The following discussion may be understood more fully by reference to the consolidated financial statements, notes to the consolidated financial statements and management's discussion and analysis of financial condition and results of operations contained in our Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on March 20, 2009.

The following discussion contains forward-looking statements, which involve risk and uncertainties. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors which are difficult to forecast and can materially affect our quarterly or annual operating results. Fluctuations in revenues and operating results may cause volatility in our stock price. Please also see Item 1A. "Risk Factors."

Business Overview

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

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

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

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

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

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

Operations Overview

Market demand is currently substantially lower than historical levels, as is evident in our results for the first quarter of 2009, with particularly steep declines in consumer-related market segments, including the digital consumer and wireless communications segments. Unit shipments to the digital consumer segment suffered a greater than 45% sequential decline in the fourth quarter of 2008, followed by an additional 13% decline in the first quarter of 2009. Although these declines were pervasive, highlights in the first quarter of 2009 include sequential unit growth for shipments into DVD players, portable media players and set-top boxes, as well as a robust recovery for shipments to mobile phones. Shipments to the Internet computing segment began to stabilize and the networking segment had positive sequential growth in the first quarter of 32%, following a 36% decline in the fourth quarter, with increased shipments to DSL broadband access and WiFi networking devices.

Our first quarter revenues fell to the lowest level since 1999, due to the unprecedented drop in demand which began in September 2008. However, we are encouraged that our first quarter revenues exceeded our expectations, given the current challenging economic environment. As we progressed through the first quarter, we received more short-term purchase orders in memory products than we had initially projected. However, pressure on average selling prices, particularly in commodity memory, continue to impact gross margin performance and is likely to persist for several quarters. This pressure is the result of both weak end-market demand and manufacturing over-capacity in our industry. While it is likely that demand will begin to recover this year, we believe that much of the improvement in the first quarter was a function of inventory replenishment, rather than an improvement in end-user demand. Therefore, our focus continues to be on executing our strategy of diversification and the advancement of our technology through collaborated efforts with our strategic partners, while reducing our inventory and expenses, and streamlining our operations.

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

Non-Memory Products

Several years ago, with the recognition that our core memory business will continue to experience average selling price pressure that would limit our revenue growth potential, we began a diversification plan of investing in products and technologies that are expected to yield higher average selling prices and gross margins than our current memory products. We believe that a strategy of diversification will allow for better growth opportunities and higher return for our shareholders. Although it has taken time to establish this new business, our goal remains unchanged and we have made notable progress in this area. In the first quarter of 2009, our non-memory business contributed 22% of product revenue and more than 50% of product gross profit.

With NANDrive, our embedded flash solid-state drive product family, we continue to have design-in activities and customer interest, particularly for applications such as IP set-top boxes, mobile Internet devices and industrial applications. During the first quarter, we expanded this product line with the initial shipments of an 8GByte NANDrive product for consumer applications. Although our non-memory business was negatively impacted by the broad industry downturn and adverse economic environment, unit shipments of NANDrive increased 14% sequentially. As we further diversify our customer base, we expect to see a steadier run-rate and improved manufacturing efficiency. NANDrive was also a finalist in the EDN Innovation of the Year Awards, among an impressive list of products from other leading manufacturers.

Our RF power amplifier and front-end module products targeting the embedded Wi-Fi market are being received well in the marketplace. Using advanced technologies, these devices feature a highly-efficient, low-power, small-footprint design that supports 802.11 wireless standard. Since the introduction of this family of products last year, we have seen design-in and early production into embedded system applications, such as gaming consoles and cellular phones. While volumes are still low, we anticipate a relatively steady growth rate for these products in future quarters.

Due to the complexity of these new product families, the design-in and qualification cycle is expected to be long, and we further expect our near term results to be significantly impacted by the challenging overall economic environment.

Memory Products and Technology Licensing

As a result of the current weak demand environment, gross margins for our memory business suffered a substantial decline. Our memory gross margin dropped below 10% for both the fourth quarter of 2008 and the first quarter of 2009, and we do not expect to see significant improvement until the general economic climate improves.

Continued product innovation and technology advancement are particularly important in light of these challenging market conditions. We continue to focus on achievements in our memory business and have begun to ramp up production of our 120nm technology products at both Shanghai Grace Semiconductor Manfucturing Corporation and PowerChip Semiconductor Corporation, the foundries we expect to produce a majority of our products in 2009. Six products have been released to production, with four more under verification and qualification including 16Mbit, 32Mbit and 64Mbit parallel and serial family of products. For the 12-inch line at PowerChip, the first product is in production and we expect to release two more products in 2009. We believe this 12-inch line will provide the proper cost structure to remain competitive in the broader commodity memory market. Marking further achievement in the area of memory technology, our 26 Series SQI family of serial interface flash memory devices received an Innovation of the Year Award from EDN Magazine, in recognition of the product's performance advantages, reduced size and low power consumption.

While our technology licensing revenues remained relatively stable in the first quarter of 2009, this reflects the business of our customer base from the fourth quarter of 2008. Accordingly, we expect royalty revenues over the next few quarters to reflect the current downturn within the semiconductor industry. Our licensing business remains a tremendous asset to our financial model and our continued investment in our core memory products and technology roadmap helps to ensure this business will thrive as market demand improves.

Global Reorganization

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

As a result of our global reorganization, our operating expenses decreased substantially in the first quarter of 2009. Our restructuring efforts have been conducted in a manner that we believe will best enable us to support the current and future requirements of our customer base and invest appropriately in our technology roadmap in order to enhance both our shorter and longer term competitive position. We are actively working towards a goal of returning the company to profitability and are managing our assets conservatively through this period. Our fabless business model, in conjunction with our technology leadership, has been resilient during past business cycle downturns and we look forward to emerging as a strong competitor from this challenging environment.

Concentrations

We derived 87.3% and 86.6% of our net product revenues during the year ended December 31, 2008 and the first quarter of 2009, respectively, from product shipments to Asia. In addition, substantially all of our wafer suppliers and packaging and testing subcontractors are located in Asia.

Shipments to our top ten end customers, which exclude transactions through stocking representatives and distributors, accounted for 21.4% and 15.3% of our net product revenues during the year ended December 31, 2008 and the first quarter of 2009, respectively.

No single end customer, which we define as original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, contract electronic manufacturers, or CEMs, or end users, represented 10.0% or more of our net product revenues during the year ended December 31, 2008 and the first quarter of 2009.

We ship products to, and have accounts receivable from, OEMs, ODMs, CEMs, stocking representatives, distributors and our logistics center. Our stocking representatives, distributors and logistics center reship our products to our end customers, including OEMs, ODMs, CEMs and end users. Shipments, by us or our logistics center, to our top three stocking representatives for reshipment accounted for 54.6% and 60.7% of our product shipments during the year ended December 31, 2008 and the first quarter of 2009, respectively. In addition, the same three stocking representatives solicited sales, for which they received a commission, for 7.0% and 2.1% of our product shipments to end users during the year ended December 31, 2008 and the first quarter of 2009, respectively.

We out-source our end customer service logistics in Asia to Silicon Professional Technology Ltd., or SPT, which supports our customers in Taiwan, China and other Southeast Asia countries. SPT provides forecasting, planning, warehousing, delivery, billing, collection and other logistic functions for us in these regions. SPT is a wholly-owned subsidiary of one of our stocking representatives in Taiwan, Professional Computer Technology Limited, or PCT. Products shipped to SPT are accounted for as our inventory held at our logistics center, and revenue is recognized when the products have been delivered and are considered as sold to our end customers by SPT. For the year ended December 31, 2008 and the first quarter of 2009, SPT serviced end customer sales accounting for 56.2% and 60.4%, respectively, of our net product revenues recognized. As of December 31, 2008 and March 31 2009, SPT represented 50.9% and 56.4%, respectively, of our net accounts receivable.

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

Critical Accounting Estimates

For information related to our revenue recognition and other critical accounting estimates, please refer to the "Critical Accounting Estimates" section of Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for the year ended December 31, 2008. There have been no significant changes to our critical accounting estimates.

Results of Operations:

Net Revenues (in thousands, except percentages)



                                                     Three Months Ended
                                          March 31,     December 31,     March 31,
                                            2008            2008           2009         1Q09-Over-1Q08 Change           1Q09-Over-4Q08 Change
Memory revenue                           $    61,690   $       37,174   $    29,747   $     (31,943 )     (51.8 )%   $     (7,427 )        (20.0 )%
Non-memory revenue                             8,008            9,120         9,040           1,032        12.9 %             (80 )         (0.9 )%

Product revenues                              69,698           46,294        38,787         (30,911 )     (44.3 )%         (7,507 )        (16.2 )%
Technology licensing                          11,387           12,058        11,342             (45 )      (0.4 )%           (716 )         (5.9 )%

Total net revenues                       $    81,085   $       58,352   $    50,129   $     (30,956 )     (38.2 )%   $     (8,223 )        (14.1 )%

The following discussions are based on our reportable segments described in Note 9 "Segment Reporting" to our condensed consolidated financial statements.

Memory Products

Memory product revenue in the first quarter of 2009 was down significantly from comparative periods, largely as a result of the unprecedented sudden decrease in worldwide demand for semiconductor products which began September 2008.

Memory product revenue decreased 20.0% in the first quarter of 2009 from the fourth quarter of 2008, primarily due to a decrease in unit shipments of 9% and a 14% decline in average selling prices. Memory product revenue decreased 51.8% in the first quarter of 2009 compared to the first quarter of 2008, primarily due to a 38% decrease in unit shipments and a 23% decline in average selling prices. Reduced demand for digital consumer and wireless communications products resulted in lower unit shipments, while average selling prices also declined, due to increased competitive pressures, over-capacity and the challenging overall macroeconomic environment.

Although we anticipate memory product revenue may improve somewhat in the later part of 2009, as part of a general seasonal trend, we expect that memory product revenue will continue to be at historically low levels throughout 2009.

Non-Memory Products

Non-memory product revenue remained stable in the first quarter of 2009 from the fourth quarter of 2008, with an increase in unit shipments of 1% partially offsetting a decrease of 4% in average selling prices. Non-memory product revenue increased 12.9% in the first quarter of 2009 compared to the first quarter of 2008, with a 75% increase in average selling prices, from product mix, partially offset by a 37% decrease in unit shipments. Revenue for the first quarter of 2009 also benefited from the recognition of deferred revenue, based on collection of outstanding accounts receivable.

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

Technology Licensing Revenue

Technology licensing revenue includes a combination of up-front fees and royalties. Technology licensing revenue decreased 5.9% in the first quarter of 2009 from the fourth quarter of 2008, with a decrease in royalty revenue partially offset by additional up-front fees. Technology licensing revenues for the first quarter of 2009 were comparable to the first quarter of 2008.

Our royalty revenues are recorded when reported to us by our licensees, which is the quarter following our licensees' sales, and thus the royalty portion of our licensing revenue for the first quarter of 2009 reflects the business of our licensees in the fourth quarter of 2008. Therefore, we expect royalty revenue will decline significantly in the second quarter, as a result of the current adverse economic conditions. Although there may be some improvement in the later part of 2009, we expect that licensing revenues will continue to fluctuate significantly in the future, depending on general economic conditions.

Gross Profit (in thousands, except percentages)



                                                      Three Months Ended
                                         March 31,       December 31,       March 31,
                                           2008              2008             2009           1Q09-Over-1Q08 Change           1Q09-Over-4Q08 Change
Memory gross profit                     $    12,675     $        2,472     $       810     $     (11,865 )     (93.6 )%   $     (1,662 )        (67.2 )%
Memory gross margin                            20.5 %              6.6 %           2.7 %
Non-memory gross profit                       1,647              2,066           3,442             1,795       109.0 %           1,376           66.6 %
Non-memory gross margin                        20.6 %             22.7 %          38.1 %

Product gross profit                         14,322              4,538           4,252           (10,070 )     (70.3 )%           (286 )         (6.3 )%
Product gross margin                           20.5 %              9.8 %          11.0 %
Technology licensing gross profit            11,387             12,058          11,342               (45 )      (0.4 )%           (716 )         (5.9 )%
Technology licensing gross margin             100.0 %            100.0 %         100.0 %

Total gross profit                      $    25,709     $       16,596     $    15,594     $     (10,115 )     (39.3 )%   $     (1,002 )         (6.0 )%

Total gross margin                             31.7 %             28.4 %          31.1 %


Product Gross Profit

Memory products

Gross profit for memory products decreased 67.2% in the first quarter of 2009 compared to the fourth quarter of 2008, and 93.6% from the first quarter of 2008, due to the decrease in revenue from lower unit shipments and the decline in average selling prices. The decrease in first quarter gross profit, as compared with the fourth quarter, was partially offset by the sale of $1.3 million in inventory which had been previously written down. The significant declines in average selling prices in the first quarter of 2009 from comparative periods resulted in a gross margin impact which is proportionally greater than the reduction in revenue.

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

Non-memory products

Gross profit for non-memory products increased 66.6% in the first quarter of 2009 from the fourth quarter of 2008, despite revenue remaining essentially flat, as gross profit in the fourth quarter was negatively impacted by inventory write-downs. Gross profit for non-memory products increased by 109.0% in the first quarter of 2009 compared to the first quarter of 2008, primarily due to higher average selling prices, from product mix. Gross profit for the first quarter of 2009 also benefited from the recognition of deferred revenue for the sale of $0.5 million in inventory which had previously been written down.

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

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

Operating Expenses (in thousands, except percentages)

In December 2008, we announced the implementation of a global reorganization designed to reflect changes in anticipated demand for our products. The reorganization included a reduction in overall headcount of approximately 120, or 17 percent of our global workforce, most of which was completed by the end of 2008. The workforce reduction and other restructuring actions took place worldwide and in all functional areas of the company, and are expected to reduce payroll-related expenses by approximately $13 million in 2009. In addition, we have taken steps to reduce overall operating expenses, which is evident in our results for the first quarter of 2009, as compared with the first quarter of 2008.

Research and development

                                                       Three Months Ended
                                          March 31,       December 31,       March 31,
                                            2008              2008             2009            1Q09-Over-1Q08 Change            1Q09-Over-4Q08 Change

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

Research and development expenses for the first quarter of 2009 decreased $2.4 million, or 17.7% from the fourth quarter of 2008, primarily due to decreases of $1.1 million for software and intellectual property licenses, $1.0 million in product-related expenses and $0.6 million in expenses related to compensation and benefits. The decrease in compensation was offset slightly by payroll taxes which are generally higher in the early part of the year, despite our personnel reduction. Research and development expenses for the fourth quarter of 2008 included a $1.1 million charge to write off various intellectual property licenses, as we refined our focus toward our most strategic initiatives. Research and development expenses decreased $4.2 million, or 26.9% in the first quarter of 2009, as compared with the first quarter of 2008, primarily due to decreases of $2.0 million in product-related expenses, $1.8 million in compensation, and $0.5 million in benefits. The reductions to compensation and benefit-related expenses are consistent with our personnel reduction.

Although measures taken in the fourth quarter of 2008 in connection with our global reorganization resulted in a reduction to research and development expenses for the first quarter of 2009, as compared to the first quarter of . . .