demand.~~may ~~Our~~increase ~~own~~somewhat ~~inventory~~throughout ~~has~~2010, ~~declined~~due ~~significantly~~in ~~from~~part ~~the~~to ~~end~~a continuation of the ~~third~~recent ~~quarter~~relative price stability as well as increased demand. In addition, the continued growth of ~~2008~~our non-memory business, as wewell ~~carefully~~as ~~monitor~~our ~~customer~~efforts ~~requirements~~to expand our presence to targeted strategic accounts in North America and ~~have~~Europe, ~~adjusted~~are ~~wafer~~expected ~~starts accordingly~~to contribute to improved product gross margins in 2010. We expect our product revenues and gross profit in 2010 to ~~reduce~~recover from 2009. However, we do not expect our ~~inventory~~2010 ~~level~~product ~~further~~revenues into return to the ~~first~~level ~~quarter~~of 2008 or prior periods, as a result of ~~2009~~the prolonged worldwide economic downturn.

~~The~~During ~~global~~the ~~reorganization~~past ~~and~~few ~~reduction~~quarters ~~in workforce~~we ishave ~~being~~signed ~~conducted~~several innew alicensing ~~manner~~agreements, ~~that~~which we ~~believe~~expect ~~will~~to ~~best~~contribute ~~enable~~upfront usfees tobeginning ~~support~~with the ~~current~~first ~~and~~quarter ~~future requirements~~ of ~~our~~2010. ~~customer~~In ~~base~~addition, ~~and~~we ~~invest~~anticipate ~~appropriately~~solid growth in our ~~technology~~royalty ~~roadmap~~revenue in ~~order~~2010, as compared to ~~enhance~~2009, ~~both~~if ~~our~~market ~~shorter~~conditions ~~and~~for ~~longer~~our ~~term competitive~~licensees’ ~~position~~products remain positive. Our ~~objective~~licensing isbusiness toremains ~~continue~~a totremendous ~~execute~~asset onto our ~~strategy~~financial ofmodel ~~diversification~~ and ~~the~~our ~~advancement~~continued ofinvestment in our core memory products and technology ~~through~~roadmap helps to ensure this business will grow as market demand continues to improve.

34We expect our operating expenses to be at slightly higher levels in 2010, as compared to 2009, excluding any non-recurring charges, which represents a significant reduction from periods prior to our 2008 global reorganization. As a result of the anticipated improvement in product gross margins and significant contribution from our licensing business, we expect good operating income growth in 2010, as compared to 2009.

collaborated efforts with our strategic partners, while reducing operating expenses. Our fabless business model, in conjunction with our technology leadership, has been resilient during past business cycle downturns and we look forward to emerging stronger from this challenging environment.

The semiconductor industry has historically been cyclical, characterized by periodic changes in business conditions caused by product supply and demand imbalance. When the industry experiences downturns, they often occur in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. These downturns are characterized by weak product demand, excessive inventory and accelerated decline of selling prices. Our current operating environment represents such a downturn and we cannot predict the extent or duration of the downturn.

Concentrations

We derived 8788.78%, 8887.83% and 8791.37% of our net product revenues during ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, respectively, from product shipments to Asia. In addition, substantially all of our wafer suppliers and packaging and testing subcontractors are located in Asia.

Shipments to our top ten end customers, which exclude transactions through stocking representatives and distributors, accounted for 2017.18%, 1721.84% and 2118.46% of our net product revenues in ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, respectively.

No single end customer, which we define as original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, contract electronic manufacturers, or CEMs, or end users, represented 10.0% or more of our net product revenues during ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009.

We ship products to, and have accounts receivable from, OEMs, ODMs, CEMs, stocking representatives, distributors and our logistics center. Our stocking representatives, distributors and logistics center reship our products to our end customers, including OEMs, ODMs, CEMs and end users. Shipments, by us or our logistics center, to our top three stocking representatives for reshipment accounted for 4860.50%, 6054.06% and 5458.69% of our product shipments in ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, respectively. In addition, the same three stocking representatives solicited sales, for which they received a commission, for 109.31%, 97.10% and 71.02% of our product shipments to end users in ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, respectively.

We out-source our end customer service logistics in Asia to Silicon Professional Technology Ltd., or SPT, which supports our customers in Taiwan, China and other Southeast Asia countries. SPT provides forecasting, planning, warehousing, delivery, billing, collection and other logistic functions for us in these regions. SPT is a wholly-owned subsidiary of one of our stocking representatives in Taiwan, Professional Computer Technology Limited, or PCT. Please see a description of our relationship with PCT under “Related Party Transactions.” Products shipped to SPT are accounted for as our inventory held at our logistics center, and revenue is recognized when the products have been delivered and are considered as sold to our end customers by SPT. For the years ended December 31, ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, SPT serviced end customer sales accounting for 5960.1%, 6056.12% and 5659.25% of our net product revenues recognized. As of December 31, ~~2007~~2008 and ~~2008~~2009, SPT represented 6550.39% and 5066.91% of our net accounts receivable, respectively.

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

Results of Operations

On February 4, 2009 we announced our results for the quarter and year ended December 31, 2008. Since that time and prior to the filing of this Annual Report on Form 10K, we re-evaluated and increased our inventory

write-down by $907,000 and re-assessed the valuation of our investment in GSMC, increasing our recorded impairment by $6.0 million. During the fourth quarter of 2008, we recorded a total impairment to our investment in GSMC of $11.6 million to adjust the carrying value to its estimated fair value of $11.5 million as of December 31, 2008. As a result, net loss for the fourth quarter of 2008 is $36.6 million, or $0.38 per share, based on 95.5 million shares outstanding and net loss for the year ended December 31, 2008 is $39.8 million, or $0.40 per share, based on 100.0 million diluted shares outstanding.

Net Revenues (in thousands, except percentages)

	Year Ended						Increase(Decrease)~~2006~~2007 vs. ~~2007~~2008					Increase(Decrease)~~2007~~2008 vs. ~~2008~~2009
	December 31,2006		December 31,2007		December 31,2008
	December 31,2007		December 31,2008		December 31,2009
Memory revenue	$	~~350~~333,~~156~~451	$	~~333~~228,~~451~~237	$	~~228~~170,~~237~~160	$	(16105,~~705~~214	)	(431.86	)%	$	(~~105~~58,~~214~~077	)	(3125.64	)%
Non-memory revenue		6538,~~285~~465		38,~~465~~628		3842,~~628~~502		~~(26,820~~163	)	~~(41~~0.14	)%		~~163~~3,874		010.40	%
Product revenues		~~415~~371,~~441~~916		~~371~~266,~~916~~865		~~266~~212,~~865~~662		(43105,~~525~~051	)	(1028.52	)%		(~~105~~54,~~051~~203	)	(2820.23	)%
Technology licensing		3739,~~068~~832		3948,~~832~~670		4839,~~670~~665		28,~~764~~838		722.52	%		8(9,~~838~~005	)	22(18.25	)%
Total net revenues	$	~~452~~411,~~509~~748	$	~~411~~315,~~748~~535	$	~~315~~252,~~535~~327	$	(4096,~~761~~213	)	(923.04	)%	$	(9663,~~213~~208	)	(2320.40	)%

~~The~~38 ~~following discussions are based on our reportable segments described in Note 15 “Segment and Geographic Reporting” to our consolidated financial statements.~~

The following discussions are based on our reportable segments described in Note 13 “Segment and Geographic Reporting” to our consolidated financial statements.

Memory Products

Memory product revenue ~~decreased~~for ~~31.6%~~2009 inwas ~~2008~~down significantly from ~~2007~~2008, ~~primarily~~largely ~~due~~as toa result of the ~~overall~~unprecedented ~~reduction~~sudden decrease in worldwide demand for semiconductor products ~~caused~~which bybegan ~~the~~in ~~global economic~~September, ~~downturn~~2008. InThis ~~2008,~~decline aswas ~~compared~~more ~~with~~pronounced ~~2007~~in the first half of the year, ~~both~~with ~~unit~~a ~~shipments~~year ~~and~~over ~~average~~year ~~selling~~decrease ~~prices~~of ~~decreased~~41.7% ~~across~~through ~~all~~the second quarter of 2009. After a modest recovery in the second half, memory product ~~families,~~revenue ~~and~~for ~~were~~2009 ~~down~~was ~~23.6%~~still ~~and~~down 1025.4%, ~~respectively~~from 2008. Although total unit shipments ~~for~~in ~~serial~~2009 ~~flash~~were ~~products~~comparable ~~decreased 16.6%~~with in 2008, ~~from~~down ~~2007~~only 2%, average selling prices ~~remained~~decreased ~~relatively~~24%, ~~stable~~with declines across nearly all memory product families, ~~down~~as ~~only~~a 3result of reduced end customer demand in the early part of 2009.~~3%.~~

Memory product revenue decreased 31.6% in ~~2007~~2008 from ~~2006 primarily~~2007, primarily due to ~~supply~~the ~~constraints~~overall ~~due~~reduction toin ~~wafer~~demand ~~shortages~~for ~~from~~semiconductor ~~our~~products ~~foundry~~in ~~sources.~~the ~~These~~later ~~shortages~~part ~~led~~of to2008 ~~orders~~caused ~~that~~by ~~could~~the ~~not~~global beeconomic ~~fulfilled and forced us to be more selective in order acceptance~~downturn. AsIn ~~a result~~2008, ~~certain~~as ~~revenue~~compared ~~opportunities~~with ~~were lost~~2007, ~~due~~both ~~to our inability to produce an adequate supply of products. While overall~~ unit shipments ~~increased~~and ~~3.4% for 2007,~~ average selling prices ~~declined~~decreased ~~8.8%~~across ~~due~~all tomemory ~~continuing~~product families, ~~competitive~~and ~~pricing~~were ~~pressures~~down in23.6% ~~low-density~~and ~~markets~~10.4%, respectively.

We anticipate that memory product revenues will ~~decline~~increase ~~again~~in 2010, as compared to 2009, due to improvement in the ~~first~~global ~~quarter~~economy and our efforts in expanding our presence to targeted strategic accounts in North America and Europe. However, due to the nature of ~~2009~~our memory business, ~~and~~we anticipate memory product revenues may continue to fluctuate ~~significantly~~ in the future.

Non-Memory Products

Non-memory product revenue increased 010.40% in ~~2008~~2009 from ~~2007~~2008, with aincreases ~~decrease~~ in unit shipments ofand ~~21.8%, led by smart card IC, offset by an increase in~~ average selling prices ~~of 32.5%~~, ~~due~~from to product mix~~. The decrease in unit shipments for smart card IC was~~, ~~due in part to our decision to focus on sales~~ of ~~higher~~13% ~~margin~~and ~~products~~22%, respectively. The favorable product mix primarily reflects the ~~introduction~~continued ofincrease ~~our~~in ~~NANDrive~~demand ~~family~~for ~~of products~~NANDrive.

Non-memory product revenue ~~decreased~~was ~~substantially~~essentially flat in ~~2007~~2008, ~~from~~as ~~2006.~~compared ~~Supply~~to ~~constraints~~2007, with a ~~15.0%~~ decrease in ~~units~~unit ~~shipped~~shipments ~~and~~of ~~a 27.8~~22% ~~decrease~~offset by an increase in average selling prices ~~all~~of ~~led~~33%, due to ~~the~~product ~~decline~~mix. The ~~decline~~decrease ~~was~~in ~~led~~unit byshipments ~~NAND~~was due in ~~Controller~~part ~~shipments~~to ~~which~~our ~~declined~~decision ~~77.5%~~to ~~for~~focus ~~2007.~~on ~~Decreases~~sales of ~~average~~higher ~~selling~~margin ~~prices~~products inand ~~non-memory~~the ~~products~~favorable inproduct ~~2007~~mix ~~were~~primarily ~~mainly~~reflects ~~due~~the tointroduction ~~pricing~~of ~~pressures~~our onNANDrive ~~smart~~family ~~card~~of ~~ICs~~products.

We expect non-memory product revenue to fluctuate significantly throughout ~~2009~~2010 due to the ~~current adverse economic conditions, as well as the~~ start-up nature of our new product lines and diversification in our customer base.

Technology Licensing Revenue

Technology licensing revenue includes a combination of up-front fees and royalties. Technology licensing revenue ~~increased~~decreased 2218.25% in ~~2008~~2009 from ~~2007~~2008, ~~with~~as a result the ~~increase~~generally ~~coming~~adverse ~~from~~economic ~~royalties,~~conditions ~~primarily~~in ~~due~~late 2008 and early 2009. Our royalty revenues are recorded when reported to anus ~~ongoing~~by our licensees, which is the quarter following our licensees’ sales. Thus our royalty revenues were down significantly from the prior year in the second quarter of 2009, reflecting lower ~~trend~~demand ~~toward~~for ~~flash~~our ~~technology~~licensee’s ~~within~~products ~~microcontroller~~in ~~markets~~the first quarter of 2009.

Technology licensing revenue ~~for 2007~~ increased 722.52% ~~over~~in ~~2006~~2008 from 2007, with the increase coming from royalties, primarily due to ~~increased~~an ~~royalties~~ongoing ~~from~~trend ~~our~~toward ~~licensees~~flash technology within microcontroller markets.

We anticipate revenues from technology licensing will ~~remain~~increase ~~relatively~~substantially ~~stable~~ in 2010, as compared to 2009, ~~but~~and may fluctuate ~~significantly~~ in the future, depending on general economic conditions.

Gross Profit (in thousands, except percentages)

	Year Ended									Increase(Decrease)~~2006~~2007 vs. ~~2007~~2008					Increase(Decrease)~~2007~~2008 vs. ~~2008~~2009
	December 31,2006			December 31,2007			December 31,2008
	December 31,2007			December 31,2008			December 31,2009
Memory gross profit	$	6472,~~156~~802		$	7239,~~802~~026		$	3919,~~026~~285		$	8(33,~~646~~776	)	13(46.54	)%	$	(3319,~~776~~741	)	(4650.46	)%
Memory gross margin		1821.38	%		2117.81	%		1711.13	%
Non-memory gross profit		177,~~642~~782			79,~~782~~535			916,~~535~~290			(91,~~860~~753	)	~~(55~~22.95	)%		16,~~753~~755		2270.58	%
Non-memory gross margin		2720.02	%		2024.27	%		2438.73	%
Product gross profit		8180,~~798~~584			8048,~~584~~561			4835,~~561~~575			(132,~~214~~023	)	(139.57	)%		(3212,~~023~~986	)	(3926.7	)%
Product gross margin		1921.7	%		2118.72	%		1816.27	%
Technology licensing gross profit		3739,~~068~~832			3948,~~832~~670			4839,~~670~~665			28,~~764~~838		722.52	%		8(9,~~838~~005	)	22(18.25	)%
Technology licensing gross margin		100.0	%		100.0	%		100.0	%
Total gross profit	$	~~118~~120,~~866~~416		$	~~120~~97,~~416~~231		$	9775,~~231~~240		$	1(23,~~550~~185	)	1(19.3	)%	$	(2321,~~185~~991	)	(1922.36	)%
Total gross margin		2629.32	%		2930.28	%		3029.8	%

Product Gross Profit

Memory products

Gross profit for memory products decreased 4650.46% in ~~2008~~ 2009 from ~~2007~~2008, primarily due to the decrease in revenue resulting from ~~the~~lower ~~overall~~average ~~reduction~~selling inprices. Although demand for semiconductor products. ~~Average~~improved ~~selling~~in ~~prices~~the ~~declined~~second ~~somewhat~~half of 2009, aswith aaverage ~~result~~selling ofprices remaining relatively stable from the ~~generally~~first half, ~~competitive~~prices ~~industry~~were ~~environment~~down sharply as compared with 2008. Gross profit for ~~2008~~2009 was ~~also~~ negatively impacted by inventory write-downs of $119.71 million,. ~~primarily~~Gross onprofit ~~our~~benefited ~~serial~~by ~~flash~~$6.2 million and ~~ComboMemory~~$5.3 ~~products,~~million ~~due~~for to2008 ~~quantities in excess of forecasted demand~~ and ~~declining average selling prices. Comparatively~~2009, ~~in 2007~~respectively, ~~high demand coupled with capacity constraints resulted in low inventory levels and favorable cost variances~~ from the sale of inventory ~~products for~~ which we had previously ~~taken~~been ~~write-downs~~written down.

Gross profit for memory products indecreased ~~2007 increased 13~~46.54% ~~from~~in ~~2006.~~2008 ~~While~~from ~~supply~~2007, primarily ~~constraints~~due ~~caused~~to athe ~~loss~~decrease ofin revenue, itresulting ~~also~~from ~~forced~~the usoverall toreduction ~~review~~in ~~existing~~demand ~~business~~for ~~carefully~~semiconductor ~~and~~products. ~~allowed~~Average usselling toprices ~~pursue~~declined somewhat, as a result of the ~~most~~generally ~~profitable~~competitive ~~opportunities~~industry environment. AsGross aprofit for 2008 was ~~result~~also negatively impacted by inventory write-downs of $11.7 million, wedue ~~concentrated~~to onquantities ~~sales~~in excess of ~~higher~~forecasted ~~margin~~demand ~~products~~and ~~with~~declining ~~just~~average aselling 3prices.4% ~~increase~~Comparatively, in ~~units~~2007, ~~shipped~~high ~~over~~demand ~~2006.~~coupled ~~Overall~~with ~~memory~~capacity ~~gross~~constraints ~~margins~~resulted ~~were~~in uplow inventory ~~3.5%~~levels asand afavorable ~~result~~cost ofvariances ~~shipping~~from ~~more~~the ~~profitable~~sale of products, ~~despite~~for anwhich ~~8.8%~~we ~~decrease~~had inpreviously ~~average~~taken ~~selling prices~~write-downs.

We expect memory product ~~margins~~gross profit to ~~fluctuate~~improve ~~significantly~~in 2010, due to improvement in the global economy and higher gross margins on targeted strategic accounts in North America and Europe. Memory product gross profit may fluctuate in the future due to changes in sales volume, product mix, average selling prices and inventory write-downs.

Non-memory products

Gross profit for non-memory products increased 2270.58% in ~~2008~~2009 from ~~2007~~2008, despite a 13% reduction in overall unit shipments and ~~the~~persistent ~~generally~~ weak economic environment in the early part of 2009. The increase in gross profit was due to ~~higher unit shipments and~~ stable ~~average~~prices ~~selling~~across ~~prices~~key ~~for~~product ~~NANDrive~~lines and ~~microcontroller~~higher ~~products,~~overall ~~which~~average ~~was~~selling ~~partially~~prices, ~~offset~~due byto aproduct ~~decrease~~mix. inThe ~~unit~~benefit ~~shipments~~to ~~for other~~ non-memory ~~products~~gross ~~and~~profit ~~inventory~~from ~~write-downs~~the sale of inventory ~~$1.5~~which ~~million,~~had ~~primarily~~previously onbeen ~~smart~~written ~~card~~down ~~IC inventory~~was not significant for 2008 or 2009.

Gross profit for non-memory products increased ~~declined 55~~22.95% in ~~2007~~2008 from ~~2006.~~2007, ~~NAND~~despite ~~Controller~~a ~~shipments~~reduction ~~declined~~in byoverall ~~9.5 million units~~unit ~~leading~~shipments toand the ~~majority~~generally ofweak ~~the~~economic ~~decline~~environment. The increase in gross profit. Inwas ~~addition,~~due ~~supply constraints led~~ to anhigher ~~overall 15.0% decrease in~~ unit shipments ~~which,~~and ~~coupled~~stable ~~with~~average ~~continuing~~selling ~~pricing~~prices ~~pressures~~for onNANDrive ~~smart~~and microcontroller ~~card~~products, ~~contributed~~which towas apartially ~~27.8%~~offset by a decrease in ~~average~~ ~~selling~~unit ~~prices~~shipments asfor ~~well~~other asnon-memory aproducts ~~6.8%~~and ~~decrease~~inventory ~~in our overall non~~write-~~memory~~downs ~~gross~~of ~~margins~~$1.5 million.

We40 ~~expect non-memory product margins to fluctuate significantly in the future due to changes in sales volume, product mix, average selling prices and inventory write-downs.~~

For otherTable factorsof that could affect our gross profit, please also see Item 1A. “Risk Factors—We incurred significant inventory valuation and adverse purchase commitment adjustments in 2006, 2007 and 2008 and we may incur additional significant inventory valuation adjustments in the future.” Contents

We expect non-memory product margins to fluctuate in the future due to changes in sales volume, product mix, average selling prices and inventory write-downs.

For other factors that could affect our gross profit, please also see Item 1A. “Risk Factors—We incurred significant inventory valuation and adverse purchase commitment adjustments in 2007, 2008 and 2009 and we may incur additional significant inventory valuation adjustments in the future.”

Operating Expenses (in thousands)

In December 2008, we announced the implementation of a global reorganization designed to reflect changes in anticipated demand for our products. The reorganization included a reduction in overall headcount of approximately 120, or 17% of our global workforce, most of which was completed by the end of 2008. The workforce reduction and other restructuring actions took place worldwide and in all functional areas of the company. Largely as a result of this restructuring, we reduced our expenses related to compensation and benefits by over $15 million in 2009 from 2008. In addition, we have taken steps to reduce overall operating expenses, which is evident in our results for 2009, as compared with 2008.

Research and development

	Year Ended									Increase(Decrease)~~2006~~2007 vs. ~~2007~~2008				Increase(Decrease)~~2007~~2008 vs. ~~2008~~2009
	December 31,2006			December 31,2007			December 31,2008
	December 31,2007			December 31,2008			December 31,2009
Research and development	$	5256,~~003~~712		$	5658,~~712~~955		$	5843,~~955~~160		$	42,~~709~~243	94.10	%	$	2(15,~~243~~795	)	~~4.0~~	%(26.8	)%
Percent of revenue		1113.58	%		1318.87	%		1817.71	%

Research and development expenses include costs associated with the development of new products, enhancements to existing products, quality assurance activities and occupancy costs. These costs consist primarily of employee salaries, ~~stock~~share-based compensation and other benefit-related expenses, software and intellectual property licenses, the cost of materials such as wafers and masks and the cost of design and development tools.

Research and development expenses for ~~2008 increased~~2009 bydecreased $215.28 million, or 426.08%, from ~~2007~~2008, due primarily to ~~increases~~decreases of $29.5 million for expenses related to compensation and benefits, $2.4 million for product development related expenses including wafers, masks and evaluation parts ~~and~~ , $2.31 million for software and intellectual property licenses. ~~These increases were partially offset by decreases of $801,000 for salaries, bonuses~~ and ~~employee benefits, and~~ $~~434,000 for stock-based compensation~~1.3 ~~Research~~million ~~and development expenses~~ for ~~2008~~outside ~~included a $1~~services.1 ~~million~~The ~~charge~~reduction toin ~~write~~product ~~off~~development ~~various intellectual~~related ~~property~~expenses ~~licenses,~~primarily asreflects ~~we refined~~ our ~~focus~~response ~~toward our most strategic initiatives. Total expense related~~ to ~~compensation~~the ~~and~~significant ~~benefits~~decrease ~~decreased~~ in ~~2008,~~demand asfor ~~compared~~our ~~to 2007~~customers’ products, ~~largely~~which asoccurred ain ~~result~~connection ofwith ~~our~~the ~~emphasis~~worldwide oneconomic ~~research and development activities in Asia~~downturn. The decrease in ~~expense~~expenses for ~~stock-based~~outside ~~compensation~~services isin ~~due~~2009 ~~primarily~~reflects our ongoing efforts to ~~the~~manage ~~accelerated~~expenditures. ~~expense~~Research ~~recognition~~and indevelopment ~~2007~~expenses offor ~~options~~2008 ~~granted~~included ina ~~prior~~$1.1 million ~~years,~~charge ~~coupled~~to ~~with~~write aoff ~~reduction~~various inintellectual ~~the~~property ~~number~~licenses, ofas ~~options~~we ~~granted~~refined toour ~~research~~focus ~~and development~~toward ~~personnel~~our inmost ~~2008~~strategic initiatives.

~~For~~Research ~~2007~~and indevelopment ~~comparison~~expenses tofor ~~2006,~~2008 ~~research~~increased ~~and~~$2.2 ~~development~~million, ~~expenses~~or ~~increased~~4.0%, from 2007, due primarily to ~~higher~~increases ~~depreciation expense~~ of $~~626,000,~~2.2 ~~increased~~million ~~salaries~~for product development related expenses including wafers, masks and ~~wages~~evaluation ofparts and $12.3 million, ~~additional~~ for software ~~license~~and ~~fees~~intellectual property licenses. These increases were partially offset by decreases of $~~617~~0.8 million for salaries,~~000~~ bonuses and ~~accruals~~employee benefits, and $0.4 million for ~~bonus~~share-based ~~programs~~compensation. ofTotal ~~$999~~expense related to compensation and benefits decreased in 2008,~~000.~~ ~~Increased~~as compared to 2007, largely as a result of our emphasis on research and development ~~expenses~~activities ~~were~~in ~~generally~~Asia. The decrease in expense for share-based compensation is due primarily to the ~~ramp~~accelerated upexpense ofrecognition ~~next~~in 2007 ~~generation~~of ~~products~~options granted in prior years, coupled with a reduction in the number of options granted to research and development personnel in 2008.

38Although measures taken in the fourth quarter of 2008 in connection with our global reorganization resulted in a reduction to research and development expenses for 2009, as compared to 2008, no significant additional

~~Due~~ reductions toare aplanned ~~sharp~~at ~~decline~~this intime. ~~booking activities and near-term revenue forecasts in the fourth quarter of 2008~~Further, we ~~implemented~~expect acertain ~~worldwide~~product-related ~~restructuring plan and reduced our overall headcount. Although these measures are intended to reduce our operating~~ expenses ~~for 2009 as compared~~ to ~~2008,~~fluctuate ~~reductions~~throughout ~~to research and development expenses may not be significant in the near term. Further~~2010, ~~these expenses may continue to fluctuate~~ based on the timing of engineering projects for new product introductions and the development of new technologies to support future growth.

Sales and marketing

	Year Ended									Increase(Decrease)~~2006~~2007 vs. ~~2007~~2008						~~Increase(Decrease)2007 vs. 2008~~	Increase(Decrease)2008 vs. 2009
	December 31,2006			December 31,2007			December 31,2008
	December 31,2007			December 31,2008			December 31,2009
Sales and marketing	$	2829,~~464~~229		$	2926,~~229~~605		$	2620,~~605~~344		$	~~765~~(2,624	)	~~2.7~~	%(9.0	)%	$	~~(2,624~~$	)(6,261	)	~~(9.0~~	)%(23.5	)%
Percent of revenue		67.31	%		78.14	%		8.41	%

Sales and marketing expenses consist primarily of commissions, employee salaries, ~~stock~~share-based compensation expense and other benefit-related expenses, as well as travel and entertainment expenses.

Sales and marketing expenses for ~~2008~~ 2009 decreased $2.6.3 million, or 923.05%, from ~~2007~~2008, due primarily to adecreases ~~reduction~~of in$3.4 million for expenses related to compensation and benefits, $1.3 million for commissions and logistics center fees ofand $1.70 million, asfor ~~well~~travel asand marketing ~~decreases~~programs. ofSales ~~$409,000~~and marketing expenses for ~~salaries~~2008 decreased $2.6 million, ~~bonuses~~or ~~and~~9.0%, ~~employee~~from ~~benefits~~2007, due primarily to decreases of $~~274,000~~1.7 million for ~~stock-based compensation~~commissions and logistics center fees and $~~146,000~~0.7 million for ~~travel~~expenses ~~and~~related ~~marketing~~to ~~programs~~compensation and benefits. These decreases in commissions and ~~compensation~~logistics ~~related~~center ~~expenses~~fees, in 2008 and again in 2009, are consistent with the ~~decline~~year over year declines in product revenues. The decrease in expenses for ~~2008~~travel asand ~~compared~~marketing ~~with~~programs ~~2007~~in 2009 reflects our ongoing efforts to manage expenditures.

~~For~~We ~~2007,~~expect that sales and marketing expenses ~~increased~~will ~~slightly~~remain ~~over~~flat ~~2006~~or ~~due~~increase tosomewhat ~~increases~~ in ~~salaries and wages of $1~~ 2010.4 ~~million and accruals for bonus programs of $231~~Further,~~000.~~ ~~Partially~~sales ~~offsetting~~and ~~these~~marketing expenses ~~were~~may ~~lower~~fluctuate ~~commission~~throughout ~~expenses~~2010 ofto ~~$781,000~~support ~~and~~new ~~lower~~product ~~logistic~~introductions ~~fees~~and ofany ~~$339,000~~anticipated ~~due~~future ~~to the decline in revenue from 2006~~growth.

We expect that sales and marketing expenses will remain flat or decrease somewhat in the near term, due to the lower commission expenses which are commensurate with a declining revenue forecast. However, these expenses may fluctuate throughout 2009 to support new product introductions and any anticipated future growth.

General and administrative

	Year Ended									Increase(Decrease)~~2006~~2007 vs. ~~2007~~2008						~~Increase(Decrease)2007 vs. 2008~~	Increase(Decrease)2008 vs. 2009
	December 31,2006			December 31,2007			December 31,2008
	December 31,2007			December 31,2008			December 31,2009
General and administrative	$	2227,~~278~~603		$	2726,~~603~~331		$	2620,~~331~~706		$	5(1,~~325~~272	)	~~23.9~~	%(4.6	)%	$	~~(1,272~~$	)(5,625	)	~~(4.6~~	)%(21.4	)%
Percent of revenue		46.97	%		68.73	%		8.32	%

General and administrative expenses consist primarily of employee salaries, ~~stock~~share-based compensation, and other benefit-related expenses for administrative, executive and finance personnel, services and legal fees and allowances for doubtful accounts.

General and administrative expenses for ~~2008~~2009 decreased $15.36 million, or 421.64%, from ~~2007~~2008, due primarily to decreases of $1.2.8 million for ~~salaries,~~expenses ~~bonuses~~related ~~and~~to ~~employee~~compensation ~~benefits~~ and benefits, $1.45 million for outside services~~. These~~ ~~decreases~~and ~~were partially offset by increases of~~ $~~746,000~~0.7 million for ~~stock-based~~amortization. ~~compensation~~General and ~~$388,000~~administrative ~~for~~expenses ~~property~~in ~~and~~2009 ~~business~~decreased ~~taxes,~~nearly ~~which~~across ~~was~~the ~~largely~~board, ~~due~~as toa ~~property~~result ~~tax~~of ~~refunds~~our ~~received~~efforts into ~~2007~~manage expenditures. ~~The decrease in salaries~~However, ~~bonuses~~these ~~and~~decreases ~~employee benefits~~were ispartially ~~largely~~offset ~~due~~by toa ~~the~~charge ~~elimination~~ of ~~executive~~$0.7 million ~~bonuses~~for inestimated ~~2008~~expenses ~~and~~related ~~the~~to ~~decrease in outside services expense reflects~~ the ~~completion~~potential settlement of ~~various finance and accounting and information technology projects~~litigation. ~~The~~See ~~increase~~also inNote ~~stock-based compensation~~5 ~~includes~~“Contingencies” ato ~~charge~~our ofconsolidated ~~$244,000~~financial ~~for~~statements. ~~fully-vested restricted~~

39General and administrative expenses for 2008 decreased $1.3 million, or 4.6%, from 2007, due primarily to decreases of $1.2 million for salaries, bonuses and employee benefits and $1.4 million for outside services. These decreases were partially offset by increases of $0.7 million for share-based compensation and $0.4 million for property and business taxes, which was largely due to property tax refunds received in 2007. The decrease in salaries, bonuses and employee benefits is largely due to the elimination of executive bonuses in 2008 and the

~~stock~~decrease ~~awards~~in ~~granted~~outside toservices ~~employees~~expense reflects the completion of various finance and accounting and information technology projects. The increase in share-based compensation in 2008, as ~~well~~compared to as2007, aincludes ~~charge~~charges of $~~245,000~~0.5 million for fully-vested restricted stock awards granted to employees and stock options granted to directors. There were no restricted stock awards granted in 2007, and no annual stock option grants to directors in 2007 because we did not hold an annual shareholder meeting. ~~See also Item 9B. “Other Information”.~~

~~For~~Due ~~2007~~to ~~compared~~declines toin ~~2006,~~revenue ~~general~~for 2008 and ~~administrative~~2009, ~~expenses~~we ~~increased~~have ~~due~~implemented measures to ~~higher~~manage ~~outside~~expenditures, ~~service~~and ~~expenses~~the impact of ~~$1.2~~these ~~million,~~measures ~~related~~is toevident ~~tax~~in ~~and accounting,~~our asoperating ~~well~~expenses asfor ~~accruals~~2009. ~~for~~As ~~bonus~~the ~~programs~~nature of ~~$754,000.~~certain ~~Other~~general ~~increases~~and ~~included~~administrative ~~depreciation~~expenses ~~expense~~are ofrelatively ~~$551~~fixed,~~000~~ ~~and~~these ~~legal~~expenses ~~fees~~have ~~expense~~not ofdecreased ~~$422~~in proportion to revenue. Further,~~000~~ certain expenses may increase somewhat to support long-term strategic initiatives.

Due to a decline in revenue forecast, we have implemented measures to manage expenditures. These measures may impact our general and administrative expenses in 2009, however, some of the impact is already evident in our 2008 results. As the nature of certain general and administrative expenses are relatively fixed, these expenses will not decrease in proportion to revenue. Further, certain expenses may increase somewhat to support long-term strategic initiatives.

Other operating expenses

	Year Ended									Increase(Decrease)~~2006~~2007 vs. ~~2007~~2008						~~Increase(Decrease)2007 vs. 2008~~	Increase(Decrease)2008 vs. 2009
	December 31,2006			December 31,2007			December 31,2008
	December 31,2007			December 31,2008			December 31,2009
Other operating expenses	$	—30,931		$	302,~~931~~514		$	~~2,514~~329		$	30(28,~~931~~417	)	—	%(92	)%	$	~~(28,417~~$	)(2,185	)	~~(92~~	)%(87	)%
Percent of revenue		07.05	%		70.58	%		0.81	%

AsIn aconnection ~~result~~with ofour ~~weakening demand, caused by the rapid slowdown in the~~ global ~~economy,~~reorganization ~~in December 2008 we~~ announced ~~the implementation of a global reorganization to reflect changes~~ in ~~anticipated~~December ~~levels of business. The plan includes a reduction in overall headcount of approximately 120~~2008, orwe ~~17%, of our global workforce, most of which was completed by the end of 2008. We~~ incurred a restructuring charges ~~charge~~ of $2.5 million inand ~~the~~$0.3 ~~fourth~~million ~~quarter~~in of 2008 and 2009, ~~all~~respectively. ofThese ~~which~~charges iswere related to estimated severance costs associated with the workforce reduction. We ~~expect to incur an additional restructuring charge of approximately $0.4 million in the first quarter of 2009 related to our global reorganization. We~~ do not expect to incur ~~significant~~ additional expense related to this specific reorganization ~~during the remainder of 2009~~. ~~See also Note 20 “Restructuring Charges” to our consolidated financial statements.~~

During 2007 we conducted a voluntary independent review of our historical stock option granting practices. We incurred $12.0 million of expenses in 2007 related to this review, which included legal, tax, accounting, ~~equity~~ and other professional services. Our review of our historical option granting practices was substantially completed in 2007 and we did not incur any expenses related to this review in 2008 or 2009. Also in 2007, the market price of our common stock declined to the point where our net assets exceeded our total market capitalization and we concluded that the carrying amount of our goodwill exceeded its implied fair value. Accordingly, we recorded an $18.0 million impairment charge during the fourth quarter of 2007. In addition, we reviewed the carrying value of our long-lived assets and determined that the estimated future cash flows were insufficient to recover the carrying value of certain long-lived assets. As a result, we recorded impairment charges of $~~585,000~~1.0 million to intangible assets, property and equipment ~~and $384,000 to intangible assets~~ in order to write down these assets to their estimated fair market value.

There were similar declines in the market price of our common stock in 2008 and 2009, and the carrying value of our net assets exceeded our total market capitalization at December 31, 2008 and 2009. We reviewed the carrying value of our long-lived assets and concluded that the estimated future cash flows were sufficient for recovery, or that the fair market value of the underlying assets exceeded the carrying value. Therefore, we did not record any impairment to long-lived assets in 2008 or 2009. Based on our annual review of goodwill performed during 2008 and 2009, we concluded that the carrying value of goodwill did not exceed its implied fair value and we did not record any impairment.

Interest, Dividend and Other income and expense, net

	Year Ended									Increase(Decrease)~~2006~~2007 vs. ~~2007~~2008						~~Increase(Decrease)2007 vs. 2008~~	Increase(Decrease)2008 vs. 2009
	December 31,2006			December 31,2007			December 31,2008
	December 31,2007			December 31,2008			December 31,2009
Interest income	$	47,~~594~~329		$	74,~~329~~057		$	41,~~057~~966		$	2(3,~~735~~272	)	~~59.5~~	%(44.6	)%	$	~~(3,272~~$	)(2,091	)	~~(44.6~~	)%(51.5	)%
Percent of revenue		1.08	%		1.83	%		10.38	%

Interest income includes interest from cash and short-term cash equivalents, as well as long-term available-for-sale debt securities.

~~Interest~~43 income for 2008 decreased $3.3 million, or 44.6%, from 2007, primarily as a result of declining interest rates, as well as declining cash balances, due in part to our stock repurchase program. For 2007 in comparison to 2006, interest income increased due to higher levels of cash and cash equivalents, as well as interest rates that remained stable the majority of the year. We expect that interest income will fluctuate due to changing economic conditions, as well as fluctuating short-term and long-term interest rates in the United States.

	Year Ended									Increase(Decrease)2006 vs. 2007				Increase(Decrease)2007 vs. 2008
	December 31,2006			December 31,2007			December 31,2008
Dividend income	$	1,143		$	1,666		$	1,578		$	523	45.8	%	$	(88	)	(5.3	)%
Percent of revenue		0.3	%		0.4	%		0.5	%

Interest income for 2009 decreased $2.1 million, or 51.5%, from 2008, primarily as a result of declining interest rates. Interest income for 2008 decreased $3.3 million, or 44.6%, from 2007, primarily as a result of declining interest rates, as well as declining cash balances, due in part to our stock repurchase program. We expect that interest income will fluctuate due to changing economic conditions, as well as fluctuating short-term and long-term interest rates in the United States.


	Year Ended									Increase (Decrease) 2007 vs. 2008					Increase (Decrease) 2008 vs. 2009
	December 31, 2007			December 31, 2008			December 31, 2009			Increase (Decrease) 2007 vs. 2008					Increase (Decrease) 2008 vs. 2009
Dividend income	$	1,666		$	1,578		$	1,406		$	(88	)	(5.3	)%	$	(172	)	(10.9	)%
Percent of revenue		0.4	%		0.5	%		0.6	%

Dividend income includes dividends from equity investments in publicly held companies.

~~For~~Dividend ~~2008~~income declined somewhat in 2009, as compared towith 2008 and 2007, ~~dividend~~reflecting the generally adverse global economic conditions. Dividend income was relatively flat from 2007 to 2008, as our investee’s earnings varied slightly year to year. ~~The~~Dividend ~~majority~~income ofmay ~~these~~decline ~~dividends were~~further ~~issued~~in ~~during~~2010, ~~the~~based ~~second~~on ~~quarter~~the ofsale ~~2008.~~in ~~For~~late ~~2007~~2009 ~~compared~~of toa ~~2006,~~portion ~~dividend~~of ~~income increased due to higher earnings from~~ our ~~investees,~~investments ~~corresponding~~in topublicly ~~higher dividends issued~~held companies. We expect that dividend income may fluctuate significantly in the future due to the timing and nature of our investments, as well as changing economic conditions in Taiwan. ~~In particular, the worldwide economic downturn may cause our dividend income to decrease in 2009.~~

	Year Ended									Increase(Decrease)~~2006~~2007 vs. ~~2007~~2008						~~Increase(Decrease)2007 vs. 2008~~	Increase(Decrease)2008 vs. 2009
	December 31,2006			December 31,2007			December 31,2008
	December 31,2007			December 31,2008			December 31,2009
Other income (expense), net	$	20115		$	~~115~~(517	)	$	~~(517~~354	)	$	95(632	)	~~475.0~~	%(549.6	)%	$	~~(632~~$	)871	(~~549~~168.65	)%
Percent of revenue		0.0	%		(0.02	)%		(0.21	)%

Other income (expense), net includes foreign currency translation gains and losses and other miscellaneous transactions. For 2008, other income (expense) consists primarily of translation loss of $779,000 and miscellaneous income of $283,000 as remuneration received for the participation of certain of our officers on the boards of directors of companies in which we hold equity investments. Other income (expense) may fluctuate significantly year to year but we do not expect it to have material impact on our consolidated statements of operations.

In 2009, other income (expense) consists primarily of miscellaneous income of $0.2 million as remuneration received for the participation of certain of our officers on the Boards of Directors of companies in which we hold equity investments. In 2008, other income (expense) consists primarily of translation loss of $0.8 million, partially offset by miscellaneous income of $0.3 million as remuneration for Board participation. Other income (expense) may fluctuate significantly year to year but we do not expect it to have material impact on our consolidated statements of operations.

Interest expense

	Year Ended									Increase(Decrease)~~2006~~2007 vs. ~~2007~~2008						~~Increase(Decrease)2007 vs. 2008~~	Increase(Decrease)2008 vs. 2009
	December 31,2006			December 31,2007			December 31,2008
	December 31,2007			December 31,2008			December 31,2009
Interest expense	$	~~345~~495		$	~~495~~140		$	~~140~~19		$	~~150~~(355	)	~~43.5~~	%(71.7	)%	$	~~(355~~$	)(121	)	~~(71.7~~	)%(86.4	)%
Percent of revenue		0.1	%		0.10	%		0.0	%

41Interest expense declined in 2009, as compared to 2008 and 2007, as we paid our line of credit in full during the first quarter of 2008 and do not have any significant outstanding debt. The line of credit expired on August 31, 2008 with no outstanding balance.

Interest expense declined in 2008 compared to 2007 as we paid our line of credit in full during the first quarter of 2008 and do not have any other significant outstanding debt. Interest expense increased in 2007 from 2006, as we had higher borrowings under our line of credit, approximately $6.8 million at December 31, 2007. The line of credit expired on August 31, 2008 with no outstanding balance.

Gain on sale of investments

~~During~~In ~~the~~2009, ~~first quarter of 2006~~ we ~~realized~~exchanged aour ~~pre-tax~~equity ~~gain~~interest ofin ACET ~~$12.2 million~~for ~~from~~an ~~the~~equity ~~sale~~interest ofin ~~4.0 million~~Aptos ~~shares~~Design ~~of our investment in Powertech Technology~~Lab, ~~Incorporated~~Inc., or ~~PTI.~~ADL, Asa ofprivately ~~December 31,~~held ~~2008~~Taiwanese company, werecognizing ~~owned~~a ~~8.0 million~~gain ~~shares~~ of ~~PTI~~$0.8 ~~During~~million. ~~the~~See ~~second~~Note ~~quarter~~16 of“Pro ~~2007,~~Rata weShare ~~realized a pre-tax gain~~ of ~~$142,000~~Loss onfrom ~~the~~Equity ~~conversion~~Investments” ~~of bonds~~ to ~~common~~our ~~stock~~consolidated infinancial ~~PCT. We did not~~statements ~~recognize~~for ~~any~~further ~~gain~~discussion ~~on sale~~ of ~~equity~~the ~~investments~~exchange ~~in 2008.~~ of

ACET stock. Also in 2009, we recorded a $1.0 million gain from the sale of a portion of our investments in publicly held companies in Taiwan. In 2007, we realized a pre-tax gain of $0.1 million on the conversion of bonds to common stock in PCT. We did not recognize any gain on sale of equity investments in 2008.

Impairment of investments

~~After~~In ~~discussions~~2001 ~~with~~and ~~the management of Grace Semiconductor Manufacturing Corporation~~2004, ~~or GSMC, during the fourth quarter of 2006,~~ we ~~undertook~~invested aan ~~review of~~aggregate ~~the carrying value~~ of ~~this~~$83.2 ~~investment~~million in ~~order~~GSMC, towhich ~~determine~~was ~~whether~~carried itat ~~had~~cost ~~suffered~~with an ~~other-than-temporary~~average price ~~decline~~per inshare ~~value. As part~~ of ~~the~~$1.0375 ~~review~~for ~~we considered~~ the ~~historical~~preferred ~~performance~~equity ~~of the business, expectations of future operating results~~ and ~~other~~$0.01 ~~factors~~for ~~relevant to determining~~ the ~~estimated~~common ~~fair value of our~~ equity ~~holdings~~. ~~Based~~We onrecorded ~~this~~impairment ~~review,~~charges wein ~~recorded~~2006, an2007, ~~impairment~~2008 ~~charge~~and 2009, of ~~approximately~~ $40.6 million, to$19.4 ~~write~~million, ~~down~~$11.6 ~~the~~million ~~investment~~and to$0.5 ~~its~~million, ~~estimated~~respectively. ~~fair~~For ~~value~~each ~~as of~~impairment ~~December 31~~recorded, ~~2006. During~~ the ~~third~~primary ~~quarter~~triggering ofevent ~~2007~~was ~~further~~an ~~discussions~~expected ~~were~~round ~~held~~of ~~with~~financing ~~GSMC~~at ~~management~~a ~~which~~lower ~~required~~price usper toshare ~~perform~~than athe ~~review~~carrying value of ~~the~~our ~~investment~~preferred inequity. ~~order~~To to determine ~~whether~~if itthere ~~had~~is ~~suffered~~ an ~~additional~~indication of impairment. ~~Based~~during ~~on changes~~each inreporting ~~GSMC’s operating plans and the impact on future expectations for the business~~period, we ~~determined~~consider ~~that~~ the price ~~investment~~per ~~had~~share ~~suffered~~of athe ~~further~~most ~~decline~~recent inround ~~value. Accordingly, we recorded an additional impairment charge~~ of ~~$19.4~~financing ~~million in the third quarter~~ of ~~2007~~new toequity ~~write~~investments, ~~down~~ the ~~carrying~~expected ~~value~~timing of the ~~investment~~next toround ~~its estimated fair value as~~ of ~~September 30~~financing, ~~2007. During~~ the ~~fourth~~history ~~quarter~~ of ~~2008,~~operating ~~new~~losses ~~funding was secured which included a restructuring~~ and ~~recapitalization~~negative ~~of GSMC.~~cash ~~Based~~flow, onearnings ~~the new funding~~ and ~~recapitalization,~~cash asflow ~~well as an updated review of their historical performance~~outlook, ~~expectations~~expected ofcash ~~future~~burn ~~operating~~rate ~~results~~ and ~~other factors relevant to determining the estimated fair value of our equity holdings, we~~ ~~recorded a further impairment of $11.6 million to write down~~ the ~~carrying~~technological ~~value~~feasibility of ~~the~~GSMC’s ~~investment to its estimated fair value of $11~~products.5 ~~million as of December 31, 2008.~~

~~During~~We ~~the~~used ~~fourth quarter of 2008,~~ the ~~management~~following ofthree ~~Advanced~~generally Chip Engineering Technology, Inc., or ACET, a privately held Taiwanese company, determined that additional funding would be required to continue operations. Discussions were held with various parties, and a preliminary offer was made to purchase substantially all outstanding shares of ACET was accepted byvaluation ~~ACET’s Board of Directors.~~methods Asdiscussed ~~this~~below ~~offer~~in ~~was~~determining ~~made~~the atfair ~~a lower per share price than our current carrying~~ value, ~~and based on all other available information, we have determined that the value~~ of our investment in ~~ACET~~GSMC ~~has~~2008 ~~suffered~~and an2009: other-than-temporary decline in value. Accordingly, we recorded an impairment of $9.7 million to write down the carrying value of the investment to its estimated fair value of $2.6 million as of December 31, 2008.

~~During~~• ~~the~~The ~~fourth~~Income ~~quarter~~Approach ofwhich ~~2008,~~indicates the ~~quoted~~fair ~~market~~value ~~price~~of ona ~~the~~business ~~Taiwan~~based ~~Stock~~on ~~Exchange for~~ the ~~common~~discounted ~~stock~~value of ~~King~~the ~~Yuan~~cash ~~Electronics~~flows ~~Company,~~the ~~Limited, or~~business ~~KYE,~~is ~~was~~expected ~~lower~~to ~~than our per share carrying value~~generate. ~~The~~In ~~quoted~~evaluating ~~market~~this ~~price~~approach ~~for KYE decreased more than 40% during 2008 and~~ we ~~did~~discounted ~~not find any indication that~~ the ~~value~~expected ofcash ~~the~~flows ~~stock~~by ~~would~~using ~~recover~~a inweighted ~~the~~average ~~near~~cost ~~term. We concluded that the decline was other than temporary and recorded an impairment charge~~ of ~~$231,000~~capital ~~to bring the carrying value to its fair market value as~~ of ~~December 31, 2008~~14%. We do not have a long-term contract with KYE to supply us with services. We are not obligated to provide KYE with any additional financing. At December 31, 2008, our investment is valued at $1.1 million, based on the quoted market price.

~~During~~• ~~2007~~The weMarket ~~noted~~Comparable ~~that~~Method ~~EoNex~~which ~~Technologies,~~indicates ~~Inc.,~~the orfair ~~EoNex,~~value of a ~~privately~~business ~~held~~by ~~Korean~~comparing ~~company,~~it ~~had~~to ~~suffered~~other ~~significant~~publicly ~~declines~~traded incompanies ~~net revenue and~~ in ~~the~~similar ~~fourth~~lines ~~quarter~~ of ~~2007 we concluded that our investment in~~ business.

42• The Market Transaction Method which estimates the fair value of a business based on the market price of actual merger and acquisition transactions.

To arrive at the fair value of our investment in GSMC as of June 30, 2009, we weighted the indication from the Income Approach at 50% and the indication from the Market Comparable Method at 50%. In doing so we considered the following:

•

Since some comparable companies are not projecting the magnitude of growth that is expected for GSMC due to its planned capacity expansion, we believe that the indicated value by the Income Approach reasonably reflects the long-term growth potential of GSMC.

•

We believe the Market Comparable Method also results in an equally reasonable value since GSMC’s most recent results and projections are similar to those of a select group of publicly traded companies in their industry.

•

The Market Transaction Method tends to produce less reliable indications for a private early-stage company with significant growth over the projection period because their value indications are based upon current operating results and therefore are better suited to value companies that are already in a steady state of profitability and growth.

Similar factors were considered in evaluating the fair value of our investment in GSMC in connection with impairments recorded in prior years. When evaluating the fair value of GSMC in 2008, the Income Approach was weighted more heavily, at 80%, based on our assessment of the facts and circumstances of GSMC’s business and operating environment at the time. In particular, the growth projections for GSMC in earlier years were significantly greater than most otherwise comparable companies.

We then used the Option Pricing Approach to allocate the aggregate fair value of our investment in GSMC across the individual classes of GSMC equity we hold, based on the concept that equity securities can be viewed as call options on the underlying assets of the company. We determined the strike prices of the options based on

~~EoNex~~the ~~was~~characteristics ~~impaired.~~of ~~Given~~the acapital ~~lack~~structure of ~~funds~~the ~~and~~company, nosuch ~~immediate~~as ~~source~~the ~~for~~number ~~additional~~of ~~financing~~shares of each class of equity, weseniority ~~wrote~~levels, ~~off~~liquidation ~~our~~preferences ~~investment~~and inconversion values for preferred equity, and the ~~fourth~~strike ~~quarter~~prices of ~~2007~~warrants and ~~recorded~~ anoptions. ~~impairment~~The ~~charge~~time to the expiration of these options is equal to the ~~$3.0 million~~expected ~~carrying~~time ~~value~~to ofa ~~EoNex~~liquidity event (initial public offering, sale, merger, etc.).

InDuring 2008, the ~~first~~management ~~quarter~~ of ~~2006~~ACET we determined that ~~our investment~~additional infunding ~~Nanotech~~would ~~Corporation,~~be orrequired ~~Nanotech,~~to acontinue ~~privately~~operations. ~~held~~Discussions ~~Cayman~~were ~~Island~~held ~~company~~with various parties, ~~had~~and ~~become~~a ~~impaired~~preliminary asoffer ~~Nanotech~~was ~~defaulted~~made onto ~~its~~purchase ~~loan~~substantially ~~payments~~all tooutstanding ~~certain~~shares of ~~its~~ACET, ~~business~~which ~~partners~~was ~~and~~accepted ~~began~~by ~~preparations~~ACET’s ~~for~~Board ~~liquidation~~of Directors. As this offer was made at a ~~result~~lower per share price than our carrying value at the time, and based on all other available information, we ~~wrote off~~determined that the value of our investment in ACET had suffered an other-than-temporary decline in value. We recorded an impairment of $39.3 7 million to write down the carrying value of the investment to ~~and~~its anestimated ~~outstanding~~fair ~~loan~~value of $~~225~~2.6 million as of December 31,~~000~~ 2008, based on the per share price of the approved offer. In September, 2009, the shareholders of ACET completed a reorganization of its capital structure through the partial sale of ACET to ADL. In the reorganization, our entire investment in ACET was exchanged for preferred shares in ADL, representing a 17.2% equity ownership position with a carrying value of $2.3 million.

InAt December 31, 2008, the ~~first~~quoted ~~quarter~~market price on the Taiwan Stock Exchange for the common stock of KYE was lower than our per share carrying value. The quoted market price for KYE decreased more than 40% during 2008, and we ~~fully~~did ~~reserved~~not afind ~~note receivable~~any ~~from~~indication anthat ~~unrelated~~the ~~third~~value ~~party~~of the stock would recover in the ~~amount~~near term. We concluded that the decline was other than temporary and recorded an impairment charge of $~~216,000~~0.2 ~~due~~million. toWe did not record impairment charges on our ~~expected~~investment ~~inability~~in toKYE ~~collect~~in it2007 or 2009.

In 2006, we invested $3.0 million in EoNex Technologies, Inc., or EoNex, a privately held Korean company. During 2007 we noted that EoNex had suffered significant declines in net revenue, lacked operating funds and had no immediate source for additional financing. We concluded that our investment in EoNex was impaired and recorded an impairment charge equal to the $3.0 million carrying value.

In 2008, we fully reserved a note receivable from an unrelated third party in the amount of $0.2 million due to our expected inability to collect it.

Pro Rata Share of Loss from Equity Investments

Year Ended

Increase(Decrease)~~2006~~2007 vs. ~~2007~~2008

Increase(Decrease)~~2007~~2008 vs. ~~2008~~2009

December 31,2006

December 31,2007

December 31,2008

December 31,2007

December 31,2008

December 31,2009

Pro rata share of loss from equity investments

37,~~199~~035

79,~~035~~145

91,~~145~~280

32,~~836~~110

~~119~~30.90

2(7,~~110~~865

)

~~30.0~~

%(86.0

Our pro rata share of loss from equity investments primarily represents our share of loss in ACET. Our pro rata share of ACET’s loss for ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009 was $37.20 million, $79.01 million and $90.18 million, respectively. Our share of ACET’s loss for 2009 ~~2008~~decreased ~~increased~~significantly, as compared to 2008, primarily asdue ato ~~result~~an impairment of ~~the~~$9.7 ~~decline~~million recorded in ~~value~~2008, ofas ~~certain~~well ~~long~~as ~~lived assets.~~a ~~Our~~reduction ~~total~~in ~~investment~~ACET’s ~~represents~~operating 38expenses.5% ofThe impairment resulted in a subsequent reduction to our pro rata share of the ~~outstanding~~carrying ~~equity~~value of ~~ACET~~long atlived ~~December 31,~~assets ~~2008~~and associated depreciation expense.

WeIn ~~expect~~the tothird ~~continue~~quarter toof ~~record~~2009, as part of a ~~our~~reorganization ~~pro~~of ~~rata~~the ~~share~~capital structure of ACET’s, ~~losses~~we exchanged our equity interest in ACET for ~~the~~an ~~foreseeable~~equity ~~future~~interest in ADL. ~~For~~Our ~~further~~investment ~~information~~in ADL is accounted for using the cost method. Accordingly, ~~please~~we ~~refer~~do not expect to record any additional pro rata share of loss related to our investment in ACET or ADL. See also Note 16 “~~Equity~~Pro ~~Investments~~Rata ~~and~~Share ~~Related~~of ~~Party~~Loss ~~Reporting~~from Equity Investments” to our consolidated financial statements.

~~Provision~~46 ~~for (Benefit from) Income Taxes~~

We maintained a full valuation allowance on our net deferred tax assets as of December 31, 2008. The valuation allowance was determined in accordance with the provisions of Statement of Financial Accounting Standards No. 109, or SFAS No. 109, Accounting for Income Taxes, which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction by jurisdiction basis. Based upon the weight of available evidence, which includes our historical operating performance, reported cumulative net losses since inception and difficulty in accurately forecasting our results there is sufficient negative evidence under SFAS No. 109 and accordingly, a full valuation allowance was recorded against U.S. deferred tax assets. We intend to maintain a full valuation allowance on the U.S. deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.

Effective January 1, 2007, we adopted Financial Accounting Standards Board, or FASB, Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, or FIN 48. The cumulative effect of adopting FIN No. 48 is recognized as a change in accounting principle, recorded as an adjustment to the opening balance of retained earnings on the adoption date. The cumulative effect of adopting FIN 48 was a $3.2 million increase to our reserves for uncertain tax positions with a corresponding adjustment to the opening balance of accumulated deficit. We recognize interest and penalties related to uncertain tax positions in income tax expense. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made. The amount of interest and penalties accrued upon the adoption of FIN 48 and at December 31, 2007 and 2008 was not material.

~~For~~Provision ~~2008~~for we(Benefit ~~recorded a $3.4 million tax benefit on a pre-tax loss of $34.0 million. The net benefit consists primarily of a refund~~ from) anIncome ~~Internal~~Taxes Revenue Service settlement from an amended return, partially offset by foreign income and withholding taxes, including foreign withholding tax reserves. This represents a decrease of $7.6 million, as compared to a tax provision of $4.2 million for 2007. Our tax provision for 2006 was $7.1 million. The decrease in provision for 2007, as compared with 2006, is primarily related to a reduction in federal provision, due to a reduction in taxable income in the U.S.

We recorded a tax provision of $4.2 million, a tax benefit of $3.4 million, and a tax provision of $4.7 million in 2007, 2008 and 2009, respectively. Our recorded tax provision in both 2007 and 2009 consists primarily of foreign withholding taxes, liabilities for uncertain tax positions related to foreign withholding tax and currency re-measurement on those liabilities. The net benefit in 2008 consists primarily of a refund from an Internal Revenue Service settlement from an amended return, partially offset by foreign income and withholding taxes, including liabilities for uncertain tax positions.

We maintained a full valuation allowance on our net deferred tax assets as of December 31, 2009. Determination of the valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable and such assessment is required on a jurisdiction by jurisdiction basis. Based upon the weight of available evidence, which includes our historical operating performance, reported cumulative net losses since inception and difficulty in accurately forecasting our results, we provided a full valuation allowance against our net deferred tax assets. We intend to maintain a full valuation allowance on the U.S. deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.

In July 2006, the Financial Accounting Standards Board, or FASB, issued guidance which clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely to be realized upon ultimate settlement. We adopted this guidance in 2007, which resulted in a $3.2 million increase to our reserve for uncertain tax positions with a corresponding adjustment to the opening balance of accumulated deficit. The amount of interest and penalties accrued upon the adoption of this guidance was not material.

Segments

Our Memory ~~product~~Product segment, which is comprised of NOR flash memory products, includes the Multi-Purpose Flash or MPF family, the Multi-Purpose Flash Plus or MPF+ family, the Advanced Multi-Purpose Flash Plus or Advanced MPF+ family, the Concurrent SuperFlash or CSF family, the Firmware Hub or FWH family, the SPI serial flash family, the Serial Quad I/O or SQI flash family, the ComboMemory family, the Many-Time Programmable or MTP family, and the Small Sector Flash or SSF family.

Our Non-Memory Product ~~product~~ segment is comprised of all other semiconductor products including flash microcontrollers, smart card ICs and modules, radio frequency ICs and modules, NAND Controllers and NAND Controller-based modules.

Our Technology Licensing segment includes both up-front fees and royalties generated from the licensing of our SuperFlash technology to semiconductor manufacturers for use in embedded flash applications.

We do not allocate operating expenses, interest and other income/expense, interest expense, impairment of investments or provision for or benefit from income taxes to any of these segments for internal reporting purposes, as we do not believe that allocating these expenses is beneficial in evaluating segment performance. Additionally, we do not allocate assets to segments for internal reporting purposes as we do not manage our segments by such metrics.

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

Year Ended December 31,

2006

2007

2008

2007

2008

2009

Revenues

Gross Profit

Revenues

Gross Profit

Revenues

Gross Profit

Memory

~~350~~333,~~156~~451

6472,~~156~~802

~~333~~228,~~451~~237

7239,~~802~~026

~~228~~170,~~237~~160

3919,~~026~~285

Non-Memory

6538,~~285~~465

177,~~642~~782

38,~~465~~628

79,~~782~~535

3842,~~628~~502

916,~~535~~290

Technology Licensing

3739,~~068~~832

3948,~~832~~670

4839,~~670~~665

~~452~~411,~~509~~748

~~118~~120,~~866~~416

~~411~~315,~~748~~535

~~120~~97,~~416~~231

~~315~~252,~~535~~327

9775,~~231~~240

Related Party ~~Transactions~~Reporting

Related Party Transactions and Balances

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

	Revenues
	Year Ended December 31,
	2006		2007		2008
	2007		2008		2009
Apacer Technology, Inc. & related entities	$	32,~~087~~879	$	23,~~879~~485	$	3,~~485~~865
Grace Semiconductor Manufacturing Corp.		~~1,480~~176		~~176~~391		~~391~~503
Silicon Professional Technology Ltd.		~~245~~223,~~332~~490		~~223~~149,~~490~~647		~~149~~126,~~647~~191
Silicon Technology Co., Ltd.		~~1,279~~280		~~280~~—		—
	$	~~251~~226,~~178~~825	$	~~226~~153,~~825~~523	$	~~153~~130,~~523~~559


	Purchases
	Year Ended December 31,
	2007		2008		2009
Aptos Design Lab, Inc. & related entities	$	108	$	1,104	$	2,427
Grace Semiconductor Manufacturing Corp.		72,110		70,216		38,700
Powertech Technology, Incorporated		20,145		18,232		9,307

	$	92,363	$	89,552	$	50,434

	Purchases
	Year Ended December 31,
	2006		2007		2008
Advanced Chip Engineering Technology, Inc.	$	84	$	108	$	1,104
Grace Semiconductor Manufacturing Corp.		69,153		72,110		70,216
King Yuan Electronics Company, Limited		30,550		24,680		21,037
Powertech Technology, Incorporated		16,159		20,145		18,232
		$115,946		$117,043		$110,589

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

	Accounts Receivable
	Year Ended December 31,
	2007		2008
	2008		2009
Apacer Technology, Inc. & related entities	$	51330	$	~~330~~491
Grace Semiconductor Manufacturing Corp.		~~172~~185		~~185~~765
Silicon Professional Technology Ltd.		3610,~~789~~246		1024,~~246~~884
Silicon Technology Co., Ltd.		—		—
	$	10,761	$	26,140
	$	37,012	$	10,761

	Accounts Payble and Accruals
	Year Ended December 31,
	2007		2008
Advanced Chip Engineering Technology, Inc.	$	11	$	83
Grace Semiconductor Manufacturing Corp.		8,490		1,700
King Yuan Electronics Company, Limited		5,509		2,633
Powertech Technology, Incorporated		3,861		1,466
Professional Computer Technology Ltd.		—		20
Silicon Professional Technology Ltd.		624		175
	$	18,495	$	6,077

In 1996, we acquired a 14% interest in Silicon Technology Co., Ltd., or Silicon Technology, a privately held Japanese company, for $939,000 in cash. We acquired the interest in Silicon Technology in order to provide a presence for our products in Japan. We now have our own office in Japan, although Silicon Technology continues to sell our products. We are not obligated to provide Silicon Technology with any additional financing. At December 31, 2008, our investment of $939,000, which is carried at cost, represented 8.7% of the outstanding equity of Silicon Technology.

In 2000, we acquired a 10% interest in Apacer Technology, Inc., or Apacer, for $9.9 million in cash. Apacer, a privately held Taiwanese company, is a memory module manufacturer and customer. SST is a Board member of Apacer, represented by Bing Yeh, our President, CEO and Chairman of our Board of Directors. In 2001, we invested an additional $2.1 million in Apacer. In August 2002, we made an additional investment of $181,000. The investment was written down to $4.4 million during 2002. At December 31, 2008, our investment, which is carried at cost, represented 9.3% of the outstanding equity of Apacer. We are not obligated to provide Apacer with any additional financing.

In 2000, we acquired a 15% interest in PCT, a Taiwanese company, for $1.5 million in cash. SST is a Board member of PCT, represented by Bing Yeh, our President, CEO and Chairman of our Board of Directors. PCT is one of our stocking representatives. In May 2002, we made an additional investment of $179,000 in PCT. During 2003, PCT completed an initial public offering on the Taiwan Stock Exchange and we sold a portion of our

holdings. Under Taiwan security regulations, due to SST’s position as a member of PCT’s board of directors, a certain number of shares must be held in a central custody and are restricted from sale. Shares that are unrestricted and available for sale are carried at quoted market price and included in long-term available-for-sale equity investments. Shares to be held in custody for greater than a one year period are carried at cost and included in equity investments. In 2007, we sold $1.7 million in PCT European convertible bonds we had held since February 2004 for a gain of $142,000. As of December 31, 2008, the value of the stock investment recorded as long-term available-for-sale is $2.2 million and the restricted portion of the investment carried at cost is recorded at $671,000. At December 31, 2008 our investment represented 10.0% of PCT’s outstanding equity.


	Accounts Payable and Accruals
	Year Ended December 31,
	2008		2009
Aptos Design Lab, Inc. & related entities	$	83	$	—
Grace Semiconductor Manufacturing Corp.		1,700		6,667
Powertech Technology, Incorporated		1,466		1,125
Professional Computer Technology Ltd.		20		—
Silicon Professional Technology Ltd.		175		394

	$	3,444	$	8,186

~~PCT~~Deferred ~~and~~revenue ~~its subsidiary, Silicon Professional Alliance Corporation, or SPAC, earn commissions for point-of-sales transactions to its customers. Commissions to PCT and SPAC are paid~~ at ~~the same rate as all of our other stocking representatives in Asia. In 2006~~December 31, ~~2007~~2009 ~~and 2008 we incurred sales commissions of~~ includes $~~364,000, $1~~9.5 7 million ~~and~~from ~~$189,000,~~Grace ~~respectively,~~Semiconductor toManufacturing ~~PCT and SPAC. Shipments~~Corporation, ~~by us~~ or ~~our logistics center~~GSMC, ~~to PCT and SPAC~~ for ~~reshipment~~up-front ~~accounted~~licensing ~~for 42~~fees.~~6%,~~ 46.2% and 43.0% of our product shipments in 2006, 2007 and 2008. In addition, PCT and SPAC solicited sales for 2.0%, 1.6% and 1.8% of our shipments to end users in 2006, 2007 and 2008, respectively, for which they also earned a commission.

~~PCT~~Professional ~~has~~Computer Technology ~~established~~Limited, aor ~~separate~~PCT, ~~company~~ and ~~wholly-owned~~ its subsidiary, ~~SPT,~~Silicon toProfessional ~~provide~~Alliance ~~forecasting~~Corporation, ~~planning,~~or ~~warehousing~~SPAC, ~~delivery,~~earn ~~billing,~~commissions ~~collection and other logistic functions~~ for ~~us in Taiwan. SPT now services substantially all~~ point-of-sales ~~our~~transactions ~~end~~to customers. ~~based~~Commissions into ~~Taiwan,~~PCT ~~China~~ and ~~other Southeast~~SPAC ~~Asia countries. Products shipped to SPT~~ are ~~accounted~~paid ~~for as our inventory held~~ at ~~our logistics center, and revenue is recognized when~~ the ~~products~~same ~~have~~rate ~~been delivered and are considered~~ as aall ~~sale~~of to our ~~end~~other ~~customers by SPT. We pay SPT a~~stocking ~~fee~~representatives ~~based~~in ~~on a percentage of revenue for each product sold through SPT to our end customers~~Asia. ~~For~~In ~~2006~~2007, ~~2007~~2008 and ~~2008,~~2009 we incurred sales commissions of $31.75 million, $30.4 2 million, and $20.3 1 million, respectively, ofto ~~fees~~PCT ~~related~~and ~~to SPT~~SPAC. ~~The~~Shipments, ~~fees~~by ~~paid~~us toor ~~SPT covers~~by ~~the~~our ~~cost~~logistics ofcenter, ~~warehousing~~to PCT and ~~insuring~~SPAC ~~inventory~~for ~~and~~reshipment ~~accounts~~accounted for ~~receivable~~46.2%, ~~personnel~~43.0% ~~costs~~and ~~required~~45.2% toof ~~maintain~~our ~~logistics~~product ~~and~~shipments ~~information~~in ~~technology~~2007, ~~functions~~2008 and ~~the~~2009. ~~costs~~In toaddition, ~~perform~~PCT ~~billing~~ and ~~collection~~SPAC ofsolicited ~~accounts~~sales ~~receivable~~for 1.6%, ~~SPT~~1.8% ~~receives extended~~and ~~payment~~1.2% ~~terms~~of ~~and~~our isshipments ~~obligated~~ to ~~pay~~end ususers ~~whether~~in or2007, ~~not~~2008 ~~they~~and ~~have~~2009, ~~collected~~respectively, ~~the~~for ~~accounts~~which ~~receivable~~they also earned a commission.

WePCT, doa ~~not~~Taiwanese ~~have~~company, ~~any~~has ~~long~~established a separate company and wholly-~~term~~owned subsidiary, Silicon Professional ~~contracts~~Technology Ltd., ~~with~~or SPT, ~~PCT~~to orprovide ~~SPAC~~forecasting, planning, warehousing, delivery, billing, collection and other logistic functions for us in Taiwan. SPT now services substantially all of our end customers based in Taiwan, ~~PCT~~China orand ~~SPAC~~other Southeast ~~may~~Asia ~~cease~~countries. ~~providing~~Products ~~services~~shipped to usSPT are accounted for as our inventory held at ~~any~~our ~~time~~logistics center, and revenue is recognized when the products have been delivered and are considered as a sale to our end customers by SPT. IfWe pay SPT, ~~PCT~~a fee orbased ~~SPAC~~on ~~were~~a percentage of revenue for each product shipped through SPT to ~~terminate~~our ~~their~~end ~~relationship~~customers. ~~with~~For us2007, 2008 and 2009, we ~~would~~incurred ~~experience~~$3.4 million, a$2.3 million ~~delay~~and in$2.0 ~~reestablishing~~million, respectively, of fees related to SPT. The fee paid to SPT covers the cost of warehousing and insuring inventory and accounts receivable, the personnel costs required to maintain logistics and ~~distribution~~ information technology functions ~~which~~and ~~would~~the ~~harm~~costs ~~our~~to ~~business~~perform demand forecasting, billing and collection of accounts receivable. WeSPT ~~are~~receives ~~not~~extended payment terms and is obligated to ~~provide~~pay ~~SPT,~~us ~~PCT~~whether or ~~SPAC~~not ~~with~~they ~~any~~have ~~additional~~collected ~~financing~~the accounts receivable.

~~In 2000,~~Description we acquired, for $4.6 million in cash, a 1% interest in KYE, a Taiwanese company, which is a production subcontractor. The investment was made in KYE in order to strengthen our relationship with KYE. During 2001, KYE completed an initial public offering on the Taiwan Stock Exchange. Accordingly, the investment has been included in long-term available-for-sale investments in the balance sheet as of ~~December 31,~~Related ~~2008.~~Parties The investment was written down to $1.3 million during 2001. During the fourth quarter of 2008, the quoted market price on the Taiwan Stock Exchange was lower than our per share carrying value, and we concluded that the decline was other than temporary. Accordingly, we recorded an impairment charge of $231,000 to bring the carrying value to its fair market value as of December 31, 2008. We do not have a long-term contract with KYE to supply us with services. We are not obligated to provide KYE with any additional financing. At December 31, 2008, our investment is valued at $1.1 million, based on the quoted market price on the Taiwan Stock Exchange, and represents 0.4% of the outstanding equity of KYE.

In ~~2000~~1996, we ~~acquired~~invested a$0.9 3%million ~~interest~~ in ~~PTI,~~Silicon ~~a Taiwanese company, which is a production subcontractor, for $2~~Technology Co.5, ~~million in cash~~Ltd., ~~SST is a Board member~~or ofSilicon ~~PTI~~Technology, ~~represented~~a byprivately ~~Bing~~held ~~Yeh,~~Japanese ~~our President, CEO and Chairman of our Board of Directors~~company. ~~The~~We ~~investment~~acquired ~~was~~the ~~made~~interest in ~~PTI~~Silicon Technology in order to ~~strengthen~~provide ~~our~~a ~~relationship~~presence ~~with PTI. The shares available~~ for ~~sale~~our ~~are~~products ~~carried~~in atJapan, ~~the~~and ~~quoted~~have ~~market~~since ~~price~~established ~~and included~~an office in ~~long-term~~Japan. ~~available-for-sale~~We ~~equity~~are ~~investments.~~not ~~Shares~~obligated ~~required~~ to beprovide ~~held~~Silicon Technology inwith ~~custody~~any ~~for~~additional ~~greater~~financing. ~~than~~Our ainvestment ~~one~~is ~~year period are~~ carried at cost and ~~included~~represents ~~in equity investments~~8.7% Inof ~~August~~the ~~2004,~~outstanding weequity ~~invested~~of anSilicon ~~additional~~Technology ~~$723~~at December 31,~~000~~ ~~cash~~2009. ~~in PTI shares available~~

46In 2000, 2001 and 2002, we invested an aggregate of $12.2 million in Apacer Technology, Inc., or Apacer. Apacer, a privately held Taiwanese company, is a memory module manufacturer and customer. SST is a Board member of Apacer, represented by Bing Yeh, our CEO and Chairman of our Board of Directors. In 2002, the investment was written down to $4.4. We are not obligated to provide Apacer with any additional financing. Our investment is carried at cost and represents 9.3% of the outstanding equity of Apacer at December 31, 2009.

In 2000 and 2002, we invested an aggregate $1.7 million in PCT. SST is a Board member of PCT, represented by Bing Yeh, our CEO and Chairman of our Board of Directors. During 2003, PCT completed an initial public offering on the Taiwan Stock Exchange and we sold a portion of our holdings. As of December 31,

~~for~~2009, ~~sale.~~our ~~During~~entire ~~the~~investment ~~first~~is ~~quarter~~included ofin ~~2006,~~Long-term weavailable-for-sale ~~sold~~equity ~~four~~investments, ~~million~~carried ~~common~~at ~~shares~~the ofquoted ~~PTI~~market ~~for~~price ~~a net gain~~ of $127.2 million., Noand ~~portion~~represents 10.1% of ~~the~~PCT’s ~~investment is~~outstanding ~~restricted~~equity. We do not have aany long-term ~~contract~~contracts with ~~PTI~~SPT, toPCT ~~supply~~or usSPAC, ~~with~~and ~~services.~~we We are not obligated to provide ~~PTI~~SPT, PCT or SPAC with any additional financing. AsSPT, ofPCT ~~December 31,~~or ~~2008,~~SPAC ~~our~~may ~~remaining~~cease ~~investment~~providing isservices ~~valued~~to us at ~~$13~~any time.~~3 million~~ If SPT, ~~based~~PCT onor SPAC were to ~~the~~terminate ~~quoted~~their ~~market~~relationship ~~price~~with us we would experience a delay in reestablishing warehousing, logistics and ~~represents~~distribution ~~1.3%~~functions ofwhich ~~the~~would ~~outstanding~~harm ~~equity~~our ~~of PTI~~business.

In ~~2001~~2000 and 2004, we invested an aggregate of $833.2 million in ~~GSMC,~~Powertech ~~a Cayman Islands company. Bing Yeh~~Technology, ~~our President~~Incorporated, ~~CEO~~or ~~and Chairman of our Board of Directors~~PTI, ~~is also~~ a ~~member~~Taiwanese ofcompany ~~GSMC’s~~and ~~board~~production ofsubcontractor ~~directors.~~in ~~GSMC~~order ~~has~~to astrengthen ~~wholly~~our ~~owned~~relationship ~~subsidiary,~~with ~~Shanghai Grace Semiconductor~~PTI. ~~Manufacturing~~SST ~~Corporation, or Grace, which~~ is a ~~wafer~~Board ~~foundry~~member ~~company~~of ~~with operations in Shanghai~~PTI, ~~China.~~represented ~~Grace~~by ~~began~~Bing toYeh, ~~manufacture~~ our ~~products~~CEO inand ~~late~~Chairman ~~2003.~~of Weour doBoard ~~not~~of ~~have a long-term contract with Grace to supply us with products~~Directors. ~~Our investment in GSMC is carried at cost.~~ During ~~the fourth quarter of 2006~~2003, wePTI ~~recorded~~completed an ~~impairment~~initial ~~charge~~public ofoffering ~~$40.6 million~~on ~~to write down~~ the ~~carrying~~Taiwan ~~value~~Stock toExchange ~~its~~and ~~estimated~~we ~~fair~~sold ~~value,~~a asportion ~~the~~of ~~impairment~~our ~~was~~holdings. ~~considered~~In to2006 bewe ~~other-than-temporary in~~sold ~~nature~~4.0 million ~~Similarly~~common inshares ~~the third quarter~~ of ~~2007,~~PTI wefor ~~determined~~a ~~our~~net ~~investment~~gain ~~in GSMC had become further impaired and we recorded an additional impairment charge~~ of $1912.42 million. ~~During~~In ~~the~~2009 ~~fourth~~we ~~quarter~~sold ~~of 2008~~330,000 ~~new~~shares ~~funding~~for ~~was secured which included~~ a ~~restructuring~~net ~~and~~gain ~~recapitalization~~ of ~~GSMC~~$0.9 ~~The~~million. ~~approved~~We ~~new~~do ~~funding~~not ~~and~~have ~~recapitalization~~a ~~includes~~long-term ~~the~~contract ~~conversion~~with ofPTI ~~three~~to ~~series~~supply ofus ~~preferred~~with ~~stock~~services ~~into one single series of preferred shares~~ and ~~the~~we ~~conversion~~are ofnot ~~certain~~obligated ~~debt~~to ~~instruments~~provide toPTI ~~equity.~~with ~~Based~~any onadditional ~~the~~financing. ~~new~~Our ~~funding~~investment ~~and~~in ~~recapitalization,~~PTI asis ~~well~~included asin anLong-term ~~updated~~available-for-sale ~~review of their historical performance~~investments, ~~expectations~~carried ofat ~~future operating results and other factors relevant to determining~~ the ~~estimated~~quoted ~~fair~~market ~~value~~price of ~~our equity holdings, we recorded an impairment charge of~~ $1127.~~6 million to write down the carrying value of the investment to its estimated fair value of $11.5 million. At December~~2 31million, ~~2008,~~and werepresents ~~owned 10.~~1~~% on a fully diluted basis, and 14~~.92% ~~on a non-diluted basis,~~ of the outstanding ~~stock~~equity of ~~GSMC.~~PTI ~~Upon~~at ~~completion of the new funding and certain debt conversions~~December 31, ~~which are expected to occur in the first half of~~ 2009~~, our ownership share would be 6~~.~~6%.~~

In ~~2002~~2001 and 2004, we ~~acquired~~invested aan 6%aggregate ~~interest~~of in$83.2 million ~~Insyde~~cash ~~Software~~in ~~Corporation~~GSMC, ora ~~Insyde~~privately held Cayman Islands company. GSMC has a wholly owned subsidiary, Grace, which is a ~~Taiwanese~~wafer foundry company, ~~for~~with ~~$964,000~~operations in ~~cash~~Shanghai, China. ~~SST~~Grace isbegan ato ~~Board~~manufacture ~~member~~our ofproducts ~~Insyde, represented~~in bylate 2003. Bing Yeh, our ~~President,~~ CEO and Chairman of our Board of Directors., ~~During~~is ~~2003,~~also ~~Insyde~~a ~~completed~~member anof GSMC’s ~~initial~~Board ~~public~~of ~~offering~~Directors. onIn ~~the~~2006, ~~Taiwan~~2007, ~~Stock~~2008 ~~Exchange.~~and ~~Under~~2009 ~~Taiwan~~we ~~security~~recorded ~~regulations,~~impairment ~~due~~charges toof ~~SST’s~~$40.6 million, ~~position~~$19.4 asmillion, a$11.6 ~~member~~million ~~of Insyde’s~~and ~~board~~$0.5 ofmillion, ~~directors~~respectively, ato ~~certain~~write ~~number~~down ofthe ~~shares~~carrying ~~must~~value beof ~~held~~our investment in aGSMC ~~central~~to ~~custody~~its estimated ~~and~~fair ~~are~~value, ~~restricted~~as ~~from~~these ~~sale.~~impairments ~~Shares~~were ~~that~~considered ~~are~~to ~~unrestricted~~be ~~and~~other ~~available~~than ~~for~~temporary ~~sale~~in ~~are~~nature. ~~carried~~In at2009, ~~quoted~~we ~~market~~granted ~~price~~a ~~and~~technology ~~included~~license to GSMC in ~~long-term available-~~exchange for~~-sale~~ ~~equity~~preferred ~~investments.~~shares ~~Shares~~in toGSMC, bevalued ~~held~~at in$9.7 ~~custody~~million. ~~for~~The ~~greater~~fair ~~than~~value aof ~~one~~the ~~year~~shares ~~period~~issued was ~~are~~determined ~~carried~~based aton ~~cost~~an ~~and~~assessment ~~included~~made in ~~equity~~connection ~~investments.~~with ~~The~~the ~~stock~~impairment ~~investment~~of ~~was~~our ~~written~~investment ~~down~~in byGSMC ~~$509,000~~in ~~during 2004~~2009. InSee ~~January~~Note ~~2004,~~17 ~~we invested~~“Impairment anof ~~additional~~Investments” ~~$133,000~~to ~~cash~~our inconsolidated ~~Insyde’s~~financial ~~convertible~~statements ~~bonds~~for ~~that~~additional weinformation ~~converted~~on tothe ~~371,935~~methodology used ~~shares~~to ofdetermine ~~Insyde’s~~the ~~common~~fair ~~stock~~value inof ~~April 2007, bringing~~ our ~~total~~ equity investment ~~cost~~in ~~to $588,000~~GSMC. InWe ~~June~~do ~~2007,~~not wehave ~~invested~~any anlong-term ~~additional $910,000~~obligations ~~cash~~to inpurchase ~~Insyde’s~~products ~~convertible~~from ~~bonds.~~GSMC Asand ofwe ~~December 31,~~are ~~2008,~~not ~~the~~obligated ~~equity~~to ~~investment~~provide isGSMC ~~valued~~with atany $1additional financing.~~6 million,~~ ~~based~~Our oninvestment ~~the~~is ~~quoted~~carried ~~market~~at ~~price,~~cost and represents 6an 11.01% ofvoting ~~Insyde’s~~interest ~~outstanding~~in ~~equity~~GSMC at December 31, 2009.

In ~~June~~2002 ~~2004,~~ we ~~acquired~~invested ~~a 9% interest in ACET, a privately held Taiwanese company for~~ $41.0 million ~~cash.~~in ~~ACET,~~the acommon ~~related~~stock of ~~entity~~Insyde ofSoftware ~~KYE~~Corporation, isor Insyde, a ~~production~~ ~~subcontractor~~Taiwanese company. SST is a Board member of ~~ACET~~Insyde, ~~currently holding three seats,~~ represented by ~~Chen~~Bing ~~Tsai~~Yeh, our ~~Senior~~CEO ~~Vice~~and ~~President,~~Chairman ~~Worldwide~~of ~~Backend~~our ~~Operations.~~Board ~~During~~of ~~2005,~~Directors. weUnder ~~recorded~~Taiwan asecurity ~~$605~~regulations,~~000~~ ~~impairment~~investors ~~charge~~with ~~related~~representation toon ~~our~~the Board ~~investment~~of inDirectors ~~ACET, due to an additional round~~ of ~~equity~~certain ~~financing~~companies atmust retain a ~~lower~~certain ~~per~~number ~~share~~of ~~cost~~shares ~~than~~in ~~our~~central ~~basis at the time. In September 2006~~custody, wewhich ~~invested~~are anrestricted ~~additional~~from ~~$15~~sale.~~9 million~~ inAs ~~ACET~~of ~~that~~December 31, ~~increased~~2009, our ~~ownership~~investment ~~share~~in ofconvertible ~~ACET’s outstanding~~bonds ~~capital stock from 9.4% to 46.9%~~ and ~~required~~a usportion ~~to change from the cost method~~ of ~~accounting~~our ~~to the~~ equity ~~method of accounting for this~~ investment. ~~Under the equity method of accounting, we~~ are ~~required~~included ~~to record our interest~~ in ~~ACET’s~~Long-term ~~reported~~available-for-sale ~~net~~equity ~~income~~investments orand ~~loss~~carried ~~each~~at ~~reporting~~$8.0 ~~period~~million, asbased ~~well~~on ~~as restate~~ the ~~prior~~quoted ~~period~~market ~~financial~~price ~~results~~of toInsyde’s ~~reflect~~common ~~the~~stock. ~~equity~~The ~~method~~remaining ofportion ~~accounting from the date~~ of the ~~initial~~ investment., Wewhich ~~record~~is ~~this~~restricted ~~expense in “pro rata share of loss~~ from ~~equity~~sale, ~~investments”~~is oncarried ~~our~~at ~~consolidated~~a ~~statements~~cost of ~~operations~~$0.3 ~~Under~~million and ~~this~~included ~~accounting~~in ~~treatment~~Equity investments, weothers. ~~recorded~~We ~~charges~~are ofnot ~~$3.2 million~~obligated ~~for~~to ~~the~~provide ~~year~~Insyde ~~ended~~with ~~December 31,~~any ~~2006,~~additional $7financing.~~0 million~~ ~~for~~Our ~~the~~equity ~~year~~investment ~~ended December 31,~~represents ~~2007 and $9~~6.~~1 million~~0% ~~for~~of ~~the~~Insyde’s ~~year~~outstanding ~~ended~~equity at December 31, ~~2008,~~2009. ~~representing our share of the losses~~

47In 2009, our entire investment in Advanced Chip Engineering Technology, Inc., or ACET, was exchanged for preferred shares in ADL, representing a 17.2% equity ownership position with a carrying value of $2.3 million. ADL is a privately held Taiwanese company and the parent company of ACET, a production subcontractor. SST is a Board member of ADL, represented by Yaw-Wen Hu, our Executive Vice president, Chief Operating Officer and a member of our Board of Directors. We are not obligated to provide ADL with any additional financing and our investment is carried at cost. See Note 16 “Pro Rata Share of Loss from Equity Investments” to our consolidated financial statements for further discussion of the reorganization of ACET’s capital structure.

for ACET. We also recorded $689,000 and $609,000 of our share of stock-based compensation for ACET during 2007 and 2008, respectively. In the third quarter ended September 30, 2007, we made an additional cash investment, among other investing enterprises, of $10.3 million in ACET’s common stock. Based on that transaction, we recorded a gain on the change in ownership interest of $1.8 million for the year ended December 31, 2007. During the fourth quarter of 2008, we determined that the value of our investment in ACET suffered an other-than-temporary decline in value, based on a variety of factors, including ACET’s determination that additional funding would be required to continue operations and a contemplated sale of substantially all outstanding shares at a lower per share price than our current carrying value. Accordingly, we recorded an impairment of $9.7 million to write down the carrying value of the investment to its estimated fair value of $2.6 million. At December 31, 2008, our investment represented 38.5% of ACET’s outstanding equity.

In November 2004, we acquired a 30% interest in Nanotech Corporation, or Nanotech, a privately held Cayman Islands company, for $3.8 million cash. During the first quarter of 2006, we determined that our investment in Nanotech had become impaired as Nanotech defaulted on its loan payments to certain of its business partners and began preparations for liquidation. As a result, we wrote our investment down to zero as well as an outstanding loan for $225,000.

In May 2006, we acquired a 2% interest in EoNex, a privately held Korean company, for $3.0 million in cash. In the fourth quarter of 2007, we concluded that our investment in EoNex was impaired. Given a lack of funds and no immediate source for additional financing, we wrote off our investment in the fourth quarter of 2007 and recorded an impairment charge equal to the $3.0 million carrying value of EoNex.

In July 2007, we acquired a 7% interest in Aptos Technology Inc., a privately held Taiwanese company, for $2.4 million in cash and we acquired a 18% interest in EnzyTek Technology Inc., a privately held Taiwanese company, for $275,000 in cash. We account for these investments under the cost method. We are not obligated to provide Aptos or EnzyTek with any additional financing. At December 31, 2008, our investments in Aptos and EnzyTek represented 5.1% and 17.7%, respectively, of the outstanding equity of these companies.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, cost of revenue, expenses and related disclosure of contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

We believe the following critical accounting policies affect our significant judgments and estimates used in the preparation of our consolidated financial statements. Our management has discussed the development and selection of these critical accounting policies with the Audit Committee of our Board. The Audit Committee has reviewed our disclosures relating to our critical accounting policies and estimates in this Annual Report on Form 10-K.

Our critical accounting estimates are as follows:

•

Revenue recognition;

•

Allowance for sales returns;

•

Allowance for doubtful accounts;

•

Allowance for excess and obsolete inventory and lower of cost or market;

•

Provision for adverse purchase commitments;

•

Warranty accrual;

•

Litigation losses;

•

Valuation of equity investments;

•

Goodwill;

•

Long-lived assets;

• ~~Stock~~Share-based compensation;

•

Accounting for income taxes; and

•

Fair value measurements.

Revenue recognition. Sales to direct customers and foreign stocking representatives are recognized net of an allowance for estimated returns. When product is shipped to direct customers or stocking representatives or by our distributors or SPT to end users, prior to recognizing revenue, we also require that evidence of the arrangement exists, the price is fixed or determinable and collection is reasonably assured. Legal title generally passes to our customers at the time our products are shipped. Payment terms typically range from 30 to 65 days. Sales to distributors are made primarily under arrangements allowing price protection and the right of stock rotation on unsold merchandise. Because of the uncertainty associated with pricing concessions and future returns, we defer recognition of such revenues, related costs of revenues and related gross profit until the merchandise is sold by the distributor. Products shipped to SPT are accounted for as our inventory held at our logistics center, and revenue is recognized when the products have been delivered and are considered as a sale to our end customers by SPT.

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

~~Royalties~~51 received during the upgrade period under these arrangements are recognized as revenue based on the ratio of the elapsed portion of the upgrade period to the estimated upgrade period. The remaining portions of the royalties are recognized ratably over the remaining portion of the upgrade period. Royalties received after the upgrade period has elapsed are recognized when reported to us which generally occurs one quarter in arrears and concurrently with the receipt of payment.

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

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

If we make different judgments or utilize different estimates in relation to the estimated period of technology enhancement and development, the amount and timing of our revenues from up-front license fees and royalties could be materially affected.

Allowance for sales returns. We maintain an allowance for estimated product returns by our customers. We estimate our allowance for sales returns based on our historical return experience, current economic trends, changes in customer demand, known returns we have not received and other estimates. The allowance for sales returns was $1.5 0 million, $1.0.5 million and $~~503,000~~0.3 asmillion ofas of December 31, ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, respectively. If we make different judgments or utilize different estimates, the amount and timing of our revenue could be materially different.

49Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses due to the inability of our customers to make their required payments. We evaluate our allowance for doubtful accounts based on the aging of our accounts receivable, the financial condition of our customers and their payment history, our historical write-off experience and other estimates. If we were to make different judgments of the financial condition of our customers or the financial condition of our customers were to deteriorate, additional allowances may be required, which could materially impact our results of operations. The allowance for doubtful accounts was $20,000, $79,000 and $12,000 as of December 31, 2007, 2008 and 2009, respectively. As of December 31, 2009, SPT accounted for 66.1% of our net accounts receivable balance. If SPT were to experience financial difficulty, our collection of accounts receivable could be adversely affected and our business could be harmed.

Allowance for excess and obsolete inventory and lower of cost or market. Our inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market value. We typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and fluctuate substantially. The value of our inventory is dependent on our estimate of average future selling prices, and, if average selling prices are lower than our estimate, we may be required to reduce our inventory value to reflect the lower of cost or market. Our inventories include high technology parts and components that are specialized in nature or subject to rapid technological obsolescence. We maintain allowance for inventory for potentially excess and obsolete inventories and those inventories carried at costs that are higher than their market values. We review on-hand inventory including inventory held at the logistic center for potential excess, obsolete and lower of cost or market exposure and adjust the level of inventory reserve accordingly. For excess inventory analysis, we compare the inventory on hand with the forecasted demand. Demand is based on one year for packaged products and two years for products in die form. For the obsolete inventory analysis, we review inventory items in detail and consider date code, customer base requirements, planned or recent product revisions, end of life plans and diminished market demand. Inventories, once written down to their new basis, are not subsequently written back up. If we determine that market conditions are less favorable than those currently projected by management, such

~~Allowance~~ as ~~for doubtful accounts. We maintain~~ an ~~allowance~~unanticipated ~~for~~decline ~~doubtful~~in ~~accounts~~average ~~for~~selling ~~estimated losses~~prices ~~due~~or todemand ~~the~~not ~~inability~~meeting of our ~~customers~~expectations, toadditional ~~make~~inventory ~~their~~write-downs ~~required~~may ~~payments~~be required. WeThe ~~evaluate our~~ allowance for ~~doubtful~~excess ~~accounts based on the aging of our accounts receivable, the financial condition of our customers~~ and ~~their~~obsolete ~~payment history, our~~inventories ~~historical write-off experience~~ and ~~other~~lower ~~estimates. If we were to make different judgments~~ of ~~the~~cost ~~financial condition of our customers~~ or ~~the~~market ~~financial~~reserves ~~condition of our customers were to deteriorate, additional allowances may be required, which could materially impact our results of operations. The allowance for doubtful accounts~~ was $~~112~~19.7 million,~~000,~~ $~~20,000~~14.6 million and $~~79,000~~9.4 million as of December 31, ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, respectively. As of December 31, 2008, SPT accounted for 50.9% of our net accounts receivable balance. If SPT were to experience financial difficulty, our collection of accounts receivable could be adversely affected and our business could be harmed.

~~Allowance~~Provision for ~~excess~~adverse ~~and~~purchase ~~obsolete~~commitments. ~~inventory~~We ~~and~~maintain ~~lower~~a ofprovision ~~cost~~for oradverse ~~market.~~purchase ~~Our~~commitments ~~inventories~~for ~~are~~in-process ~~stated~~orders at ~~the~~our ~~lower~~vendors ofwhen ~~cost~~we ~~(determined~~have onrecorded ~~a first-in,~~lower ~~first-out~~of ~~basis)~~cost or market ~~value.~~valuation provision Weagainst ~~typically plan~~ our ~~production~~on-hand ~~and~~ inventory. ~~levels~~Once ~~based~~production onhas ~~internal~~begun ~~forecasts~~against ofour ~~customer~~purchase ~~demand~~orders, ~~which~~we are ~~highly~~committed ~~unpredictable~~to ~~and~~purchasing ~~fluctuate~~the ~~substantially. The value of our~~ inventory ~~is dependent on our estimate of average future selling prices~~or, ~~and,~~ if ~~average~~we ~~selling~~cancel ~~prices~~the ~~are lower than our estimate~~order, we ~~may~~are beliable ~~required~~for toall ~~reduce~~costs ~~our~~incurred ~~inventory~~up ~~value~~ to ~~reflect~~ the ~~lower~~time of ~~cost or market~~cancellation. ~~Our~~If ~~inventories~~we ~~include high technology parts and~~have ~~components~~written ~~that~~down ~~are~~our specialized in nature or subject to rapid technological obsolescence. We maintain allowance for inventory for potentially excess and obsolete inventories and those inventories carried at costs that are higher than their market values. We review on-hand inventory ~~including~~of ~~inventory held at~~ the ~~logistic~~ordered ~~center~~product for ~~potential excess, obsolete and~~ lower of cost or market ~~exposure and adjust the level of inventory reserve accordingly. For excess inventory analysis~~valuations, we ~~compare the~~must ~~inventory~~consider ~~on hand with~~ the ~~forecasted~~impact ~~demand.~~to ~~Demand~~in-process isinventory ~~based~~at onour ~~one~~vendor. ~~year~~We ~~for~~evaluate ~~packaged~~our ~~products~~in ~~and~~purchase ~~two~~orders ~~years~~to ~~for~~determine ~~products~~the inimpact ~~die~~of ~~form.~~canceling ~~For~~ the ~~obsolete inventory analysis, we review inventory items in detail~~ order and ~~consider~~the ~~date~~impact ~~code,~~of ~~customer base~~purchasing ~~requirements,~~the ~~planned~~inventory orat ~~recent~~a ~~product~~cost ~~revisions,~~higher ~~end~~than ofthe ~~life~~estimated ~~plans~~current ~~and diminished~~ market ~~demand~~value. If we determine that market conditions ~~are~~become less favorable than those currently projected by management, such as an unanticipated decline in average selling prices or demand not meeting our expectations, additional inventory write-downs may be required. ~~The~~when ~~allowance~~the ~~for~~inventory ~~excess~~is ~~and~~purchased. ~~obsolete~~The ~~inventories~~recorded ~~and~~provision ~~lower~~for ofadverse ~~cost~~purchase orcommitments ~~market reserves~~ was $270.7 1 million, $191.7 1 million and $142.6 ~~million~~ million as of December 31, ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, respectively.

~~Provision~~Warranty ~~for~~accrual. ~~adverse~~Our ~~purchase~~products ~~commitments.~~are ~~We maintain~~generally asubject ~~provision~~to warranty ~~for~~and ~~adverse~~we ~~purchase~~provide ~~commitments~~ for ~~in-process~~the ~~orders~~estimated atfuture ~~our~~costs ~~vendors~~of ~~when~~repair, wereplacement ~~have~~or ~~recorded~~customer ~~lower~~accommodation ofupon ~~cost~~shipment orof ~~market~~the ~~valuation~~product ~~provision~~in ~~against~~the ~~our~~accompanying ~~on-hand~~statements ~~inventory~~of operations. ~~Once~~Our ~~production~~warranty ~~has~~accrual ~~begun~~is ~~against~~estimated ~~our~~based ~~purchase~~on ~~orders,~~historical weclaims ~~are~~compared ~~committed~~ to ~~purchasing~~historical ~~the~~revenues ~~inventory~~and ~~or,~~assumes ifthat we ~~cancel~~will ~~the~~replace ~~order,~~products wesubject ~~are liable for all costs incurred up~~ to ~~the~~a ~~time of cancellation~~claim. IfFor wenew ~~have written down our on-hand inventory of the ordered product for lower of cost or market valuations~~products, we ~~must~~ ~~consider~~use ~~the impact to in-process inventory at~~ our ~~vendor.~~historical Wepercentage ~~evaluate~~for ~~our in purchase orders to determine~~ the ~~impact~~appropriate ofclass ~~canceling the order and the impact~~ of ~~purchasing the inventory at a cost higher than the estimated current market value~~product. ~~If we~~Should ~~determine~~actual ~~that~~product ~~market~~failure ~~conditions~~rates ~~become~~differ ~~less~~from ~~favorable than those currently projected by management, such as an unanticipated decline in average selling prices or demand not meeting~~ our ~~expectations~~estimates, ~~additional~~revisions ~~inventory write-downs may be~~to ~~required~~the ~~when~~estimated ~~the~~warranty ~~inventory~~liability iswould ~~purchased~~be required. The recorded ~~provision~~value ~~for~~of ~~adverse~~our ~~purchase~~warranty ~~commitments~~accrual was $~~119~~358,000, $~~111~~176,000 and $~~1.1~~43,000 ~~million~~ as of December 31, ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, respectively.

~~Warranty~~Litigation ~~accrual~~losses. ~~Our~~From ~~products~~time ~~are~~to ~~generally~~time, ~~subject~~we toare ~~warranty~~involved ~~and~~in welegal ~~provide~~actions ~~for~~arising in the ~~estimated~~ordinary ~~future~~course ~~costs~~ of ~~repair,~~business. ~~replacement~~We orhave ~~customer~~incurred ~~accommodation~~certain ~~upon~~costs ~~shipment~~associated ofwith ~~the~~defending ~~product~~these inmatters. ~~the~~There ~~accompanying~~can ~~statements~~be ofno ~~operations.~~assurance ~~Our~~that ~~warranty~~shareholder ~~accrual~~class isaction ~~estimated~~complaints, ~~based~~shareholder onderivative ~~historical~~complaints ~~claims~~or ~~compared~~other tothird ~~historical~~party ~~revenues~~assertions ~~and~~will ~~assumes~~be ~~that~~resolved wewithout ~~will~~costly ~~replace~~litigation, ~~products~~in ~~subject to~~ a ~~claim.~~manner ~~For~~that ~~new~~is ~~products,~~not weadverse ~~use~~to our ~~historical~~financial ~~percentage~~position, ~~for~~results of operations or cash flows or without requiring royalty payments in the ~~appropriate~~future, ~~class~~all of ~~product.~~which ~~Should~~may ~~actual~~adversely ~~product~~impact ~~failure~~net ~~rates~~income. ~~differ~~We ~~from~~have ~~our~~accrued ~~estimates,~~what ~~revisions~~we believe to be probable costs in connection with the ~~estimated~~potential ~~warranty~~settlement ~~liability~~of ~~would~~the beshareholder ~~required.~~class ~~The~~action ~~recorded~~complaints ~~value~~and ofthe ~~our~~shareholder ~~warranty accrual~~derivative ~~was~~complaints. ~~$298~~As a result,~~000,~~ approximately $~~358,000~~0.7 million is included in Accrued expenses and ~~$176,000~~other liabilities in our financial statements as of December 31, ~~2006, 2007 and 2008, respectively~~2009.

50Valuation of equity investments. We hold minority interests in companies having operations in the semiconductor industry. We record an impairment charge when we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results for these companies could result in an inability to recover the carrying value of the investments, and a corresponding impairment charge in the future, which could be material to our results of operations.

We review our investments quarterly for indicators of impairment. For non-marketable equity securities, the impairment analysis requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the fair value of the investment. The indicators that we use to identify those events or circumstances include (a) the investee’s revenue and earnings trends; (b) the technological feasibility of the investee’s products and technologies; (c) the general market conditions in the investee’s industry or geographic area, including adverse regulatory or economic changes; (d) factors related to the investee’s ability to remain in business, such as the investee’s liquidity, debt ratios, and the rate at which the investee is using its cash; (e) the investee’s receipt of additional funding at a lower valuation; and (f) whether it is more likely-than-not that we will be required to sell the security prior to any anticipated recovery in fair value. Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other than temporarily impaired, in which case the investment is written down to its impaired value and a new cost basis is

~~Litigation losses. From time to time, we are involved in legal actions arising in the ordinary~~ ~~course of business~~established. WeWhen ~~have~~an ~~incurred~~investee ~~certain~~is ~~costs~~not ~~associated~~considered ~~with~~viable ~~defending~~from ~~these~~a ~~matters.~~financial ~~There can be no assurance that shareholder class action complaints, shareholder derivative complaints~~ or ~~other~~technological ~~third~~point ~~party~~of ~~assertions will be resolved without costly litigation~~view, inwe awrite ~~manner~~off ~~that~~the ~~is not adverse to our financial position~~investment, ~~results~~since ofwe ~~operations~~consider ~~or cash flows or without requiring royalty payments in~~ the ~~future,~~estimated ~~all~~fair ofvalue ~~which~~to ~~may~~be ~~adversely impact net income~~nominal. ~~As of December 31,~~If ~~2008,~~an noinvestee ~~estimate~~obtains ~~can~~additional befunding ~~made~~at ~~of the possible loss or~~ a ~~possible~~valuation ~~range~~lower ofthan ~~loss~~our ~~associated~~carrying ~~with~~amount ~~the~~or ~~resolution~~requires ~~of these contingencies and therefore we have not recorded any accrual for such costs. If additional information becomes available such that we can estimate with~~ a ~~reasonable~~new ~~degree~~round of ~~certainty~~equity ~~that~~funding ~~there~~to isstay ain ~~possible~~operation ~~loss~~and orthe anew ~~possible~~funding ~~range~~does ofnot ~~loss~~appear ~~associated with these contingencies~~imminent, ~~then~~ we ~~would~~presume ~~record~~that the ~~minimum~~investment ~~estimated~~is ~~liability,~~other ~~such costs or estimates could materially~~than ~~impact~~temporarily ~~our~~impaired, ~~results~~unless ofspecific ~~operations~~facts and ~~financial~~circumstances ~~position~~indicate otherwise.

~~Valuation~~Quoted ofmarket ~~equity~~prices ~~investments~~are not available for Level 3 assets. WeTherefore, ~~hold~~when ~~minority~~a ~~interests~~fair invalue ~~companies having~~determination ~~operations~~is inrequired ~~the~~for ~~semiconductor~~Level ~~industry.~~3 Weassets, ~~record~~we anuse ~~investment~~other ~~impairment~~valuation ~~charge~~techniques, ~~when~~including wethe ~~believe~~Income anApproach ~~investment~~and ~~has~~the ~~experienced~~Market aComparable ~~decline~~Method. inThe ~~value~~results ~~that~~under isboth ~~other~~approaches ~~than~~are ~~temporary.~~evaluated ~~Future~~and weighted ~~adverse~~across ~~changes~~the inindividual ~~market~~classes ~~conditions~~of orequity ~~poor~~using ~~operating results~~the inOption ~~these~~Pricing ~~companies~~Approach, ~~could~~under ~~result~~which inequity ~~losses~~securities orwere anviewed ~~inability~~as tocall ~~recover~~options on the ~~carrying~~underlying ~~value~~assets of the ~~investments,~~company. ~~thereby~~Significant ~~possibly~~inputs ~~requiring~~used anunder ~~impairment~~the ~~charge~~Income inApproach ~~the~~include forecasted future. ~~The~~free ~~carrying~~cash ~~value~~flows ofbased ~~our~~on ~~equity~~the ~~investments~~investee’s ~~was~~management ~~$113.6 million~~representation, ~~$90.7 million~~ estimated expenses based on historical financial data and ~~$42~~a present value discount rate.~~8 million~~ asSignificant inputs under the Market Comparable Method include historical and projected financial data of ~~December 31,~~publicly ~~2006,~~traded ~~2007~~companies in similar lines of business and ~~2008~~historical transaction analysis of corporate acquisitions in the related industries, ~~respectively.~~based Weon ~~recorded~~weighted ~~impairment~~average ~~charges~~cost of ~~$44~~capital.~~1 million,~~ ~~$22.4 million~~Significant ~~and~~inputs used ~~$21.6 million~~under ~~for~~the Option Pricing Approach include the ~~years~~strike ~~ended~~prices ~~December 31,~~of ~~2006~~the options, ~~2007~~the ~~and 2008~~number of shares of each class of equity, ~~respectively.~~seniority ~~Further~~levels, weliquidation ~~may~~preferences ~~record~~and ~~additional~~conversion ~~such~~values ~~impairment~~for ~~charges~~preferred inequity, the ~~future,~~time ~~which~~to ~~could~~the beexpiration ~~material~~of tothese options ~~our~~and ~~results~~the ofexpected ~~operations~~time to a liquidity event.

~~Investments~~Goodwill. inWe ~~non-marketable~~are ~~equity~~required ~~securities~~to ~~are~~test ~~inherently~~goodwill ~~risky,~~annually for impairment and abetween ~~number~~annual oftests ~~these~~in ~~companies~~certain ~~are~~circumstances. ~~likely~~We towrite ~~fail.~~down ~~Their~~goodwill ~~success~~when it is ~~dependent~~impaired. onOur ~~product~~impairment ~~development,~~review ~~market~~process ~~acceptance,~~compares ~~operational~~the ~~efficiency~~fair value of the reporting unit in which the goodwill resides to its carrying value, and ~~other~~we ~~key~~have ~~business~~determined ~~success~~that ~~factors~~our reporting units are equivalent to our operating segments for the purpose of this analysis. We utilize a two-step approach to testing goodwill for impairment. The first step tests for possible impairment by applying a fair value-based test. In ~~addition~~computing fair value of our reporting units, ~~depending~~we onuse ~~their~~estimates of future ~~prospects~~revenues, costs and ~~market~~cash ~~conditions~~flows from such units. The second step, ~~they~~if ~~may~~necessary, ~~not~~measures bethe ~~able~~amount toof ~~raise~~such ~~additional~~an ~~funds~~impairment ~~when~~by ~~needed~~applying orfair ~~they~~value-based ~~may~~tests ~~receive~~to ~~lower~~individual assets ~~valuations,~~and ~~with~~liabilities. ~~less~~We ~~favorable~~perform ~~investment~~this ~~terms~~analysis ~~than~~during inthe ~~previous financings~~fourth quarter of each fiscal year. During 2007, ~~and~~we determined the ~~investments~~goodwill ~~would~~acquired ~~likely~~from our acquisition of G-Plus and Actrans had become impaired in the amounts of $14.8 million ~~Such~~and $3.2 million, respectively. We did not record any impairment ~~charges~~charge ~~may~~related ~~have~~to ~~material~~goodwill ~~impact~~in on2008 and 2009. As of December 31, 2009, our ~~results~~recorded goodwill of ~~operations~~$11.2 million relates to our technology licensing segment and was not at risk of failing the first step in the test for possible impairment.

WeLong-lived ~~review~~assets. ~~our~~Long-lived ~~investments~~assets ~~quarterly~~include ~~for~~property ~~indicators of impairment; however~~and equipment, ~~for non-marketable~~ equity ~~securities,~~investments ~~the~~and ~~impairment~~intangible ~~analysis~~assets. ~~requires~~We ~~significant~~are ~~judgment~~required to ~~identify~~amortize ~~events~~purchased orintangible ~~circumstances~~assets ~~that~~other ~~would~~than ~~likely~~goodwill ~~have~~over atheir ~~significant adverse~~useful ~~effect~~lives, onunless ~~the~~these ~~fair~~lives ~~value~~are ofdetermined ~~the investment. The indicators that we use~~ to ~~identify~~be ~~those~~indefinite. ~~events~~Purchased orintangible ~~circumstances~~assets ~~include~~are ~~(a) the~~carried ~~investee’s~~at cost ~~revenue~~less ~~and~~accumulated ~~earnings~~amortization. ~~trends~~Amortization ~~relative~~is tocomputed ~~predefined~~using ~~milestones~~the ~~and~~straight-line ~~overall~~method ~~business prospects;~~over ~~(b)~~ the ~~technological~~estimated ~~feasibility~~useful lives of ~~the~~one ~~investee’s~~to ~~products~~five ~~and~~years. ~~technologies;~~Whenever ~~(c) the~~events ~~general~~or ~~market~~changes ~~conditions~~ in ~~the~~circumstances ~~investee’s~~indicate ~~industry~~that orthe ~~geographic~~carrying ~~area,~~amounts ~~including~~of ~~adverse~~long-lived ~~regulatory~~assets ormay not ~~economic~~be ~~changes; (d) factors~~recoverable, ~~related~~we toestimate the ~~investee’s~~future ~~ability~~cash ~~to remain in business~~flows, ~~such~~undiscounted asand ~~the~~without ~~investee’s~~interest ~~liquidity~~charges, ~~debt~~expected ~~ratios,~~to ~~and~~result from the ~~rate~~use atof ~~which~~those ~~the~~assets ~~investee~~and istheir ~~using~~eventual ~~its~~disposition. ~~cash;~~If ~~and (e)~~ the ~~investee’s~~sum ~~receipt~~ of ~~additional~~the ~~funding at~~expected afuture ~~lower~~cash ~~valuation.~~flows ~~Investments~~is ~~identified~~less asthan ~~having~~the ancarrying amount ~~indicator~~ of ~~impairment~~those ~~are~~assets, ~~subject~~we torecognize ~~further~~an ~~analysis~~impairment toloss ~~determine~~based ifon the ~~investment~~excess isof ~~other~~the ~~than~~carrying ~~temporarily~~amount ~~impaired,~~over ~~in which case~~ the ~~investment~~fair ~~is written down to its impaired~~ value ~~and~~ aof ~~new~~the ~~cost basis is established~~assets. ~~When~~As anpart ~~investee is not considered viable from a financial or technological point~~ of ~~view,~~our we2007 ~~write off the investment~~analysis, ~~since~~ we ~~consider~~determined ~~the~~$1.0 ~~estimated~~million ~~fair~~of ~~value~~long-lived toassets behad ~~nominal~~been impaired. IfIn an2008, ~~investee obtains additional~~we ~~funding~~recorded at a ~~valuation~~$1.1 ~~lower~~million ~~than~~charge ~~our~~to ~~carrying~~research ~~amount~~and ordevelopment ~~requires~~to awrite ~~new~~off ~~round~~various ofintellectual ~~equity~~property ~~funding~~licenses, toas ~~stay~~we inrefined ~~operation~~our ~~and~~focus ~~the~~toward ~~new~~our ~~funding~~most ~~does~~strategic ~~not~~initiatives. ~~appear~~We ~~imminent,~~did wenot ~~presume~~record ~~that~~any ~~the~~significant ~~investment~~impairment ischarges ~~other~~related ~~than~~to ~~temporarily impaired, unless specific~~long-lived ~~facts~~assets ~~and~~in ~~circumstances indicate otherwise~~2009.

~~Goodwill~~Share-based compensation. ~~Statement~~We ofmeasure ~~Financial~~compensation ~~Accounting~~expense ~~Standards~~based ~~No. 142,~~on ~~Goodwill~~estimated ~~and Other~~fair ~~Intangible~~values ~~Assets,~~of orall share-based ~~SFAS~~awards ~~No. 142,~~to ~~requires~~our ~~goodwill~~employees toand bedirectors. ~~tested~~We ~~for~~estimate ~~impairment~~the onfair anvalue ~~annual~~of ~~basis~~stock ~~and~~options ~~between~~on ~~annual~~the ~~tests~~date inof ~~certain~~grant ~~circumstances,~~using ~~and~~the ~~written~~Black-Scholes ~~down~~option ~~when~~valuation ~~impaired~~model. ~~Our~~The ~~impairment review process compares the~~ fair value of ~~the~~equity-based ~~reporting~~awards ~~unit~~is inamortized ~~which~~over the ~~goodwill~~requisite ~~resides~~service toperiod, generally ~~its~~the ~~carrying~~vesting ~~value.~~period Weof ~~determined~~the ~~that~~award, ~~our~~and ~~reporting~~we ~~units~~have ~~are~~elected ~~equivalent~~ to ~~our~~attribute ~~operating~~the ~~segments~~value ~~for~~of ~~the~~share-based ~~purposes~~compensation ofto ~~completing~~expense ~~our~~using ~~SFAS~~the ~~No. 142~~graded ~~analysis~~vesting method. WeShare-based ~~utilize~~compensation aexpense ~~two-step approach~~is torecognized ~~testing~~based ~~goodwill~~on ~~for~~the ~~impairment.~~value ~~The~~of ~~first~~the ~~step~~portion ~~tests~~of share-based ~~for~~payment ~~possible~~awards ~~impairment~~that byis ~~applying~~ultimately aexpected to vest.

5154

fair value-based test. In computing fair value of our reporting units, we use estimates of future revenues, costs and cash flows from such units. The second step, if necessary, measures the amount of such an impairment by applying fair value-based tests to individual assets and liabilities. We ~~perform~~make ~~this~~quarterly ~~analysis~~assessments ~~during the fourth quarter~~ of ~~each fiscal year. During~~ the ~~fourth~~adequacy ~~quarter~~ of ~~2007, we determined~~ the ~~goodwill~~additional ~~acquired from our acquisition of G~~paid-~~Plus and Actrans had become impaired~~ in ~~the~~capital ~~amounts~~pool, ofor ~~$14.8 million~~APIC ~~and $3.2 million~~pool, ~~respectively.~~to Wedetermine ~~did~~if ~~not~~there ~~record~~are any ~~impairment~~tax ~~charge~~shortfalls ~~related~~which torequire ~~goodwill~~recognition in ~~2008.~~the ~~As of~~consolidated ~~December 31,~~statements ~~2008, our recorded goodwill~~ of ~~$11~~operations.2 ~~million relates to our technology licensing segment.~~

~~Long-lived~~The ~~assets. Long~~Black-~~lived~~Scholes ~~assets~~option ~~include~~valuation ~~property~~model ~~and~~requires ~~equipment,~~additional ~~equity~~estimates ~~investments~~ and ~~intangible~~assumptions, ~~assets.~~including expected ~~SFAS~~stock ~~No. 142~~price ~~requires~~volatility ~~purchased~~and ~~intangible~~expected ~~assets~~term. ~~other~~We ~~than~~estimate ~~goodwill~~expected tovolatility bebased ~~amortized~~on ~~over~~our ~~their~~historical ~~useful~~stock ~~lives~~volatility. ~~unless~~If ~~these~~we ~~lives are~~ determined tothat ~~be indefinite.~~another ~~Purchased~~method ~~intangible~~used ~~assets~~to ~~are~~estimate ~~carried~~expected atvolatility ~~cost~~was ~~less~~more ~~accumulated~~reasonable ~~amortization.~~than ~~Amortization~~our iscurrent ~~computed~~methods, ~~using~~or if ~~the~~another ~~straight-line~~ method ~~over~~for ~~the~~calculating ~~estimated~~these ~~useful~~input ~~lives~~assumptions ofwas ~~one~~prescribed toby ~~five~~authoritative ~~years.~~guidance, ~~Whenever events or changes in circumstances indicate that~~ the ~~carrying~~fair ~~amounts~~value ofcalculated ~~long~~for share-~~lived~~based ~~assets~~awards ~~may~~could ~~not~~change besignificantly. ~~recoverable,~~Higher wevolatility ~~estimate the future cash flows, undiscounted~~ and ~~without~~longer ~~interest charges,~~ expected tolives result ~~from~~in ~~the~~an ~~use~~increase ofto share-based ~~those~~compensation ~~assets~~determined ~~and~~at ~~their eventual disposition. If~~ the ~~sum~~ date of ~~the~~grant. ~~expected~~For ~~future cash flows is less than~~ the ~~carrying~~purpose ~~amount~~ of ~~those~~estimating ~~assets~~expected term, we ~~recognize~~believe anthat ~~impairment~~our ~~loss~~historical ~~based~~stock onoption ~~the~~exercise ~~excess~~data ofis ~~the~~not ~~carrying~~an ~~amount~~accurate ~~over~~predictor ~~the fair value~~ of ~~the~~future ~~assets~~exercise transactions. AsWe ~~part~~utilize ofdata ~~our~~from selected ~~2007~~semiconductor ~~analysis~~companies, which we ~~determined~~have ~~$969,000~~concluded ~~of long-lived~~are ~~assets~~similar ~~had~~with ~~been~~regard ~~impaired.~~to ~~During~~market ~~the~~capitalization, ~~fourth~~stock ~~quarter~~option ofcontractual ~~2008~~term, weand ~~recorded~~vesting ~~a $1~~schedules.1 ~~million~~We ~~charge~~intend to ~~research~~continue ~~and development~~ to ~~write~~use ~~off~~a ~~various~~similar ~~intellectual~~methodology ~~property~~until ~~licenses, as~~ we ~~refined~~determine ~~our~~that ~~focus toward~~ our ~~most strategic initiatives.~~ Wehistorical ~~did~~stock ~~not~~option ~~record~~exercise ~~any~~data ~~other~~is ~~impairment~~expected ~~charges~~to ~~related~~more toaccurately ~~long-lived~~predict ~~assets~~future inexercise ~~2008~~transactions.

~~Stock-based~~Accounting ~~compensation~~for income taxes. We ~~apply~~currently ~~the provisions~~maintain ofa ~~SFAS~~full ~~No. 123(R)~~valuation ~~with~~allowance ~~regard~~on toour ~~equity~~net ~~based~~deferred ~~compensation,~~tax ~~which~~assets. ~~requires~~Determination of the ~~recognition~~valuation ofallowance ~~the~~requires ~~fair~~an ~~value~~assessment of ~~equity~~both ~~based~~positive ~~compensation.~~and ~~The~~negative ~~fair~~evidence ~~value~~when ofdetermining ~~stock~~whether ~~options~~it ~~shares~~is ~~are~~more ~~estimated~~likely ~~using~~than not athat ~~Black-Scholes~~deferred ~~option~~tax ~~valuation model.~~assets ~~This~~are ~~model~~recoverable ~~requires~~and ussuch toassessment ~~make~~is ~~subjective~~required ~~assumptions~~on ina ~~implementing~~jurisdiction ~~SFAS~~by Nojurisdiction basis. ~~123(R),~~ ~~including~~Based ~~expected~~upon ~~stock~~the ~~price~~weight ~~volatility~~of available evidence, ~~and~~which ~~estimated~~includes ~~life~~our ofhistorical ~~each~~operating ~~award.~~performance, ~~The~~reported ~~fair~~cumulative ~~value~~net oflosses since ~~equity-based~~inception ~~awards~~and isdifficulty ~~amortized~~in ~~over~~accurately ~~the~~forecasting ~~requisite service~~our ~~period~~results, ~~generally~~we ~~the~~provided ~~vesting~~a ~~period~~full ofvaluation ~~the~~allowance ~~award,~~against ~~and~~our wenet ~~have~~deferred ~~elected~~tax assets. We intend to ~~use~~maintain ~~the~~a ~~accelerated~~full ~~method~~valuation allowance on the U.S. Wedeferred ~~make~~tax ~~quarterly~~assets ~~assessments~~until ofsufficient positive ~~the~~evidence ~~adequacy~~exists to support reversal of the ~~additional~~valuation ~~paid-in~~allowance. ~~capital~~During ~~pool~~2007, or2008 ~~APIC~~and ~~pool~~2009, towe ~~determine~~maintained ifa ~~there~~full ~~are~~valuation ~~any~~allowance on our deferred tax ~~shortfalls~~ ~~which~~assets. ~~require~~At ~~recognition~~December 31, in2007, 2008 and 2009 the ~~consolidated~~valuation ~~statements~~allowance ofagainst ~~operations~~our deferred tax assets was $27.0 million, $45.2 million and $33.5 million, respectively.

WeIn ~~use~~July ~~historical~~2006, ~~volatility~~the asFASB weissued guidance ~~believe~~which itclarifies isthe ~~more reflective~~accounting offor ~~market~~income ~~conditions~~taxes ~~and~~by prescribing a ~~better~~recognition ~~indicator~~threshold ofand ~~volatility.~~measurement Weattribute ~~use~~for the ~~simplified~~financial ~~calculation~~statement ofrecognition ~~expected~~and ~~life~~measurement ~~described~~of inuncertain ~~the~~tax ~~SEC~~positions ~~Staff~~taken ~~Accounting~~or ~~Bulletin~~expected ~~No. 107~~to ~~and~~be ~~amended~~taken byin ~~Staff~~a company’s ~~Accounting~~income ~~Bulletin~~tax Noreturn. ~~110.~~ IfThe ~~we determined~~new ~~that~~guidance ~~another~~utilizes ~~method~~a ~~used~~two-step toapproach ~~estimate~~for ~~expected~~evaluating ~~volatility~~uncertain ~~was~~tax ~~more~~positions: ~~reasonable~~step ~~than~~one, ~~our~~recognition, ~~current~~requires ~~methods,~~a orcompany to determine if ~~another~~the ~~method~~weight ~~for~~of ~~calculating~~available ~~these~~evidence ~~input~~indicates ~~assumptions~~that ~~was~~a ~~prescribed~~tax byposition ~~authoritative~~is ~~guidance,~~more likely ~~the~~than ~~fair~~not ~~value~~to ~~calculated~~be ~~for share-based~~sustained ~~awards~~upon ~~could~~audit, ~~change~~including ~~significantly.~~resolution ~~Higher~~of ~~volatility~~related ~~and~~appeals ~~longer~~or ~~expected~~litigation ~~lives~~processes, ~~result~~if inany; anand ~~increase~~step totwo, ~~share-based~~measurement, ~~compensation~~is ~~determined~~based aton the ~~date~~largest amount of ~~grant~~benefit, which is more likely than not to be realized on ultimate settlement.

~~Accounting~~Our provision for income taxes. Weis ~~currently~~subject ~~maintain~~to avolatility ~~full~~and ~~valuation~~could ~~allowance~~be onadversely ~~our~~impacted ~~net~~by ~~deferred~~changes ~~tax~~in ~~assets.~~earnings ~~The~~or tax ~~valuation~~laws ~~allowance~~and ~~was determined~~regulations in ~~accordance~~various ~~with~~jurisdictions. ~~the~~We ~~provisions~~are ofsubject ~~SFAS~~to ~~No. 109,~~the ~~Accounting~~continuous ~~for~~examination ~~Income~~of ~~Taxes,~~our orincome ~~SFAS~~tax ~~No. 109,~~returns ~~which~~by ~~requires~~the anInternal ~~assessment~~Revenue ofService ~~both positive~~ and ~~negative~~other ~~evidence~~tax ~~when~~authorities. ~~determining~~We ~~whether~~regularly itassess isthe ~~more~~likelihood ~~likely~~of ~~than~~adverse ~~not~~outcomes ~~that~~resulting ~~deferred~~from ~~tax~~these ~~assets~~examinations ~~are~~to ~~recoverable;~~determine ~~such~~the ~~assessment~~adequacy isof ~~required~~our onprovision afor ~~jurisdiction~~income bytaxes. ~~jurisdiction~~There ~~basis.~~can ~~Expected~~be ~~future~~no ~~U.S.~~assurance ~~losses~~that ~~represented~~the ~~sufficient~~outcomes ~~negative~~from ~~evidence~~these ~~under~~continuous ~~SFAS~~examinations ~~No. 109~~will ~~and~~not ~~accordingly,~~have aan ~~full~~adverse ~~valuation~~effect ~~allowance~~on ~~was recorded~~our ~~against~~operating ~~U.S.~~results ~~deferred~~and ~~tax~~financial ~~assets~~condition. WeTo the ~~intend~~extent tothat ~~maintain a full valuation allowance on~~ the ~~U.S.~~final ~~deferred~~ tax ~~assets~~outcome ~~until~~of ~~sufficient~~these ~~positive~~matters ~~evidence~~is ~~exists~~different tothan ~~support~~the ~~reversal~~amounts ofrecorded, ~~the~~such ~~valuation~~differences ~~allowance.~~will ~~During~~impact ~~2006,~~the ~~2007~~provision ~~and~~for ~~2008,~~income ~~we maintained~~taxes ain ~~full~~the ~~valuation~~period ~~allowance~~in onwhich ~~our~~such ~~deferred~~determination ~~tax~~is ~~assets~~made. AtThe ~~December 31,~~provision ~~2006,~~for ~~2007~~income ~~and~~taxes ~~2008~~includes the impact ~~valuation~~of ~~allowance~~changes ~~against~~to ~~our~~reserves, ~~deferred~~as ~~tax~~well ~~assets~~as ~~was~~the ~~$34.7 million,~~related ~~$36.2 million~~net interest and ~~$44~~penalties.~~9 million,~~ ~~respectively.~~

~~Effective~~Fair ~~January~~value measurements. In September 2006, the FASB 1issued guidance that defines fair value, ~~2007~~establishes a framework for the measurement of fair value under generally accepted accounting principles, weand ~~adopted~~enhances ~~FASB~~disclosures ~~Interpretation~~about Nofair value measurements. ~~48,~~ ~~Accounting~~We ~~for~~adopted ~~Uncertainty~~the guidance in ~~Income~~2008 ~~Taxes—an interpretation~~for fair value measurements of ~~FASB~~financial ~~Statement~~assets Noand liabilities and fair value measurements of non-financial assets and liabilities made on a recurring basis. ~~109,~~ Fair value is defined as the exchange price that would be received for an asset or ~~FIN~~paid 48to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ~~FIN~~Valuation 48techniques ~~prescribes~~used ato ~~recognition~~measure ~~threshold~~fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard

5255

~~measurement~~describes ~~attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in~~ a ~~company’s income~~fair ~~tax~~value ~~return,~~hierarchy ~~and~~based ~~also provides guidance~~ on ~~derecognition,~~three ~~classification,~~levels interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance with SFAS No. 109. Step one, Recognition, requires a company to determine if the weight of ~~available evidence indicates that a tax position is more likely than not to be sustained upon audit~~inputs, ~~including resolution~~ of ~~related appeals~~which orthe ~~litigation~~first ~~processes, if any. Step~~ two, ~~Measurement,~~are isconsidered ~~based~~observable onand the ~~largest~~last ~~amount of benefit~~unobservable, ~~which~~that ismay ~~more likely than not to~~ be ~~realized~~used ~~on ultimate settlement. The cumulative effect of adopting FIN 48 on January 1, 2007 was recognized as a change in accounting principle, recorded as an adjustment~~ to ~~the~~measure ~~opening~~fair ~~balance~~value ofwhich ~~retained~~are ~~earnings on~~ the ~~adoption date. The cumulative effect of adopting FIN 48 was a $3.2 million increase to the opening balance of~~ ~~accumulated~~following: deficit. We recognize interest and penalties related to uncertain tax positions in income tax expense. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made. The amount of interest and penalties accrued upon the adoption of FIN 48 and at December 31, 2008 was not material.

Fair value measurements. Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually (fair value of reporting units for goodwill impairment tests, non-financial assets and liabilities acquired in a business combination.) Therefore, we adopted the provisions of SFAS No. 157 with respect to our financial assets and liabilities only. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

•

Level 1—Quoted prices in active markets for identical assets or liabilities.

•

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The adoption of this statement did not impact our consolidated results of operations and financial condition, but required additional disclosure for assets and liabilities measured at fair value.

Liquidity and Capital Resources

	Year Ended December 31,
	2006			2007			2008
	2007			2008			2009
Cash provided by (used in):
Operating activities	$	8031,~~900~~163		$	3113,~~163~~783		$	139,~~783~~486
Investing activities	$	(5717,~~740~~595	)	$	(1745,~~595~~262	)	$	~~(45~~32,~~262~~359	)
Financing activities	$	~~431~~3,399		$	3(35,~~399~~951	)	$	(~~35,951~~417	)

53Principal sources of liquidity at December 31, 2009 consist of $122.9 million of cash, cash equivalents, and short-term available-for-sale investments. Additional sources of liquidity may include certain marketable debt securities classified as long-term available-for-sale investments.

Our cash and cash equivalents and short-term and long-term investment portfolio as of December 31, 2009 consists of money market funds, federal, state and municipal government obligations, foreign and public corporate debt securities and listed equity securities. We follow an established investment policy and set of guidelines to monitor, manage and limit our exposure to interest rate fluctuations and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer. As a result of current adverse financial market conditions, some financial instruments, such as structured investment vehicles, sub-prime mortgage-backed securities and collateralized debt obligations, may pose risks arising from liquidity and credit concerns. As of December 31, 2009, we had no direct holdings in these categories of investments and our exposure to these financial instruments through our indirect holdings in money market mutual funds was not material to total cash, cash equivalents and short-term investments. As a result of market conditions, the value of our investments in publicly held companies in Taiwan, a component of our long-term investment portfolio, may fluctuate significantly from quarter to quarter. The value of these investments declined significantly in the fourth quarter of 2008 and we recorded an impairment charge of $0.2 million associated with our investment in KYE. See Note 15 “Investments” to our consolidated financial statements for more information on our investment in KYE. We did not record any impairments associated with our investments in publicly held companies during 2009. While we cannot predict future market conditions or market liquidity, we have taken steps, including regularly reviewing our investments and associated risk profiles, which we believe will allow us to effectively manage the risks of our investment portfolio. We cannot predict long-term liquidity or capital resource requirements on material capital expenditures and other demands and commitments to be incurred beyond the next twelve months.

Operating activities. Operating activities provided $9.5 million of cash for 2009. The primary sources of cash from operating activities in 2009 were a $9.0 million increase in accounts payable and a $7.3 million decrease in inventories, along with non-cash expenses of $11.4 million for inventory write-downs and provision for adverse purchase commitments, $8.6 million for depreciation and amortization and $2.5 million for share-based compensation. Offsetting these sources of cash were our net loss of $10.2 million a $17.5 million increase in trade accounts receivable. The changes to accounts receivable and inventory balances primarily reflect the

~~Principal~~ sharp ~~sources~~drop in product sales during the fourth quarter of ~~liquidity~~2008 atand ~~December 31~~inventory replenishment by our customers throughout 2009. Similarly, ~~2008~~the ~~consist~~increase in accounts payable in 2009 is primarily due to the reduction of ~~$99.9 million~~production activities and corresponding accounts payable balance at the end of ~~cash~~2008. Share-based compensation expense for 2009 declined, ~~cash~~as compared to previous years, due in part to charges in 2008 related to the grant of ~~equivalents~~restricted stock options and tender offer, as well as a reduction in the number of options granted in 2008 and ~~short-term~~2009. ~~available-~~The decrease in depreciation and amortization expenses for 2009 is largely due to the significant reduction in capital expenditures in 2009, coupled with the run-~~sale~~out ~~investments~~of amortization on intangible assets from acquisitions in 2004 and 2005. ~~Additional~~Our ~~sources~~share of ~~liquidity~~ACET’s ~~may~~loss ~~include~~for ~~certain~~2009 ~~marketable~~decreased ~~debt~~significantly, ~~securities~~as ~~classified~~compared asto 2008, primarily due to an impairment of $9.7 million recorded in the fourth quarter of 2008. The impairment resulted in a subsequent reduction to our pro rata share of the carrying value of long~~-term~~ ~~available-~~lived assets and associated depreciation expense. In the third quarter of 2009, we exchanged our equity interest in ACET for~~-sale~~ ~~investments~~an equity interest in ADL and, accordingly, discontinued recording any pro rata share of loss related to our investment in ACET.

~~Our~~Operating ~~cash~~activities ~~and~~provided ~~cash~~$13.8 ~~equivalents~~million ~~and~~of ~~short-term~~cash ~~investment~~for ~~portfolio as of December~~2008. ~~31,~~The ~~2008~~primary ~~consists~~source of ~~money~~cash ~~market~~from ~~funds,~~operating ~~federal,~~activities ~~state~~in ~~and municipal~~2008 ~~government~~was ~~obligations,~~a ~~and foreign and public corporate debt securities~~$35.4 ~~Our~~million ~~investment~~decrease ~~portfolio~~in ~~also~~trade ~~includes~~accounts ~~listed~~receivable, ~~equity~~due ~~securities~~to ~~and~~the ~~marketable~~sharp decline ~~debt~~in ~~securities~~revenue ~~with~~in ~~maturities~~the ~~greater~~fourth ~~than one year~~quarter. WeOffsetting ~~follow~~this ansource ~~established investment policy and set~~ of ~~guidelines~~cash toflow ~~monitor,~~was ~~manage~~a ~~and limit our exposure to interest rate and credit risk~~$22.9 ~~The~~million ~~policy~~decrease ~~sets~~in ~~forth~~accounts ~~credit~~payable, ~~quality~~due ~~standards~~to ~~and~~the ~~limits~~reduction ~~our~~in ~~exposure~~overall toproduction ~~any~~activities. ~~one~~Although ~~issuer.~~we Asreported a ~~result~~net loss of ~~current~~$39.8 ~~adverse~~million ~~financial market~~for ~~conditions~~2008, ~~some~~this loss ~~financial~~was ~~instruments,~~offset ~~such~~by ~~as structured investment vehicles, sub~~non-~~prime~~cash ~~mortgage-backed~~operating ~~securities~~expenses ~~and~~including ~~collateralized debt obligations, may pose risks arising from liquidity and credit concerns~~$14.2 Asmillion ~~of December 31, 2008, we had no direct holdings~~ in ~~these~~inventory ~~categories~~write-downs ~~of investments~~ and ~~our~~provision ~~exposure~~for toadverse ~~these~~purchase ~~financial~~commitments, ~~instruments~~$10.6 ~~through~~million ~~our indirect holdings~~ in ~~money~~depreciation ~~market mutual funds was not material to total cash, cash equivalents~~ and ~~short-term~~amortization and ~~long-term investments~~$4.7 Asmillion ofin ~~December 31,~~share-based ~~2008~~compensation, wein ~~had~~addition to a$9.1 ~~recorded~~million ~~impairment~~in ~~charge~~non-cash oflosses ~~$231,000~~ related to our ~~investment~~equity interest in ~~KYE.~~ACET ~~Please~~and ~~also see “Related Party Transactions”~~$21.6 ~~While~~million wein ~~cannot~~impairments ~~predict future market conditions or market liquidity, we have taken steps, including regularly reviewing our investments and associated risk profiles, which we believe will allow us~~ to ~~effectively~~equity ~~manage the risks of our investment portfolio~~investments.

~~Operating~~The ~~activities.~~major ~~Operating~~contributing ~~activities~~factors ~~provided~~to ~~$13.8~~our ~~million~~sources and uses of operating cash ~~for~~during ~~2008. The~~2007 ~~primary~~were ~~source~~our ofnet ~~cash~~loss ~~from~~of ~~operating~~$49.0 million, ~~activities~~offset ~~in 2008~~by ~~was~~ a $3515.4 2 million ~~decrease~~reduction inof ~~trade~~inventories ~~accounts receivable,~~ due to ~~the~~supply ~~sharp~~constraints ~~decline~~and ina ~~revenue~~focus inby ~~the~~management ~~fourth~~to reduce ~~quarter.~~average ~~Offsetting~~levels ~~this source~~ of ~~cash~~inventory ~~flow~~on ~~was~~hand, and a ~~$22.9 million~~ decrease in ~~accounts~~receivables ~~payable,~~of ~~due~~$9.4 million toas ~~the~~a ~~reduction~~result inof ~~overall production~~the ~~activities.~~timing ~~Although~~of wepayments ~~reported~~from aour ~~net~~customers ~~loss~~and oflower ~~$39~~sales.8 ~~million~~Net ~~for 2008, this~~ loss was ~~offset~~also affected by non-cash ~~operating~~items ~~expenses~~in ~~including~~2007, including $1422.2 4 million inof ~~inventory~~impairment ~~write-downs~~charges ~~and~~from ~~provision~~our ~~for~~investments ~~adverse~~in ~~purchase~~GSMC ~~commitments~~and EoNex, a $1019.6 0 million ~~in depreciation~~charge ~~and~~for ~~amortization~~the impairment of goodwill and ~~$4.7~~long ~~million~~lived inassets, ~~stock~~share-based compensation expense of $5.3 million, indepreciation ~~addition~~and toamortization expense of $911.1 3 million, inand ~~non-cash~~a ~~losses~~$8.5 million ~~related~~charge to our ~~equity~~inventory ~~interest in ACET~~ and ~~$21.6~~adverse ~~million~~purchase incommitments ~~impairments to equity investments~~provision.

~~The~~Investing ~~major~~activities. ~~contributing~~Investing ~~factors~~activities toprovided ~~our sources and uses of operating cash during 2007 were our net loss of~~ $4932.~~0 million,~~4 ~~offset by a $15.2~~ million ~~reduction~~during ~~of inventories due to supply constraints and a focus by management to reduce average levels of inventory on hand~~2009, ~~and~~with ~~a decrease in receivables of~~ $9108.4 3 million asin amaturities ~~result~~ of ~~the~~available-for-sale ~~timing~~debt ofsecurities ~~payments~~partially ~~from~~offset ~~our customers and lower sales levels. Net loss was also affected~~ by ~~non-cash items in 2007, including~~ $2274.4 8 million ~~of impairment charges from our investments~~ in ~~GSMC~~purchases ~~and~~of ~~EoNex,~~available-for-sale ~~a $19~~debt securities.~~0 million~~ ~~charge~~Purchases ~~for the impairment~~ of ~~goodwill,~~ property and equipment ~~and~~were ~~intangible~~not ~~assets,~~significant ~~stock-based~~in ~~compensation expense of $5.3 million~~2009, ~~depreciation~~reflecting ~~and~~efforts ~~amortization~~to ~~expense~~carefully ofmanage ~~$11.3 million,~~cash ~~and~~in aresponse ~~$8.5 million charge~~ to ~~our inventory and~~ adverse ~~purchase~~market ~~commitments provision~~conditions.

~~During~~We ~~2006,~~used ~~our operating activities included our net loss of~~ $2045.~~8 million,~~3 ~~offset by a $17.2~~ million ~~reduction~~for ~~of inventories,~~investing ~~due~~activities toduring ~~changes in average levels of carried inventory~~2008, ~~and~~consisting aprimarily ~~decrease in receivables~~ of $12120.4 million asused afor ~~result~~purchases of ~~payments~~available-for-sale ~~from~~debt ~~our~~securities ~~customers~~and $8.3 ~~Net~~million ~~loss~~for ~~was~~property ~~also~~and ~~affected~~equipment. This byuse ~~non-~~of cash ~~items~~was inpartially ~~2006,~~offset ~~including~~by $4484.1 million ~~of impairment charges from our investments~~ in ~~GSMC~~sales and ~~Nanotech,~~maturities ~~a $12.2 million gain on the sale~~ of ~~PTI shares, stock~~available-~~based~~for-sale ~~compensation expense of $8~~investments.~~0 million,~~ ~~depreciation~~We ~~and~~purchased ~~amortization~~long-term ~~expense~~available-for-sale ofdebt ~~$10.0 million,~~securities ~~and~~in ~~a $16.0 million~~order ~~charge~~ to ~~our~~obtain ~~inventory~~a ~~and~~higher ~~adverse~~interest ~~purchase~~rate ~~commitments provision~~yield.

~~Investing~~For ~~activities.~~2007, Wethe ~~used~~primary ~~$45.3~~uses ~~million for~~of cash from investing activities ~~during~~were ~~2008, consisting primarily of~~ $~~120~~95.4 7 million used for ~~purchases~~the purchase of available-for-sale investments, ~~debt~~$13.0 million for the purchase of equity securities, and $86.3 4 million for ~~property~~fixed ~~and equipment~~assets. ~~This~~These ~~use~~uses of cash ~~was~~were partially offset by the receipt of $8499.1 5 million in cash from the sales and maturities of available-for-sale investments. ~~We purchased long-term available-for-sale debt securities in order to obtain a higher interest rate yield.~~

~~For~~Financing ~~2007,~~activities. ~~the~~There ~~primary~~were no significant sources or uses of cash from ~~investing~~financing activities ~~were $95~~during 2009.~~7 million~~ ~~used~~Net ~~for~~cash ~~the~~used ~~purchase~~by offinancing ~~available-for-sale~~activities ~~investments~~was ~~and~~ $~~13.~~0 ~~million in cash to purchase additional equity securities~~.4 ~~In addition~~million, wewith ~~used~~ $61.4 0 million ~~during~~for ~~2007~~payments ~~to purchase fixed assets. These uses~~ of ~~cash~~capital ~~were~~leases ~~partially~~largely offset by ~~the receipt of~~ $990.5 6 million in ~~cash~~proceeds from ~~the~~issuance ~~sales and maturities~~ of ~~available-for-sale~~common ~~investments~~stock.

54Net cash used by financing activities totaled $36.0 million for 2008, including $28.9 million for repurchase of common stock and $6.9 million for repayment of our line of credit. For further information on the repurchase of common stock, see Note 19 “Stock Repurchase Program” to our consolidated financial statements.

For 2006, the primary uses of cash from investing activities were $96.6 million used for the purchase of available-for-sale investments and $18.9 million in cash to purchase additional equity securities, including $15.9 million for additional shares of ACET. In addition, we used $6.3 million during 2006 to purchase fixed assets. These uses of cash were partially offset by the receipt of $64.4 million in cash from the sales and maturities of available-for-sale investments.

Financing activities. Net cash used by financing activities totaled $36.0 million for 2008, including $28.9 million for repurchase of common stock and $6.9 million for repayment of our line of credit. For further information on the repurchase of common stock, please see Note 19 “Stock Repurchase Program” to our consolidated financial statements.

Cash from financing activities in 2007 related primarily to the borrowing of $3.5 million from our line of credit, which was denominated in Chinese RMB.

Cash from financing activities in 2006 related primarily to the issuance of common stock under our employee stock purchase plan and the exercise of employee stock options of $2.7 million offset by capital lease payments of $1.5 million and $857,000 in debt repayments.

Contractual Obligations and Commitments

Purchase Commitments. As of December 31, ~~2008~~2009, we had outstanding purchase commitments with our foundry vendors of $1322.27 million for delivery in ~~2009~~2010. We have recorded a liability of $12.16 million for related adverse purchase commitments.

Lease Commitments. We have long-term, non-cancelable building lease commitments. Future payments due under building lease, purchase commitments and other contractual obligations as of December 31, ~~2008~~2009 are as follows (in thousands):

	Total		Less than1 year		1 - 3 years		3 - 5 years		More than5 years
Capital leases	$	1,~~073~~962	$	~~874~~831	$	~~195~~1,131	$	4—	$	—
Operating leases		63,~~619~~686		42,~~442~~057		~~1,467~~875		97156		~~613~~598
Purchase commitments		1322,~~244~~670		1322,~~244~~670		—		—		—
Total	$	2028,~~936~~318	$	1825,~~560~~558	$	12,~~662~~006	$	~~101~~156	$	~~613~~598

Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, ~~2008~~2009, we are unable to make reasonably reliable estimates of the period of cash settlement with respective taxing authorities. Therefore, $1315.26 million of unrecognized tax benefits that may result in a cash payment have been excluded from the contractual obligations table above. See Note 1412 “Income Taxes” to our consolidated financial statements for afurther discussion onof income taxes. We have no material long-term debt obligations as of December 31, ~~2008~~2009.

Credit Facilities

On September 15, 2006, SST China Limited, a wholly-owned subsidiary of SST, entered into a 10-month facility agreement with Bank of America, N.A. Shanghai Branch, a U.S. bank, for RMB 60.8 million revolving line of credit, or approximately $8 million U.S. dollars. This line expired and was replaced in August 2007, when SST China Limited entered into a one year facility agreement with Bank of America, N.A. Shanghai Branch for RMB 58.40 million revolving line of credit. The interest rate for the line of credit was 90% of People’s Bank of China’s base rate. There were no restrictions in the agreement as to how the funds may be used and the facility line was guaranteed by the parent company, Silicon Storage Technology, Inc. The balance on the line of credit was repaid in full in the first quarter of 2008 and expired August 31, 2008, with no outstanding balance.

Off-Balance Sheet Arrangements

During ~~2007~~2008 and ~~2008~~2009, and as of December 31, ~~2007~~2008 and ~~2008~~2009, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purposes entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Stock Repurchase Program

In ~~January~~ 2008, our Board of Directors authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $30.0 million. The program authorized repurchases to be made from time to time in the open market or in privately negotiated transactions, in compliance with the Securities Exchange Act of 1934 Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. The program, which commenced February 11, 2008, did not obligate us to acquire shares at any particular price per share and could be suspended at any time and at our discretion. During 2008, we repurchased 9.5 million shares for $28.9 million through open market repurchases. AsWe ~~of December 31, 2008, the program has been~~ suspended ~~and no further repurchases under~~ the program ~~are contemplated~~ at ~~this~~December 31, ~~time~~2008. ~~See~~We ~~also~~made ~~Note~~no 19repurchases ~~“Stock~~of ~~Repurchase Program” to~~ our ~~consolidated~~common ~~financial~~stock ~~statements~~in 2009.

Operating Capital Requirements

We believe that our cash balances, together with funds we expect to generate from operations, will be sufficient to meet our projected working capital and other cash requirements through at least the next twelve months. Although our revenue projections for the next year have been adversely impacted by the rapid decline in demand for semiconductor products, we believe our available cash and marketable securities are sufficient to cover projected working capital requirements without significant gross profit contribution.

However, there can be no assurance that future events will not require us to seek additional borrowings or capital and, if so required, that such borrowing or capital will be available on acceptable terms. Factors that could affect our short-term and long-term cash used or generated from operations and as a result, our need to seek additional borrowings or capital include:

•

the average selling prices of our products;

•

customer demand for our products;

•

the need to secure future wafer production capacity from our suppliers;

•

the timing of significant orders and of license and royalty revenue;

•

merger, acquisition or joint venture projects;

•

investments in strategic business partners;

•

unanticipated research and development expenses associated with new product introductions; and

•

the outcome of ongoing litigation.

Please also see Item 1A. “Risk Factors—Risks Related to Our Business ~~Risks~~and Industry—Our operating results fluctuate materially, and an unanticipated decline in revenues may disappoint securities analysts or investors and result in a decline in our stock price.”

Recent Accounting Pronouncements

In ~~December 2008~~October 2009, the FASB issued ~~FASB~~guidance ~~Staff~~addressing ~~Position~~the ~~FAS~~accounting ~~140~~for multiple-4deliverable ~~and~~arrangements ~~FIN~~to ~~46(R)-8,~~enable ~~Disclosures~~vendors byto ~~Public~~account for ~~Entities~~products ~~(Enterprises)~~or ~~about~~services ~~Transfers~~separately ofrather ~~Financial~~than ~~Assets~~as ~~and~~a ~~Interests~~combined inunit. ~~Variable~~The ~~Interest~~guidance ~~Entities,~~amends ~~or FSP~~the ~~No.~~criteria ~~FAS~~for ~~140-4~~separating ~~and~~consideration ~~FIN~~in ~~46(R)~~multiple-8deliverable arrangements. ~~FSP~~This ~~No.~~guidance ~~FAS~~replaces ~~140-4~~all ~~and~~references ~~FIN~~to ~~46(R)-8~~fair ~~amends~~value ~~FASB~~as ~~Statement~~a ~~No. 140,~~measurement ~~Accounting~~criteria with ~~for~~the ~~Transfers~~a ~~and~~selling ~~Servicing~~price ofhierarchy ~~Financial~~for ~~Assets~~determining ~~and~~the ~~Extinguishments~~selling price of ~~Liabilities~~a deliverable, towhich ~~require~~is ~~public~~based ~~entities~~on: to(a) vendor-specific ~~provide additional~~objective ~~disclosures~~evidence; ~~about~~(b) third-party ~~transfers~~evidence; or (c) estimates. This guidance eliminates the residual method of ~~financial~~allocation ~~assets.~~and Itrequires ~~also~~that ~~amends~~arrangement ~~FASB~~consideration ~~Interpretation~~be ~~No. 46,~~allocated ~~Consolidation~~at ofthe ~~Variable~~inception ~~Interest~~of ~~Entities,~~the arrangement to ~~require~~all ~~public~~deliverables ~~enterprises,~~using ~~including~~the ~~sponsors~~relative ~~that~~selling ~~have~~price amethod. ~~variable~~In ~~interest~~addition, inthis aguidance significantly expands required disclosures. The ~~variable~~guidance ~~interest~~is ~~entity,~~effective toprospectively ~~provide~~for ~~additional~~revenue ~~disclosures~~arrangements ~~about~~entered ~~their~~into ~~involvement~~or ~~with~~materially ~~variable~~modified ~~interest~~in ~~entities.~~fiscal ~~The~~years ~~adoption~~beginning ofon ~~FSP~~or Noafter June 15, 2010. ~~FAS~~Early ~~140-4~~adoption ~~and~~is ~~FIN~~permitted. ~~46(R)-8~~We ~~did~~are ~~not~~currently ~~have~~evaluating ~~material~~this ~~impact~~guidance to ~~our~~determine ~~consolidated~~its impact, ~~financial~~if ~~position~~any, ~~results~~on ~~of operations~~our ~~and~~consolidated ~~cash~~financial ~~flows~~statements.

In ~~November~~December ~~2008~~2009, the FASB issued ~~Emerging~~guidance ~~Issues~~changes ~~Task~~how ~~Force~~a ~~No. 08-6~~reporting entity determines when an entity that is insufficiently capitalized, ~~Equity~~or ~~Method~~is ~~Investment Accounting~~not ~~Considerations~~controlled through voting, or ~~EITF~~similar ~~No. 08-6.~~rights, ~~EITF~~should Nobe consolidated. ~~08-6~~ ~~clarifies~~The determination of whether a ~~number~~reporting ofentity ~~matters~~is ~~associated~~required ~~with~~to ~~the~~consolidate ~~impact~~another ofentity ~~FAS~~is ~~141~~based on, among other things, the (R1) other entity’s purpose and ~~FAS~~design; ~~160~~and on(2) the ~~accounting~~reporting ~~for~~entity’s ~~equity~~ability ~~method~~to ~~investments.~~direct ~~EITF~~the ~~08-6~~activities ~~applies~~of ~~prospectively~~the toother entity that most significantly impact the ~~first~~other entity’s economic performance. ~~annual~~The ~~reporting~~guidance ~~period~~also ~~beginning~~requires ona orreporting ~~after~~entity ~~December 15~~to provide additional disclosures, ~~2008~~including how its involvement with a variable interest entity affects the reporting entity’s financial statements. WeThis doguidance ~~not~~is ~~expect~~effective at the ~~adoption~~start of ~~EITF~~the first ~~No.~~fiscal year beginning after November ~~08-6~~15, to2009 ~~have~~and ~~material~~early ~~impact~~application tois ~~our~~not ~~consolidated~~permitted. ~~financial~~We ~~position,~~are ~~results~~currently evaluating the impact of ~~operations~~this ~~and~~guidance ~~cash~~on ~~flows~~our consolidated financial statements.

In ~~December 2007~~January 2010, the FASB issued ~~SFAS~~guidance Noamending and clarifying requirements for fair value measurements and disclosures. ~~160,~~ ~~Noncontrolling~~The ~~Interests~~new guidance requires disclosure of transfers in ~~Consolidated~~and ~~Financial~~out ~~Statements—An~~of ~~Amendment~~Level 1 and Level 2 and a reconciliation of ~~ARB No. 51,~~all oractivity ~~SFAS~~in ~~No. 160.~~Level ~~SFAS~~3 ~~No. 160~~The ~~establishes~~guidance ~~new~~also ~~accounting~~requires ~~and~~detailed ~~reporting~~disaggregation ~~standards~~disclosure for ~~the~~each ~~noncontrolling~~class ~~interest~~of assets and liabilities in aall ~~subsidiary~~levels, and disclosures about inputs and valuation techniques for ~~the~~Level ~~deconsolidation~~2 ofand aLevel ~~subsidiary~~3. ~~SFAS~~The ~~No. 160~~guidance is effective ~~for~~at ~~fiscal~~the ~~years beginning~~start onof interim or annual reporting periods beginning after December 15, ~~2008.~~2009 Weand ~~are~~the ~~still~~disclosure ~~assessing~~reconciliation of all activity in Level 3 is effective at the ~~impact~~start of ~~SFAS~~annual ~~No.~~reporting periods beginning after December ~~160~~15, on2010. ~~our~~We ~~consolidated~~do ~~financial~~not ~~position,~~currently ~~results~~anticipate ofthat ~~operations~~this ~~and~~guidance ~~cash~~will ~~flows~~have a material impact on our consolidated financial statements upon adoption.

In59 December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations, or SFAS No. 141(R). SFAS No. 141(R) will change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141(R) will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS No. 141(R) will have an impact on accounting for business combinations once adopted but the effect will be dependent upon acquisitions at that time.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to risks associated with foreign exchange rate fluctuations due to our international manufacturing and sales activities. These exposures may change over time as business practices evolve and could negatively impact our operating results and financial condition. Currently, we do not hedge these foreign exchange rate exposures. Substantially all of our sales are denominated in U.S. dollars. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and therefore reduce the demand for our products. Such a decline in the demand could reduce revenues and/or result in operating losses. In addition, a downturn in the economies of China, Japan or Taiwan could impair the value of our investments in companies with operations in these countries. If we consider the value of these companies to be impaired, we will write off, or expense, some or all of our investments. In 2006, 2007 and 2008, we recorded investment impairments of $44.1 million, $22.4 million and $21.8 million, respectively.

At any time, fluctuations in interest rates could affect interest earnings on our cash, cash equivalents and short-term investments, or the fair value of our investment portfolio. A 10% move in interest rates as of December 31, 2008 would have an immaterial effect on our financial position, results of operations and cash flows. Currently, we do not hedge these interest rate exposures. As of December 31, 2008, the carrying value of our available-for-sale investments approximated fair value.

~~The~~Item ~~table~~7A. ~~below~~Quantitative ~~presents the carrying value~~ and ~~related~~Qualitative ~~weighted~~Disclosures ~~average~~About ~~interest~~Market ~~rates for our unrestricted and restricted cash, cash equivalents, short-term available-for-sale investments and long-term available-for-sale debt securities as of December 31, 2008 (in thousands):~~ Risk

	CarryingValue		InterestRate
Cash and cash equivalents—variable rate	$	50,880	1.1	%
Short-term available-for-sale investments—fixed rate		48,997	2.8	%
Long-term available-for-sale debt securities—fixed rate		31,848	2.5	%
	$	131,725

We are exposed to risks associated with foreign exchange rate fluctuations due to our international manufacturing and sales activities, including currency exchange rates for China, Taiwan, Japan, Korea, Singapore, Malaysia and the United Kingdom. These exposures may change over time as business practices evolve and could negatively impact our operating results and financial condition. Currently, we do not hedge these foreign exchange rate exposures. Substantially all of our sales are denominated in U.S. dollars. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and therefore reduce the demand for our products. Such a decline in the demand could reduce revenues and/or result in operating losses. We have liabilities for uncertain tax positions related to foreign withholding tax on license revenue, and fluctuations in foreign exchange rates could affect the measurement of these liabilities. As of December 31, 2009, a 10% move in these rates could result in an increase to our tax provision expense of approximately $0.9 million. In addition, a downturn in the economies of China, Japan or Taiwan could impair the value of our investments in companies with operations in these countries. If we consider the value of these companies to be impaired, we will write off, or expense, some or all of our investments. In 2007, 2008 and 2009 we recorded investment impairments of $22.4 million, $21.8 million and $0.5 million, respectively. We do not currently hold any investments sensitive to market risk which were entered into for trading purposes.

At any time, fluctuations in interest rates could affect interest earnings on our cash, cash equivalents and short-term investments, or the fair value of our investment portfolio. A 10% move in interest rates as of December 31, 2009 would have an immaterial effect on our financial position, results of operations and cash flows. Currently, we do not hedge these interest rate exposures.

The table below presents the carrying value and related weighted average interest rates for our unrestricted and restricted cash, cash equivalents, short-term available-for-sale investments and long-term available-for-sale debt securities as of December 31, 2009 (in thousands, except percentages):


	Carrying Value		Interest Rate
Cash and cash equivalents—variable rate	$	92,299	0.4	%
Short-term available-for-sale investments—fixed rate		30,613	0.6	%
Long-term available-for-sale debt securities—fixed rate		19,609	0.7	%

	$	142,521

Item 8.

Financial Statements and Supplementary Data

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

Supplementary Data: Selected Consolidated Quarterly Data

The following tables present our unaudited consolidated statements of operations data for each of the eight quarters in the period ~~ended~~ ended December 31, ~~2008~~2009. The operating results for any quarter should not be relied upon as necessarily indicative of results for any future period. We expect our quarterly operating results to fluctuate in future periods due to a variety of reasons, including those discussed in Item 1A. “Risk Factors.”

	Quarter Ended
	March 31,2007			June 30,2007			September 30,2007			December 31,2007
	(in thousands, except per share data)
Net revenues:
Product revenues	$	88,211		$	90,277		$	97,794		$	95,634
License revenues		9,313			9,066			9,709			11,744
Total net revenues	$	97,524		$	99,343		$	107,503		$	107,378
Gross profit	$	26,521		$	25,593		$	33,897		$	34,405
Income (loss) from operations	$	(773	)	$	(7,094	)	$	2,390		$	(18,582	)
Net loss	$	(1,314	)	$	(7,519	)	$	(16,605	)	$	(23,519	)
Net loss per share—basic	$	(0.01	)	$	(0.07	)	$	(0.16	)	$	(0.23	)
Net loss per share—diluted	$	(0.01	)	$	(0.07	)	$	(0.16	)	$	(0.23	)

In the third quarter of 2007, we recorded a $19.4 million impairment charge for our investment in GSMC. In the fourth quarter of 2007, we recorded a $3.0 million impairment charge for our investment in EoNex and a $19.0 million charge for the impairment of goodwill and long-lived assets. We incurred expenses related to our voluntary independent review of our historical stock option granting practices and resulting financial restatement of $4.0 million, $2.3 million and $5.7 million for the second quarter, third quarter and fourth quarter of 2007, respectively.


	Quarter Ended
	March 31, 2008			June 30, 2008			September 30, 2008		December 31, 2008
	(in thousands, except per share data)
Net revenues:
Product revenues	$	69,698		$	71,073		$	79,800	$	46,294
License revenues		11,387			12,627			12,597		12,059

Total net revenues	$	81,085		$	83,700		$	92,398	$	58,352
Gross profit	$	25,709		$	23,949		$	30,977	$	16,596
Income (loss) from operations	$	(4,569	)	$	(5,913	)	$	4,072	$	(10,764	)
Net income (loss)	$	1,459		$	(9,569	)	$	4,921	$	(36,626	)
Net income (loss) per share—basic	$	0.01		$	(0.09	)	$	0.05	$	(0.38	)
Net income (loss) per share—diluted	$	0.01		$	(0.09	)	$	0.05	$	(0.38	)

In the fourth quarter of 2008, we recorded impairment charges of $9.7 million and $11.6 million related to our investments in ACET and GSMC, respectively, as well as a restructuring charge of $2.5 million. During the first quarter of 2008, we recorded a tax benefit of $7.9 million for a refund received from the Internal Revenue Service.


	March 31, 2009			June 30, 2009			September 30, 2009		December 31, 2009
	(in thousands, except per share data)
Net revenues:
Product revenues	$	38,787		$	51,766		$	61,766	$	60,343
License revenues		11,342			6,317			9,487		12,519

Total net revenues	$	50,129		$	58,083		$	71,253	$	72,862
Gross profit	$	15,594		$	13,509		$	22,463	$	23,674
Income (loss) from operations	$	(6,269	)	$	(7,543	)	$	1,480	$	3,032
Net Income (loss)	$	(9,241	)	$	(6,448	)	$	3,092	$	2,360
Net loss per share—basic	$	(0.10	)	$	(0.07	)	$	0.03	$	0.02
Net loss per share—diluted	$	(0.10	)	$	(0.07	)	$	0.03	$	0.02

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A.

Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also are designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

~~Our~~61 management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a 15(e) and 15d 15(e)) as of December 31, 2008. Based on their evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of December 31, 2008, our disclosure controls and procedures are effective.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a 15(e) and 15d 15(e)) as of December 31, 2009. Based on their evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of December 31, 2009, our disclosure controls and procedures are effective.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a 15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, ~~2008~~2009. In making its assessment of internal control over financial reporting, our management used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment was reviewed with the Audit Committee of the Board of Directors. Based on its assessment of internal control over financial reporting, management has concluded that, as of December 31, ~~2008~~2009, our internal control over financial reporting was effective.

59The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Remediation of Material Weakness

In the Disclosure Controls and Procedures included in our quarterly report on Form 10-Q for the quarter ended June 30 and September 30, 2009, our management concluded that, as of June 30, 2009 and September 30, 2009, our internal control over financial reporting was not effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principals.

As of June 30, 2009, we did not maintain effective controls to ensure the accuracy of the provision for income taxes. Specifically, we did not maintain a sufficient complement of tax resources with the required proficiency to identify, evaluate, review and report complex tax accounting matters. This deficiency resulted in adjustments to the unaudited condensed consolidated financial statements for the quarter ended June 30, 2009. Specifically, during the second quarter of 2009, we identified certain prior period errors totaling $2.2 million, related to the provision for (benefit from) income taxes. In calculating our tax provision for the quarter ended March 31, 2009, we incorrectly calculated the balance of the foreign withholding tax liability for uncertain tax

~~The~~ positions ~~effectiveness~~on ofwhich re-measurement was required due to changes in foreign currency exchange rates. As a result, our ~~internal~~income ~~control~~tax ~~over~~provision ~~financial~~was ~~reporting~~overstated asby of$2.1 million in the quarter ended March 31, 2009. In addition, we overstated by $0.1 million the liability for uncertain tax positions for foreign tax withholding on license revenue at December 31, 2008. ~~has~~This ~~been~~control deficiency could result in a material misstatement of ~~audited~~our byannual ~~PricewaterhouseCoopers~~or ~~LLP,~~interim anconsolidated ~~independent~~financial ~~registered~~statements ~~public~~that ~~accounting~~would ~~firm~~not be prevented or detected. Accordingly, asmanagement ~~stated~~determined inthat ~~their~~this ~~report~~control ~~which~~deficiency ~~appears~~constituted ~~herein~~a material weakness.

~~Remediation~~Subsequent to the identification of the material weakness described above, we have taken the following remediation measures ~~Prior~~related ~~Year~~to ~~Material~~the ~~Weakness~~calculation of the provision for income taxes and determination of the liability for uncertain tax positions:

~~The~~• ~~evaluation~~Updated ofwithholding ~~internal~~rates ~~control~~on ~~over~~a ~~financial~~quarterly ~~reporting~~basis asupon ofwhich ~~December 31, 2006 and 2007, performed under~~ the ~~supervision~~tax ofliability ~~our~~is ~~management,~~calculated ~~including our Chief Executive Officer~~ and ~~Chief~~established ~~Financial~~additional ~~Officer,~~procedures ~~identified~~to ~~material~~evaluate ~~weaknesses in our internal control over financial reporting. Specifically, our controls over~~ the ~~perpetual inventory~~accuracy ~~system, recording~~ of inventory adjustments resulting from physical inventory observations, standard cost updates, processing of outside service provider costs to inventory accounts, capitalization of production variances into inventory and valuation of inventory related reserves in accordance with generally accepted accounting principles in the ~~United~~tax ~~States,~~liability ~~were~~including ~~not~~a ~~effective.~~roll ~~These~~forward ~~control~~schedule ~~deficiencies resulted in audit adjustments to the 2006~~ and ~~2007~~checklist ~~consolidated annual and interim financial statements. We had previously determined that our existing inventory tracking and management system was inadequate and began planning for the implementation~~ of aprocedures ~~new system in 2006. In August 2007, we converted~~ to ~~Oracle~~be ~~Shop~~performed ~~Floor Management,~~each or OSFM, a computerized perpetual inventory tracking and management system that is integrated with our other accounting and information technology systems, and continued remediation efforts throughout 2008. In the fourth quarter ~~of 2008, we remediated the controls associated with the physical inventory observation~~. ~~The changes to control procedures primarily consisted of the following:~~

• ~~Perpetual~~Established ~~inventory~~a ~~system.~~database Weon ~~identified~~all ~~and~~transactions ~~corrected~~subject ~~the~~to ~~program~~foreign ~~loading~~withholding ~~data~~tax ~~from~~for ~~our~~purposes ~~vendors~~of toaccurately ~~OSFM~~calculating the withholding tax liability.

• ~~Physical~~Reallocated ~~inventory~~management ~~observations.~~resources ~~Vendor~~to ~~data~~the ~~and~~review ~~timing~~of ~~issues~~the ~~were~~foreign ~~resolved,~~withholding ~~which~~tax ~~decreased~~liability and the ~~time~~re-measurement ~~necessary~~required due to ~~reconcile~~changes ~~the~~in ~~physical~~foreign ~~inventory~~currency ~~observations~~exchange rates.

•During ~~Standard~~the ~~cost~~quarters ~~updates.~~ended ~~New~~September 30, ~~procedures~~2009 ~~have~~and ~~been~~December 31, ~~implemented~~2009, management totested ~~evaluate~~the design and ~~adjust~~operating aseffectiveness ~~necessary~~of ~~for~~the ~~standard~~controls ~~cost~~and ~~updates~~concluded ~~during~~that the ~~quarter~~material ~~that~~weakness ~~can~~described ~~potentially~~above ~~misstate~~has ~~the~~been ~~calculation~~remediated as of ~~capitalized~~December 31, ~~production variances~~2009.

• Processing outside service provider costs. Automated alerts were implemented to notify information technology staff when a change in system status occurs.

• Valuation of inventory reserves. The process used to calculate reserves was extensively modified and reviewed by management. Additional control procedures, including third party reviews, were implemented to minimize control weaknesses. The individual responsible for the reserve calculation was adequately trained in the operation of the system.

Changes in Internal Control Over Financial Reporting

As described above, we ~~there~~have ~~were~~completed ~~changes to~~ our ~~internal~~corrective ~~control~~actions ~~over financial reporting (as defined~~ in ~~Rule~~response ~~13a~~to ~~15(f) of~~ the ~~Exchange~~aforementioned ~~Act)~~material ~~that~~weakness ~~occurred~~ during the ~~fourth~~ quarter ~~of the year~~ ended December 31, ~~2008~~2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting as defined in Rules 13a 15(f) and 15d 15(f) of the Exchange Act.

Item 9B.

Other Information

~~In March 2007, our Board of~~None Directors determined to conduct a voluntary review of our historical stock option grant practices covering the time from our initial public offering in 1995 through 2007. The Chairman of the Audit Committee reached the conclusion that incorrect measurement dates were used for financial accounting purposes for stock option grants made in certain prior periods, and as a result, we restated our historical financial statements. Because the restatement process was not concluded until early 2008, we did not hold an annual shareholder meeting in 2007.

6063

On July 7, 2008 we announced that the SEC formally notified us that the SEC investigation related to our historical stock option grant practices had been terminated. No enforcement action has been recommended. In addition, we announced that the NASDAQ Stock Market LLC formally notified us that with the holding of our annual meeting on June 27, 2008 we have regained compliance with NASDAQ listing requirements.

In February 2009, we announced we had reached an agreement in principle with one of our existing foundry licensees, to license our SuperFlash technology for an additional number of nodes. The agreement in principle provides for a concurrent equity investment by us in GSMC pursuant to a separate subscription agreement. If consummated, then pursuant to the license agreement GSMC would remit back to us a cash fee equal to our equity investment. In addition, we would be entitled to additional cash payments on specific dates and future royalty payments based on the use of the licensed technology. The definitive agreements, however, are subject to a number of pre-conditions which must be satisfied. In the event the conditions are not satisfied or the parties otherwise do not agree to waive their satisfaction, the equity investment and license transaction will not be consummated. We do not expect that the conditions will be satisfied, if at all, until the second quarter of 2009. We cannot guarantee that such conditions will be satisfied or otherwise waived. As a result of the impairment charges that we have incurred with respect to our investment in GSMC, we are currently analyzing the amount of revenue, if any, that we may recognize pursuant to the license agreement, if the transactions are consummated.

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

The information required by this item will be ~~contained~~included in ~~our~~Form ~~definitive~~10-K/A, ~~Proxy Statement with respect~~ to ~~our~~be ~~2009~~filed ~~Annual~~no ~~Meeting~~later ofthan ~~Shareholders~~120 ~~under~~days ~~the~~after ~~captions “Election of Directors,” “Security Ownership of Certain Beneficial Owners and Management—Compliance with~~ the ~~Reporting~~end ~~Requirement~~ of ~~Section 16(a),” “Information Regarding~~ the ~~Board~~reporting ~~of Directors and its Committees—Audit Committee~~period,” ~~“Report~~in of the ~~Audit~~event ~~Committee~~that ofwe ~~the Board~~are ofsubject ~~Directors,”~~to ~~“Information~~such ~~Regarding~~requirements ~~the Board of Directors and its Committees—Nominating and Corporate Governance Committee,” and “Code of Conduct,” and is incorporated by reference into this Annual Report. The~~at ~~information~~that ~~relating to our executive officers is contained in Part I, Item 1 of this Annual Report~~time.

Item 11.

Executive Compensation

The information required by this item will be ~~contained~~included in ~~our~~Form ~~definitive~~10-K/A, ~~Proxy~~to ~~Statement~~be ~~with~~filed ~~respect~~no tolater ~~our~~than ~~2009~~120 ~~Annual~~days ~~Meeting~~after ofthe ~~Shareholders~~end ~~under~~of the ~~captions~~reporting ~~“Executive Compensation~~period,” ~~“Compensation~~in ~~Committee~~the ~~Interlocks~~event ~~and~~that ~~Insider~~we ~~Participation,” “Director~~are ~~Compensation”~~subject ~~and~~to ~~“Compensation~~such ~~Committee~~requirements ~~Report”~~at ~~and~~that ~~is incorporated by reference into this Annual Report~~time.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The information required by this item will be ~~contained~~included in ~~our~~Form ~~definitive~~10-K/A, ~~Proxy~~to ~~Statement~~be ~~with~~filed ~~respect~~no tolater ~~our~~than ~~2009~~120 ~~Annual~~days ~~Meeting~~after ~~of Shareholders under~~ the ~~captions~~end ~~“Security Ownership~~ of ~~Certain~~the ~~Beneficial~~reporting period, ~~Owners~~in ~~and~~the ~~Management”~~event ~~and~~that ~~“Executive~~we ~~Compensation—Equity Compensation Plan Information,” and~~ are ~~incorporated~~subject byto ~~reference~~such ~~into~~requirements ~~this~~at ~~Annual~~that ~~Report~~time.

Item 13.

Certain Relationships and Related Transactions, and Director Independence

The information required by this item will be ~~contained~~included in ~~our~~Form ~~definitive~~10-K/A, ~~Proxy~~to ~~Statement~~be ~~with~~filed ~~respect~~no tolater ~~our~~than ~~2009~~120 ~~Annual~~days ~~Meeting~~after ofthe ~~Shareholders~~end ~~under~~of the ~~captions “Transactions with Related Parties” and~~reporting ~~“Independence~~period, ofin the ~~Board~~event ofthat ~~Directors”~~we ~~and~~are issubject ~~incorporated~~to bysuch ~~reference~~requirements ~~into~~at ~~this~~that ~~Annual Report~~time. ~~Please also see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Party Transactions.”~~

Item 14.

Principal Accountant Fees and Services

The information required by this item will be ~~contained~~included in ~~our~~Form ~~definitive~~10-K/A, ~~Proxy~~to ~~Statement~~be ~~with~~filed ~~respect~~no tolater ~~our~~than ~~2009~~120 ~~Annual~~days ~~Meeting~~after ofthe ~~Shareholders~~end ~~under~~of the ~~caption~~reporting ~~“Principal~~period, ~~Accountant~~in ~~Fees~~the ~~and~~event ~~Services”~~that ~~and~~we isare ~~incorporated~~subject byto ~~reference~~such ~~into~~requirements at ~~this~~that ~~Annual Report~~time.

6264

PART IV

Item 15.

Exhibits and Financial Statement Schedules

(a)(1) Consolidated Financial Statements. The index to the consolidated financial statements is below.

Item		Page
Report of Independent Registered Public Accounting Firm		6769
Consolidated Balance Sheets		6870
Consolidated Statements of Operations		6971
Consolidated Statements of Shareholders’ Equity and Comprehensive Loss		70
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss)		72
Consolidated Statements of Cash Flows		7173
Notes to the Consolidated Financial Statements		7274
(2) Financial Statement Schedule.
Schedule II—Valuation and Qualifying Accounts		107
Schedule II—Valuation and Qualifying accounts		109

Exhibits. See Exhibit Index in part (b), below.

(b) Index to Exhibits.

ExhibitNumber	Exhibit Description	Incorporated By Reference				FiledHerewith
		Form	File No.	Exhibit	Filing Date
2.1	Agreement and Plan of Merger, dated February 2, 2010, by and among Microchip Technology Incorporated, Sun Acquisition Corporation and SST.	8-K	000-26944	2.1	2/3/2010
2.2	Amendment No. 1 to Agreement and Plan of Merger, dated February 22, 2010, by and among Microchip Technology Incorporated, Sun Acquisition Corporation and SST.	8-K	000-26944	2.2	2/23/2010
2.3	Amendment No. 2 to Agreement and Plan of Merger, dated March 8, 2010, by and among Microchip Technology Incorporated, Sun Acquisition Corporation and SST.	8-K	000-26944	2.3	3/8/2010
3.1	Bylaws of Silicon Storage Technology, Inc., as amended.	8-K	000-26944	3.1	1/7/2008
3.2	Restated Articles of Incorporation of SST, dated November 3, 1995.	S-1	33-97802	3.4	10/5/1995
3.3	Certificate of Amendment of the Restated Articles of Incorporation of SST, dated June 30, 2000.	10-Q	000-26944	3.5	8/7/2000
3.4	Certificate of Designation of Series A Junior Participating Preferred Stock	8-K	000-26944	99.3	5/18/1999
4.1	Reference is made to Exhibits 3.1 to 3.4.
4.2	Specimen Stock Certificate of SST.	S-1	33-97802	4.2	11/3/1995
4.3	Rights Agreement between SST and American Stock Transfer and Trust Co., dated May 4, 1999.	8-K	000-26944	99.2	5/18/1999
4.4	Amendment No. 1 to Rights Agreement between SST and American Stock Transfer and Trust Co., dated October 28, 2000.	10-K	000-26944	3.6	3/30/2001
10.1+	1995 Equity Incentive Plan and related agreements.	S-8	333-108345	99.1	8/29/2003
10.2+	1995 Employee Stock Purchase Plan.	S-8	333-108345	99.3	8/29/2003
10.3+	1995 Non-Employee Director’s Stock Option Plan, as amended, and related form of stock option agreement.	10-Q	000-26944	10.3	8/11/2008
10.4+	Employee Profit Sharing Plan.	10-Q	000-26944	10.4	5/10/2006

6365

ExhibitNumber

Exhibit Description

Incorporated By Reference

FiledHerewith

Form

File No.

Exhibit

Filing Date

10.5

Lease Agreement between SST and Sonora Court Properties, dated May 4, 1993, as amended.

S-1

33-97802

10.6

10/5/1995

4.4

Amendment No. 1 to Rights Agreement between SST and American Stock Transfer and Trust Co., dated October 28, 2000.

10-K

000-26944

3.6

3/30/2001

10.6

Lease Agreement between SST and Coast Properties, dated May 4, 1995, as amended.

S-1

33-97802

10.7

10/5/1995

10.1+

1995 Equity Incentive Plan and related agreements.

S-8

333-108345

99.1

8/29/2003

10.7

Lease Amendment, dated March 4, 1998, between SST and Sonora Court Properties.

10-Q

000-26944

10.17

8/14/1998

10.2+

2009 Employee Stock Purchases Plan.

DEF 14

000-26944

Annex A

4/30/2009

10.8

Lease Amendment, dated March 4, 1998, between SST and Coast Properties.

10-Q

000-26944

10.18

8/14/1998

10.3+

1995 Non-Employee Director’s Stock Option Plan, as amended, and related form of stock option agreement.

10-Q

000-26944

10.3

8/11/2008

10.9

Second Amendment to Lease, dated September 13, 1999, between SST and Coast Properties.

10-K

000-26944

10.23

2/24/2000

10.4+

Employee Profit Sharing Plan.

10-Q

000-26944

10.4

5/10/2006

10.1

Lease Agreement between SST and Bhupinder S. Lehga and Rupinder K. Lehga, dated November 15, 1999.

10-K

000-26944

10.24

2/24/2000

10.5+

Non-Employee Director Cash Retainer Program.

8-K

000-26944

10.15

4/21/2005

10.11

Lease Agreement between SST and The Irvine Company, dated November 22, 1999.

10-K

000-26944

10.25

2/24/2000

10.6+

Form of Indemnity Agreement by and between SST and each executive officer and director.

10-K

000-26944

10.18

1/16/2008

10.12

Sunnyvale Industrials Net Lease Agreement, dated June 26, 2000.

10-Q

000-26944

10.28

8/7/2000

10.7+

2007 Executive Bonus Plan.

10-Q

000-26944

10.19

1/18/2008

10.13+

Non-Employee Director Cash Retainer Program.

8-K

000-26944

10.15

4/21/2005

10.8+

2008 Equity Incentive Plan.

8-K

000-26944

10.18

7/1/2008

10.14+

Form of Indemnity Agreement by and between SST and each executive officer and director.

10-K

000-26944

10.18

1/16/2008

10.9+

Form of Stock Option Grant Notice and Agreement.

8-K

000-26944

10.19

7/1/2008

10.15+

2007 Executive Bonus Plan.

10-Q

000-26944

10.19

1/18/2008

10.10+

Form of Non-Employee Director Stock Option Grant Notice and Agreement.

8-K

000-26944

10.2

7/1/2008

10.16+

2008 Equity Incentive Plan.

8-K

000-26944

10.18

7/1/2008

10.11+

Form of Restricted Stock Unit Grant Notice and Agreement.

8-K

000-26944

10.21

7/1/2008

10.17+

Form of Stock Option Grant Notice and Agreement.

8-K

000-26944

10.19

7/1/2008

10.12+

Form of Restricted Stock Bonus Grant Notice and Agreement.

8-K

000-26944

10.22

7/1/2008

10.18+

Form of Non-Employee Director Stock Option Grant Notice and Agreement.

8-K

000-26944

10.2

7/1/2008

10.13+

Letter Agreement by and between SST and Michael Briner, dated June 25, 2008.

8-K

000-26944

10.23

7/1/2008

10.19+

Form of Restricted Stock Unit Grant Notice and Agreement.

8-K

000-26944

10.21

7/1/2008

10.14

Settlement Agreement, dated May 21, 2008, between SST and the Riley Group.

8-K

000-26944

10.16

5/23/2008

10.20+

Form of Restricted Stock Bonus Grant Notice and Agreement.

8-K

000-26944

10.22

7/1/2008

10.15+

Form of Stock Bonus Agreement.

8-K

000-26944

10.17

6/4/2008

10.21+

Letter Agreement by and between SST and Michael Briner, dated June 25, 2008.

8-K

000-26944

10.23

7/1/2008

10.16

Voting Agreement by and among SST, Bing Yeh, Deborah Yeon-May Yeh, Golden Eagle Capital L.P. and Yeh Family Trust U/T/D dated August 14, 1995.

8-K

000-26944

10.1

3/16/2010

10.22

Settlement Agreement, dated May 21, 2008, between SST and the Riley Group.

8-K

000-26944

10.16

5/23/2008

10.23+

Form of Stock Bonus Agreement.

8-K

000-26944

10.17

6/4/2008

21.1

Subsidiaries of SST.

23.1

Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.

6466

ExhibitNumber

Exhibit Description

Incorporated By Reference

FiledHerewith

Form

~~File No~~FileNo.

Exhibit

~~Filing Date~~FilingDate

23.2

Consent of PricewaterhouseCoopers, Independent Registered Public Accounting Firm.

23.3

Consent of Ernst & Young, Independent Registered Public Accounting Firm.

24.1

Power of Attorney is contained on the signature page.

31.1

Certification of ~~President and~~ Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2

Certification of Chief Financial Officer and Senior Vice President of Finance as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1*

Certification of ~~President and~~ Chief Executive Officer, as required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

32.2*

Certification of Chief Financial Officer and Senior Vice President of Finance, as required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

99.1

Audited Financial Statements of Advanced Chip Engineering Technology Inc.

99.2

Financial Statements of Advanced Chip Engineering Technology Inc.

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

+	Management contract, compensatory plan or arrangement.

6567

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, County of Santa Clara, State of California, on the ~~20th~~ 17th day of March, ~~2009~~2010.

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

POWER OF ATTORNEY

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

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

Signature	Title	Date
/s/ BING YEH Bing Yeh	~~President,~~ Chief Executive Officer and Chairman of the Board (Principal Executive Officer)	March 2017, ~~2009~~2010
/s/ JAMES B. BOYD James B. Boyd	Chief Financial Officer and Senior Vice President, Finance (Principal Financial and Accounting Officer)	March 2017, ~~2009~~2010
/s/ YAW WEN HU Yaw Wen Hu	Director	March 2017, ~~2009~~2010
/s/ RONALD CHWANG Ronald Chwang	Director	March 2017, ~~2009~~2010
/s/ TERRY NICKERSON Terry Nickerson	Director	March 2017, ~~2009~~2010
/s/ EDWARD YAO-WU YANG Edward Yao-Wu Yang	Director	March 2017, ~~2009~~2010
/s/ BRYANT R. RILEY Bryant R. Riley	Director	March 20, 2009

6668

Report of Independent Registered Public Accounting Firm

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

In our opinion, the consolidated ~~balance~~financial ~~sheets and the related consolidated~~ statements oflisted ~~operations,~~in ~~shareholders’~~the ~~equity~~index ~~and~~appearing ~~comprehensive~~under ~~loss~~Item ~~and~~15(a)(1) ~~cash flows~~ present fairly, in all material respects, the financial position of Silicon Storage Technology, Inc. and its subsidiaries at December 31, ~~2008~~2009 and ~~2007~~2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 ~~2008~~ in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2008~~2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and the financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 14 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in 2007.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

/s/ PricewaterhouseCoopers LLP

San Jose, California

March 2017, ~~2009~~2010

6769

SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

	December 31,
	2007			2008
	2008			2009
ASSETS
Current assets:
Cash and cash equivalents	$	~~118~~50,~~157~~880		$	5092,~~880~~299
Short-term available-for-sale investments		4448,~~067~~997			4830,~~997~~613
Trade accounts receivable-unrelated parties, net of allowance for doubtful accounts of $20 at December 31, 2007 and $79 at December 31, 2008		19,301			9,356
Trade accounts receivable-unrelated parties, net of allowance for doubtful accounts of $79 at December 31, 2008 and $12 at December 31, 2009		9,356			11,520
Trade accounts receivable-related parties		3710,~~012~~761			1026,~~761~~140
Inventories		5054,~~178~~159			5436,~~159~~881
Other current assets		64,~~055~~153			45,~~153~~317
Total current assets		~~274~~178,~~770~~306			~~178~~202,~~306~~770
Property and equipment, net		18,247			18,913
Long-term available-for-sale debt securities		31,848			19,609
Long-term available-for-sale equity investments		3618,~~160~~196			1840,~~196~~619
Long-term available-for-sale debt securities		—			31,848
Equity investments, GSMC		11,506			20,720
Equity investments, GSMC		23,150			11,506
Equity investments, others		13,113			11,436
Equity investments, ACET		20,756			2,627
Property and equipment, net		18,913			12,051
Equity investments, others		10,645			10,486
Goodwill		11,221			11,221
Intangible assets, net		73,~~391~~573			31,~~573~~661
Other assets		1,~~125~~807			14,~~807~~520
Total assets	$	~~403~~288,~~465~~483		$	~~288~~324,~~483~~607
LIABILITIES
Current liabilities:
Borrowing under line of credit facility	$	6,836		$	—
Trade accounts payable-unrelated parties	$	15,702		$	20,052
Trade accounts payable-unrelated parties		23,572			13,069
Trade accounts payable-related parties		3,444			8,186
Trade accounts payable-related parties		18,495			6,077
Accrued expenses and other liabilities		14,200			12,215
Accrued expenses and other liabilities		21,457			14,200
Deferred revenue		3,841			13,970
Deferred revenue		3,004			3,841
Total current liabilities		37,187			54,423
Total current liabilities		73,364			37,187
Taxes payable		7,760			8,947
Taxes payable		6,194			7,760
Other liabilities		322			1,110
Other liabilities		1,354			322
Total liabilities		45,269			64,480
Total liabilities		80,912			45,269
Commitments (Note 4) and Contingencies (Note 5)
SHAREHOLDERS’ EQUITY
Preferred stock, no par value:
Authorized: 7,000 shares. Series A Junior Participating Preferred Stock, no par value Designated: 450 shares Issued and outstanding: none at December 31, 2007 and 2008		—			—
Authorized: 7,000 shares. Series A Junior Participating Preferred Stock, no par value Designated: 450 shares. Issued and outstanding: none at December 31, 2008 and 2009
Common stock, no par value:
Authorized: 250,000 shares Issued and outstanding: 104,198 shares at December 31, 2007 and 95,498 shares at December 31, 2008		434,905			412,312
Authorized: 250,000 shares. Issued and outstanding: 95,498 shares at December 31, 2008 and 95,854 shares at December 31, 2009		412,312			415,267
Accumulated other comprehensive income		3114,~~239~~308			1438,~~308~~503
Accumulated deficit		(~~143~~183,~~591~~406	)		(~~183~~193,~~406~~643	)
Total shareholders’ equity		~~322~~243,~~553~~214			~~243~~260,~~214~~127
Total liabilities and shareholders’ equity	$	~~403~~288,~~465~~483		$	~~288~~324,~~483~~607

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

6870

SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

Year Ended December 31,

2006

2007

2008

2007

2008

2009

Net revenues:

Product revenues—unrelated parties

~~165~~145,~~743~~267

~~145~~113,~~267~~733

~~113~~82,~~733~~606

Product revenues—related parties

~~249~~226,~~698~~649

~~226~~153,~~649~~132

~~153~~130,~~132~~056

Technology licensing—unrelated parties

3539,~~588~~656

3948,~~656~~279

4839,~~279~~162

Technology licensing—related parties

~~1,480~~176

~~176~~391

~~391~~503

Total net revenues

~~452~~411,~~509~~748

~~411~~315,~~748~~535

~~315~~252,~~535~~327

Cost of revenues:

Cost of revenues—unrelated parties

~~122~~102,~~764~~227

~~102~~81,~~227~~998

8157,~~998~~453

Cost of revenues—related parties

~~210~~189,~~879~~105

~~189~~136,~~105~~306

~~136~~119,~~306~~634

Total cost of revenues

~~333~~291,~~643~~332

~~291~~218,~~332~~304

~~218~~177,~~304~~087

Gross profit

~~118~~120,~~866~~416

~~120~~97,~~416~~231

9775,~~231~~240

Operating expenses:

Research and development

5256,~~003~~712

5658,~~712~~955

5843,~~955~~160

Sales and marketing

2829,~~464~~229

2926,~~229~~605

2620,~~605~~344

General and administrative

2227,~~278~~603

2726,~~603~~331

2620,~~331~~706

Other (Note 11)

—

30,931

2,514

Other (Note 10)

30,931

2,514

329

Total operating expenses

~~102~~144,~~745~~475

~~144~~114,~~475~~405

~~114~~84,~~405~~539

Income (loss) from operations

16,121

(24,059

)

(17,174

)

Loss from operations

(24,059

)

(17,174

)

(9,299

)

Interest income

47,~~594~~329

74,~~329~~057

41,~~057~~966

Dividend income

1,~~143~~666

1,~~666~~578

1,~~578~~406

Interest expense

(~~345~~495

)

(~~495~~140

)

(~~140~~19

)

Gain on sale of investments

~~12,206~~159

~~159~~—

—1,811

Impairment of investments

(4422,~~123~~400

)

(2221,~~400~~832

)

(~~21,832~~485

)

Other income (expense), net

20115

~~115~~(517

)

~~(517~~355

)

Loss before provision for income taxes and pro rata share of loss from equity investments

(10,384

)

(37,685

)

(34,028

)

Loss before provision for (benefit from) income taxes and pro rata share of loss from equity investments

(37,685

)

(34,028

)

(4,265

)

Provision for (benefit from) income taxes

74,~~194~~237

4(3,~~237~~358

)

(34,~~358~~692

)

Loss before pro rata share of loss from equity investments

(1741,~~578~~922

)

(4130,~~922~~670

)

(308,~~670~~957

)

Pro rata share of loss from equity investments

37,~~199~~035

79,~~035~~145

91,~~145~~280

Net loss

(2048,~~777~~957

)

(4839,~~957~~815

)

(3910,~~815~~237

)

Net loss per share—basic and diluted

(0.2047

)

(0.4740

)

(0.4011

)

Shares used in per share calculation—basic and diluted

~~103~~104,~~355~~134

~~104~~100,~~134~~019

~~100~~95,~~019~~790

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

6971

SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND

COMPREHENSIVE INCOME (LOSS)

(in thousands)

	Common Stock					~~UnearnedShare-BasedCompensation~~AccumulatedOtherComprehensiveIncome			~~AccumulatedOtherComprehensiveIncome~~AccumulatedDeficit			~~AccumulatedDeficit~~Total			~~Total~~
	Shares		Amount
Balances, December 31, 2005	102,827		$	415,375		$	(558	)	$	31,780		$	(70,652	)	$	375,945
Balances, December 31, 2006	103,629		$	425,863		$	31,281		$	(91,429	)	$	365,715
Issuance of shares of common stock under employee stock purchase and option plans	~~802~~569			21,~~744~~236			—			—			—1,236			~~2,744~~
Reversal of unearned stock-based compensation upon adoption of FAS 123(R)	—			(558	)		558			—			—			—
Share-based compensation	—			5,291			—			—			5,291
Share-based compensation	—			8,013			—			—			—			8,013
Equity affiliate share-based compensation	—			689			—			—			689
Tax benefit from exercise of stock options	—			(11	)		—			—			—			(11	)
Impact of change in accounting for uncertain tax positions	—			—			—			(3,205	)		(3,205	)
Gain on change in equity interest in ACET	—			~~300~~1,826			—			—			1,826			~~300~~
Net loss	—			—			—			—(48,957	)		~~(20,777~~	)
Unrealized loss on available-for-sale investments	—			—			—			(608	)		—
Unrealized gain on available-for-sale investments	—			—			106			—
Cumulative translation adjustment	—			—			—(148	)		~~109~~—			—
Comprehensive loss	—			—			—			—			—(48,999	)		~~(21,276~~	)
Balances, December 31, 2006	103,629			425,863			—			31,281			(91,429	)		365,715
Balances, December 31, 2007	104,198			434,905			31,239			(143,591	)		322,553
Issuance of shares of common stock under employee stock purchase and option plans	~~569~~818			1,~~236~~107			—			—			—1,107			~~1,236~~
Share-based compensation	—			5,291			—			—			—			5,291
Repurchase of common stock	(9,518	)		(28,922	)		—			—			(28,922	)
Equity affiliate share-based compensation	—			689			—			—			—			689
Share-based compensation	—			4,643			—			—			4,643
Impact of adoption of FIN 48	—			—			—			—			(3,205	)		(3,205	)
Equity affiliate share-based compensation	—			609			—			—			609
Gain on change in equity interest in ACET	—			1,826			—			—			—			1,826
Other	—			(30	)		—			—			(30	)
Net loss	—			—			—			—(39,815	)		~~(48,957~~	)
Unrealized gain on available-for-sale investments	—			—			—			106			—
Unrealized loss on available-for-sale investments	—			—			(17,180	)		—
Cumulative translation adjustment	—			—			—249			~~(148~~—	)		—
Comprehensive loss	—			—			—			—			—(56,746	)		~~(48,999~~	)
Balances, December 31, 2007	104,198			434,905			—			31,239			(143,591	)		322,553
Balances, December 31, 2008	95,498			412,312			14,308			(183,406	)		243,214
Issuance of shares of common stock under employee stock purchase and option plans	~~818~~356			~~1,107~~583			—			—			—583			~~1,107~~
Repurchase of common stock	(9,518	)		(28,922	)		—			—			—			(28,922	)
Share-based compensation	—			2,403			—			—			2,403
Share-based compensation	—			4,643			—			—			—			4,643
Other	—			(31	)		—			—			(31	)
Equity affiliate share-based compensation	—			609			—			—			—			609
Net loss	—			—			—			(10,237	)
Other	—			(30	)		—			—			—			(30	)
Unrealized gain on available-for-sale investments	—			—			24,399			—
Net loss	—			—			—			—			(39,815	)
Cumulative translation adjustment	—			—			(204	)		—
Unrealized loss on available-for-sale investments	—			—			—			(17,180	)		—
Comprehensive income	—			—			—			—			13,958
Cumulative translation adjustment	—			—			—			249			—
Balances, December 31, 2009	95,854		$	415,267		$	38,503		$	(193,643	)	$	260,127
Comprehensive loss	—			—			—			—			—			(56,746	)
Balances, December 31, 2008	95,498		$	412,312		$	—		$	14,308		$	(183,406	)	$	243,214

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

7072

SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	Twelve Months EndedDecember 31,
	2006			2007			2008
	2007			2008			2009
Cash flows from operating activities:
Net loss	$	(2048,~~777~~957	)	$	(4839,~~957~~815	)	$	(3910,~~815~~237	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1011,~~022~~302			1110,~~302~~595			108,~~595~~648
Share-based compensation expense		85,~~013~~291			54,~~291~~654			42,~~654~~541
Provision (credits) for doubtful accounts receivable		(708	)		(92	)		59
Write-down of inventories and provision for adverse purchase commitments		8,473			14,181			11,427
Provision for (release from) sales returns		579			(653	)		481
Pro rata share of loss from equity investments		7,035			9,145			1,280
Write-down of inventories and provision for adverse purchase commitments		15,995			8,473			14,181
Impairment loss on equity investment		22,400			21,598			485
Pro rata share of loss from equity investments		3,199			7,035			9,145
Impairment loss on goodwill, intangible assets, property and equipment		18,961			1,096			—
Impairment loss on equity investments		44,123			22,400			21,598
Gain on sale or exchange of equity investments		(159	)		—			(1,811	)
Impairment loss on property, equipment and intangible assets		—			969			1,096
Other		(509	)		789			147
Impairment loss on goodwill		—			17,992			—
Gain on sale of equity investments		(12,206	)		(159	)		—
Other		(10	)		236			249
Changes in operating assets and liabilities:
Trade accounts receivable-unrelated parties		2,116			804			9,401
Trade accounts receivable—unrelated parties		804			9,401			(2,087	)
Trade accounts receivable-related parties		10,305			8,572			26,255
Trade accounts receivable—related parties		8,572			26,255			(15,371	)
Inventories		1715,~~205~~222			15(17,~~222~~065	)		~~(17~~7,~~065~~269	)
Other current and non-current assets		23,~~302~~595			31,~~595~~811			~~1,811~~125
Trade accounts payable-unrelated parties		(17,072	)		(7,690	)		(10,504	)
Trade accounts payable—unrelated parties		(7,690	)		(10,504	)		4,350
Trade accounts payable-related parties		14,643			(17,900	)		(12,418	)
Trade accounts payable—related parties		(17,900	)		(12,418	)		4,742
Accrued expenses and other liabilities		45,~~274~~109			5(6,~~109~~777	)		(62,~~777~~453	)
Deferred revenue		(~~1,103~~386	)		~~(386~~837	)		~~837~~431
Net cash provided by operating activities		8031,~~900~~163			3113,~~163~~783			139,~~783~~486
Cash flows from investing activities:
Investments in equity securities		(1812,~~854~~950	)		~~(12,950~~—	)		—(439	)
Purchase of property and equipment		(6,~~256~~360	)		(68,~~360~~320	)		(81,~~320~~110	)
Purchases of available-for-sale investments		(9695,~~611~~660	)		(95120,~~660~~438	)		(~~120~~74,~~438~~808	)
Purchase of intellectual property license		(494	)		(1,585	)		(139	)
Investments in notes receivable		(500	)		(533	)		(1,500	)
Sales and maturities of available-for-sale and equity investments		64,368			99,460			84,080
Purchase of intellectual property license		(1,585	)		(139	)		—
Other		107			(500	)		(445	)
Maturities of available-for-sale investments		99,460			84,080			108,251
Net cash used in investing activities		(57,740	)		(17,595	)		(45,262	)
Sales of available-for-sale and equity investments		—			—			1,586
Other		—			88			379
Net cash provided by (used in) investing activities		(17,595	)		(45,262	)		32,359
Cash flows from financing activities:
Debt repayments		(857	)		—			—
Borrowing against line of credit		3,549			—			—
Borrowing against line of credit		3,020			3,549			—
Payments on line of credit		—			(6,943	)		—
Payments on line of credit		(3,000	)		—			(6,943	)
Issuance of shares of common stock		1,237			1,107			583
Issuance of shares of common stock		2,744			1,237			1,107
Repurchases of shares of common stock		—			(28,922	)		—
Repurchases of shares of common stock		—			—			(28,922	)
Principal payments of capital leases		(1,387	)		(1,193	)		(1,000	)
Principal payments of capital leases		(1,476	)		(1,387	)		(1,193	)
Net cash provided by (used in) financing activities		3,399			(35,951	)		(417	)
Net cash provided by (used in) financing activities		431			3,399			(35,951	)
Effect of changes in foreign currency exchange rates on cash		217			153			(9	)
Effect of changes in foreign currency exchange rates on cash		—			217			153
Net increase (decrease) in cash and cash equivalents		17,184			(67,277	)		41,419
Net increase (decrease) in cash and cash equivalents		23,591			17,184			(67,277	)
Cash and cash equivalents at beginning of period		100,973			118,157			50,880
Cash and cash equivalents at beginning of period		77,382			100,973			118,157
Cash and cash equivalents at end of period	$	118,157		$	50,880		$	92,299
Cash and cash equivalents at end of period	$	100,973		$	118,157		$	50,880
Supplemental disclosure of cash flow information:
Cash received for interest	$	15,~~185~~924		$	53,~~924~~453		$	32,~~453~~207
Cash paid for interest	$	70161		$	~~161~~140		$	~~140~~19
Net cash paid for (received from) income taxes	$	~~2,343~~365		$	~~365~~(8,281	)	$	(~~8,281~~7	)
Fixed assets acquired under capital leases	$	—684		$	~~684~~140		$	~~140~~1,888
Non-cash transactions:
Acquisition of equity securities by granting technology license	$	—		$	—		$	9,699

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

7173

SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Silicon Storage Technology, Inc. (SST, us or we) is a ~~leading~~ supplier of flash memory semiconductor devices for the digital consumer, networking, wireless communications and Internet computing markets. Flash memory is a form of nonvolatile memory that allows electronic systems to retain information when the system is turned off. We also produce and sell other semiconductor products including NAND Controller and NAND Controller-based modules, ~~smart card ICs,~~ flash microcontrollers and radio frequency ICs and modules. We license our SuperFlash technology to other companies for non-competing applications. Our products are used in personal computers, personal computer peripheral devices, consumer electronics and communications devices. Our products are sold to manufacturers located primarily in Asia.

Use of Estimates in Preparation of the Financial Statements

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

Risks, Uncertainties and Concentrations

Our sales are concentrated in the nonvolatile memory class of the semiconductor memory industry, which is highly competitive and rapidly changing. Significant technological changes in the industry, changes in customer requirements, changes in product costs and selling prices, and the emergence of competitor products with new features, capabilities, or technologies could adversely affect our operating results. We currently buy all semiconductor wafers and die from outside suppliers and we are dependent on third party subcontractors to assemble and test our products. Failure by these suppliers to satisfy our requirements on a timely basis, at competitive prices and in sufficient quantities could cause us to suffer manufacturing delays, possible loss of revenues, or higher than anticipated costs of revenues, any of which could have a severe adverse affect on our operating results.

We out-source our customer service logistics function in Asia to Silicon Professional Technology Ltd., or SPT, which supports our customers in Taiwan, China and other Southeast Asian countries. We ship our products to SPT who in turn ships our products on to end customers and sales representatives. SPT provides forecasting, planning, warehousing, delivery, billing, collection and other logistic functions for us in these regions. SPT is a wholly-owned subsidiary of one of our stocking representatives in Taiwan, Professional Computer Technology Limited, or PCT. Products shipped to SPT are accounted for as our inventory held at our logistics center, and revenue is recognized when the products have been delivered and are considered sold to our end customers by SPT. For the years ended December 31, ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, SPT serviced end customer sales accounting for 5960.1%, 6056.12% and 5659.25%, respectively, of our recognized net product revenues. As of December 31, ~~2007~~2008 and ~~2008~~2009 SPT represented 6550.39% and 5066.91% of our net accounts receivable, respectively. ~~Further~~See ~~description~~Note of14 ~~our~~“Related ~~relationships~~Party Reporting” ~~with~~and ~~PCT~~Note ~~and~~15 ~~SPT~~“Investments” ~~are~~for ina ~~Note 16~~description ~~“Equity~~of ~~Investments~~our ~~and~~relationships ~~Related~~with ~~Party~~PCT ~~Reporting”~~and SPT.

We ship products to, and have accounts receivable from, original equipment manufacturers or OEMs; original design manufacturers or ODMs; and contract electronic manufacturers or CEMs. In addition, we ship products to, and have accounts receivable from, our stocking representatives, distributors and our logistics center. Our stocking representatives, distributors and our logistics center in turn reship our products to our end customers, including OEMs, ODMs, CEMs and end users. Shipments, by us or our logistic center, to our top

7274

three stocking representatives for reshipment accounted for 4860.50%, 6054.06% and 5458.69% of our product shipments in ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, respectively. In addition, the same three stocking representatives solicited sales, for which they received a commission, for 109.31%, 97.10% and 71.02% of our product revenue to end users in ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, respectively. Our stocking representatives and distributors could discontinue their relationship with us or discontinue selling our products at any time. The loss of our relationship with any of our stocking representatives or distributors could adversely affect our operating results by impairing our ability to sell our products to our end customers. Our logistics center, SPT, may cease providing services to us at any time. If SPT were to terminate their logistics relationship with us we would experience a delay in re-establishing warehousing, logistics and distribution functions, which could adversely affect our operating results. If SPT or PCT were to terminate their sales representative relationship with us it could impair our revenue significantly and affect our ability to collect accounts receivable from SPT or PCT and may adversely affect our operating results as would the termination of any of our top three stocking representatives.

We derived 8788.78%, 8887.83% and 8791.37% of our net product revenues from Asia during ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, respectively. In addition, substantially all of our wafer suppliers and packaging and testing subcontractors are located in Asia. Any kind of economic, political or environmental instability in this region of the world can have a severe negative impact on our operating results due to the large concentration of our production and sales activities in this region.

Our revenues may be impacted by our ability to obtain adequate wafer supplies from our foundries. We outsource substantially all of our manufacturing and testing activities. We currently buy all of our wafers and sorted die from a limited number of suppliers. The majority of our products are manufactured by four foundries, Shanghai Grace Semiconductor Manufacturing Corporation, or Grace, and Shanghai Hua Hong NEC Electronic Company Limited, or HHNEC, in China, Taiwan Semiconductor Manufacturing Company, Limited, or TSMC, in Taiwan, and ~~Seiko-Epson~~Maxchip Electronics Corporation, or Maxchip, in Taiwan. We have an equity investment in ~~Grace~~ Grace Semiconductor Manufacturing Corporation, or GSMC, a Cayman Islands company, which owns the wafer foundry subsidiary, Grace in Shanghai, China. We anticipate that these foundries, together with Samsung Corporation in Korea and Powerchip ~~Semiconductor~~ Semiconductor Corporation, or PSC, in Taiwan will continue to manufacture substantially all of our products in the foreseeable future. The foundries with which we currently have arrangements, together with any additional foundry at which capacity might be obtained, may not be willing or able to satisfy all of our manufacturing requirements on a timely basis and/or at favorable prices. In addition, we have encountered delays in qualifying new products and in ramping-up new product production and we could experience these delays in the future. We are also subject to the risks of service disruptions, raw material shortages and price increases by our foundries. Such disruptions, shortages and price increases could harm our operating results. Purchases from our top three suppliers accounted for 52.1% and 36.3% of our costs of revenues in 2008 and 2009, respectively.

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

•

reduced control over delivery schedules and quality;

•

the potential lack of adequate capacity during periods of strong demand;

•

difficulties selecting and integrating new subcontractors;

•

limited warranties on products supplied to us;

•

potential increases in prices due to capacity shortages and other factors; and

•

potential misappropriation of our intellectual property.

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

It75 should be noted that we may be greatly impacted by the political, economic and military conditions in Taiwan and/or China. Both are continuously engaged in political disputes. Such disputes may continue and even

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

Our corporate headquarters are located in California near major earthquake faults. In addition, some of our major suppliers and their fabs in Asia are located near fault lines. In the event of a major earthquake or other natural disaster near our headquarters, our operations could be harmed. Similarly, a major earthquake or other natural disaster, such as a typhoon, near one or more of our major suppliers, ~~like the earthquakes in April 2006 and December 2006 or the typhoons in September 2001 and July 2005 that occurred in Taiwan,~~ could potentially disrupt the operations of those suppliers, which could then limit the supply of our products and harm our business.

Basis of Consolidation

The consolidated financial statements include the accounts of SST and our wholly-owned subsidiaries after elimination of inter-company balances and transactions.

Reclassifications

Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications did not change previously reported net loss, total assets or shareholders’ equity.

Foreign Currency Transactions

Monetary accounts maintained in currencies other than the United States dollar are remeasured using the foreign exchange rate at the balance sheet dates. Operational accounts and non-monetary balance sheet accounts are remeasured and recorded at the rate in effect at the date of the transactions. The effects of foreign currency remeasurement are reported in current operations. The functional currency of SST and all its subsidiaries, except SST China, is the United States dollar. The functional currency of SST China is the Chinese Yuan. The effect of foreign currency remeasurement was $~~779,000~~0.8 million for 2008. ~~and~~The effect of foreign currency remeasurement was not material to our consolidated financial statements in ~~2006~~2007 or ~~2007~~2009.

Financial Instruments

Cash equivalents are highly liquid investments with stated maturities of three months or less as of the dates of purchase. Highly liquid investments included in cash equivalents are classified as available-for-sale and are carried at cost, which approximates fair value. We maintain substantially all of our cash balances with two major financial and/or brokerage institutions domiciled in the United States and we have not experienced any material losses relating to these investment instruments.

Short and long-term investments, ~~which~~ are comprised of ~~federal,~~domestic ~~state~~government and ~~municipal government obligations,~~ foreign ~~and public~~ corporate debt securities , and foreign listed equity securities,. These investments are classified as available-for-sale, and carried at fair value, with the unrealized gains or losses, net of tax, reported in Shareholders’ Equity as a component of accumulated other comprehensive income (loss). The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, both of which are included in interest income. Realized gains and losses are recorded on the specific identification method.

The carrying amounts reported for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are considered to approximate fair values based upon the short maturities of those financial instruments. The fair value of available-for-sale investments is set forth in Note 2 ~~“Available-for-Sale~~15 “Investments”.” Financial ~~instruments that potentially subject us to~~ ~~concentrations of credit risks comprise,~~

7476

instruments that potentially subject us to concentrations of credit risks comprise, principally, cash, cash equivalents, investments and trade accounts receivable. We perform credit evaluations of new customers and require those without positive, established credit histories to pay in advance, upon delivery or through letters of credit. Otherwise, for customers which we do not require collateral we maintain an allowance for potential credit losses.

We have acquired interests in Japanese and Taiwanese companies and a Cayman Islands company operating in China. See Note 16 ~~“Equity~~15 “Investments ~~and Related Party Reporting”~~.” Some of the Taiwanese investments are held in public companies whose stock is traded on the Taiwan Stock Exchange. Under Taiwan security regulations, ainvestors ~~certain~~with ~~number~~representation ofon ~~shares~~the ~~must~~Board beof ~~held~~Directors of incertain ~~central~~companies ~~custody~~must ifretain ~~we have~~a ancertain ~~employee~~number ~~serving~~of onshares ~~the~~in ~~Board~~central ofcustody, ~~Directors~~which ofare arestricted ~~Taiwan~~from ~~company~~sale. Shares to be held in central custody for greater than a one year period are carried at cost and recorded as equity investments. Shares that are unrestricted and available for sale within one year from the balance sheet date are carried at quoted market price and included in “long-term available-for-sale equity investments”,” with unrealized gains and losses reported as a separate component of shareholders’ equity.

We review our investments quarterly for indicators of impairment. Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other than temporarily impaired, in which case the investment is written down to its estimated fair market value and a new cost basis is established. If an investee obtains additional funding at a valuation lower than our carrying amount or requires a new round of equity funding to stay in operation and the new funding does not appear imminent, we presume that the investment is other than temporarily impaired, unless specific facts and circumstances indicate otherwise.

Cash dividends and other distributions of earnings from the investees, if any, are included in other income at the date of record.

Accounts Receivable

The allowance for doubtful accounts is based on an assessment of the collectibility of customer accounts receivable. We review the allowance by considering factors such as historical collection experience, credit quality, age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. We maintain an allowance for estimated product returns by our customers. We estimate our allowance for sales returns based on our historical return experience, current economic trends, changes in customer demand, known returns we have not received and other estimates.

Inventories

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

Our inventories include high technology parts and components that are specialized in nature or subject to rapid technological obsolescence. We review on-hand inventory, including inventory held at our logistic center, for potential excess and obsolete items and adjust the level of inventory reserve accordingly. For excess inventory analysis, we compare the inventory on hand with the forecasted demand. Demand is based on one year for packaged products and two years for products in die form. For the obsolete inventory analysis, we review inventory items in detail and consider date code, customer base requirements, planned or recent product revisions, end of life plans and diminished market demand. In the event that customer requirements cause us to change this methodology, it may be necessary for us to provide for an additional allowance, which could result in a significant adjustment and could harm our financial results.

7577

Inventories, once written down to their new basis, are not subsequently written back up. While we have programs to minimize the required inventories on hand and we consider technological obsolescence when estimating allowances for potentially excess and obsolete inventories and consider average selling price, or ASP, forecasts when estimating allowances for lower of cost or market reserves, it is reasonably possible that such estimates could change in the near term and such changes could have a significant impact on our financial position and results of operations.

Non-Marketable and Other Equity Investments

We account for non-marketable and other equity investments under either the cost or equity method and include them in long-term assets. Our non-marketable and other equity investments include:

Equity method investments. When we have the ability to exercise significant influence, but not control, over the investee, we record equity method adjustments in “Pro rata share of loss from equity investments”.” Equity method adjustments include: our proportionate share of investee income or loss, gains or losses resulting from investee capital transactions, amortization of certain differences between our carrying value and our equity in the net assets of the investee at the date of investment and other adjustments required by the equity method. Equity method investments include marketable and non-marketable investments.

Non-marketable cost method investments. When we do not have the ability to exercise significant influence over the investee we record such investments at cost.

Investments in non-marketable equity securities are inherently risky, and a number of these companies may fail. Their success is dependent on product development, market acceptance, operational efficiency, and other key business success factors. In addition, depending on their future prospects and market conditions, they may not be able to raise additional funds when needed or they may receive lower valuations, with less favorable investment terms than in previous financings, and thus our investments in them may become impaired.

We review our investments quarterly for indicators of impairment. For non-marketable equity securities, the impairment analysis requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the fair value of the investment. The indicators that we use to identify those events or circumstances include (a) the investee’s revenue and earnings trends ~~relative to predefined milestones and overall business prospects~~; (b) the technological feasibility of the investee’s products and technologies; (c) the general market conditions in the investee’s industry or geographic area, including adverse regulatory or economic changes; (d) factors related to the investee’s ability to remain in business, such as the investee’s liquidity, debt ratios, and the rate at which the investee is using its cash; and (e) the investee’s receipt of additional funding at a lower valuation. Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other than temporarily impaired, in which case the investment is written down to its estimated fair market value and a new cost basis is established. If an investee obtains additional funding at a valuation lower than our carrying amount or requires a new round of equity funding to stay in operation and the new funding does not appear imminent, we presume that the investment is other than temporarily impaired, unless specific facts and circumstances indicate otherwise.

For the years ended December 31, ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009, we recorded impairments of our investments totaling $4422.14 million, $2221.4 8 million and $210.85 million, respectively. See Note 1217 “Impairment of Investments”.”

Investments in Variable Interest Entities

We are required to evaluate all transactions and relationships with potential variable interest entities (VIEs) to determine whether we are the primary beneficiary of the ~~entities,~~ ~~in accordance with Financial Accounting Standards Board, or FASB, Interpretation No~~entities. ~~46(R),~~ ~~Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51, or FIN 46(R).~~ Our overall methodology for evaluating transactions and relationships under the VIE requirements includes the following two steps:

•

determine whether the entity meets the criteria to qualify as a VIE; and

•

determine whether we are the primary beneficiary of the VIE.

In78 ~~performating the first step, the significant factors and judgments that we consider in making the determination as to whether an entity is a VIE include:~~

In performing the first step, the significant factors and judgments that we consider in making the determination as to whether an entity is a VIE include:

•

the design of the entity, including the nature of is risks and the purpose for which the entity was created, to determine the variability that the entity was designed to create and distribute to its interest holders;

•

the nature of our involvement with the entity;

•

whether control of the entity may be achieved through arrangements that do not involve voting equity;

•

whether there is sufficient equity investment at risk to finance the activities of the entity; and

•

whether parties other than the equity holders have the obligation to absorb expected losses or the right to receive residual returns.

For each VIE identified, we then perform the second step and evaluate whether we are the primary beneficiary of the VIE by considering the following significant factors and judgments:

•

whether our variable interest absorbs the majority of the VIE’s expected losses;

•

whether our variable interest receives the majority of the VIE’s expected returns; and

•

whether we have the ability to make decisions that significantly affect the VIE’s results and activities.

Based on our evaluation of the above factors and judgments, as of December 31, ~~2008~~2009, GSMC is a VIE, of which we are not the primary beneficiary. During 2009, we disposed of ~~any~~an investment in ACET, which had been identified as a VIE, of which we were not the primary beneficiary. There have been no other material changes in the status of our VIE or primary beneficiary designations during ~~2008~~2009. For additional information on our ~~equity~~related ~~investments~~parties and ~~related~~equity ~~parties~~investments, see Note 1614 “~~Equity~~Related Party Reporting,” Note 15 “Investments” and ~~Related~~Note ~~Party~~16 ~~Reporting”.~~“Pro Rata Share of Loss from Equity Investments.”

Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives of three to seven years, except for buildings for which the useful life is forty years. Leasehold improvements are depreciated over seven years or the term of the lease, whichever is shorter. See also Note 3 “Balance Sheet Detail”.” Upon sale or retirement of assets, the costs and related accumulated depreciation and amortization are removed from the Balance Sheet and the resulting gain or loss is recorded in operations. Maintenance and repairs are charged to operations as incurred.

Goodwill

~~Goodwill~~We ~~and~~review ~~intangibles~~goodwill ~~assets,~~annually ~~including~~for ~~intellectual~~impairment ~~property,~~or ~~were~~when ~~generally acquired~~ changes in ~~acquisitions~~circumstances inindicate ~~2004~~that ~~and~~the ~~2005.~~carrying ~~Statement~~amount of ~~Financial Accounting~~these ~~Standards~~assets ~~No. 142,~~many ~~Goodwill~~not ~~and~~be ~~Other~~recoverable. ~~Intangible~~We ~~Assets,~~write ordown ~~SFAS No. 142, requires~~ goodwill towhen bewe ~~tested~~deem ~~for~~it ~~impairment~~is ~~on an annual basis, and between annual tests under certain circumstances, and written down when~~ impaired. We perform ~~this~~an impairment analysis during the fourth quarter of each fiscal year.

77We evaluate whether goodwill has been impaired at the reporting unit level by first determining whether the estimated fair value of the reporting unit is less than its carrying value and, if so, by determining whether the implied fair value of goodwill within the reporting unit is less than the carrying value. We determine fair values using discounted future cash flow analyses. As a result of our impairment analysis in the fourth quarter of 2007, we recorded an impairment charge related to the goodwill initially recognized as a result of the acquisitions of G-Plus and Actrans. We did not record any impairment charge related to goodwill in 2008 and 2009. See also Note 7 “Goodwill and Intangible Assets.”

We evaluate whether goodwill has been impaired at the reporting unit level by first determining whether the estimated fair value of the reporting unit is less than its carrying value and, if so, by determining whether the implied fair value of goodwill within the reporting unit is less than the carrying value. Fair values are determined by discounted future cash flow analyses. As a result of our impairment analysis in the fourth quarter of 2007, we recorded an impairment charge related to the goodwill initially recognized as a result of the acquisitions of G-Plus and Actrans. We did not record any impairment charge related to goodwill in 2008. See Note 7 “Goodwill and Intangible Assets”.

Long-Lived Assets

Long-lived assets consist primarily of property and equipment and intangible assets. Purchased intangible assets, ~~are~~other than goodwill, are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over the estimated useful lives of one to five years. Whenever events or changes in circumstances indicate that the carrying amounts of long-lived assets may not be recoverable, we estimate the future cash flows, undiscounted and without interest charges, expected to result from the use of those assets and their eventual disposition. If the sum of the undiscounted expected future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. AsWe aperform ~~result~~an ~~of our~~ impairment analysis induring the fourth quarter of each fiscal year. In 2007, we recorded an impairment ~~charge~~loss of $~~969,000~~0.4 ~~related to~~million ~~our~~on ~~long-lived~~intangible assets. ~~During~~acquired ~~the~~from ~~fourth~~our ~~quarter~~acquisition of G-Plus. In 2008, we recorded a $1.1 million charge to research and development to write off various intellectual property licenses~~, as we refined our focus toward our most strategic initiatives~~. ~~We did not record any other impairment charges related to long-lived assets in 2008.~~

Product Revenue Recognition

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

License and Royalty Revenue Recognition

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

Research and Development

~~Research~~We charge research and development expenses ~~are charged~~ to operations as incurred.

Advertising Costs

We expense all advertising costs as incurred. Advertising costs were not material for the years ended December 31, ~~2006~~2007, ~~2007~~2008 and ~~2008~~2009.

~~Provision~~80 ~~for Income Taxes~~

We maintained a full valuation allowance on our net deferred tax assets as of December 31, 2008. The valuation allowance was determined in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes, which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction by jurisdiction basis. Based upon the weight of available evidence, which includes our historical operating performance, reported cumulative net losses since inception and difficulty in accurately forecasting our results there is sufficient negative evidence under SFAS No. 109 and accordingly, a full valuation allowance was recorded against U.S. deferred tax assets. We intend to maintain a full valuation allowance on the U.S. deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.

Effective January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, or FIN 48. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance with SFAS No. 109. Step one, Recognition, requires a company to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, Measurement, is based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement. The cumulative effect of adopting FIN 48 on January 1, 2007 was recognized as a change in accounting principle, recorded as an adjustment to the opening balance of retained earnings on the adoption date. The cumulative effect of adopting FIN 48 was a $3.2 million increase to our reserve for uncertain tax position with a corresponding adjustment to the opening balance of accumulated deficit.

We recognize interest and penalties related to uncertain tax positions in income tax expense. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made.

Stock-based Compensation

We account for our share-based compensation under the provisions of SFAS No. 123(R), Share-based Payment (revised 2004). SFAS No. 123(R) requires the measurement and recognition of compensation expense for all stock-based payment awards made to the Company’s employees and directors. We estimate the fair value of stock options on the date of grant using the Black-Scholes option valuation model and elected to attribute the value of share-based compensation to expense using the graded vesting method. Share-based compensation expense is recognized based on the value of the portion of share-based payment awards that is ultimately expected to vest. Compensation cost recognized includes the applicable amounts of: (a) compensation cost of all stock-based awards granted prior to January 1, 2006 (based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123) and (b) compensation cost for all stock-based awards granted or modified subsequent to January 1, 2006 (based on the grant-date fair value estimated in accordance with the new provisions of SFAS No. 123(R).)

Provision for Income Taxes

We periodically receive dividend payments from our investments in foreign companies, which are subject to withholding of income tax. We record these taxes, as well as any refunds of these taxes, on a cash basis. The adjustment resulting from re-measurement of foreign currency tax liabilities is included in income tax provision or benefit. We recognize interest and penalties related to uncertain tax positions in income tax provision or benefit. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made.

In July 2006, the Financial Accounting Standards Board, or FASB, issued guidance which clarifies the accounting for income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return. This guidance utilizes a two-step approach for evaluating uncertain tax positions: step one, recognition, requires a company to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any; and step two, measurement, is based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement.

Share-based Compensation

We measure compensation expense based on estimated fair values of all share-based awards to our employees and directors. We estimate the fair value of stock options on the date of grant using the Black-Scholes option valuation model and elected to attribute the value of share-based compensation to expense using the graded vesting method. Share-based compensation expense is recognized based on the value of the portion of share-based payment awards that is ultimately expected to vest. Compensation cost recognized includes the applicable amounts of compensation cost of all share-based awards granted prior to January 1, 2006 and compensation cost for all share-based awards granted or modified subsequent to January 1, 2006, based on the grant-date fair value. We estimate expected volatility based on the historical volatility of our common stock. We believe that our historical stock option exercise data is not an accurate predictor of future exercise transactions. For periods ending on or before June 30, 2009, we used the simplified method of calculating expected term for new grants. Beginning with the third quarter of 2009, in estimating the expected term, we utilize data from selected semiconductor companies, which we have concluded are similar with regard to market capitalization, stock option contractual term and vesting schedules. We intend to continue to use a similar methodology until we determine that our historical stock option exercise data is expected to more accurately predict future exercise transactions.

Comprehensive Income (Loss)

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

~~Recent~~81 ~~Accounting Pronouncements~~

In December 2008, the FASB issued FASB Staff Position FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities, or FSP No. FAS 140-4 and FIN 46(R)-8. FSP No. FAS 140-4 and FIN 46(R)-8 amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to require public entities to provide additional disclosures about transfers of financial assets. It also amends FASB Interpretation No. 46, Consolidation of Variable Interest Entities, to require public enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities. The adoption of FSP No. FAS 140-4 and FIN 46(R)-8 did not have material impact to our consolidated financial position, results of operations and cash flows.

In November 2008, the FASB issued Emerging Issues Task Force No. 08-6, Equity Method Investment Accounting Considerations, or EITF No. 08-6. EITF No. 08-6 clarifies a number of matters associated with the impact of FAS 141(R) and FAS 160 on accounting for equity method investments. EITF 08-6 applies prospectively to the first annual reporting period beginning on or after December 15, 2008. We do not expect the adoption of EITF No. 08-6 to have material impact to our consolidated financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51, or SFAS No. 160. SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. We are still assessing the impact of SFAS No. 160 on our consolidated financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations, or SFAS No. 141(R). SFAS No. 141(R) will change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141(R) will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We expect SFAS No. 141(R) will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time.

2. Available-for-Sale Investments

Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually (fair value of reporting units for goodwill impairment tests, non-financial assets and liabilities acquired in a business combination.) Therefore, we adopted the provisions of SFAS No. 157 with respect to our financial assets and liabilities only. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is

~~defined~~Recent ~~under~~Accounting ~~SFAS~~Pronouncements No. 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

In October 2009, the FASB issued guidance addressing the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. The guidance amends the criteria for separating consideration in multiple-deliverable arrangements. This guidance replaces all references to fair value as a measurement criteria with the a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures. The guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are currently evaluating this guidance to determine its impact, if any, on our consolidated financial statements.

In December 2009, the FASB issued guidance that changes how a reporting entity determines when an entity that is insufficiently capitalized, or is not controlled through voting or similar rights, should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, (1) the other entity’s purpose and design and (2) the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. The guidance also requires a reporting entity to provide additional disclosures, including how its involvement with a variable interest entity affects the reporting entity’s financial statements. This guidance is effective at the start of the first fiscal year beginning after November 15, 2009 and early application is not permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.

In January 2010, the FASB issued guidance amending and clarifying requirements for fair value measurements and disclosures. The new guidance requires disclosure of transfers in and out of Level 1 and Level 2 and a reconciliation of all activity in Level 3. The guidance also requires detailed disaggregation disclosure for each class of assets and liabilities in all levels, and disclosures about inputs and valuation techniques for Level 2 and Level 3. The guidance is effective at the start of interim or annual reporting periods beginning after December 15, 2009 and the disclosure reconciliation of all activity in Level 3 is effective at the start of annual reporting periods beginning after December 15, 2010. We do not currently anticipate that this guidance will have a material impact on our consolidated financial statements upon adoption.

2. Fair Value

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

•

Level 1—Quoted prices in active markets for identical assets or liabilities.

•

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Level 1 assets consist of money market funds and marketable equity investments. These instruments are traded in active markets with sufficient volume and frequency of transactions. Level 2 assets consist of municipal and United States government bonds with quoted market prices, which are traded in less active markets.

The adoption of this statement did not impact our consolidated results of operations and financial condition, but required additional disclosure for assets and liabilities measured at fair value.

In accordance with SFAS No. 157, the following table represents our fair value hierarchy for our financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2008 (in thousands):

Description	Level 1		Level 2		Level 3		Total
Money market funds	$	10,721	$	—	$	—	$	10,721
Short term available-for-sale investments		—		48,997		—		48,997
Long term available-for-sale investments		18,196		31,848		—		50,044
Total	$	28,917	$	80,845	$	—	$	109,762

Effective January 1, 2008, we adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS No. 159. SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. We did not elect to adopt the fair value option under SFAS No. 159.

The fair value of available-for-sale investments, as of December 31, 2008 are as follows (in thousands):

	December 31, 2008
	AmortizedCost		UnrealizedGains		UnrealizedLosses		EstimatedFair Value
Corporate bonds and notes	$	5,924	$	15	$	—

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Filing Compare · SILICON STORAGE TECHNOLOGY INC