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 business strategy is two fold: to continue to develop and grow our core NOR flash memory and embedded flash technology licensing business, while diversifying our business by expanding into new markets and pursuing growth opportunities through the development of new NAND Controller-based module and radio frequency IC products. In the NOR flash market, our goals are to be the 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 non-memory 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

In response to the challenging market conditions of the past year, we began taking a fresh look at every aspect of our business; focusing our resources on areas that we believe 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 have made good progress, and strong execution of these objectives, combined with an improved demand environment, resulted in solid financial performance for the third quarter of 2009, as well as yielding several key achievements in product development and technology licensing which we believe will help drive future growth.

After reaching a low point during the month of January, our product shipments rebounded in the first quarter of 2009. The end-market demand recovery that began in the second quarter continued through the third quarter, resulting in a greater than 30% sequential increase in unit shipments in the third quarter of 2009, as compared to the second quarter. Unit shipments to the digital consumer segment increased 47% sequentially, with digital camera, DVD and set-top-box applications showing especially strong growth. Unit shipments to the Internet computing segment increased 45% sequentially, with across-the-board increases, particularly in notebook and desktop PC, hard disk drive and PC monitor applications. Unit shipments to the networking segment increased 47% sequentially, driven primarily by shipment increases in DSL modem and wireless LAN applications. Unit shipments to the wireless communications segment were essentially flat, with the sequential growth in Bluetooth cordless phone and GPS applications offset by a steep decline in mobile phone shipments. Our licensing revenue increased significantly in the third quarter of 2009, reflecting the improvement in our licensees' business in the second quarter.

We have begun to see stabilization in the pricing environment, as the rate of price decline for like products has slowed significantly from earlier in the year. Coupled with strong unit shipments, this stabilization contributed to a healthy growth in revenue across all application segments. Although our blended average selling price decreased approximately 7% in the third quarter of 2009, as compared to the second quarter, this decrease was primarily due to changes in our product mix, with strong revenue growth in serial flash and radio frequency power amplifier products, which have relatively lower average selling prices. Although seasonal trends in NOR flash, in combination with likely digestion of inventory in the channel, are expected to result in lower industry-wide demand, we expect this relative price stability will continue through the fourth quarter.

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.

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. For the nine months ended September 30, 2009, our non-memory business contributed 20% of product revenue and 47% 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, and our customer base for the NANDrive product line includes more than 80 customers. Our engineering teams are designing new controllers with new interfaces to expand our addressable market into applications such as mobile Internet devices, automotive and industrial equipment, camcorders and IP set-top boxes. We believe our growing portfolio of design wins is indicative of an emerging business and that we are in front of a positive revenue cycle for this product family.

Our radio frequency power amplifier products targeting the embedded Wi-Fi market showed strong sequential growth in the third quarter of 2009, with shipments in excess of 20 million units. Using advanced technologies, these devices feature a highly-efficient, low-power, small-footprint design that supports 802.11 wireless standard. We recently announced the availability of our newest radio frequency power amplifier, which supports an operating voltage up to 5V, resulting in ultra-high linear output power capability. This new device helps increase the transmission range and data rate of wireless access points and routers to better support broadband applications, such as streaming video and other multimedia-rich content. These products are winning designs with major chipset manufacturers for use in smart phone applications, and we expect the ramp up of these chipsets to drive volume shipments of our power amplifier products in 2010. In addition, design wins 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 long, and we further expect our near term results to be impacted by the challenging overall economic environment.

Memory Products and Technology Licensing

Our focus on product innovation and technology advancement is essential to sustaining growth in challenging market conditions. As we refine our roadmap, we are putting special emphasis on development of innovative products with differentiated features that expand our addressable market. We recently announced a new family of high-speed quad-bit serial flash memory with our proprietary execute-in-place feature, which builds upon the success of our innovative and award-winning SQI flash products. In order to take advantage of significant cost savings, over the past several years, electronics device manufacturers have been transitioning from parallel flash to serial flash for use in certain applications. However, serial flash has historically not offered the performance level required for use in applications requiring very high speed memory access, such as mobile handsets, Bluetooth headsets and GPS devices. Our high speed SQI serial flash achieves a breakthrough combination of the high performance level typically associated with parallel flash memory and the low pin count and space savings of serial flash memory, as well as extremely low power consumption, which is critical for the design of next-generation devices. We also continue to ramp our 120nm technology products at Shanghai Grace Semiconductor Manufacturing Corporation, or Grace, and Maxchip Electronics Corporation, or Maxchip. In addition to cost advantages, these products offer significant performance, power efficiency and footprint advantages over previous generations. Our goal is for these 120nm products to contribute 50% of our memory product revenue over the next few quarters.

Our licensing revenue increased by more than 50% in the third quarter of 2009, as compared to the second quarter, reflecting the general improvement in the semiconductor industry in the second quarter. We anticipate continued growth in our royalty revenue in the fourth quarter, as market conditions remained positive in the third quarter, and several new licensing agreements are expected to contribute up front fees. 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 to new accounts in wafer foundries, integrated device manufacturers and design houses, we are also working with current licensees to expand to more advanced technology nodes. During the past few quarters we have signed several new licensing agreements, which we expect will begin to contribute upfront fees in the fourth quarter. 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 continues to improve.

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 nine months ended September 30, 2009, as compared to the nine months ended September 30, 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.

Concentrations

We derived 87.3% and 91.4% of our net product revenues during the year ended December 31, 2008 and the nine months ended September 30, 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 18.9% of our net product revenues during the year ended December 31, 2008 and the nine months ended September 30, 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 nine months ended September 30, 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 59.3% of our product shipments during the year ended December 31, 2008 and the nine months ended September 30, 2009, respectively. In addition, the same three stocking representatives solicited sales, for which they received a commission, for 7.0% and 1.3% of our product shipments to end users during the year ended December 31, 2008 and the nine months ended September 30, 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 nine months ended September 30, 2009, SPT serviced end customer sales accounting for 56.2% and 59.5%, respectively, of our net product revenues. As of December 31, 2008 and September 30, 2009, SPT represented 50.9% and 71.6%, 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
                                   September 30,    June 30,     September 30,       3Q09-Over-3Q08           3Q09-Over-2Q09
                                       2008           2009           2009                Change                   Change
Memory revenue                    $        68,521   $  41,652   $        50,038   $ (18,483 )    (27.0 )%    $    8,386   20.1 %
Non-memory revenue                         11,280      10,114            11,728         448        4.0 %          1,614   16.0 %

Product revenues                           79,801      51,766            61,766     (18,035 )    (22.6 )%        10,000   19.3 %
Technology licensing                       12,597       6,317             9,487      (3,110 )    (24.7 )%         3,170   50.2 %

Total net revenues                $        92,398   $  58,083   $        71,253   $ (21,145 )    (22.9 )%    $   13,170   22.7 %

                                    Nine Months Ended
                             September 30,     September 30,       3Q09-Over-3Q08
                                 2008              2009                Change
     Memory revenue         $       191,064   $       121,437   $ (69,627 )    (36.4 )%
     Non-memory revenue              29,508            30,882       1,374        4.7 %

     Product revenues               220,572           152,319     (68,253 )    (30.9 )%
     Technology licensing            36,611            27,146      (9,465 )    (25.9 )%

     Total net revenues     $       257,183   $       179,465   $ (77,718 )    (30.2 )%

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 for the nine months ended September 30, 2009 was down significantly from the same period in 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 and third quarters of 2009 is still down sharply from the previous year.

Memory product revenue increased 20.1% in the third quarter of 2009 from the second quarter, primarily due to an increase in unit shipments of 30%, which was partially offset by a 6% decline in average selling prices. The digital consumer and Internet computing segments showed strong recovery in the third quarter of 2009, with unit shipments up 49% and 45%, respectively, from the second quarter, and relatively modest declines in averages selling prices. Memory product revenue for the third quarter of 2009 was down 27.0% from the third quarter of 2008, primarily due to a 27% decline in average selling prices, while unit shipments were flat. Reduced demand for wireless communications and digital consumer products beginning in the second half of 2008 resulted in a decline in average selling prices, due to increased competitive pressures, over-capacity and the challenging overall macroeconomic environment.

Although we anticipate memory product revenue will remain relatively stable in the fourth quarter of 2009, as part of a general seasonal trend, we expect that memory product revenue will continue to be at historically low levels for the remainder of 2009.

Non-Memory Products

Non-memory product revenue increased 16.0% in the third quarter of 2009 from the second quarter, with an increase in unit shipments of 38% partially offset by a decrease of 13% in average selling prices. Non-memory product revenue for the third quarter of 2009 was comparable to the third quarter of 2008, with a 10% decrease in average selling prices and only a slight increase in unit shipments, as revenue for the third quarter of 2008 was negatively impacted by our deferral of revenue for certain uncollected accounts receivable.

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

Technology Licensing Revenue

Technology licensing revenue includes a combination of up-front fees and royalties. Technology licensing revenue for the third quarter of 2009 increased 50.2% from the second quarter of 2009, and decreased 24.7% from the third quarter of 2008. The increase in the third quarter of 2009, as compared to the second quarter, is a result of improvement in demand for our licensee's products in the second quarter, as our royalty revenues are recorded when reported to us by our licensees, which is the quarter following our licensees' sales. Despite this improvement, overall demand in 2009 is still down from demand levels in 2008. Although we anticipate continued improvement in licensing revenue for the fourth quarter 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
                                      September 30,       June 30,        September 30,         3Q09-Over-3Q08           3Q09-Over-2Q09
                                          2008              2009              2009                  Change                   Change
Memory gross profit                  $        14,110      $   3,789      $         8,285      $ (5,825 )    (41.3 )%    $   4,496   118.7 %
Memory gross margin                             20.6 %          9.1 %               16.6 %
Non-memory gross profit                        4,270          3,403                4,691           421        9.9 %         1,288    37.8 %
Non-memory gross margin                         37.9 %         33.6 %               40.0 %

Product gross profit                          18,380          7,192               12,976        (5,404 )    (29.4 )%        5,784    80.4 %
Product gross margin                            23.0 %         13.9 %               21.0 %
Technology licensing gross profit             12,597          6,317                9,487        (3,110 )    (24.7 )%        3,170    50.2 %
Technology licensing gross margin              100.0 %        100.0 %              100.0 %

Total gross profit                   $        30,977      $  13,509      $        22,463      $ (8,514 )    (27.5 )%    $   8,954    66.3 %

Total gross margin                              33.5 %         23.3 %               31.5 %




                                                  Nine Months Ended
                                         September 30,          September 30,             3Q09-Over-3Q08
                                             2008                   2009                      Change
Memory gross profit                     $        36,555        $        12,884        $ (23,671 )      (64.8 )%
Memory gross margin                                19.1 %                 10.6 %
Non-memory gross profit                           7,469                 11,536            4,067         54.5 %
Non-memory gross margin                            25.3 %                 37.4 %

Product gross profit                             44,024                 24,420          (19,604 )      (44.5 )%
Product gross margin                               20.0 %                 16.0 %
Technology licensing gross profit                36,611                 27,146           (9,465 )      (25.9 )%
Technology licensing gross margin                 100.0 %                100.0 %

Total gross profit                      $        80,635        $        51,566        $ (29,069 )      (36.1 )%

Total gross margin                                 31.4 %                 28.7 %

Product Gross Profit

Memory products

Gross profit for memory products increased 118.7% in the third quarter of 2009 compared to the second quarter of 2009, primarily due to higher revenue and the sale of inventory which had previously been written down. Gross profit for the second quarter of 2009 was also negatively impacted by inventory write-downs of $2.4 million, due primarily to decreases in average selling prices, as compared to inventory write-downs of $1.9 million for the third quarter of 2009. Gross profit decreased 41.3% in the third quarter of 2009 and 64.8% in the nine months ended September 30, 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 $3.1 million and $4.6 million for the three and nine months ended September 30, 2009, respectively, from the sale of inventory which had previously been written down. Gross profit benefited by $2.6 million and $3.8 million for the three and nine months ended September 30, 2008, respectively, from the sale of inventory which had previously been written down.

. . .