19

SMPG includes our three standard flash memory product families: the MPF family, the MPF+ family and the MTP family. Effective January 1, 2003, we transferred certain MTP products from SMPG to SPG. Effective July 1, 2003, we transferred the Small Sector Flash, or SSF, family from SMPG to SPG. Effective January 1, 2004, we transferred the last MTP series of products from SMPG to SPG. Accordingly, our segment revenues and gross profit information have been reclassified for presentation purposes as if the transfer occurred as of January 1, 2002. SMPG revenues were $269.4 million in 2004, $166.8 million in 2003 and $143.2 million in 2002. The increase in revenue in 2004 compared to 2003 was the result of both an increase in unit shipments of 26.9% and an increase in average selling prices of 28.7%. The increase in revenues in 2003 compared to 2002 was primarily due to increases in unit shipments of our products by 23.4%, offset by decreases in average selling prices of 7.6%. Gross margin was 18.0% in 2004, 12.8% in 2003 and 3.8% in 2002. The increase in gross margin in 2004 from 2003 was due to improvements in the market price during the first three quarters as well as lower manufacturing costs achieved by transitioning manufacturing technology to lower geometries. The increase in gross margin in 2003 from 2002 was primarily due to higher inventory valuation adjustments in 2002, the sale of previously reserved inventory in 2003 and product mix.

ASPG includes Concurrent SuperFlash, Serial Flash, Firmware Hub, or FWH, and Low Pin Count, or LPC flash products. ASPG also includes flash embedded controllers such as the ATA controller. Effective January 1, 2003, we transferred FlashFlex51 microcontroller products from ASPG to SPG. Accordingly, our segment revenues and gross profit information have been reclassified for presentation purposes as if the transfer occurred as of January 1, 2002. ASPG revenues were $73.2 million in 2004, $60.5 million in 2003 and $67.8 million in 2002. The increase in revenues in 2004 compared to 2003 was primarily due to an increase in unit shipments of 29.4%, offset by decreases in average selling prices of 7.7%. The decrease in revenues in 2003 compared to 2002 was primarily due to decreases in average selling prices of 31.8%, offset by increases in unit shipments of our products of 32.9%. Gross margin was 26.5% in 2004, 19.1% in 2003 and 36.2% in 2002. The increase in gross margin in 2004 from 2003 was due to lower manufacturing costs achieved by transitioning manufacturing technology to lower geometries and product mix. The decrease in gross margin in 2003 from 2002 was primarily due to decreases in average selling prices and product mix.

SPG includes ComboMemory, ROM/RAM Combos, SSF, MTP, FlashFlex51 microcontrollers and other special flash products. Effective January 1, 2003, we transferred certain MTP products from SMPG to SPG and FlashFlex51 microcontroller products from ASPG to SPG. Effective July 1, 2003, we transferred the SSF family from SMPG to SPG. Effective January 1, 2004, we transferred the last MTP series of products from SMPG to SPG. Accordingly, our segment revenue and gross margin information have been reclassified for presentation purposes as if the transfer occurred as of January 1, 2002. SPG revenues were $44.6 million in 2004, $29.3 million in 2003 and $33.0 million in 2002. The increase in revenues in 2004 compared to 2003 was the result of both an increase in unit shipments of 5.8% and an increase in average selling prices of 34.3%. The decrease in revenues in 2003 compared to 2002 was primarily due to decreases in average selling prices of 19.5% offset by an increase in unit shipments of our products by 12.3%. Gross margin was 28.5% in 2004, 16.3% in 2003 and 23.6% in 2002. The increase in gross margin in 2004 from 2003 was due to lower manufacturing costs achieved by transitioning manufacturing technology to lower geometries. The increase in gross margin in 2004 from 2003 was due to improvements in the market price during the first three quarters as well as lower manufacturing costs achieved by transitioning manufacturing technology to lower geometries. The decrease in gross margin in 2003 from 2002 was primarily due to decreases in average selling prices and product mix.

Emosyn Products include the Theseus Platinum product family and other flash memory based microprocessor chips. We acquired a majority ownership of Emosyn on September 10, 2004. The segment revenue of $16.9 million for 2004 is from the date of acquisition through the end of the year. Gross margin for 2004 was 14.0%.

SCC includes RF transceiver, synthesizer, power amplifier and switch products. We formed SST Communications Corporation and acquired substantially all of the assets of G-Plus, Inc. on November 5, 2004. The segment revenue of $593 thousand for 2004 is from the date of acquisition through the end of the year. Gross margin for 2004 was negative 35.8%.

Revenue and gross profit related to Technology Licensing was $44.5 million for 2004, $38.5 million for 2003 and $30.6 million for 2002. The increase from 2003 to 2004 is due to increased up-front license fees from our new licensees. The increase from 2002 to 2003 related primarily to increase royalty payments from our existing licensees and up-front license fees from our new licensees.

20

Related Party Transactions

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

 
                                                             Year Ended
                                                         December 31, 2004
                                                  --------------------------------
                                                    Revenues         Purchases
                                                  ------------  ------------------
Silicon Technology Co., Ltd..................... $      7,943  $               --
Apacer Technology, Inc and related entities.....        2,359                 707
Silicon Professional Technology Ltd.............      214,195                  --
Grace Semiconductor Manufacturing Corporation...          156              59,278
King Yuan Electronics Company, Limited..........           --              38,248
Powertech Technology, Incorporated..............           --              14,718
                                                  ------------  ------------------
                                                 $    224,653  $          112,951
                                                  ============  ==================
 
                                                             Year Ended
                                                         December 31, 2003
                                                  --------------------------------
                                                    Revenues         Purchases
                                                  ------------  ------------------
Silicon Technology Co., Ltd..................... $      3,615  $               --
Apacer Technology, Inc and related entities.....        1,555               2,361
Silicon Professional Technology Ltd.............      164,810                  --
Grace Semiconductor Manufacturing Corporation...           --                  12
King Yuan Electronics Company, Limited..........           --              19,659
Powertech Technology, Incorporated..............           --               9,280
                                                  ------------  ------------------
                                                 $    169,980  $           31,312
                                                  ============  ==================
 
                                                             Year Ended
                                                         December 31, 2002
                                                  --------------------------------
                                                    Revenues         Purchases
                                                  ------------  ------------------
Silicon Technology Co., Ltd..................... $      2,089  $               --
Acer and related entities (1)...................          269                  --
Apacer Technology, Inc and related entities.....          899                 588
Professional Computer Technology Limited........          141                  --
Silicon Professional Technology Ltd.............      140,003                  --
King Yuan Electronics Company, Limited..........           --              18,163
Powertech Technology, Incorporated..............           --               8,378
                                                  ------------  ------------------
                                                 $    143,401  $           27,129
                                                  ============  ==================
 

(1) Excludes Apacer Technology, Inc. balances.

21

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

                                                          December 31, 2003            December 31, 2004
                                                  --------------------------------  -----------------------
                                                                     Accounts                     Accounts
                                                    Accounts       Payable and       Accounts    Payable and
                                                   Receivable        Accruals       Receivable    Accruals
                                                  ------------  ------------------  -----------  ----------
Silicon Technology Co., Ltd..................... $        232  $               --  $       322  $       --
 
Apacer Technology, Inc and related entities.....          400                 736          458         320
Professional Computer Technology Limited........           --                  15           --          72
Silicon Professional Technology Ltd.............       40,588                 550       32,037         694
Grace Semiconductor Manufacturing Corporation...           --                  --          156      17,227
King Yuan Electronics Company, Limited..........           --               6,896           --      13,702
Powertech Technology, Incorporated..............           --               2,533           --       3,867
Other...........................................           --                   4           --          --
                                                  ------------  ------------------  -----------  ----------
                                                 $     41,220  $           10,734  $    32,973  $   35,882
                                                  ============  ==================  ===========  ==========
 

In November 2004, we acquired a 30% interest in Nanotech Corporation, or Nanotech, a privately held Cayman Island company, for $3.8 million cash. Nanotech, a development stage company, has a wholly owned subsidiary which is in the process of establishing foundry operations in China. Bing Yeh, our President, CEO and Chairman of our Board of Directors, is also a member of Nanotech's board of directors. Tsuyoshi Taira, a member of our Board of Directors, also invested in this round of financing. We are not obligated to provide Nanotech with any additional financing. At December 31, 2004 our investment, which is accounted for under the equity method, represented 30% of the outstanding equity of Nanotech.

Allowance for excess and obsolete inventory and lower of cost or market. Our inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market value. We typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. The value of our inventory is dependent on our estimate of future average selling prices, and, if our projected average selling prices are over estimated, we may be required to adjust our inventory value to reflect the lower of cost or market. Our inventories include high technology parts and components that are specialized in nature or subject to rapid technological obsolescence. We maintain allowance for inventory for potentially excess and obsolete inventories and those inventories carried at costs that are higher than their market values. 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. Some of our customers have requested that we ship them product that has a finished goods date of manufacture that is less than one year old. In the event that this becomes a common requirement, it may be necessary for us to provide for an additional allowance for our on hand finished goods inventory with a date of manufacture of greater than one year old, which could result in additional inventory write-downs. Our allowance for excess and obsolete inventories includes an allowance for our on hand finished goods inventory with a date of manufacture of greater than two years old and for certain products with a date of manufacture of greater than one year old. For the obsolete inventory analysis, we review inventory items in detail and consider date code, customer base requirements, known product defects, planned or recent product revisions, end of life plans and diminished market demand. If we determine that market conditions are less favorable than those currently projected by management, such as an unanticipated decline in average selling prices or demand not meeting our expectations, additional inventory write-downs may be required. The allowance for excess and obsolete inventories and lower of cost or market was $27.4 million, $11.2 million and $32.2 million as of December 31, 2002, 2003 and 2004, respectively.

Accounting for income taxes. During the third quarter of 2003 we recorded a charge to establish a full valuation allowance against our deferred tax assets offset by a reduction in income tax payable as a result of a reassessment of expected liabilities for 2003 and certain exposures. Accordingly, for 2003 we recorded an income tax expense of $26.4 million. During the fourth quarter of 2003, we maintained a full valuation allowance on our net deferred tax assets. The valuation allowance was determined in accordance with the provisions of Statement of Financial Accounting Standards No. 109, 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. Cumulative losses incurred in the U.S. in recent years represented sufficient negative evidence under SFAS No. 109 and accordingly, a full valuation allowance was recorded against U.S. deferred tax assets. We intend to maintain a full valuation allowance on the U.S. deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance. During 2004, we maintained a full valuation allowance on our deferred tax assets. At December 31, 2003 and 2004 the valuation allowance against our deferred tax asset was $41.1 million and $27.2 million, respectively.

 
                                                                    Less than                                More than
Contractual obligations                              Total            1 year         1-3 years   3-5 years    5 years
------------------------------------------------  ------------  ------------------  -----------  ----------  ---------
Notes payable................................... $        744  $              705  $        39  $       --  $      --
Operating leases................................       16,602               4,182        5,797       5,727        896
Purchase commitments............................      100,694             100,694           --          --         --
Other long-term liability.......................          480                  --          480          --         --
                                                  ------------  ------------------  -----------  ----------  ---------
Total........................................... $    118,520  $          105,581  $     6,316  $    5,727  $     896
                                                  ============  ==================  ===========  ==========  =========
 

In March 2004, the Financial Accounting Standards Board, or FASB, issued EITF Issue No. 03-01, or EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" which provided new guidance for assessing impairment losses on investments. Additionally, EITF 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however the disclosure requirements remain effective for annual periods ending after June 15, 2004. We will evaluate the impact of EITF 03-1 once final guidance is issued.

28

In October 2004, the FASB approved EITF Issue 04-10 "Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds" which addresses an issue in the application of paragraph 19 of SFAS No. 131, Disclosures about Segments of an Enterprise and related information. In November 2004, the FASB delayed until further notice the effective date of this issue. We are currently assessing the impact of the disclosure requirements of EITF Issue 04-10 on our consolidated financial statements.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No.151 are intended to improve financial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred beginning after June 15, 2005. We are currently reviewing the impact of SFAS No. 151 on the carrying amounts of our inventory. We do not expect the adoption of SFAS No. 151 will have a material impact on our consolidated financial statements.

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

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

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

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.

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.

37

For example, changes requiring that we record compensation expense in the statement of operations for stock options using the fair value method or any changes in existing taxation rules related to stock options could have a significant negative effect on our reported results. The FASB has issued changes to generally accepted accounting principles in the United States that, when implemented the third quarter of 2005, will require us to record charges to earnings for the stock options we grant.

Changing laws, regulations and standard relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq National Market 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 may result 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.

Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to evaluate and determine the effectiveness of our internal controls 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, 2004 and will continue to do so for future fiscal periods. We may encounter problems or delays in completing the review and evaluation, the implementation of improvements and the receipt of a positive attestation, or any attestation at all, by our independent auditors. Additionally, management's assessment of our internal controls over financial reporting may identify deficiencies that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors.

Should we, or our independent registered public accounting firm, 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.

38

In September 2004 we acquired majority ownership in Emosyn and in November 2004 we acquired substantially all of the assets of G-Plus. 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 of 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 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.

The semiconductor industry has historically been cyclical, characterized by periodic changes in business conditions caused by product supply and demand imbalance. When the industry experiences downturns, they often occur in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. These downturns are characterized by weak product demand, excessive inventory and accelerated declines of average selling prices. In some cases, downturns, such as the one we experienced from late 2000 through 2002, have lasted for more than a year. Our business could be further harmed by industry-wide prolonged downturns in the future. The flash memory products portion of the semiconductor industry, from which we derive substantially all of our revenues, suffered from excess capacity in 2001, 2002, 2003 and in late 2004, which resulted in greater than normal declines in our markets, which unfavorably impacted our revenues, gross margins and profitability. While these conditions began to improve during the third quarter of 2003, deteriorating market conditions at the end of 2000 through the first part 2003 and again in the fourth quarter of 2004 have resulted in the decline of our selling prices and harmed our operating results.

39

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

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

We are exposed to risks associated with foreign exchange rate fluctuations due to our international manufacturing and sales activities. These exposures may change over time as business practices evolve and could negatively impact our operating results and financial condition. Currently, we do not hedge these foreign exchange rate exposures. All of our sales are denominated in U.S. dollars. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and therefore reduce the demand for our products. Such a decline in the demand could reduce revenues and/or result in operating losses. In addition, a downturn in the economies of China, Japan or Taiwan could impair the value of our equity investments in companies with operations in these countries. If we consider the value of these companies to be impaired, we will write off, or expense, some or all of our investments. In 2001, we wrote down our investment in KYE by $3.3 million to $1.3 million due to an other than temporary decline in its market value. As of December 31, 2004, the recorded value of our KYE investment was $2.3 million based on the quoted market price. In the third quarter of 2002, we wrote down our investment in Apacer, a privately held memory module manufacturer located in Taiwan, by $7.8 million due to an other than temporary decline in its value. As of December 31, 2004, the recorded value of our Apacer investment was $4.4 million. During 2004, we wrote down our investment in Insyde by $509 thousand because Insyde's stock price had declined below the acquisition cost for more than six months. The impairment was considered to be "other-than-temporary" in nature. In addition, we have equity investments in companies with operations in China, Japan, Taiwan and United States with recorded values at December 31, 2004 of $86.9 million, $0.9 million, $16.6 million and $0.6 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, 2004 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, 2004, the carrying value of our available-for-sale investments approximated fair value. The table below presents the carrying value and related weighted average interest rates for our unrestricted and restricted cash, cash equivalents and available-for-sale investments as of December 31, 2004 (in thousands):

 
                                                                             Carrying     Interest
                                                                               Value        Rate
                                                                            -----------  -----------
Short-term available-for-sale investments - fixed rate.................... $    68,628          2.2%
Cash and cash equivalents - variable rate.................................      35,365          0.4%
                                                                            -----------
                                                                           $   103,993          1.6%
                                                                            ===========
 

40

Item 8. Consolidated Financial Statements and Supplementary Data

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

The following table presents our unaudited consolidated statements of operations data for each of the eight quarters in the period ended December 31, 2004. In our opinion, this information has been presented on the same basis as the audited consolidated financial statements included in a separate section of this report, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts below to present fairly the unaudited quarterly results when read in conjunction with the audited consolidated financial statements and related notes. The operating results for any quarter should not be relied upon as necessarily indicative of results for any future period. We expect our quarterly operating results to fluctuate in future periods due to a variety of reasons, including those discussed in "Business Risks."

 
                                                            Quarter Ended
                                        ------------------------------------------------------
                                         March 31,      June 30,    September 30, December 31,
                                            2004          2004          2004          2004
                                        ------------  ------------  ------------  ------------
                                                (in thousands, except per share data)
Net revenues:
    Product revenues.................. $     91,370  $    115,571  $    101,260  $     96,530
    License revenues..................       13,063        12,958        10,912         7,534
                                        ------------  ------------  ------------  ------------
      Total net revenues.............. $    104,433  $    128,529  $    112,172  $    104,064
Gross profit.......................... $     38,151  $     48,767  $     39,584  $        603
Income (loss) from operations......... $     15,421  $     23,396  $     14,752  $    (27,330)
Net income (loss)..................... $     14,233  $     22,099  $     14,522  $    (26,925)
Net income (loss) per share-basic..... $       0.15  $       0.23  $       0.15  $      (0.28)
Net income (loss) per share-diluted... $       0.14  $       0.22  $       0.15  $      (0.28)
 
 
                                                            Quarter Ended
                                        ------------------------------------------------------
                                         March 31,      June 30,    September 30, December 31,
                                            2003          2003          2003          2003
                                        ------------  ------------  ------------  ------------
                                                (in thousands, except per share data)
Net revenues:
    Product revenues.................. $     53,921  $     54,860  $     65,397  $     82,351
    License revenues..................        7,788         9,320         8,538        12,866
                                        ------------  ------------  ------------  ------------
      Total net revenues.............. $     61,709  $     64,180  $     73,935  $     95,217
Gross profit.......................... $      9,208  $     16,247  $     18,341  $     32,470
Income (loss) from operations......... $    (11,083) $     (3,739) $    (37,390) $     10,815
Net income (loss)..................... $    (10,665) $     (4,589) $    (59,018) $      9,105
Net income (loss) per share-basic..... $      (0.11) $      (0.05) $      (0.62) $       0.10
Net income (loss) per share-diluted... $      (0.11) $      (0.05) $      (0.62) $       0.09
 

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

We recorded an operating lease impairment of $1.5 million relating to an operating lease for an abandoned building in the second quarter of 2004. We expensed the in-process research and development resulting from the acquisitions of Emosyn and G-Plus in the amount of $1.7 million and $4.2 million in the third and fourth quarters of 2004, respectively. We recorded a provision of adverse purchase commitments of $2.6 million and $5.4 million in the third and fourth quarter, respectively. In the fourth quarter of 2004, we recorded an $18.3 million valuation adjustment against inventory for potentially excess and obsolete inventories and those inventories carried at costs that are higher than their market values.

41

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

Not applicable.

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 (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. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met.

Our management, including the 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, 2004. Based upon the evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that due to the material weakness described below, our disclosure controls and procedures were not effective at the reasonable assurance level as of December 31, 2004.

There were no changes in our internal controls over financial reporting during our fourth quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management is responsible for establishing and maintaining adequate internal control over financial reporting. 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 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.

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 has assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making its assessment of internal control over financial reporting, our management used the criteria described in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

A material weakness is a control deficiency or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of December 31, 2004, we did not maintain effective control over accounting for and review of the valuation of inventory, the income tax provision and related balance sheet accounts and licensing revenue because we lacked a sufficient complement of personnel with a level of accounting expertise that is commensurate with our financial reporting requirements. Specifically, we lacked sufficient controls over the write down of inventory to its lower of cost or market, accounting for complex licensing contracts with multiple elements, and processes and procedures related to the determination and review of the quarterly and annual tax provisions in accordance with generally accepted accounting principles in the United States. This control deficiency resulted in an audit adjustment to the 2004 consolidated financial statements related to the write-down of inventory to the lower of cost or market. Additionally, this deficiency could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness. Because of this material weakness, we have concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2004 based on criteria in Internal Control-Integrated Framework.

42

Management has excluded Emosyn LLC ("Emosyn"), and SST Communications Corporation ("SCC"), from its assessment of internal control over financial reporting as of December 31, 2004, because these companies were acquired by us in purchase business combinations during 2004. Emosyn and SCC are consolidated subsidiaries whose combined total assets and revenues represent 6.4% and 6.4%, respectively, of the related consolidated financial statement amount as of and for the year ended December 31, 2004.

Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, and independent registered public accounting firm, as stated in their report which appears herein.

In response to the material weakness described above, we have recently hired new senior accounting personnel and is in the process of hiring additional accounting and finance staff. In addition, we intend to enhance its training programs for accounting and finance personnel.

On December 21, 2004, were notified by the Enforcement Office of the Securities and Exchange Commission that it is conducting an informal inquiry regarding trading of shares of our common stock prior to our December 20, 2004 announcement of updated guidance for our financial results for the fourth quarter of 2004. The inquiry involves trading in shares of our common stock by an executive officer, a director of SST and three employees. We are cooperating with the Enforcement Office.

43

PART III

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

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

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

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

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

44

PART IV

Item 15. Exhibits and Financial Statement Schedule

(a) (1) Consolidated Financial Statements. The index to the consolidated financial statements is found on page 49 of this Report.

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

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

(b) Index to Exhibits.

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

________

1. Filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, filed August 5, 2004 and incorporated by reference herein.
2. Filed as Exhibit 3.4 to our Registration Statement on Form S-1, as amended, File No. 33-97802, filed on October 5, 1995, and incorporated by reference herein.
3. Filed as Exhibit 3.5 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, filed on August 7, 2000, and incorporated by reference herein.
4. Filed as Exhibit 99.3 to our Current Report on Form 8-K filed on May 18, 1999, and incorporated by reference herein.
5. Filed as Exhibit 4.2 to our Registration Statement on Form S-1, as amended, File No. 33-97802, filed on November 3, 1995, and incorporated by reference herein.
6. Filed as Exhibit 99.2 to our Current Report on Form 8-K filed on May 18, 1999, and incorporated by reference herein.
7. Filed as Exhibit 3.6 to our Annual Report on Form 10-K for the year ended December 31, 2000, as amended, filed on March 30, 2001, and incorporated by reference herein.
8. Filed as amended as Exhibit 99.1 to our Registration Statement on Form S-8, File No. 333-98135, filed on August 15, 2002, and incorporated by reference herein.
9. Filed as amended as Exhibit 99.2 to our Registration Statement on Form S-8, File No. 33-33130, filed on March 23, 2000, and incorporated by reference herein.
10. Filed as amended as Exhibit 99.2 to our Registration Statement on Form S-8 File No. 33-98135, filed on August 15, 2002, and incorporated by reference herein.
11. Filed as Exhibit 10.5 to our Registration Statement on Form S-1, as amended, File No. 33-97802, filed on October 5, 1995, and incorporated by reference herein.
12. Filed as Exhibit 10.6 to our Registration Statement on Form S-1, as amended, File No. 33-97802, filed on October 5, 1995, and incorporated by reference herein.
13. Filed as Exhibit 10.7 to our Registration Statement on Form S-1, as amended, File No. 33-97802, filed on October 5, 1995, and incorporated by reference herein.
14. Filed as Exhibit 10.17 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed on August 14, 1998, and incorporated by reference herein.
15. Filed as Exhibit 10.18 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed on August 14, 1998, and incorporated by reference herein.
16. Filed as Exhibit 10.23 to our Annual Report on Form 10-K for the year ended December 31, 1999, as amended, filed on February 24, 2000, and incorporated by reference herein.
17. Filed as Exhibit 10.24 to our Annual Report on Form 10-K for the year ended December 31, 1999, as amended, filed on February 24, 2000, and incorporated by reference herein.
18. Filed as Exhibit 10.25 to our Annual Report on Form 10-K for the year ended December 31, 1999, as amended, filed on February 24, 2000, and incorporated by reference herein.
19. Filed as Exhibit 10.28 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, filed on August 7, 2000, and incorporated by reference herein.

47

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 31st day of March, 2005.

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.

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

48

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

49

Report of Independent Registered Public Accounting Firm

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

      We have completed an integrated audit of Silicon Storage Technology, Inc.'s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

      In our opinion, the consolidated financial statements listed in the index appearing under Item 15 (a) (1) present fairly, in all material respects, the financial position of Silicon Storage Technology, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 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. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

      We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

      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.

      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.

As described in Management's Report on Internal Control over Financial Reporting , management has excluded Emosyn LLC ("Emosyn") and SST Communications Corporation ("SCC") from its assessment of internal control over financial reporting as of December 31, 2004 because these companies were acquired by the Company in purchase business combinations during 2004. We have also excluded Emosyn and SCC from our audit of internal control over financial reporting. Emosyn and SCC are consolidated subsidiaries whose combined total assets and revenues represent 6.4% and 6.4%, respectively, of the related consolidated financial statement amount as of and for the year ended December 31, 2004.

      In our opinion, management's assessment that Silicon Storage Technology, Inc. did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the COSO. Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Silicon Storage Technology, Inc. has not maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the COSO.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
March 31, 2005

51

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

 
 
                                                                 Amortized  Unrealized   Unrealized     Fair
                                                                   Cost        Gain         Loss        Value
                                                                 ---------  -----------  -----------  ---------
Corporate bonds and notes...................................... $     106  $        --  $        --  $     106
Government bonds and notes.....................................    78,625           --          (69)    78,556
Foreign listed equity securities...............................     6,509       16,977         (393)    23,093
                                                                 ---------  -----------  -----------  ---------
Total bonds, notes and equity securities....................... $  85,240  $    16,977  $      (462)   101,755
                                                                 =========  ===========  ===========
Less amounts classified as cash equivalents.............................................               (10,033)
                                                                                                      ---------
     Total short and long-term available-for-sale investments...........................             $  91,722
                                                                                                      =========
Contractual maturity dates for investments in bonds and notes:
     Less than 1 year...................................................................             $  68,628
                                                                                                      =========
 

The unrealized gain as of December 31, 2004 is recorded in accumulated other comprehensive income, net of tax of zero.

Market values were determined for each individual security in our investment portfolio. The declines in value of the government bonds and notes primarily relate to changes in the interest rates and are considered temporary in nature. With respect to our foreign listed equity securities, our policy is to review our equity holdings on a regular basis to evaluate whether or not such securities have experienced an other than temporary decline in fair value. Our policy includes, but is not limited to, reviewing each company's cash position, earnings and revenue outlook, stock price performance over the past six months, liquidity, management and ownership. If we believe that an other-than-temporary decline in value exists, it is our policy to write down these investments to the market value and record the related write-down in our consolidated statement of operations. At December 31, 2004, the foreign listed equity securities having a fair value of $1.3 million have been in a continuous loss position for less than twelve months.

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

 
                                                                 Amortized  Unrealized   Unrealized     Fair
                                                                   Cost        Gain         Loss        Value
                                                                 ---------  -----------  -----------  ---------
Corporate bonds and notes...................................... $     184  $        --  $        --  $     184
Government bonds and notes.....................................   158,382           14           --    158,396
Foreign listed equity securities...............................     3,759        9,265         (101)    12,923
                                                                 ---------  -----------  -----------  ---------
Total bonds, notes and equity securities....................... $ 162,325  $     9,279  $      (101)   171,503
                                                                 =========  ===========  ===========
Less amounts classified as cash equivalents.............................................               (45,590)
                                                                                                      ---------
     Total short and long-term available-for-sale investments...........................             $ 125,913
                                                                                                      =========
Contractual maturity dates for investments in bonds and notes:
     Less than 1 year...................................................................             $ 100,944
     Greater than 1 year................................................................                12,046
                                                                                                      ---------
                                                                                                     $ 112,990
                                                                                                      =========
 

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

62

3. Balance Sheet Detail (in thousands):

Trade accounts receivable comprise:

 
                                                                      December 31,
                                                                 ----------------------
                                                                   2003        2004
                                                                 ---------  -----------
Trade Accounts Receivable...................................... $  57,749  $    61,377
Allowance for sales returns....................................    (1,301)      (2,009)
Allowance for doubtful accounts................................    (1,118)      (1,189)
                                                                 ---------  -----------
                                                                $  55,330  $    58,179
                                                                 =========  ===========
 

Inventories, net, comprise:

 
                                                                      December 31,
                                                                 ----------------------
                                                                   2003        2004
                                                                 ---------  -----------
Raw materials.................................................. $  20,735  $    86,355
Work in process................................................    11,265        4,151
Finished goods.................................................     9,579       60,520
Inventory held at logistic center..............................     4,541        5,592
                                                                 ---------  -----------
                                                                $  46,120  $   156,618
                                                                 =========  ===========
 

Other current assets comprise:

 
                                                                      December 31,
                                                                 ----------------------
                                                                   2003        2004
                                                                 ---------  -----------
Refundable income tax.......................................... $   5,533  $     6,035
Other current assets...........................................     7,699       10,014
                                                                 ---------  -----------
                                                                $  13,232  $    16,049
                                                                 =========  ===========
 

Property and Equipment comprise:

 
                                                                      December 31,        Estimated
                                                                 ----------------------    Useful
                                                                   2003        2004         Lives
                                                                 ---------  -----------  -----------
Land........................................................... $      --  $       959
Building.......................................................        --        1,532   Forty years
Equipment......................................................    13,533       17,662   Four years
Computer and design hardware...................................    11,900       13,684   Three years
Software.......................................................     9,768       13,254   Three years
Vehicles.......................................................        12           29   Five years
Furniture and fixtures.........................................     1,958        2,072   Seven years
Leasehold improvements.........................................     7,255        8,695   (1)
                                                                 ---------  -----------
                                                                   44,426       57,887
Less accumulated depreciation..................................    33,392       41,461
                                                                 ---------  -----------
                                                                   11,034       16,426
Construction in progress.......................................       291          194
                                                                 ---------  -----------
                                                                $  11,325  $    16,620
                                                                 =========  ===========
 

(1) Seven years or remaining lease term, whichever is less

Depreciation expense was $9.3 million, $7.7 million and $6.6 million for 2002, 2003 and 2004, respectively.

63

Accrued liabilities comprise:

 
                                                                      December 31,
                                                                 ----------------------
                                                                   2003        2004
                                                                 ---------  -----------
Accrued compensation and related costs......................... $   4,911  $     6,829
Accrued adverse puchase commitment.............................       537        8,330
Accrued commission.............................................     1,333        2,198
Impairment lease liability.....................................       215          976
Accrued yield commitment.......................................       201        1,167
Accrued income tax payable.....................................       659        2,038
Accrued warranty...............................................       187        3,826
Other accrued liabilities......................................     3,868        5,229
                                                                 ---------  -----------
                                                                $  11,911  $    30,593
                                                                 =========  ===========
 

Our technology license agreements generally include an indemnification clause that indemnifies the licensee against liability and damages (including legal defense costs) arising from any claims of patent, copyright, trademark or trade secret infringement by our proprietary technology. The terms of these guarantees approximate the terms of the technology license agreements, which typically range from five to ten years. Our current license agreements expire from 2005 through 2014. The maximum possible amount of future payments we could be required to make, if such indemnifications were required on all of these agreements, is $39.7 million. We have not recorded any liabilities as of December 31, 2004 related to these indemnities as no such claims have been made or asserted.

Accrued warranty:

 
                                                                Year Ended December 31,
                                                                 ----------------------
                                                                   2003        2004
                                                                 ---------  -----------
Balance at beginning of year................................... $     492  $       187
Accruals for warranties issued during the period...............       485        4,834
Settlements made...............................................      (790)      (1,195)
                                                                 ---------  -----------
Balance at end of year......................................... $     187  $     3,826
                                                                 =========  ===========
 

Our products are generally subject to warranty and we provide for the estimated future costs of repair, replacement or customer accommodation upon shipment of the product in the accompanying statements of operations. Our warranty accrual is based on specific known open warranty issues and an estimate of unknown claims. The unknown estimated accrual is based on historical claims compared to historical revenues and assumes that we have to replace products subject to a claim. For new products, we use our historical percentage for the appropriate class of product. Warranty expense has increased from 2003 to 2004 due to rescreening work related to two specific customers and higher shipment volume and return rates.

We lease our corporate facilities under non-cancelable operating leases that expire in 2005 through 2012. The leases require escalating monthly payments over their terms and, therefore, periodic rent expense is being recognized on a straight-line basis. Under the terms of the leases, we are responsible for maintenance costs, including real property taxes, utilities and other costs. Rent expense was $5.4 million, $5.5 million and $5.0 million in 2002, 2003 and 2004, respectively.

During 2001 and the second quarter of 2004, we recorded charges to other operating expense of $756 thousand and $1.5 million, respectively, relating to operating leases for two unoccupied buildings. These charges represent the fair value of the liability determined by reducing the remaining lease commitment by the estimated sublease income relating to these two buildings. The estimated liability may be adjusted subsequently depending on the actual sublease income we may receive. At December 31, 2002, 2003 and 2004, payments made have reduced the recorded liability to $473 thousand, $270 thousand and $976 thousand, respectively.

64

Future minimum rental payments at December 31, 2004 are as follows (in thousands):

 
 
2005........................................................... $   4,182
2006...........................................................     2,941
2007...........................................................     2,856
2008...........................................................     2,822
2009...........................................................     2,905
Thereafter.....................................................       896
                                                                 ---------
                                                                $  16,602
                                                                 =========
 

In January 1996, Atmel Corporation filed suit against SST alleging that we infringed six U.S. patents. We successfully moved for summary judgment on two of the six asserted patents in September 1997. In January 2001, Atmel withdrew its allegation that we infringed another patent. On May 7, 2002, a judgment was entered against the us in the amount of $36.5 million based on a jury's finding that we infringed two of the three remaining patents. We appealed the judgment on July 16, 2002. On September 12, 2003 the Court of Appeals upheld the jury's verdict. On November 18, 2003 the Court of Appeals denied our request for a rehearing, and in December 2003 we paid Atmel $37.8 million to satisfy the judgment plus statutory interest accrued during the appeals. The payment was recorded as other operating expense in the year ending December 31, 2003. In addition, on June 28, 2004 we paid $247 thousand of legal related expenses incurred by Atmel pursuant to the court order.

In January and February 2005, multiple putative shareholder class action complaints were filed against the Company and certain directors and officers, in the United States District Court for the Northern District of California, following the Company's announcement of anticipated financial results for the fourth quarter of 2004. The complaints are captioned: Hunt v. Silicon Storage Technology, Inc., et al., Case No. C 05 00408 WHA (N.D. Cal.); Baker v. Silicon Storage Technology, Inc., et al., Case No. C 05 00295 PJH (N.D. Cal.); Grobler v. Silicon Storage Technology, Inc., et al., Case No. C 05 00376 MHP (N.D. Cal.); Talmo v. Silicon Storage Technology, Inc., et al., Case No. C 05 00390 MMC (N.D. Cal.); and DiCintio v. Silicon Storage Technology, Inc., et al., Case No. C 05 0708 MMC (N.D. Cal.). The complaints seek unspecified damages on alleged violations of federal securities laws during the period from March 22, 2004 to December 20, 2004. Consolidation and the appointment of lead plaintiff are currently pending in these purported class actions. The Company intends to take all appropriate action in response to these lawsuits. The impact related to the outcome of these matters is undeterminable at this time.

In January and February 2005, following the filing of the putative class actions, multiple shareholder derivative complaints were filed in California Superior Court for the County of Santa Clara, purportedly on behalf of the Company against certain directors and officers. The factual allegations of these complaints are substantially identical to those contained in the putative shareholder class actions filed in federal court. The derivative complaints assert claims for, among other things, breach of fiduciary duty and violations of the California Corporations Code. These derivative actions have been consolidated under the caption In Re Silicon Storage Technology, Inc. Derivative Litigation, Lead Case No. 1:05CV034387 (Cal. Super. Ct., Santa Clara Co.). The Company intends to take all appropriate action in response to these lawsuits. The impact related to the outcome of these matters is undeterminable at this time.

From time to time, we are also involved in other legal actions arising in the ordinary course of business. We have accrued certain costs associated with defending these matters. There can be no assurance the remaining Atmel complaint or other third party assertions will be resolved without

65

costly litigation, in a manner that is not adverse to our financial position, results of operations or cash flows or without requiring royalty payments in the future which may adversely impact gross margins. No estimate can be made of the possible loss or possible range of loss associated with the resolution of these contingencies. As a result, no losses have been accrued in our financial statements as of December 31, 2004.

On July 16, 2004 we entered into a 2-year loan agreement with Cathay Bank, a U.S. bank, for a $3.0 million revolving line of credit. The interest rate for the line of credit is 3.475% per annum. The line of credit is collateralized by a $3.0 million certificate of deposit which is included in non-current other assets. The certificate of deposit matures in July 2006 and carries an interest rate of 2.6% per annum. As of December 31, 2004, we had no borrowings under our line of credit.

 
 
 
 
Fair value of tangible net assets acquired................... $   9,252
Existing technology..........................................     6,029
In-process research and development..........................     1,988
Trade name...................................................     1,093
Customer relationships.......................................       549
Backlog......................................................       712
Trade accounts payable, accrued expenses and other liabilitie    (3,621)
                                                               ---------
  Total purchase price....................................... $  16,002
                                                               =========
 

 
Cash......................................................... $   4,600
Common stock.................................................    22,074
Acquisition direct costs.....................................       194
                                                               ---------
  Total purchase price....................................... $  26,868
                                                               =========
 

 
Fair value of tangible net assets acquired........................ $   5,983
Existing technology...............................................     1,814
In-process research and development...............................     3,908
Customer relationships............................................       355
Backlog...........................................................        11
Goodwill..........................................................    15,600
Trade accounts payable, accrued expenses and other liabilities....      (803)
                                                                    ---------
  Total purchase price............................................ $  26,868
                                                                    =========
 

 
                                                         December 31,
                                                  ---------------------------
                                                        2003          2004
                                                  ----------------  ---------
Revenue......................................... $        303,791  $ 470,956
Net income (loss)............................... $        (75,308) $  18,550
Net income (loss) per share - basic............. $          (0.80) $    0.19
Net income (loss) per share - diluted........... $          (0.80) $    0.19
 

 
                                            Accumulated
                                   Cost    Amortization   Net
                                 ---------  ---------  ---------
Existing technology.............$   7,843  $     437  $   7,406
Trade name......................    1,093         67      1,026
Customer relationships..........      904         73        831
Backlog.........................      723        219        504
                                 ---------  ---------  ---------
Balance at December 31, 2004....$  10,563  $     796  $   9,767
                                 =========  =========  =========
 

 
                                            Amortization of
                                            Intangible Assets
                                            ---------
                                   2005    $   2,684
                                   2006        2,179
                                   2007        2,105
                                   2008        1,809
                                   2009          990
                                            ---------
                                           $   9,767
                                            =========
 

Equity Incentive Plan:

Under the Equity Incentive Plan, the Board of Directors has the authority to determine to whom options will be granted, the number of shares under option, the option term and the exercise price. The options generally are exercisable beginning one year from date of grant and generally thereafter over periods ranging from four to five years from the date of grant. The term of any options issued may not exceed ten years from the date of grant.

Our 1995 Non-Employee Directors' Stock Option Plan, or the Directors' Plan, as amended, provides for the automatic initial grant of options to purchase 45 thousand shares of our common stock to our non-employee directors. The Directors' Plan also provides for the grant of options to purchase up to an additional 18 thousand shares annually thereafter. Options under the Directors' Plan become exercisable immediately upon date of grant, and the exercise price of options granted must equal or exceed the fair market value of our common stock on the date of grant. The options expire ten years after the date of grant. As of December 31, 2004, we have reserved 950 thousand shares of common stock for issuance upon the exercise of stock options under the Directors' Plan.

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

 
 
                               Available            Options Outstanding          Weighted
                                  for    --------------------------------------   Average
                                 Grant    Shares    Price Per Share    Amount      Price
                               --------- --------- -----------------  ---------  ---------
Balances, December 31, 2001...    3,814    10,887 $  0.05 - $ 29.44  $  77,642  $    7.13
     Granted..................   (1,377)    1,377    3.65 -   10.80      7,133       5.16
     Exercised................       --    (1,193)   0.05 -    8.63     (1,227)      1.03
     Terminated...............      417      (417)   0.68 -   29.44     (4,038)      9.68
     Authorized...............    2,200        --         -                 --         --
                               --------- ---------                    ---------
Balances, December 31, 2002...    5,054    10,654    0.05 -   29.44     79,510       7.46
     Granted..................   (1,337)    1,337    2.30 -   13.57     11,460       8.57
     Exercised................       --    (1,102)   0.05 -   10.29     (2,305)      2.09
     Terminated...............      742      (742)   0.95 -   26.02     (9,595)     12.98
     Authorized...............    1,650        --         -                 --         --
                               --------- ---------                    ---------
Balances, December 31, 2003...    6,109    10,147    0.07 -   29.44     79,070       7.79
     Granted..................   (2,395)    2,395    5.77 -   16.34     19,531       8.15
     Exercised................       --    (1,067)   0.07 -   11.81     (2,786)      2.61
     Terminated...............      444      (444)   2.83 -   26.02     (4,998)     11.25
     Authorized...............       --        --         -                 --         --
                               --------- ---------                    ---------
Balances, December 31, 2004...    4,158    11,031 $  0.08 - $ 29.44  $  90,817  $    8.23
                               ========= =========                    =========
 

At December 31, 2002, 2003 and 2004, 6.6 million, 6.9 million and 6.9 million options were exercisable at a weighted-average exercise price per share of $6.62, $7.96 and $8.59, respectively.

The options outstanding and currently exercisable by exercise price under the Equity Incentive Plan and the Directors' Plan at December 31, 2004 are as follows (in thousands, except per exercise price data):

69

 
                                   Options Outstanding            Options Exercisable
                         ------------------------------------- --------------------------
                                        Weighted-
                                         Average    Weighted-                  Weighted-
                                        Remaining    Average                    Average
    Range of                 Number     Contractual  Exercise      Number       Exercise
 Exercise Prices          Outstanding      Life       Price     Outstanding      Price
------------------------ -------------- ----------  ---------- --------------  ----------
$     0.08 - $     1.04          1,175       3.06  $     0.94          1,175  $     0.94
$     1.08 - $     3.65          1,671       5.65  $     2.69          1,108  $     2.26
$     3.81 - $     4.71          1,117       6.54  $     4.45            905  $     4.47
$     4.72 - $     6.48          1,299       8.51  $     6.03            348  $     5.25
$     6.66 - $     8.16          1,111       9.50  $     7.47             99  $     7.92
$     8.28 - $     9.32          1,256       7.73  $     9.00            484  $     8.63
$     9.64 - $    11.81          1,466       5.10  $    10.76          1,260  $    10.77
$    11.85 - $    18.60          1,283       6.45  $    16.55            854  $    17.99
$    19.96 - $    28.35            636       5.45  $    24.08            636  $    24.08
$    29.44 - $    29.44             17       5.50  $    29.44             17  $    29.44
                         --------------                        --------------
$     0.08 - $    29.44         11,031       6.43  $     8.23          6,886  $     8.59
                         ==============                        ==============
 

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

 
                                                            Year Ended December 31,
                                                        -------------------------------
                                                          2002       2003       2004
                                                        ---------  ---------  ---------
Risk-free interest rate...............................   2.8-4.9%   2.4-3.1%   2.7-3.9%
Expected term of option...............................    6 years    5 years    5 years
Expected volatility...................................        99%        99%        94%
Expected dividend yield...............................         0%         0%         0%
 

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

 
                                                            Year Ended December 31,
                                                        -------------------------------
                                                          2002       2003       2004
                                                        ---------  ---------  ---------
Risk-free interest rate...............................   2.1-2.3%   1.0-1.4%   1.2-2.1%
Expected term of right................................   1/2 year   1/2 year   1/2 year
Expected volatility...................................       102%        86%        74%
Expected dividend yield...............................         0%         0%         0%
 

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

The following table summarizes Emosyn International Limited's option activities for 2004 (in thousands, except per share data):

                                                                  Weighted
                                 Available            Options Outs Average
                                 for Grant   Shares     Amount      Price
                                 ---------  ---------  ---------  ---------
Shares authorized...............    8,824
Options granted.................   (5,289)     5,289  $   2,539  $    0.48
Options canceled................       --         --
                                 ---------  ---------  ---------  ---------
Balance at December 31, 2004....    3,535      5,289  $   2,539  $    0.48
                                 =========  =========  =========  =========
 

70

As of December 31, 2004, no options were vested. The weighted average remaining life of the options outstanding is 4.7 years. The fair value of each option grant for Emosyn's stock option plan is estimated on the date of grant using the Black-Scholes multiple options pricing model with the following weighted average assumptions for 2004: risk-free interest rate of 3.3-3.9%, expected term of right of 5 years, expected volatility of 0% and expected dividend yield of 0%. Option grants are priced at the date of grant. The risk-free interest rate range represents the low and high end of the range used at different points during the year.

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

 
                                                                       Year Ended December 31,
                                                                 -----------------------------------
                                                                   2002        2003         2004
                                                                 ---------  -----------  -----------
Numerator - Basic and diluted
  Net income (loss)............................................ $ (15,095) $   (65,167) $    23,929
                                                                 =========  ===========  ===========
Denominator - Basic
  Weighted average common stock outstanding....................    92,667       94,723       95,756
                                                                 =========  ===========  ===========
 
Basic net income (loss) per share.............................. $   (0.16) $     (0.69) $      0.25
                                                                 =========  ===========  ===========
Numerator - Diluted:
  Net income (loss)............................................ $ (15,095) $   (65,167) $    23,929
                                                                 =========  ===========  ===========
Denominator - Diluted:
  Weighted average common stock outstanding....................    92,667       94,723       95,756
  Dilutive potential of common stock equivalents:
    Options....................................................        --           --        3,387
                                                                 ---------  -----------  -----------
                                                                   92,667       94,723       99,143
                                                                 =========  ===========  ===========
 
Diluted net income (loss) per share............................ $   (0.16) $     (0.69) $      0.24
                                                                 =========  ===========  ===========
 

 
                                                               Year ended December 31,
                                                  ---------------------------------------------
                                                      2002             2003            2004
                                                  ------------  ------------------  -----------
Operating lease impairment...................... $         --  $               --  $     1,479
In-process research and development.............           --                  --        5,896
Atmel Settlement................................           --              37,849           --
                                                  ------------  ------------------  -----------
                                                 $         --  $           37,849  $     7,375
                                                  ============  ==================  ===========
 

 
                                              Year Ended December 31,
                                       --------------------------------------
                                         2002           2003          2004
                                       ---------  ----------------  ---------
Current:
      Federal                         $  (3,912) $          2,516  $     736
      State..........................         1                 2          2
      Foreign........................        16             1,580      3,168
                                       ---------  ----------------  ---------
                                         (3,895)            4,098      3,906
                                       ---------  ----------------  ---------
Deferred:
      Federal........................    (5,874)           16,818         --
      State..........................    (1,162)            5,500         --
                                       ---------  ----------------  ---------
                                         (7,036)           22,318         --
                                       ---------  ----------------  ---------
                                      $ (10,931) $         26,416  $   3,906
                                       =========  ================  =========
 

 
                                                Year Ended December 31,
                                       ---------------------------------------
                                         2002           2003          2004
                                       ---------- ----------------- ----------
United States statutory rate.........     (35.0)%           (35.0)%     35.0 %
State taxes, net of federal benefit..      (4.5)               --         --
Foreign taxes, net...................        --               4.0       12.9
Research and development credit......      (5.9)             (4.8)      (4.0)
Tax exempt interest..................      (2.5)             (2.0)      (2.6)
Capital loss carried forward and not
   benefitted........................      10.4                --         --
Change in estimated tax contingency..      (4.3)               --       (1.5)
Change in valuation allowance........        --             106.1      (30.5)
Write offs...........................        --                --        4.9
Other................................      (0.2)             (0.1)      (0.2)-
                                       ---------- ----------------- ----------
                                          (42.0)%            68.2 %     14.0 %
                                       ========== ================= ==========

 
                                                         December 31,
                                                  ---------------------------
                                                        2003          2004
                                                  ----------------  ---------
Allowance for excess and obsolete inventory..... $          2,552  $     237
Allowance for sales returns.....................              457         27
Allowance for doubtful accounts.................              419         48
Other...........................................            2,803      2,500
Capitalized research and development............            2,052      1,591
Net operating loss carry-forwards...............           10,516      1,456
Depreciation....................................              803      1,902
Tax credits.....................................           21,512     20,213
                                                  ----------------  ---------
Total deferred tax asset........................ $         41,114  $  27,974
Valuation allowance.............................          (41,114)   (27,191)
Acquired intangibles............................               --       (783)
                                                  ----------------  ---------
Net deferred tax asset                           $             --  $      --
                                                  ================  =========
 

 
                                         Year Ended December 31, 2004
                                          --------------------------
                                                           Gross
                                            Revenues    Profit (Loss)
                                          ------------  ------------
SMPG.................................... $    269,376  $     48,352
ASPG....................................       73,221        19,429
SPG.....................................       44,636        12,706
Emosyn..................................       16,905         2,363
SCC.....................................          593          (212)
Technology Licensing....................       44,467        44,467
                                          ------------  ------------
                                         $    449,198  $    127,105
                                          ============  ============
 
 
                                         Year Ended December 31, 2003
                                          --------------------------
 
                                            Revenues    Gross Profit
                                          ------------  ------------
SMPG.................................... $    166,776  $     21,428
ASPG....................................       60,481        11,544
SPG.....................................       29,272         4,782
Technology Licensing....................       38,512        38,512
                                          ------------  ------------
                                         $    295,041  $     76,266
                                          ============  ============
 
 
                                         Year Ended December 31, 2002
                                          --------------------------
 
                                            Revenues    Gross Profit
                                          ------------  ------------
SMPG.................................... $    143,194  $      5,451
ASPG....................................       67,791        24,534
SPG.....................................       33,036         7,790
Technology Licensing....................       30,637        30,637
                                          ------------  ------------
                                         $    274,658  $     68,412
                                          ============  ============
 

 
                                                            Year ended December 31,
                                                  ---------------------------------------------
                                                      2002             2003            2004
                                                  ------------  ------------------  -----------
United States................................... $     21,871  $           19,600  $    32,833
Europe..........................................       10,599               9,957       28,863
Japan...........................................       28,465              27,575       35,233
Korea...........................................       30,321              25,214       36,715
Taiwan..........................................       91,219             109,254      125,491
China (including Hong Kong).....................       70,609              76,107      148,100
Other Asian countries...........................       21,574              27,334       41,963
                                                  ------------  ------------------  -----------
                                                 $    274,658  $          295,041  $   449,198
                                                  ============  ==================  ===========
 

 
                                                             December 31,
                                                  --------------------------------
                                                      2003             2004
                                                  ------------  ------------------
United States................................... $     10,052  $           13,443
China...........................................          855               1,035
Taiwan..........................................          299                 898
Other...........................................          119               1,244
                                                  ------------  ------------------
                                                 $     11,325  $           16,620
                                                  ============  ==================
 
 

 
Equity Investments comprise (in thousands):
                                                              December 31, 2004
                                                  ---------------------------------------------
                                                                    Long-term          Total
                                                     Equity     Available for Sale    Equity
                                                  Investments      Investments      Investment
                                                  ------------  ------------------  -----------
Advanced Chip Engineering Technology ........... $      4,012  $               --  $     4,012
Apacer Technology, Inc .........................        4,357                  --        4,357
Grace Semiconductor Manufacturing Corporation ..       83,150                  --       83,150
Insyde Software Corporation (1).................          322                 266          588
King Yuan Electronics Company, Limited..........           --               2,318        2,318
Nanotech Corporation ...........................        3,767                  --        3,767
Powertech Technology, Incorporated .............          767              14,076       14,843
Professional Computer Technology Limited (2)....          675               6,434        7,109
Silicon Technology Co., Ltd ....................          939                  --          939
Other...........................................          574                  --          574
                                                  ------------  ------------------  -----------
                                                 $     98,563  $           23,094  $   121,657
                                                  ============  ==================  ===========
 
                                                              December 31, 2003
                                                  ---------------------------------------------
                                                                    Long-term          Total
                                                     Equity     Available for Sale    Equity
                                                  Investments      Investments      Investment
                                                  ------------  ------------------  -----------
Apacer Technology, Inc ......................... $      4,358  $               --  $     4,358
Grace Semiconductor Manufacturing Corporation ..       50,000                  --       50,000
Insyde Software Corporation.....................          466                 397          863
King Yuan Electronics Company, Limited..........           --               3,218        3,218
Powertech Technology, Incorporated .............        1,206               5,498        6,704
Professional Computer Technology Limited........          775               3,810        4,585
Silicon Technology Co., Ltd ....................          939                  --          939
Other...........................................          333                  --          333
                                                  ------------  ------------------  -----------
                                                 $     58,077  $           12,923  $    71,000
                                                  ============  ==================  ===========
 

 
                                                               Year Ended
                                                               December 31, 2004
                                                  --------------------------------
                                                    Revenues         Purchases
                                                  ------------  ------------------
Silicon Technology Co., Ltd..................... $      7,943  $               --
Apacer Technology, Inc and related entities.....        2,359                 707
Silicon Professional Technology Ltd.............      214,195                  --
Grace Semiconductor Manufacturing Corporation...          156              59,278
King Yuan Electronics Company, Limited..........           --              38,248
Powertech Technology, Incorporated..............           --              14,718
                                                  ------------  ------------------
                                                 $    224,653  $          112,951
                                                  ============  ==================
 
                                                               Year Ended
                                                               December 31, 2003
                                                  --------------------------------
                                                    Revenues         Purchases
                                                  ------------  ------------------
Silicon Technology Co., Ltd..................... $      3,615  $               --
Apacer Technology, Inc and related entities.....        1,555               2,361
Silicon Professional Technology Ltd.............      164,810                  --
Grace Semiconductor Manufacturing Corporation...           --                  12
King Yuan Electronics Company, Limited..........           --              19,659
Powertech Technology, Incorporated..............           --               9,280
                                                  ------------  ------------------
                                                 $    169,980  $           31,312
                                                  ============  ==================
 
                                                               Year Ended
                                                               December 31, 2002
                                                  --------------------------------
                                                    Revenues         Purchases
                                                  ------------  ------------------
Silicon Technology Co., Ltd..................... $      2,089  $               --
Acer and related entities (1)...................          269                  --
Apacer Technology, Inc and related entities.....          899                 588
Professional Computer Technology Limited........          141                  --
Silicon Professional Technology Ltd.............      140,003                  --
King Yuan Electronics Company, Limited..........           --              18,163
Powertech Technology, Incorporated..............           --               8,378
                                                  ------------  ------------------
                                                 $    143,401  $           27,129
                                                  ============  ==================
 

                                                         December 31, 2003             December 31, 2004
                                                  --------------------------------  -----------------------
                                                                     Accounts                     Accounts
                                                    Accounts       Payable and       Accounts    Payable and
                                                   Receivable        Accruals       Receivable    Accruals
                                                  ------------  ------------------  -----------  ----------
Silicon Technology Co., Ltd..................... $        232  $               --  $       322  $       --
 
Apacer Technology, Inc and related entities.....          400                 736          458         320
Professional Computer Technology Limited........           --                  15           --          72
Silicon Professional Technology Ltd.............       40,588                 550       32,037         694
Grace Semiconductor Manufacturing Corporation...           --                  --          156      17,227
King Yuan Electronics Company, Limited..........           --               6,896           --      13,702
Powertech Technology, Incorporated..............           --               2,533           --       3,867
Other...........................................           --                   4           --          --
                                                  ------------  ------------------  -----------  ----------
                                                 $     41,220  $           10,734  $    32,973  $   35,882
                                                  ============  ==================  ===========  ==========
 

 
                                                                Balance at  Charged to    Write-off   Balance at
                                                                Beginning    Costs and   of Accounts    End of
Description                                                     of Period    Expenses      /Other       Period
--------------------------------------------------------------  ----------  -----------  -----------  ----------
Year ended December 31, 2002
  Allowance for doubtful accounts............................. $    2,814  $     3,046  $     1,440  $    4,420
  Allowance for sales returns................................. $    4,498  $     2,842  $     5,553  $    1,787
  Allowance for excess and obsolete inventories and adverse
     purchase commitments..................................... $   47,747  $    10,441  $    29,466  $   28,722
  Valuation allowance on deferred tax assets.................. $       --  $        --  $        --  $       --
 
Year ended December 31, 2003
  Allowance for doubtful accounts............................. $    4,420  $       228  $     3,530  $    1,118
  Allowance for sales returns................................. $    1,787  $       316  $       802  $    1,301
  Allowance for excess and obsolete inventories and adverse
     purchase commitments..................................... $   28,722  $     6,670  $    23,638  $   11,754
  Valuation allowance on deferred tax assets.................. $       --  $    41,114  $        --  $   41,114
 
Year ended December 31, 2004
  Allowance for doubtful accounts............................. $    1,118  $       825  $       754  $    1,189
  Allowance for sales returns................................. $    1,301  $     1,347  $       639  $    2,009
  Allowance for excess and obsolete inventories and adverse
     purchase commitments..................................... $   11,754  $    35,883  $     7,155  $   40,482
  Valuation allowance on deferred tax assets.................. $   41,114  $        --  $    13,923  $   27,191