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

After reaching a low point during the month of January, our product shipments rebounded in the first quarter and stabilized in the second quarter. Inventory replenishment, coupled with modest improvement in demand, led to better-than-expected product revenues, with a 44% sequential increase in overall unit shipments in the second quarter. Unit shipments to the Internet computing segment increased nearly 35% sequentially from the first quarter, with substantial recovery in hard disk drive, PC monitor and notebook applications. Unit shipments to the wireless communications segment increased 73% sequentially, driven by the strong recovery in Bluetooth and GPS applications, as well as continued sequential growth in ultra-low-cost-phone shipments. Although we saw improvement across all application segments, as compared to the previous quarter, our second quarter 2009 unit shipments are still down 20% from the previous year. As we expected, our licensing revenues declined significantly in the second quarter, reflecting the decline in our licensees' business in the first quarter.

Market conditions remain challenging, particularly for commodity memory products, as there continues to be uncertainty over the macro-economic environment, resulting in poor visibility and continued pricing pressure. This pressure is the result of both weak end-market demand and manufacturing over-capacity in the industry. While it is likely that demand will improve modestly during the remainder of 2009, we expect the pricing environment to remain challenging, as a result of the pervasive over-capacity. We do not expect prices to stabilize until fab utilization in the industry returns to a healthier level. Further, we do not expect to sustain the strong second quarter sequential growth rate in unit shipments through the third quarter.

In response to these difficult market conditions, we are taking a fresh look at every aspect of our business; focusing our resources on areas that will yield the most impact over time, while creating additional opportunities without incurring significant additional research and development expense in the near term. These efforts include a targeted approach to product development that emphasizes non-commodity applications through differentiated features, as well as new programs to enhance our licensing business. We were very pleased to announce in June that Bertrand Cambou joined our company to manage the operation of our memory business. Along with a wealth of industry experience, Dr. Cambou brings to the company a new perspective and excitement toward reviving our NOR memory business. We are actively evaluating the market environment and competitive landscape in order to streamline our product platforms and are assessing the geographic areas and strategic accounts in which we may be underrepresented. We believe there are opportunities for a greater presence and more balanced customer base with additional strategic accounts in Japan, North America and Europe. We also continue to focus on the advancement of our technology through collaborated efforts with our strategic partners, while reducing expenses and carefully managing our inventory and cash. By leveraging our core competencies and improving the efficiency of our operations, we believe that we can move closer to our goal of returning the company to profitability.

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, we have been pleased by our progress in this area, given the difficulty of penetrating new markets and in an environment where customers are scaling back new product development. In the first half of 2009, our non-memory business contributed over 20% of product revenue and nearly 60% of product gross profit.

We continue to experience good traction with our NAND controllers and modules, including NANDrive, our embedded flash solid-state drive product family. Our customer base for the NANDrive product line has been growing steadily each quarter for the past two years. However, our revenues remain small as the design cycle for the products that incorporate the NANDrive is quite long, and the current downturn has resulted in further design delays for our customers. We see continued customer enthusiasm, particularly in IP set-top boxes, mobile Internet devices and industrial applications. Over the next few quarters, we expect to expand our product offerings to increase our addressable market, with products covering a broad range of capacities from 0.5GB to 32GB. The market still presents significant challenges, with several of our design wins in the car infotainment space, which is likely to remain weak until the broader economy recovers.

Our RF power amplifier products targeting the embedded Wi-Fi market showed strong sequential growth in the second quarter, with unit shipments more than doubling to reach 14.6 million, driven by video game and printer applications. Using advanced technologies, these devices feature a highly-efficient, low-power, small-footprint design that supports 802.11 wireless standard. We are currently driving design wins in smart phone applications and expect to see product ramp within the next year. While the revenue base is still quite small, average selling prices for these products remain stable and market interest continues to grow. In addition, these design-in activities with our radio frequency power amplifier chipset partners expand opportunities for our NOR memory and NANDrive products.

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 the fourth quarter of 2008 and remained low throughout the first half of 2009. Although we saw modest improvement in the second quarter, 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. As we refine our roadmap, we are putting special emphasis on our memory product offerings with differentiated features that take advantage of the benefits of SuperFlash technology, such as high reliability, fast read/write performance with very low power requirements, and serial flash with XIP function. For the near term, we are focused on the product transition to 120nm nodes and 300mm capacity for cost improvement, and for several quarters we have been working to ramp our 120nm technology products at Shanghai Grace Semiconductor Manufacturing Corporation, or Grace, and Maxchip Electronics Corporation, or Maxchip. These products, including 16Mbit, 32Mbit and 64Mbit parallel and serial family of products, offer significant performance, power efficiency and footprint advantages over previous generations. To date, nine products have been released to production at Grace and Maxchip, with five more under verification and qualification; however the production-ramp is limited by current market demand.

Although our licensing revenues declined significantly in the second quarter, reflecting the decline in our licensees' business in the first quarter, we expect to see some increase in royalty revenues for the third quarter, reflecting general improvement in the semiconductor industry in the second quarter. Our licensing business represents considerable opportunity for us and we are placing enhanced emphasis in several areas we believe will foster growth. In addition to growing our licensee base, we are also working with current licensees to expand to more advanced technology nodes. Further, we are expanding our offering in design services, including both flash IP block and full chip design, to help our licensees reduce their time-to-market for new products. 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 half of 2009, as compared to the first half of 2008. Our restructuring efforts have been conducted in a manner that we believe will best enable us to support the current and future requirements of our customer base and invest appropriately in our technology roadmap in order to enhance both our shorter and longer term competitive position. 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 89.0% of our net product revenues during the year ended December 31, 2008 and the first half 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 18.1% of our net product revenues during the year ended December 31, 2008 and the first half 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 half 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 61.6% of our product shipments during the year ended December 31, 2008 and the first half of 2009, respectively. In addition, the same three stocking representatives solicited sales, for which they received a commission, for 7.0% and 1.8% of our product shipments to end users during the year ended December 31, 2008 and the first half 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 half of 2009, SPT serviced end customer sales accounting for 56.2% and 60.4%, respectively, of our net product revenues. As of December 31, 2008 and June 30, 2009, SPT represented 50.9% and 67.5%, 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
                                   June 30,     March 31,    June 30,       2Q09-Over-2Q08            2Q09-Over-1Q09
                                     2008         2009         2009             Change                    Change
Memory revenue                     $  60,883   $    29,747   $  41,652   $ (19,231 )    (31.6 )%    $ 11,905       40.0 %
Non-memory revenue                    10,190         9,040      10,114         (76 )     (0.7 )%       1,074       11.9 %

Product revenues                      71,073        38,787      51,766     (19,307 )    (27.2 )%      12,979       33.5 %
Technology licensing                  12,627        11,342       6,317      (6,310 )    (50.0 )%      (5,025 )    (44.3 )%

Total net revenues                 $  83,700   $    50,129   $  58,083   $ (25,617 )    (30.6 )%    $  7,954       15.9 %

                                    Six Months Ended
                                  June 30,    June 30,       2Q09-Over-2Q08
                                    2008        2009             Change
           Memory revenue         $ 122,573   $  71,399   $ (51,174 )    (41.7 )%
           Non-memory revenue        18,198      19,154         956        5.3 %

           Product revenues         140,771      90,553     (50,218 )    (35.7 )%
           Technology licensing      24,014      17,659      (6,355 )    (26.5 )%

           Total net revenues     $ 164,785   $ 108,212   $ (56,573 )    (34.3 )%

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 half of 2009 was down significantly from the first half of 2008, largely as a result of the unprecedented sudden decrease in worldwide demand for semiconductor products which began in September, 2008. Although this decline was more pronounced in the first quarter of 2009, revenue for the second quarter of 2009 is still down sharply from the previous year.

Memory product revenue increased 40.0% in the second quarter of 2009 from the first quarter, primarily due to an increase in unit shipments of 42%, which was offset slightly by a 1% decline in average selling prices. The wireless communications segment showed strong recovery in the second quarter, with unit shipments up 90% from the first quarter, and averages selling prices remaining relatively stable. Memory product revenue for the second quarter of 2009 was down 31.6% from the second quarter of 2008, primarily due to a 21% decline in average selling prices, combined with a 14% decrease in unit shipments. Reduced demand for digital consumer 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 second half 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 increased 11.9% in the second quarter of 2009 from the first quarter, with an increase in unit shipments of 50% partially offset by a decrease of 22% in average selling prices. Non-memory product revenue for the second quarter of 2009 was comparable to the second quarter of 2008, with a 74% increase in average selling prices, from product mix, largely offset by a 45% decrease in unit shipments. Revenue for the first half 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 for the second quarter of 2009 decreased significantly, as compared with both the first quarter of 2009 and the second quarter of 2008, as a result of lower demand for our licensee's products. 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 second quarter of 2009 reflects the business of our licensees in the first quarter of 2009. Although we anticipate some improvement in the second half 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
                                    June 30,        March 31,       June 30,          2Q09-Over-2Q08            2Q09-Over-1Q09
                                      2008            2009            2009                Change                    Change
Memory gross profit                 $   9,799      $       810      $   3,789      $  (6,010 )    (61.3 )%    $  2,979      367.8 %
Memory gross margin                      16.1 %            2.7 %          9.1 %
Non-memory gross profit                 1,523            3,442          3,403          1,880      123.4 %          (39 )     (1.1 )%
Non-memory gross margin                  14.9 %           38.1 %         33.6 %

Product gross profit                   11,322            4,252          7,192         (4,130 )    (36.5 )%       2,940       69.1 %
Product gross margin                     15.9 %           11.0 %         13.9 %
Technology licensing gross profit      12,627           11,342          6,317         (6,310 )    (50.0 )%      (5,025 )    (44.3 )%
Technology licensing gross margin       100.0 %          100.0 %        100.0 %

Total gross profit                  $  23,949      $    15,594      $  13,509      $ (10,440 )    (43.6 )%    $ (2,085 )    (13.4 )%

Total gross margin                       28.6 %           31.1 %         23.3 %




                                          Six Months Ended
                                      June 30,       June 30,          2Q09-Over-2Q08
                                        2008           2009                Change
  Memory gross profit                 $  22,474      $   4,599      $ (17,875 )    (79.5 )%
  Memory gross margin                      18.3 %          6.4 %
  Non-memory gross profit                 3,170          6,845          3,675      115.9 %
  Non-memory gross margin                  17.4 %         35.7 %

  Product gross profit                   25,644         11,444        (14,200 )    (55.4 )%
  Product gross margin                     18.2 %         12.6 %
  Technology licensing gross profit      24,014         17,659         (6,355 )    (26.5 )%
  Technology licensing gross margin       100.0 %        100.0 %

  Total gross profit                  $  49,658      $  29,103      $ (20,555 )    (41.4 )%

  Total gross margin                       30.1 %         26.9 %


Product Gross Profit

Memory products

Gross profit for memory products increased 367.8% in the second quarter of 2009 compared to the first quarter of 2009, primarily due to higher revenue and product mix. Gross profit for the first quarter of 2009 was also negatively impacted, to a greater extent than the second quarter of 2009, by inventory write-downs due to decreases in average selling prices. Gross profit decreased 61.3% in the second quarter of 2009 and 79.5% in the first half of 2009 compared to the same periods in 2008, based on substantially reduced revenue and lower average selling prices. The significant declines in average selling prices in 2009 from 2008 resulted in a gross margin impact which is proportionally greater than the reduction in revenue. Gross profit benefited by $0.9 million and $1.5 million in the second quarter and first half of 2009, respectively, from the sale of inventory which had previously been written down. Gross profit benefited by $0.6 million and $1.2 million in the second quarter and first half of 2008, respectively, from the sale of inventory which had previously been written down.

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 for the second quarter of 2009 was comparable to the first quarter of 2009, with an increase in revenue offset by . . .