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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K/A

(Amendment No. 1)



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(Mark One)



|x | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------

| | For the fiscal year ended: February 3, 2007
| | -------------------------------------------

OR



| ̈ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

| | For the transition period from to
| | ---------------------------------

Commission File
Number 001-32207



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SIGMA DESIGNS, INC.

(Exact name of Registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|California                                                     |  | 94-2848099                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|1221 California Circle Milpitas, California                    |  | 95035                                  
|(Address of principal executive offices)                       |  | (Zip code)                             

Registrants telephone number, including area code: (408) 262-9003

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



|                           |  |                                          
|-------------------------- |  | -----------------------------------------
|Title of each class        |  | Name of each exchange on which registered
|                           |  |                                          
|Common Stock, no par value |  | The NASDAQ Stock Market LLC              



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



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

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

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

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

Indicate by check mark whether the registrant is a large accelerated
filer, or an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer  x        Non-accelerated filer ̈

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

The aggregate market value of the registrants common stock, no par value, held by non-affiliates of the registrant was
approximately $199,355,512 based on the closing sale price of $8.89 per share as of July 28, 2006. Shares of common stock held by each executive officer, director and shareholders known by the registrant to own 5% or more of the
registrants outstanding common stock based on Schedule 13G or 13D filings and other information known to the registrant, have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

There were 22,903,930 shares of the Registrants Common Stock issued and
outstanding on March 30, 2007.



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Sigma Designs, Inc.

ANNUAL REPORT ON FORM 10-K/A (Amendment No. 1)

TABLE OF CONTENTS



|                 |  |                                             |  |  
|---------------- |  | ------------------------------------------- |  | -
|                 |  |                                             |  |  
|EXPLANATORY NOTE |  | E-1                                        
|                 | 
|PART II          |  |                                            
|Item 8.          |  | Financial Statements and Supplementary Data |  | 1
|Item 9A.         |  | Controls and Procedures                     |  | 2
|                 | 
|PART IV          |  |                                            
|Item 15.         |  | Exhibits and Financial Statement Schedules  |  | 9
|                 | 
|Signatures       |  | SIG-1                                      
|                 | 
|Certifications   |  |                                            



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EXPLANATORY NOTE

We are filing this Form 10-K/A to correct certain clerical errors made in our financial
statements contained in our Form 10-K for the fiscal year period ended February 3, 2007 filed with the Securities and Exchange Commission on April 20, 2007 (the Original Form 10-K). We believe our financial statements contained
in the Original Form 10-K presented fairly, in all material respects, our consolidated financial position as of February 3, 2007 and January 28, 2006, and the consolidated results of our operations and our cash flows in each of the fiscal
years in the three-year period ended February 3, 2007, in conformity with U.S. generally accepted accounting principles. For the sake of clarity, however, we are correcting the following clerical errors to the Original 10-K in this Amendment:



| |  |  | In our consolidated Balance Sheet, we are adding disclosure regarding the number of authorized shares of preferred stock.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | In our Consolidated Statements of Shareholders Equity and Comprehensive Income, under our Balance as of January 28, 2006, we are
correcting the amounts listed in the Total Shareholders Equity column for the line items of Compensation expenses recognized in accordance with FAS 123R and Fair value of vested stock options assumed from Blue7
acquisition. The balances in this statement as of February 3, 2007 were correctly reported in the Original 10-K, including the totals of all columns of shareholders equity and the total Shareholders Equity amount.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In our stock-based compensation discussion under Note 1  Nature of Operations and Significant Accounting Policies to our Notes to Consolidated Financial
Statements, we are correcting the amount of stock-based compensation expenses recognized under SFAS 123(R) for fiscal year 2007 from $5.1 million to $4.9 million, in order to appropriately exclude expenses related to certain non-employees. The
amount of stock-based compensation awarded to non-employees has now also been separately disclosed within Note 1.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In our stock-based compensation discussion under Note 1  Nature of Operations and Significant Accounting Policies to our Notes to Consolidated Financial
Statements, we are correcting certain amounts in the table contained under the caption, Prior to the Adoption of SFAS 123(R).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Note 11  Current and Long-term Debt to our Notes to Consolidated Financial Statements, we are correcting the effective average interest rate we paid from
January 29, 2006 to February 3, 2007 on our term loan credit facility under the Loan and Security Agreement with United Commercial Bank from 7.4% to 8.54%.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Note 12  Net Income (Loss) Per Share to our Notes to Consolidated Financial Statements, we are correcting the number of dilutive shares not included in
loss years for fiscal year 2006 (in thousands) from 2,255 to 2,621 and the number of excluded potential dilutive securities as of the end of fiscal year 2007 (in thousands) from 102 to 489.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Note 13  Shareholders Equity to our Notes to Consolidated Financial Statements, we are correcting (a) all information on the line relating to
outstanding options and options exercisable with a range of exercise prices from $9.89 to $9.89 and (b) the number of shares that remained available for future purchase under our employee stock purchase plan as of February 3, 2007 from
40,675 shares to 226,292 shares.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Note 15  Acquisition to our Notes to Consolidated Financial Statements, we are correcting the following assumptions we used to determine the fair value of
options assumed in our acquisition of Blue7 Communication: (a) expected term (in years) from 3.53 years to 5.13 years; (b) volatility from 56% to 74%; and (c) risk free interest rate from 4.44% to 4.59%.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We are including in this Form 10-K/A Part II, Item 8  Financial Statements and Supplementary Data, Part II, Item 9A  Controls and
Procedures and Part IV, Item 15  Exhibits and Financial Statement Schedules. We have made changes, which are summarized above, only to our financial statements contained in Part II, Item 8  Financial Statements and Supplementary Data.



E-1



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PART II



|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

The
financial statements required by this item, the notes related thereto, and the independent auditors report appear on pages F-1 through F-38 of this Annual Report on Form 10-K/A (Amendment No. 1).



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|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

We conducted an evaluation, under the supervision and with the participation of our management including our principal
executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of February 3, 2007. Based upon that
evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective as of February 3, 2007 because of the material weaknesses discussed below.

Managements Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. 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 in the United States (U.S. GAAP). 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 our transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and
expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets
that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation and may not prevent or detect misstatements. Projections of any evaluation
of effectiveness of internal control over financial reporting 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, including our principal executive officer and principal financial officer, assessed the effectiveness of our
internal control over financial reporting as of February 3, 2007. In making this assessment, management used the criteria set forth 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. Managements assessment identified the following control deficiencies or combination of control deficiencies that constitute material weaknesses:

Company-level controls. We did not maintain effective company-level controls as defined in the Internal ControlIntegrated Framework
published by COSO. These deficiencies related to each of the five components



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of internal control as defined by COSO (control environment, risk assessment, control activities, information and communication, and monitoring). These
deficiencies resulted in more than a remote likelihood that a material misstatement of our annual or interim financial statements would not be prevented or detected. Specifically,



| |  |  | Our control environment did not sufficiently promote effective internal control over financial reporting throughout our organizational structure, and this material
weakness was a contributing factor to the other material weaknesses described in this Item 9a;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We had inadequate risk assessment controls, including inadequate mechanisms for anticipating and identifying financial reporting risks; and for reacting to changes
in the operating environment that could have a material effect on financial reporting;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | There was inadequate communication from management to employees regarding the general importance of controls and employees duties and control responsibilities;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We had inadequate monitoring controls, including inadequate staffing and procedures to ensure periodic evaluations of internal controls to ensure that appropriate
personnel regularly obtain evidence that controls are functioning effectively and that identified control deficiencies are remediated timely;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We had an inadequate number of trained finance and accounting personnel with appropriate expertise in U.S. generally accepted accounting
principles. Accordingly, in certain circumstances, an effective secondary review of technical accounting matters was not performed;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We had inadequate controls over our management information systems related to program changes, segregation of duties, and access controls; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We had inadequate access and change controls over end-user computing spreadsheets. Specifically, our controls over the completeness, accuracy, validity and
restricted access and review of certain spreadsheets used in the period-end financial statement preparation and reporting process were not designed appropriately or did not operate as designed.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Controls over stock-based compensation. We had inadequate administration, supervision, and review controls over the approval and recording of
stock-based compensation.



| |  |  | As discussed in Note 2 in Notes to the Consolidated Financial Statements of this Form 10-K, during 2006, an internal review related to our historical stock option
granting practices was carried out by our Audit Committee. As a result of the review, we reached a conclusion that incorrect measurement dates were used for financial accounting purposes for certain stock option grants made in prior
periods. Therefore, we have recorded additional non-cash stock-based compensation expense and related tax effects with regard to past stock option grants, substantially all of which relate to options granted between February 1, 1997 and
July 29, 2006; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As discussed in Note 2 in Notes to the Consolidated Financial Statements of this Form 10-K, during our fiscal 2007 audit, we determined that incorrect measurement
dates were used to value stock options exchanged with the previously Blue7 employees upon the acquisition of Blue7. As a result, we restated our financial results for the first quarter of fiscal 2007 to record an increase to the purchase
price of $0.7 million and an additional $0.7 million of deferred stock-based compensation expense.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We are restating
previously filed annual and interim financial statements in this annual report on Form 10-K to correct the errors related to accounting for stock-based compensation.

Financial statement preparation and review procedures.We had inadequate policies, procedures and personnel to ensure that accurate, reliable interim and annual consolidated financial statements were prepared
and reviewed on a timely basis. Specifically, we had insufficient: a) levels of supporting documentation; b) review and supervision within the accounting and finance departments; c) preparation and review of footnote disclosures accompanying our
financial statements; and d) technical accounting resources. These deficiencies



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resulted in errors in the financial statements and more than a remote likelihood that a material misstatement of our annual or interim financial statements
would not be prevented or detected.

Inadequate reviews of account reconciliations, analyses and journal entries. We had inadequate
review procedures over account reconciliations, account and transaction analyses, and journal entries. Specifically, deficiencies were noted in the following areas: a) management review of supporting documentation, calculations and assumptions
used to prepare the financial statements, including spreadsheets and account analyses; and b) management review of journal entries recorded during the financial statement preparation process. These deficiencies resulted in an understatement of
warranty accrual and inventory reserves, misclassification errors between R&D expenses and Cost of Goods Sold, and other errors in the financial statements. These deficiencies resulted in a more than a remote likelihood that a material
misstatement of our annual or interim financial statements would not be prevented or detected.

Inadequate controls over purchases and
disbursements.We had inadequate controls over the segregation of duties and authorization of purchases, and the disbursement of funds. These weaknesses increase the likelihood that misappropriation of assets and/or unauthorized purchases and
disbursements could occur and not be detected in a timely manner. These deficiencies resulted in errors in the financial statements and in more than a remote likelihood that a material misstatement of our annual or interim financial statements would
not be prevented or detected. Specifically,



| |  |  | We had inadequate procedures and controls to ensure proper segregation of duties within our purchasing and disbursements processes and accounting systems;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We had inadequate procedures and controls to ensure proper authorization of purchase orders; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | We had inadequate approvals for payment of invoices and wire transfers.
| | - |  | -----------------------------------------------------------------------

Because of the weaknesses described above, management has concluded that our internal control over financial reporting was not effective as of
February 3, 2007. Armanino McKenna LLP, an independent registered public accounting firm, audited managements assessment of the effectiveness of our internal control over financial reporting. Armanino McKenna LLP issued an audit report
thereon, which is included beginning on page 51 of this Annual Report on Form 10-K.

We are addressing the outstanding material
weaknesses described above, as well as our control environment. We hired a qualified CFO in the first quarter of fiscal 2008. We also expect to undertake the following remediation efforts:



| |  |  | Hire additional qualified personnel and other resources to strengthen the accounting, finance, and information technology organizations, and develop a plan to
procure and then commence implementation of an enterprise resource planning system to replace our current system, to include appropriate information technology control;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Adopt administration, supervision, and review controls over stock based compensation as discussed above in Restatement of Consolidated Financial
Statements contained in Managements Discussion and Analysis of Financial Condition and Results of Operations;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Implement controls to ensure the periodic review of and changes to our end-user computing spreadsheets used in the period-end financial statement preparation and
reporting process; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Review and implement appropriate vendor, purchasing, and disbursements segregation of duties controls.
| | - |  | ------------------------------------------------------------------------------------------------------

These specific actions are part of an overall program that we are currently developing in an effort to remediate the material weaknesses described above.
We may not have sufficient time to implement our remediation plan before testing our internal control over financial reporting for the fiscal year end 2008.



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The certifications of our principal executive officer and principal financial officer required in
accordance with Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this Annual Report on Form 10-K. The disclosures set forth in this Item 9A contain information concerning the evaluation of our disclosure controls
and procedures and changes in internal control over financial reporting, referred to in paragraph 4 of the certifications. Those certifications should be read in conjunction with this Item 9A for a more complete understanding of the matters
covered by the certifications.

Changes in Internal Control over Financial Reporting During the Fiscal Quarter Ended February 3, 2007

During the fiscal quarter ended February 3, 2007, there were no changes in our internal control over financial reporting that have
materially affected, or are reasonable likely to materially affect, our internal control over financial reporting, other than those noted above.

Internal Control Enhancements Implemented During the Fiscal Year Ended February 3, 2007

During the fiscal year ended
February 3, 2007, we hired a SEC reporting manager with relevant accounting experience, skills and knowledge in January 2006, and we hired a Director of Internal Audit with relevant accounting/auditing experience, skills and knowledge in May
2006, thereby increasing internal technical accounting and auditing expertise. In the first quarter of fiscal 2008, we also hired a new Chief Financial Officer. These qualified personnel are beginning to address the outstanding material weaknesses
noted above.



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Board of
Directors and Stockholders of

Sigma Designs, Inc.

We have audited managements assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, appearing under Item 9A, that Sigma Designs, Inc. (the Company) did not maintain
effective internal control over financial reporting as of February 3, 2007, because of the effect of the material weaknesses identified in managements assessment and described below, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment, and an opinion on the effectiveness of the Companys internal control over financial
reporting based on our audit.

We conducted our audit 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. Our audit of internal control
included 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
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) 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 (3) 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.

A material weakness is a significant
deficiency, or combination of significant 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. The following material weaknesses
have been identified and are included in managements assessment as of February 3, 2007.

Company-level controls. The Company
did not maintain effective company-level controls as defined in the Internal Control--Integrated Framework published by COSO. These deficiencies related to each of the five components of internal control as defined by COSO (control environment, risk
assessment, control activities, information and communication, and monitoring). These deficiencies resulted in more than a remote likelihood that a material misstatement of the annual or interim financial statements would not be prevented or
detected. Specifically,



| |  |  | The Companys control environment did not sufficiently promote effective internal control over financial reporting throughout its organizational structure, and
this material weakness was a contributing factor to the other material weaknesses described in this report;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Table of Contents



| |  |  | The Company had inadequate risk assessment controls, including inadequate mechanisms for anticipating and identifying financial reporting risks; and for reacting to
changes in the operating environment that could have a material effect on financial reporting;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | There was inadequate communication from management to employees regarding the general importance of controls and employees duties and control responsibilities;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------





| |  |  | The Company had inadequate monitoring controls, including inadequate staffing and procedures to ensure periodic evaluations of internal controls to ensure that
appropriate personnel regularly obtain evidence that controls are functioning effectively and that identified control deficiencies are remediated timely;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company had an inadequate number of trained finance and accounting personnel with appropriate expertise in U.S. generally accepted accounting principles.
Accordingly, in certain circumstances, an effective secondary review of technical accounting matters was not performed;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company had inadequate controls over its management information systems related to program changes, segregation of duties, and access controls; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company had inadequate access and change controls over end-user computing spreadsheets. Specifically, the Companys controls over the completeness,
accuracy, validity and restricted access and review of certain spreadsheets used in the period-end financial statement preparation and reporting process were not designed appropriately or did not operate as designed.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Controls over stock-based compensation. The Company had inadequate administration, supervision, and review controls over the approval and
recording of stock-based compensation.



| |  |  | As discussed in Note 2 in Notes to the Consolidated Financial Statements of this Form 10-K, during 2006, an internal review related to the Companys historical
stock option granting practices was carried out by its Audit Committee. As a result of the review, the Company reached a conclusion that incorrect measurement dates were used for financial accounting purposes for certain stock option grants made in
prior periods. Therefore, the Company recorded additional non-cash stock-based compensation expense and related tax effects with regard to past stock option grants, substantially all of which relate to options granted between February 1, 1997 and
July 29, 2006.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As discussed in Note 2 in Notes to the Consolidated Financial Statements of this Form 10-K, during our fiscal 2007 audit, the Company determined that incorrect
measurement dates were used to value stock options exchanged with the previously Blue7 employees upon the acquisition of Blue7. As a result, the Company restated its financial results for the first quarter of fiscal 2007 to record an increase to the
purchase price of $0.7 million and an additional $0.7 million of deferred stock-based compensation expense.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company
is restating previously filed annual and interim financial statements in this annual report on Form 10-K to correct the errors related to accounting for stock-based compensation.

Financial statement preparation and review procedures. The Company had inadequate policies, procedures and personnel to ensure that accurate,
reliable interim and annual consolidated financial statements were prepared and reviewed on a timely basis. Specifically, the Company had insufficient: a) levels of supporting documentation; b) review and supervision within the accounting and
finance departments; c) preparation and review of footnote disclosures accompanying its financial statements; and d) technical accounting resources. These deficiencies resulted in errors in the financial statements and more than a remote likelihood
that a material misstatement of its annual or interim financial statements would not be prevented or detected.

Inadequate reviews of
account reconciliations, analyses and journal entries. The Company had inadequate review procedures over account reconciliations, account and transaction analyses, and journal entries.



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Table of Contents

Specifically, deficiencies were noted in the following areas: a) management review of supporting documentation, calculations and assumptions used to prepare the financial statements, including spreadsheets and account analyses; and b)
management review of journal entries recorded during the financial statement preparation process. These deficiencies resulted in an understatement of warranty accrual and inventory reserves, misclassification errors between R&D expenses and Cost
of Goods Sold, and other errors in the financial statements. These deficiencies resulted in a more than a remote likelihood that a material misstatement of the Companys annual or interim financial statements would not be prevented or detected.

Inadequate controls over purchases and disbursements. The Company had inadequate controls over the segregation of duties and
authorization of purchases, and the disbursement of funds. These weaknesses increase the likelihood that misappropriation of assets and/or unauthorized purchases and disbursements could occur and not be detected in a timely manner. These
deficiencies resulted in errors in the Companys financial statements and in more than a remote likelihood that a material misstatement of its annual or interim financial statements would not be prevented or detected. Specifically,



| |  |  | The Company had inadequate procedures and controls to ensure proper segregation of duties within its purchasing and disbursements processes and accounting systems;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company had inadequate procedures and controls to ensure proper authorization of purchase orders; and
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | The Company had inadequate approvals for payment of invoices and wire transfers.
| | - |  | --------------------------------------------------------------------------------

These material weaknesses were considered in determining the nature, timing, and extent of the audit tests applied in our audit of the consolidated
financial statements and financial statement schedule as of and for the year ended February 3, 2007, and this report does not affect our report dated April 20, 2007, on those financial statements and financial statement schedule.

In our opinion, managements assessment that the Company did not maintain effective internal controls over financial reporting as of February 3,
2007, is fairly stated in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the
material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of February 3, 2007, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We do not express an opinion
or any other form of assurance on managements statement referring to actions taken in remediation of the material weakness in internal controls subsequent to February 3, 2007.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated
balance sheets of Sigma Designs, Inc. as of February 3, 2007 and January 28, 2006 (restated), and the related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the period ended February
3, 2007 (restated), and our report dated April 20, 2007 expressed an unqualified opinion on those financial statements.

/s/ ARMANINO MCKENNA LLP

San Ramon, California

April 20, 2007



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PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------



|(a) | The following documents are filed as part of this Annual Report on Form 10-K/A (Amendment No. 1):
|--- | -------------------------------------------------------------------------------------------------



| | 1. | Consolidated Financial Statements
| | -- | ---------------------------------



|                                                                               |  |     
|------------------------------------------------------------------------------ |  | ----
|Financial Statements                                                           |  | Page
|Report of Independent Registered Public Accounting Firm (Armanino McKenna LLP) |  | F-1 
|Consolidated Balance Sheets                                                    |  | F-2 
|Consolidated Statements of Operations                                          |  | F-3 
|Consolidated Statements of Shareholders Equity and Comprehensive Income       |  | F-4 
|Consolidated Statements of Cash Flows                                          |  | F-5 
|Notes to Consolidated Financial Statements                                     |  | F-6 



| | 2. | Consolidated Financial Statements Schedules
| | -- | -------------------------------------------

All other
schedules have been omitted as they are not required, not applicable, or the required information is otherwise included.



|(b) | Exhibits
|--- | --------

The exhibits listed on the accompanying index to
exhibits immediately following the financial statement schedules are incorporated by reference into this Annual Report on Form 10-K/A (Amendment No. 1).



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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Sigma Designs, Inc.

We have audited the accompanying
consolidated balance sheets of Sigma Designs, Inc. as of February 3, 2007 and January 28, 2006 (restated), and the related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the
period ended February 3, 2007 (restated). Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sigma Designs, Inc. at February 3, 2007 and January 28, 2006 (restated), and the consolidated results
of their operations and their cash flows for each of the three years in the period ended February 3, 2007 (restated), in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects, the information set forth therein.

As discussed in Note 2, Restatement of Consolidated Financial Statements the Company has restated previously issued financial statements as of January 28, 2006 and for each of the years in the two
year period ended January 28, 2006.

As discussed in Note 1 to the Consolidated Financial Statements, effective January 29, 2006,
the Company adopted the provision of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment.

We also
have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Sigma Designs, Inc.s internal control over financial reporting as of February 3, 2007, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 20, 2007 expressed an unqualified opinion on managements assessment
of, and an adverse opinion on the effective operation of, internal control over financial reporting.



|                        
|------------------------
|/s/ ARMANINO MCKENNA LLP
|                        
|San Ramon, California   
|April 20, 2007          



F-1



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##### Table of Contents

SIGMA DESIGNS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



|                                                                                                                |  |                 |         |   |                   |   |         |  
|--------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                |  | February 3,2007 |         |   | January 28,2006   |  
|                                                                                                                |  |                 |         |   | (As Restated) (1) |  
|ASSETS                                                                                                          |  |                 |         |   |                   |   |         |  
|CURRENT ASSETS:                                                                                                 |  |                 |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                       |  | $               | 24,413  |   |                   | $ | 16,827  |  
|Short-term investments                                                                                          |  |                 | 8,791   |   |                   |   | 9,525   |  
|Accounts receivable (net of allowances of $601 in 2007, and $1,491 in 2006)                                     |  |                 | 11,231  |   |                   |   | 4,951   |  
|Note receivablerelated party (note 17)                                                                         |  |                 |        |   |                   |   | 900     |  
|Inventories                                                                                                     |  |                 | 16,003  |   |                   |   | 3,830   |  
|Prepaid expenses and other current assets                                                                       |  |                 | 1,095   |   |                   |   | 1,138   |  
|                                                                                                                |  |                 |         |   |                   |   |         |  
|Total current assets                                                                                            |  |                 | 61,533  |   |                   |   | 37,171  |  
|EQUIPMENT AND LEASEHOLD IMPROVEMENTSnet                                                                        |  |                 | 3,364   |   |                   |   | 1,474   |  
|LONG-TERM INVESTMENTS                                                                                           |  |                 | 263     |   |                   |   | 1,282   |  
|GOODWILL                                                                                                        |  |                 | 5,020   |   |                   |   |        |  
|OTHER INTANGIBLE ASSETS                                                                                         |  |                 | 5,527   |   |                   |   |        |  
|OTHER NON-CURRENT ASSETS                                                                                        |  |                 | 377     |   |                   |   | 430     |  
|                                                                                                                |  |                 |         |   |                   |   |         |  
|TOTAL ASSETS                                                                                                    |  | $               | 76,084  |   |                   | $ | 40,357  |  
|                                                                                                                |  |                 |         |   |                   |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                            |  |                 |         |   |                   |   |         |  
|CURRENT LIABILITIES:                                                                                            |  |                 |         |   |                   |   |         |  
|Accounts payable                                                                                                |  | $               | 13,723  |   |                   | $ | 3,467   |  
|Accrued liabilities and other                                                                                   |  |                 | 8,800   |   |                   |   | 5,667   |  
|Current portion of bank term loan                                                                               |  |                 | 226     |   |                   |   | 211     |  
|                                                                                                                |  |                 |         |   |                   |   |         |  
|Total current liabilities                                                                                       |  |                 | 22,749  |   |                   |   | 9,345   |  
|BANK TERM LOAN                                                                                                  |  |                 | 15      |   |                   |   | 233     |  
|OTHER LONG-TERM LIABILITIES                                                                                     |  |                 | 348     |   |                   |   | 102     |  
|                                                                                                                |  |                 |         |   |                   |   |         |  
|Total Liabilities                                                                                               |  |                 | 23,112  |   |                   |   | 9,680   |  
|COMMITMENTS AND CONTINGENCIES (Note 10)                                                                         |  |                 |         |   |                   |   |         |  
|SHAREHOLDERS EQUITY:                                                                                           |  |                 |         |   |                   |   |         |  
|Preferred stockno par value, 2,000,000 shares authorized; no shares issued or outstanding                      |  |                 |        |   |                   |   |        |  
|Common stockno par value: 35,000,000 shares authorized; shares outstanding: 2007, 22,903,930; 2006, 21,945,874 |  |                 | 119,301 |   |                   |   | 107,700 |  
|Deferred compensation                                                                                           |  |                 |        |   |                   |   | (4,303  | )
|Shareholder notes receivable                                                                                    |  |                 | (58     | ) |                   |   | (58     | )
|Accumulated other comprehensive income                                                                          |  |                 | 351     |   |                   |   | 204     |  
|Accumulated deficit                                                                                             |  |                 | (66,622 | ) |                   |   | (72,866 | )
|                                                                                                                |  |                 |         |   |                   |   |         |  
|Total shareholders equity                                                                                      |  |                 | 52,972  |   |                   |   | 30,677  |  
|                                                                                                                |  |                 |         |   |                   |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                      |  | $               | 76,084  |   |                   | $ | 40,357  |  
|                                                                                                                |  |                 |         |   |                   |   |         |  

---

|(1) | See Note 2, Restatement of Consolidated Financial Statements, of the Notes to Consolidated Financial Statements.
|--- | ------------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these financial statements



F-2



---

##### Table of Contents

SIGMA DESIGNS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)



|                                       |  |                 |        |                  |   |        |                  |  |   |        |  
|-------------------------------------- |  | --------------- | ------ | ---------------- | - | ------ | ---------------- |  | - | ------ | -
|                                       |  | Years Ended     |       
|                                       |  | February 3,2007 |        | January 28,2006  |   |        | January 29,2005  | 
|                                       |  |                 |        | (As Restated)(1) |   |        | (As Restated)(1) | 
|NET REVENUES                           |  | $               | 91,218 |                  | $ | 33,320 |                  |  | $ | 31,398 |  
|COST OF REVENUES                       |  |                 | 46,783 |                  |   | 11,925 |                  |  |   | 9,667  |  
|                                       |  |                 |        |                  |   |        |                  |  |   |        |  
|GROSS PROFIT                           |  |                 | 44,435 |                  |   | 21,395 |                  |  |   | 21,731 |  
|OPERATING EXPENSES:                    |  |                 |        |                  |   |        |                  |  |   |        |  
|Research and development               |  |                 | 22,515 |                  |   | 15,040 |                  |  |   | 12,288 |  
|Sales and marketing                    |  |                 | 7,841  |                  |   | 6,056  |                  |  |   | 5,268  |  
|General and administrative             |  |                 | 8,222  |                  |   | 4,868  |                  |  |   | 4,531  |  
|                                       |  |                 |        |                  |   |        |                  |  |   |        |  
|Operating expenses                     |  |                 | 38,578 |                  |   | 25,964 |                  |  |   | 22,087 |  
|                                       |  |                 |        |                  |   |        |                  |  |   |        |  
|INCOME (LOSS) FROM OPERATIONS          |  |                 | 5,857  |                  |   | (4,569 | )                |  |   | (356   | )
|Gain on sales of long-term investments |  |                 |       |                  |   | 2,549  |                  |  |   |       |  
|Interest income and other income, net  |  |                 | 815    |                  |   | 529    |                  |  |   | 294    |  
|                                       |  |                 |        |                  |   |        |                  |  |   |        |  
|INCOME BEFORE INCOME TAXES             |  |                 | 6,672  |                  |   | (1,491 | )                |  |   | (62    | )
|PROVISION FOR INCOME TAXES             |  |                 | 428    |                  |   | 70     |                  |  |   | 63     |  
|                                       |  |                 |        |                  |   |        |                  |  |   |        |  
|NET INCOME (LOSS)                      |  | $               | 6,244  |                  | $ | (1,561 | )                |  | $ | (125   | )
|                                       |  |                 |        |                  |   |        |                  |  |   |        |  
|NET INCOME (LOSS) PER SHARE:           |  |                 |        |                  |   |        |                  |  |   |        |  
|Basic                                  |  | $               | 0.28   |                  | $ | (0.07  | )                |  | $ | (0.01  | )
|                                       |  |                 |        |                  |   |        |                  |  |   |        |  
|Diluted                                |  | $               | 0.24   |                  | $ | (0.07  | )                |  | $ | (0.01  | )
|                                       |  |                 |        |                  |   |        |                  |  |   |        |  
|SHARES USED IN COMPUTATION:            |  |                 |        |                  |   |        |                  |  |   |        |  
|Basic                                  |  |                 | 22,683 |                  |   | 21,412 |                  |  |   | 20,809 |  
|                                       |  |                 |        |                  |   |        |                  |  |   |        |  
|Diluted                                |  |                 | 25,670 |                  |   | 21,412 |                  |  |   | 20,809 |  
|                                       |  |                 |        |                  |   |        |                  |  |   |        |  

---

|(1) | See Note 2, Restatement of Consolidated Financial Statements, of the Notes to Consolidated Financial Statements.
|--- | ------------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these financial statements



F-3



---

##### Table of Contents

SIGMA DESIGNS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

AND COMPREHENSIVE INCOME

(In
thousands, except share data)



|                                                                       |  |              |  |        |         |   |                       |        |   |                             |                                       |     |                     |  |   |                                  |   |  |                     |     |   |                            |   |         |                           |  |   |        |   |  |        |  
|---------------------------------------------------------------------- |  | ------------ |  | ------ | ------- | - | --------------------- | ------ | - | --------------------------- | ------------------------------------- | --- | ------------------- |  | - | -------------------------------- | - |  | ------------------- | --- | - | -------------------------- | - | ------- | ------------------------- |  | - | ------ | - |  | ------ | -
|                                                                       |  | Common Stock |  |        |         |   |                       |        |   |                             | Accumulated OtherComprehensive Income |     |                     |  |   |                                  |   |  |                     |     |  
|                                                                       |  | Shares       |  | Amount |         |   | Deferred Compensation |        |   | Shareholder NotesReceivable |                                       |     | UnrealizedGain/Loss |  |   | AccumulatedTranslationAdjustment |   |  | Accumulated Deficit |     |   | Total Shareholders Equity |   |         | TotalComprehensive Income | 
|Balance, January 31, 2004 (previously reported)                        |  | 20,637,995   |  |        | 86,948  |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     | 37  |   |                            |   | (60,963 | )                         |  |   | 26,022 |   |  |       |  
|Adjustment to opening shareholders equity                             |  |             |  |        | 13,036  |   |                       | (3,858 | ) |                             |                                       | (29 | )                   |  |   |                                 |   |  |                     | 211 |   |                            |   | (10,217 | )                         |  |   | (857   | ) |  |       |  
|                                                                       |  |              |  |        |         |   |                       |        |   |                             |                                       |     |                     |  |   |                                  |   |  |                     |     |   |                            |   |         |                           |  |   |        |   |  |        |  
|Balance, January 31, 2004 (restated) (1)                               |  | 20,637,995   |  |        | 99,984  |   |                       | (3,858 | ) |                             |                                       | (29 | )                   |  |   |                                 |   |  |                     | 248 |   |                            |   | (71,180 | )                         |  |   | 25,165 |   |  |       |  
|Net loss                                                               |  |             |  |        |        |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   | (125    | )                         |  |   | (125   | ) |  | (125   | )
|Unrealized loss on investments                                         |  |             |  |        |        |   |                       |       |   |                             |                                       |    |                     |  |   | (24                              | ) |  |                     |    |   |                            |   |        |                           |  |   | (24    | ) |  | (24    | )
|Cumulative translation adjustment                                      |  |             |  |        |        |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     | 28  |   |                            |   |        |                           |  |   | 28     |   |  | 28     |  
|                                                                       |  |              |  |        |         |   |                       |        |   |                             |                                       |     |                     |  |   |                                  |   |  |                     |     |   |                            |   |         |                           |  |   |        |   |  |        |  
|Total comprehensive loss                                               |  |             |  |        |        |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   |       |   |  | (121   | )
|Deferred stock based compensation                                      |  |             |  |        | 2,316   |   |                       | (2,316 | ) |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   |       |   |  |       |  
|Amortization of deferred stock based compensation                      |  |             |  |        |        |   |                       | 1,476  |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   | 1,476  |   |  |       |  
|Common stock issued under stock plans                                  |  | 400,967      |  |        | 1,259   |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   | 1,259  |   |  |       |  
|Excess tax benefit from stock options                                  |  |             |  |        | 1       |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   | 1      |   |  |       |  
|                                                                       |  |              |  |        |         |   |                       |        |   |                             |                                       |     |                     |  |   |                                  |   |  |                     |     |   |                            |   |         |                           |  |   |        |   |  |        |  
|Balance, January 29, 2005 (restated) (1)                               |  | 21,038,962   |  |        | 103,560 |   |                       | (4,698 | ) |                             |                                       | (29 | )                   |  |   | (24                              | ) |  |                     | 276 |   |                            |   | (71,305 | )                         |  |   | 27,780 |   |  |       |  
|Net loss                                                               |  |             |  |        |        |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   | (1,561  | )                         |  |   | (1,561 | ) |  | (1,561 | )
|Unrealized gain on investments                                         |  |             |  |        |        |   |                       |       |   |                             |                                       |    |                     |  |   | 5                                |   |  |                     |    |   |                            |   |        |                           |  |   | 5      |   |  | 5      |  
|Cumulative translation adjustment                                      |  |             |  |        |        |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     | (53 | ) |                            |   |        |                           |  |   | (53    | ) |  | (53    | )
|                                                                       |  |              |  |        |         |   |                       |        |   |                             |                                       |     |                     |  |   |                                  |   |  |                     |     |   |                            |   |         |                           |  |   |        |   |  |        |  
|Total comprehensive loss                                               |  |             |  |        |        |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   |       |   |  | (1,609 | )
|Deferred stock based compensation                                      |  |             |  |        | 1,187   |   |                       | (1,187 | ) |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   |       |   |  |       |  
|Amortization of deferred stock based compensation                      |  |             |  |        |        |   |                       | 1,582  |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   | 1,582  |   |  |       |  
|Note receivable issued for common stock                                |  |             |  |        | 29      |   |                       |       |   |                             |                                       | (29 | )                   |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   |       |   |  |       |  
|Common stock issued under stock plans                                  |  | 906,912      |  |        | 2,924   |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   | 2,924  |   |  |       |  
|Excess tax benefit from stock options                                  |  |             |  |        |        |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   |       |   |  |       |  
|                                                                       |  |              |  |        |         |   |                       |        |   |                             |                                       |     |                     |  |   |                                  |   |  |                     |     |   |                            |   |         |                           |  |   |        |   |  |        |  
|Balance, January 28, 2006 (restated) (1)                               |  | 21,945,874   |  |        | 107,700 |   |                       | (4,303 | ) |                             |                                       | (58 | )                   |  |   | (19                              | ) |  |                     | 223 |   |                            |   | (72,866 | )                         |  |   | 30,677 |   |  |       |  
|Net income                                                             |  |             |  |        |        |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   | 6,244   |                           |  |   | 6,244  |   |  | 6,244  |  
|Unrealized gain on investments                                         |  |             |  |        |        |   |                       |       |   |                             |                                       |    |                     |  |   | 35                               |   |  |                     |    |   |                            |   |        |                           |  |   | 35     |   |  | 35     |  
|Cumulative translation adjustment                                      |  |             |  |        |        |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     | 112 |   |                            |   |        |                           |  |   | 112    |   |  | 112    |  
|                                                                       |  |              |  |        |         |   |                       |        |   |                             |                                       |     |                     |  |   |                                  |   |  |                     |     |   |                            |   |         |                           |  |   |        |   |  |        |  
|Total comprehensive income                                             |  |             |  |        |        |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   |       |   |  | 6,391  |  
|Reversal of APB 25 deferred compensation upon the adoption of FAS 123R |  |             |  |        | (4,303  | ) |                       | 4,303  |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   |       |   |  |       |  
|Compensation expenses recognized in accordance with FAS 123R           |  |             |  |        | 4,949   |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   | 4,949  |   |  |       |  
|Fair value of vested stock options assumed from Blue7 acquisition      |  |             |  |        | 1,110   |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   | 1,110  |   |  |       |  
|Issuance of common stock for Blue7 acquisition                         |  | 583,870      |  |        | 8,189   |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   | 8,189  |   |  |       |  
|Non-employee stock based compensation                                  |  |             |  |        | 317     |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   | 317    |   |  |       |  
|Excess tax benefit from stock options                                  |  |             |  |        | 123     |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   | 123    |   |  |       |  
|Common stock issued under stock plans                                  |  | 374,186      |  |        | 1,216   |   |                       |       |   |                             |                                       |    |                     |  |   |                                 |   |  |                     |    |   |                            |   |        |                           |  |   | 1,216  |   |  |       |  
|                                                                       |  |              |  |        |         |   |                       |        |   |                             |                                       |     |                     |  |   |                                  |   |  |                     |     |   |                            |   |         |                           |  |   |        |   |  |        |  
|Balance, February 3, 2007                                              |  | 22,903,930   |  | $      | 119,301 |   |                       |       |   |                             | $                                     | (58 | )                   |  | $ | 16                               |   |  | $                   | 335 |   |                            | $ | (66,622 | )                         |  | $ | 52,972 |   |  |       |  
|                                                                       |  |              |  |        |         |   |                       |        |   |                             |                                       |     |                     |  |   |                                  |   |  |                     |     |   |                            |   |         |                           |  |   |        |   |  |        |  

---

|(1) | See Note 2, Restatement of Consolidated Financial Statements, of the Notes to Consolidated Financial Statements.
|--- | ------------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these financial statements



F-4



---

##### Table of Contents

SIGMA DESIGNS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                         |  |                 |         |   |                   |   |         |                   |  |   |         |  
|---------------------------------------------------------------------------------------- |  | --------------- | ------- | - | ----------------- | - | ------- | ----------------- |  | - | ------- | -
|                                                                                         |  | Year Ended      |        
|                                                                                         |  | February 3,2007 |         |   | January 28,2006   |   |         | January 29,2005   | 
|                                                                                         |  |                 |         |   | (As Restated) (1) |   |         | (As Restated) (1) | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |                 |         |   |                   |   |         |                   |  |   |         |  
|Net income (loss)                                                                        |  | $               | 6,244   |   |                   | $ | (1,561  | )                 |  | $ | (125    | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                 |         |   |                   |   |         |                   |  |   |         |  
|Depreciation and amortization                                                            |  |                 | 2,352   |   |                   |   | 938     |                   |  |   | 492     |  
|Stock-based compensation                                                                 |  |                 | 5,266   |   |                   |   | 1,582   |                   |  |   | 1,476   |  
|Provision for inventory valuation                                                        |  |                 | 1,224   |   |                   |   | 29      |                   |  |   | 230     |  
|Provision for bad debts and sales returns                                                |  |                 | 30      |   |                   |   | 31      |                   |  |   | 634     |  
|Gain on sales of long-term investments                                                   |  |                 |        |   |                   |   | (2,580  | )                 |  |   |        |  
|Loss on disposal of assets                                                               |  |                 | 10      |   |                   |   | 43      |                   |  |   | 7       |  
|Investment impairment charge                                                             |  |                 | 19      |   |                   |   | 31      |                   |  |   |        |  
|Excess tax benefit from stock options                                                    |  |                 | 123     |   |                   |   |        |                   |  |   | 1       |  
|Accretion of contributed leasehold improvements                                          |  |                 | (81     | ) |                   |   | (81     | )                 |  |   | (85     | )
|Changes in operating assets and liabilities:                                             |  |                 |         |   |                   |   |         |                   |  |   |         |  
|Accounts receivable                                                                      |  |                 | (6,310  | ) |                   |   | 1,435   |                   |  |   | (1,729  | )
|Inventories                                                                              |  |                 | (13,397 | ) |                   |   | (184    | )                 |  |   | (1,304  | )
|Prepaid expenses and other current assets                                                |  |                 | 45      |   |                   |   | (58     | )                 |  |   | (111    | )
|Other non-current assets                                                                 |  |                 |        |   |                   |   |        |                   |  |   |        |  
|Accounts payable                                                                         |  |                 | 9,517   |   |                   |   | (73     | )                 |  |   | 1,874   |  
|Accrued liabilities and other                                                            |  |                 | 3,450   |   |                   |   | 1,619   |                   |  |   | 451     |  
|                                                                                         |  |                 |         |   |                   |   |         |                   |  |   |         |  
|Net cash provided by operating activities                                                |  |                 | 8,492   |   |                   |   | 1,171   |                   |  |   | 1,811   |  
|                                                                                         |  |                 |         |   |                   |   |         |                   |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |                 |         |   |                   |   |         |                   |  |   |         |  
|Purchase of equipment                                                                    |  |                 | (3,014  | ) |                   |   | (699    | )                 |  |   | (1,227  | )
|Purchases of short-term investments                                                      |  |                 | (22,234 | ) |                   |   | (42,216 | )                 |  |   | (20,154 | )
|Maturity of short-term investments                                                       |  |                 | 23,003  |   |                   |   | 41,225  |                   |  |   | 11,600  |  
|Net proceeds (purchases of) from long-term investments                                   |  |                 |        |   |                   |   | 4,580   |                   |  |   | (2,000  | )
|Issuance of short-term promissory notes                                                  |  |                 |        |   |                   |   | (900    | )                 |  |   |        |  
|Acquisition net of cash received                                                         |  |                 | 147     |   |                   |   |        |                   |  |   |        |  
|Other non-current assets                                                                 |  |                 | 67      |   |                   |   | 164     |                   |  |   | 106     |  
|                                                                                         |  |                 |         |   |                   |   |         |                   |  |   |         |  
|Net cash provided by (used in) investing activities                                      |  |                 | (2,031  | ) |                   |   | 2,154   |                   |  |   | (11,675 | )
|                                                                                         |  |                 |         |   |                   |   |         |                   |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |  |                 |         |   |                   |   |         |                   |  |   |         |  
|Bank borrowings                                                                          |  |                 |        |   |                   |   | 600     |                   |  |   |        |  
|Repayment of bank borrowings                                                             |  |                 | (203    | ) |                   |   | (156    | )                 |  |   |        |  
|Net proceeds from sale of common stock                                                   |  |                 | 1,216   |   |                   |   | 2,924   |                   |  |   | 1,259   |  
|Costs related to registration of private offering of common stock                        |  |                 |        |   |                   |   | (63     | )                 |  |   | (130    | )
|Repayment of capital lease obligations                                                   |  |                 |        |   |                   |   |        |                   |  |   | (5      | )
|                                                                                         |  |                 |         |   |                   |   |         |                   |  |   |         |  
|Net cash provided by financing activities                                                |  |                 | 1,013   |   |                   |   | 3,305   |                   |  |   | 1,124   |  
|                                                                                         |  |                 |         |   |                   |   |         |                   |  |   |         |  
|Effect of exchange rates changes on cash                                                 |  |                 | 112     |   |                   |   | (53     | )                 |  |   | 28      |  
|                                                                                         |  |                 |         |   |                   |   |         |                   |  |   |         |  
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                         |  |                 | 7,586   |   |                   |   | 6,577   |                   |  |   | (8,712  | )
|CASH AND CASH EQUIVALENTS:                                                               |  |                 |         |   |                   |   |         |                   |  |   |         |  
|Beginning of year                                                                        |  |                 | 16,827  |   |                   |   | 10,250  |                   |  |   | 18,962  |  
|                                                                                         |  |                 |         |   |                   |   |         |                   |  |   |         |  
|End of year                                                                              |  | $               | 24,413  |   |                   | $ | 16,827  |                   |  | $ | 10,250  |  
|                                                                                         |  |                 |         |   |                   |   |         |                   |  |   |         |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                        |  |                 |         |   |                   |   |         |                   |  |   |         |  
|CASH PAID FOR INTEREST                                                                   |  | $               | 30      |   |                   | $ | 45      |                   |  | $ | 4       |  
|                                                                                         |  |                 |         |   |                   |   |         |                   |  |   |         |  
|CASH PAID FOR INCOME TAXES                                                               |  | $               | 171     |   |                   | $ | 9       |                   |  | $ | 15      |  
|                                                                                         |  |                 |         |   |                   |   |         |                   |  |   |         |  
|Issuance of common stock and assumption of stock options related to business acquisition |  | $               | 11,414  |   |                   |   |        |                   |  |   |        |  
|                                                                                         |  |                 |         |   |                   |   |         |                   |  |   |         |  

---

|(1) | See Note 2, Restatement of Consolidated Financial Statements, of the Notes to Consolidated Financial Statements.
|--- | ------------------------------------------------------------------------------------------------------------------

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



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SIGMA DESIGNS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of OperationsSigma Designs, Inc. (the Company) specializes in
silicon-based digital media processors for IP video technology, connected media players, high-definition television and PC add-in and other markets. The Companys award-winning REALmagic® Video Streaming Technology is used in a variety of consumer applications providing highly integrated solutions for high-quality decoding of H.264, MPEG-4, MPEG-2, MPEG-1 and Windows® Media Video 9 (WMV9). The Company sells its products to consumer equipment manufacturers, distributors, value-added resellers and corporate customers.

Basis of PresentationThe consolidated financial statements include Sigma Designs, Inc. and its wholly owned subsidiaries in France
and Hong Kong. All intercompany balances and transactions are eliminated upon consolidation.

ReclassificationsCertain
reclassifications have been made to prior year balances in order to conform to the current years presentation.

Accounting
PeriodThe Companys fiscal year ends on the Saturday closest to January 31. Fiscal 2007 ended on February 3, 2007. Fiscal 2006 ended on January 28, 2006. Fiscal 2005 ended on January 29, 2005. Fiscal 2007
included 53 weeks. Fiscal 2006 and 2005 each included 52 weeks.

Use of EstimatesThe preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements include but are not limited to and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates used
in preparing these financial statements are related primarily to estimates to determine the collectability of accounts receivable to determine the allowances against the accounts receivable balances, estimates of the market value used in calculating
the value of inventory on a lower of cost or market basis, estimates used in equity award valuation and stock-based compensation calculations, estimates of expected future cash flows and useful lives used in the review for impairment of investments,
goodwill, intangible assets and other long-lived assets, estimates of the Companys ability to realize its deferred tax asset which are also used to establish whether valuation allowances are needed on those assets, and estimates related to
litigation and settlement costs accrual. It is at least reasonably possible that the estimates will change within the next year. Actual results may also differ materially from managements estimates.

Change in accounting estimateThere were no changes in accounting estimates during fiscal 2007. During fiscal 2006, the Company
revised its estimate of the useful lives of certain production test equipment due to technology changes. Those lives were shortened to 2 years. Previously, all production test equipment was depreciated over 5 years. These changes were made to better
reflect the estimated periods during which such equipment will remain in service. The change had the effect of increasing fiscal 2006 depreciation expense which was recorded as cost of revenues and decreasing net income by approximately $130,000
(less than $0.01 per basic and diluted share).

Concentration of Credit RiskFinancial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The majority of the Companys cash and cash equivalents and short-term investments are on
deposit with two financial institutions. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for sales on credit. The Company reviews accounts receivable on a monthly basis to determine if any
receivables will potentially be uncollectible. The Company includes any accounts receivable



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balances that are determined to be uncollectible, along with a general reserve, in its overall allowance for doubtful accounts. The general reserve in the
allowance for doubtful accounts is a calculation based upon the accounts receivable balance and the historical effectiveness of the Companys collection of those receivables. The Company will continue to maintain reserves for potential credit
losses.

Cash and Cash EquivalentsThe Company considers all highly liquid debt instruments purchased with a remaining
maturity of 90 days or less to be cash equivalents.

Short Term InvestmentsShort-term investments represent highly
liquid debt instruments with a remaining maturity date at purchase of greater than 90 days and are stated at fair value. The differences between amortized cost (cost adjusted for amortization of premiums and accretion of discounts which are
recognized as adjustments to interest income) and fair value representing unrealized holding gains or losses, are recorded separately as a component of accumulated other comprehensive income (loss) within shareholders equity. The
Companys debt securities are classified as available-for-sale because the sale of such securities may be required prior to maturity. Any gains and losses on the sale of debt securities are determined on a specific identification basis.

InventoriesInventories are stated at the lower of standard cost (which approximates first-in, first-out basis) or
market. The Company periodically reviews its inventories for excess and obsolete inventory items and adjusts carrying costs to estimated net realizable values when they are determined to be less than cost. As a result of this inventory review, the
Company charged approximately $1.2 million, $29,000 and $230,000 to cost of revenues for fiscal 2007, 2006 and 2005, respectively.

Long-Term InvestmentsInvestments in private equity securities of less than 20% owned companies are accounted for using the cost method unless the Company can exercise significant influence or the investee is economically
dependent upon the Company, in which case the equity method is used. The Company evaluates the long-term investments for impairment annually according to Emerging Issues Task Force (EITF) Issue No. 03-01, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-01 provides guidance for evaluating whether an investment is other-than-temporarily impaired and requires certain disclosures with respect to these investments. The
guidance also included accounting considerations subsequent to the recognition of an other-than-temporary impairment and requirements for disclosures about unrealized losses that have not been recognized as other-than-temporary impairments.

Equipment and Leasehold ImprovementsEquipment and leasehold improvements are stated at cost and categorized into
computer and test equipment, software, furniture and fixtures and other. Depreciation and amortization are computed using the straight-line method based on the useful lives of the assets (three to five years) or the lease term if shorter, except for
certain production test equipment (two to five years). The contributed leasehold improvements provided by the landlord for the Companys current facility is amortized using the straight-line method over lesser of the remaining lease term or
useful life of leasehold improvements.

Goodwill and Purchased Intangible AssetsGoodwill is recorded as the difference,
if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount
and timing of future amortization.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, the Company reviews goodwill for impairment annually, or more frequently, when events or changes in circumstances indicate that the carrying amount may not be recoverable. The provisions of SFAS 142
require that a two-step test be performed to assess goodwill for impairment. First, the fair value of each reporting unit is compared to its carrying value. If the fair value exceeds the carrying value, goodwill is not impaired and no further
testing is performed. The second step is performed if the carrying value exceeds the fair value. The fair



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value of a reporting unit is allocated to all the assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business
combination at the date of the impairment test. The fair value of tangible net assets and both recognized and unrecognized intangible assets is deducted from the fair value of the reporting unit to determine the implied fair value of reporting unit
goodwill. The implied fair value of the reporting units goodwill must be compared to the carrying value of the goodwill. If the carrying value of a reporting units goodwill exceeds its implied fair value, an impairment loss equal to the
difference will be recorded.

We are currently amortizing acquired intangible assets with definite lives. Acquired developed technology is
amortized over 7 years and non-compete agreements are amortized over the contractual period (currently 3 years). The amortization expense for acquired developed technology is classified as cost of sales and the amortization expense for other
acquired intangible assets is classified as research and development expense in our consolidated statements of income.

Long Lived
AssetsThe Company accounts for long-lived assets, including purchased intangible assets, in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Long-lived assets are evaluated for
impairment whenever events or changes in circumstances such as a change in technology indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when the sum of the undiscounted future net cash flows
expected to result from the use of the asset and its eventual disposal is less than its carrying amount.

Revenue
RecognitionWe derive revenues primarily from three principal sources: product sales, product development contracts and service contracts. We generally recognize revenues for product sales and service contracts in accordance with Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition, under which revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or service has been rendered, the fee is fixed or
determinable, and collectibility is reasonably assured.

Revenues from product sales to OEMs, distributors and end users are generally
recognized upon shipment, as shipping terms are FOB shipping point, except that revenues are deferred when management cannot reasonably estimate the amount of returns or where collectibility is not assured. In those situations, revenue is recognized
when collection subsequently becomes probable and returns are estimable (generally upon resale by customers, often referred to as a sell-through basis). Allowances for sales returns, price protection and warranty costs are recorded at the time that
revenues are recognized.

Product development agreements typically require that we provide customized software to support customer-specific
designs, accordingly this revenue is accounted for under the AICPA Statement of Position (SOP) 97-2. We offer post-contract customer support (PCS) on a contractual basis for additional fees, which is typically a one year
term. In instances where software is bundled with the PCS, vendor specific objective evidence does not exist to allocate the total fee to all undelivered elements of the arrangement and, therefore, revenue and related costs are deferred until all
elements, except PCS are delivered. The total fee is then recognized ratably over the PCS term (typically one year) after the software is delivered. We classify development costs related to product development agreements as cost of revenues. Product
development revenues were approximately $581,000, $1.2 million and $981,000, for fiscal 2007, 2006, and 2005, respectively.

Revenues from
service contracts consist of fees for providing engineering support services, and are recognized ratably over the contract term. Expenses related to support service revenues are included in cost of sales. Support service revenues were $334,000,
$150,000 and $303,000 for fiscal 2007, 2006 and 2005 respectively.

Research and Development expensesResearch and
Development expenses include costs and expenses associated with the design and development of new products. To the extent that such costs include the development of computer software, they are generally incurred prior to the establishment of the
technological feasibility of the related product that is under development and are therefore expensed as incurred.



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Income TaxesDeferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards. Income taxes are accounted for under an
asset and liability approach in accordance with Statement of Financial Accounting Standards (SFAS) No. 109. Deferred tax liabilities are recognized for future taxable amounts and deferred tax assets are recognized for future
deductions net of a valuation allowance to reduce deferred tax assets to amounts that are more likely than not to be realized.

Stock-Based CompensationOn January 29, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment, (123(R)) which requires the measurement and recognition of compensation
expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS 123(R) supersedes our previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25) for periods beginning in fiscal 2007. In March 2005, the Securities and Exchange Commission issued SAB No. 107 relating to SFAS 123(R). We have applied the provisions of SAB 107 in our
adoption of SFAS 123(R).

We adopted SFAS 123(R) using the modified prospective transition method, which requires the application
of the accounting standard as of January 29, 2006, the first day of our fiscal year 2007. Our consolidated financial statements as of and for the twelve months ended February 3, 2007 reflect the impact of SFAS 123(R). In accordance
with the modified prospective transition method, our consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation expense recognized under
SFAS 123(R) for fiscal 2007 was $4.9 million, which consisted of stock-based compensation expense related to the grant of stock options and stock purchase rights.

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to
vest is recognized as expense over the requisite service period in our consolidated statement of operations. Prior to the adoption of SFAS 123(R), we accounted for employee equity awards and employee stock purchases using the intrinsic value
method in accordance with APB 25 as allowed under SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123).

Stock-based compensation expense recognized during fiscal 2007 is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense
recognized in our consolidated statement of operations for fiscal 2007 includes compensation expense for share-based payment awards granted prior to, but not yet vested as of January 28, 2006 based on the grant date fair value estimated in
accordance with the pro forma provisions of SFAS 123 and compensation expense for the share-based payment awards granted subsequent to January 28, 2006 based on the grant date fair value estimated in accordance with the provisions of
SFAS 123(R). As stock-based compensation expense recognized in the consolidated statement of operations for fiscal 2007 is based on awards ultimately expected to vest, it has been adjusted for estimated forfeitures. SFAS 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In our pro forma information required under SFAS 123 for the periods prior to fiscal 2007, the
Company accounted for forfeitures as they occurred.



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The effect of recording stock-based compensation to employees for the fiscal year ended February 3,
2007 was as follows (in thousands, except per share amount):



|                                           |  |             |       |  
|------------------------------------------ |  | ----------- | ----- | -
|                                           |  | Fiscal 2007 |      
|Stock-based compensation by type of award: |  |             |       |  
|Stock options                              |  | $           | 4,842 |  
|Employee stock purchase plan               |  |             | 107   |  
|                                           |  |             |       |  
|Total stock-based compensation             |  |             | 4,949 |  
|Tax effect on stock-based compensation     |  |             | (317  | )
|                                           |  |             |       |  
|Net effect on net income                   |  |             | 4,632 |  
|Effect on net income per share:            |  |             |       |  
|Basic                                      |  | $           | 0.20  |  
|Diluted                                    |  | $           | 0.18  |  

During fiscal 2007, we recorded stock-based compensation of $317,000 for consulting services. The
net expense recorded after tax effect was $296,000 or $0.01 per basic and diluted share.

Prior to the Adoption of SFAS 123(R)

Prior to the adoption of SFAS 123(R), we provided the disclosures required under SFAS 123, as amended by
SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosures. Consistent with the disclosure provisions of SFAS 148, our net loss and basic and diluted loss per share for fiscal 2006 and 2005 would
have been adjusted to the pro forma amounts indicated below (in thousands, except per share amounts):



|                                                                                                       |  |                  |        |   |                  |   |        |  
|------------------------------------------------------------------------------------------------------ |  | ---------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                                       |  | Years Ended      |       
|                                                                                                       |  | January 28,2006  |        |   | January 29,2005  |  
|                                                                                                       |  | (As Restated)(1) |        |   | (As Restated)(1) |  
|Net loss                                                                                               |  | $                | (1,561 | ) |                  | $ | (125   | )
|Add: stock-based employee compensation expense included in reported net income, net of tax             |  |                  | 1,582  |   |                  |   | 1,477  |  
|Deduct: stock-based employee compensation expense determined under fair value based method, net of tax |  |                  | (3,461 | ) |                  |   | (3,430 | )
|                                                                                                       |  |                  |        |   |                  |   |        |  
|Pro forma net loss                                                                                     |  | $                | (3,440 | ) |                  | $ | (2,078 | )
|                                                                                                       |  |                  |        |   |                  |   |        |  
|Basic net loss per share:                                                                              |  |                  |        |   |                  |   |        |  
|As reported                                                                                            |  | $                | (0.07  | ) |                  | $ | (0.01  | )
|                                                                                                       |  |                  |        |   |                  |   |        |  
|Pro forma                                                                                              |  | $                | (0.16  | ) |                  | $ | (0.10  | )
|                                                                                                       |  |                  |        |   |                  |   |        |  

---

|(1) | See Note 2, Restatement of Consolidated Financial Statements, of the Notes to Consolidated Financial Statements.
|--- | ------------------------------------------------------------------------------------------------------------------

Foreign CurrencyThe functional currency of the Companys foreign subsidiaries is the local currency of each country.
Accordingly, gains and losses from the translation of the financial statements of the foreign subsidiaries are included in shareholders equity. Transaction gains and losses, which are included in the other expenses, net, in the accompanying
consolidated statements of operations, have not been significant for all years presented.

Comprehensive Income
(Loss)Comprehensive income consists of net income (loss) and other comprehensive income or loss. Other comprehensive income or loss components include foreign currency translation adjustments and unrealized gains or losses on
investments.

Fair Value of Financial InstrumentsFor certain of the Companys financial instruments, including
cash and cash equivalents, accounts receivable, short-term investments, note receivable, accounts payable and other



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current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these items.

Recent Accounting Pronouncements

In
June 2006, the Financial Accounting Standards Board (FASB) issued FASB interpretation No. 48 (FIN No. 48) Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FAS
No. 109). This interpretation prescribes a recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with this interpretation is a two-step process. In the first step, recognition, the Company determines whether it is
more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step addresses measurement of a tax position
that meets the more-likely-than-not criteria. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax
return and amounts recognized in the financial statements will generally result in a) an increase in a liability for income taxes payable or a reduction of an income tax refund receivable, b) a reduction in a deferred tax asset or an increase in a
deferred tax liability or c) both a and b. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be de-recognized in the first subsequent financial reporting period in which that threshold is no longer met. Use of a valuation allowance as
described in FAS No. 109 is not an appropriate substitute for the de-recognition of a tax position. The requirement to assess the need for a valuation allowance for deferred tax assets based on sufficiency of future taxable income is unchanged
by this interpretation. This interpretation is effective for the Company on February 4, 2007. The Company is currently evaluating the impact FIN No. 48 will have to the Companys consolidated balance sheet and statement of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS 157 relate to the definition of fair
value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by the Company beginning in the
first quarter of fiscal 2009. We are currently in the process of evaluating the impact that the adoption of SFAS 157 will have on our consolidated financial position and results of operation.

2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

Restatement of Previously Issued Financial Statements

The Company is restating its consolidated balance sheet as of
January 28, 2006 and the related consolidated statements of operations, shareholders equity, and cash flows for each of the Companys fiscal years ended January 28, 2006 and January 29, 2005 as a result of an internal stock
option investigation commenced by the Audit Committee of the Companys Board of Directors (Board) and other errors identified as a result of the audit of the fiscal year ended February 3, 2007, and the re-audit of fiscal years
ended January 28, 2006 and January 29, 2005. In addition, the Company is restating the unaudited quarterly financial information and financial statements for the interim periods of 2006, and unaudited condensed financial statements for the
three months ended April 29, 2006.

Financial information included in the reports on Form 10-K, Form 10-Q and Form 8-K filed by the
Company prior to September 21, 2006, and the related opinions of the independent registered public accounting



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firms, and all earnings press releases and similar communications issued by the Company prior to September 21, 2006 should not be relied upon and are
superseded in their entirety by this 2007 Form 10-K and other reports on Form 10-Q and Form 8-K filed by the Company with the Securities and Exchange Commission on or after September 21, 2006.

Background-Stock Option Investigation

We
previously disclosed, on July 26, 2006, that the Audit Committee of our Board had commenced an internal investigation, assisted by outside legal counsel and accounting experts, of our practices related to historical stock option grants. During
the investigation, the Audit Committee reviewed stock option grants to officers, directors and employees from 1997 to 2006 encompassing approximately 1,000 grants on 41 different grant dates. On September 21, 2006, we announced that certain of
the actual measurement dates for prior option grants may differ from the recorded measurement dates.

The Audit Committee concluded its
investigation in April 2007. Its investigation found that nearly all of the stock option grants for new hires, as well as for promotion and retention, were approved by the use of Unanimous Written Consents (UWC or UWCs) of
the Companys Board, rather than at a Board meeting. The Audit Committee found that the Companys process resulted in grant dates on the UWCs routinely established before the receipt of fully-signed UWCs authorizing such grants. The Audit
Committee also found that due to these and other deficiencies in the administration of our stock option plans, a number of options grants between 1997 and 2006 were misdated.

The Audit Committee has concluded that the stock option grant process, including the utilization of UWC process described above, reflected
managements lack of appreciation of the legal and accounting standards of the stock option grant process and the erroneous belief that dates other than the stated grant date were, at best, administrative in nature and not governing. Based on
the quarterly low price points of the option grants, and absent any objective documentation to the contrary, the Audit Committee has also speculated that the ultimate selection of the grant dates stated on the UWCs may have benefited from limited
hindsight, but it has not found any conclusive evidence to this effect. The Audit Committee did not find any evidence of intent to deceive or to destroy or alter documents or to obstruct or impede the investigation in any way.

Accounting ConsiderationsStock-Based Compensation

We originally accounted for all employee, officer and director stock option grants as fixed grants under APB 25, using a measurement date of the recorded grant date. We issued all grants with an exercise price
equal to the fair market value of our common stock on the recorded grant date, and therefore originally recorded no stock-based compensation expense.

As a result of the findings of the investigation conducted by the Audit Committee and our own further review of our stock option granting practices, we determined that, although fixed accounting under APB 25 was
appropriate, the measurement dates for certain stock option grants differed from the recorded grant dates for such grants. In some instances, we were only able to locate sufficient evidence to identify the measurement date described in APB 25, the
first date on which both the number of shares that an individual employee was entitled to receive and the exercise price were known, within a range of possible dates. As a result, we developed a methodology to establish the revised measurement date
as our estimate of the first date on which both the number of shares that an individual employee was entitled to receive and the exercise price were known with finality. Using the methodology described below, we concluded that it was appropriate to
revise the measurement dates for these grants based upon our findings, and we refer to these revised measurement dates as the Deemed Measurement Dates.

We calculated stock-based compensation expense under APB 25 based upon the intrinsic value as of the Deemed Measurement Dates of stock option awards determined to be fixed under APB 25 and the vesting



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provisions of the underlying options. We calculated the intrinsic value on the Deemed Measurement Date as the closing price of our common stock on such date
as reported on the Nasdaq National Market, now the Nasdaq Global Market, less the exercise price per share of common stock as stated in the underlying stock option agreement, multiplied by the number of shares subject to such stock option award. We
recognized these amounts as compensation expense over the vesting period of the underlying options (generally four years).

The methodology
developed by such advisor was used by us, with such advisors assistance, to determine the Deemed Measurement Dates associated with prior stock option grants was as follows:

New Hire Non-Officer Employee Stock Options Effective January 2006Effective January 2006, we amended our practice of granting options to new
hire non-officer employees to grant all such options at the end of the quarter in which the employee was hired. Accordingly, we determined the Deemed Measurement Date for each of these grants to be the last business day of the quarter of the
employees quarter of hire, because it was determined to be the first date when the number of shares and the price of each grant were known with finality.

All Other Stock OptionsWe determined the Deemed Measurement Dates for all stock option grants other than those described above to be either the Approval Date or the Communication Date for the stock option
grant. The Approval Date was used in each case that it was reliably determined, and the Communication Date was used in those cases where the Approval Date could not be determined or was determined to be unreliable.

The Approval Date for the stock option was the date set forth in executed minutes or a fully-executed consent of the board of directors or
stock option committee, provided that (1) documentary evidence existed that the allocation of shares had been finalized on such date, and (2) the Communication Date for the stock option was within 30 days of the Approval Date.

The Communication Date for the stock option was the date we determined the key terms of the option (both the number of shares and the
exercise price) to be initially communicated to the optionee. In the absence of specific documentary evidence of initial communication, we generally determined the Communication Date to be the earliest of: (1) the date the employee record was
added to the stock option database application (the Record Add Date); (2) the optionee manual signature date on the stock option agreement (the Stock Option Agreement Date); and (3) for officers and directors, the
date that a Form 3 or 4 was filed with the SEC with respect to the grant (the Form 3/4 Date). However, if we determined that the earliest date was the Record Add Date, and if the Stock Option Agreement Date was more than 30 days after
the Record Add Date, then we determined the Communication Date to be the earlier of the Stock Option Agreement Date or the Form 3/4 Date.

When applying this methodology to groups of grants, we generally determined the Communication Date for the group to be the latest Record Add Date, the earliest Stock Option Agreement Date, as we determined that, under our stock option grant
process, the terms of stock options were generally communicated concurrently to each member of the group. We excluded a limited number of options, or Outliers, from the determination of the latest Record Add Date and the earliest Stock
Option Agreement Date for a group of grants when, based upon available evidence, we considered the Outlier dates as not reliable as to the date that the terms of the stock option grants were communicated to the group.

We determined that variable accounting under APB 25, which is required in situations when the terms of option grants are modified subsequent to the date
that all granting actions are complete, was not applicable for any of the grants during the Review Period.

The methodology described
above, and the determination of which stock option grants should be considered Outliers, as described above, involves judgment. We believe that the judgments applied are consistent with the provisions of the appropriate accounting pronouncements and
the letter from the Office of the Chief Accountant of the SEC to the Financial Executives International and the American Institute of Certified Public Accountants dated September 19, 2006.



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The following table summarizes the impact of the restatement adjustments on beginning accumulated deficit
as of January 31, 2004, and net income for the years ended January 28, 2006 and January 29, 2005 (in thousands):



|                                      |  |                              |        |   |                                      |   |        |   |  |   |         |  
|------------------------------------- |  | ---------------------------- | ------ | - | ------------------------------------ | - | ------ | - |  | - | ------- | -
|                                      |  | Net Income (Loss)Years Ended |        |   | AccumulatedDeficit As Of Feb. 1,2004 |  
|                                      |  | Jan. 28, 2006                |        |   | Jan. 29, 2005                        |   |       
|As previously reported                |  | $                            | 1,884  |   |                                      | $ | 1,840  |   |  | $ | (60,963 | )
|Adjustments:                          |  |                              |        |   |                                      |   |        |   |  |   |         |  
|Stock compensation expense            |  |                              | (1,582 | ) |                                      |   | (1,476 | ) |  |   | (9,150  | )
|Payroll taxes, interest and penalties |  |                              | (1,403 | ) |                                      |   | (227   | ) |  |   | (1,680  | )
|Other                                 |  |                              | (460   | ) |                                      |   | (262   | ) |  |   | 613     |  
|                                      |  |                              |        |   |                                      |   |        |   |  |   |         |  
|Total adjustments                     |  |                              | (3,445 | ) |                                      |   | (1,965 | ) |  |   | (10,217 | )
|                                      |  |                              |        |   |                                      |   |        |   |  |   |         |  
|As adjusted                           |  | $                            | (1,561 | ) |                                      | $ | (125   | ) |  | $ | (71,180 | )
|                                      |  |                              |        |   |                                      |   |        |   |  |   |         |  

The table below presents the impact of the individual restatement adjustments (in thousands),
which is explained in further detail following the table:



|                                                                    |  |                               |       |   |              |   |       |  |   |       |  |   |       |   |  |      |       |   |      |   |       |   |      |   |       |   |  |   |       |  |   |       |  |   |      
|------------------------------------------------------------------- |  | ----------------------------- | ----- | - | ------------ | - | ----- |  | - | ----- |  | - | ----- | - |  | ---- | ----- | - | ---- | - | ----- | - | ---- | - | ----- | - |  | - | ----- |  | - | ----- |  | - | -----
|                                                                    |  | ThreeMonthsEndedApril 26,2006 |       |   | Fiscal Years
|                                                                    |  |                               | 2006  |   | 2005         |   | 2004  |  |   | 2003  |  |   | 2002  |   |  | 2001 |       |   | 2000 |   | 1999  |   | 1998
|                                                                    |  | (unaudited)                   |       |   |              |   |       |  |   |       |  |   |       |   |  |      |       |   |      |   |       |   |      |   |      
|Stock-based compensation expense                                    |  | $                             | 1,095 |   |              | $ | 1,582 |  | $ | 1,476 |  | $ | 1,553 |   |  | $    | 1,343 |   |      | $ | 1,156 |   |      | $ | 1,315 |   |  | $ | 1,532 |  | $ | 1,137 |  | $ | 997  
|Accelerated vesting and extended exercisability                     |  |                               | 55    |   |              |   |      |  |   |      |  |   | 76    |   |  |      | 8     |   |      |   |      |   |      |   |      |   |  |   |      |  |   |      |  |   | 33   
|Payroll taxes, interest and penalties                               |  |                               | 372   |   |              |   | 1,403 |  |   | 227   |  |   | 700   |   |  |      | 155   |   |      |   | 15    |   |      |   | 227   |   |  |   | 523   |  |   | 22    |  |   | 38   
|                                                                    |  |                               |       |   |              |   |       |  |   |       |  |   |       |   |  |      |       |   |      |   |       |   |      |   |       |   |  |   |       |  |   |       |  |   |      
|Total stock-based expenses                                          |  |                               | 1,522 |   |              |   | 2,985 |  |   | 1,703 |  |   | 2,329 |   |  |      | 1,506 |   |      |   | 1,171 |   |      |   | 1,542 |   |  |   | 2,055 |  |   | 1,159 |  |   | 1,068
|Less: Compensation expense previously recorded                      |  |                               | (795  | ) |              |   |      |  |   |      |  |   |      |   |  |      |      |   |      |   |      |   |      |   |      |   |  |   |      |  |   |      |  |   |     
|                                                                    |  |                               |       |   |              |   |       |  |   |       |  |   |       |   |  |      |       |   |      |   |       |   |      |   |       |   |  |   |       |  |   |       |  |   |      
|Net adjustment to net income (loss) due to stock-based compensation |  |                               | 727   |   |              |   | 2,985 |  |   | 1,703 |  |   | 2,329 |   |  |      | 1,506 |   |      |   | 1,171 |   |      |   | 1,542 |   |  |   | 2,055 |  |   | 1,159 |  |   | 1,068
|Add: Other adjustments                                              |  |                               | 67    |   |              |   | 460   |  |   | 262   |  |   | (123  | ) |  |      | (153  | ) |      |   | (161  | ) |      |   | (242  | ) |  |   | 66    |  |   |      |  |   |     
|                                                                    |  |                               |       |   |              |   |       |  |   |       |  |   |       |   |  |      |       |   |      |   |       |   |      |   |       |   |  |   |       |  |   |       |  |   |      
|Total adjustments to net income (loss)                              |  | $                             | 794   |   |              | $ | 3,445 |  | $ | 1,965 |  | $ | 2,206 |   |  | $    | 1,353 |   |      | $ | 1,010 |   |      | $ | 1,300 |   |  | $ | 2,121 |  | $ | 1,159 |  | $ | 1,068
|                                                                    |  |                               |       |   |              |   |       |  |   |       |  |   |       |   |  |      |       |   |      |   |       |   |      |   |       |   |  |   |       |  |   |       |  |   |      

Restatement Adjustments

Our restated consolidated financial statements contained in this 2007 Form 10-K incorporate stock-based compensation expense, but excludes related
payroll taxes, penalties and interest expenses. The restatement adjustments result in a $16.4 million increase in accumulated deficit as of January 28, 2006. This amount includes a reduction of our previously reported consolidated net income of
approximately $3.4 million and $2.0 million for the years ended January 28, 2006 and January 29, 2005, respectively. The total restatement impact for periods through January 31, 2004 of $10.2 million has been reflected as a prior
period adjustment to accumulated deficit as of that date.

The restatement adjustments reduced the Companys previously reported
diluted earnings per share by $0.15 and $0.09 for the years ended January 28, 2006 and January 29, 2005, respectively.



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##### Table of Contents

Stock-Based CompensationThese adjustments are from the Companys determination that the
initially recorded measurement dates of option grants could not be relied upon, based upon the Audit Committees investigation and the Companys subsequent reviews and analyses. For substantially all such option grants, there was
correspondence or other evidence that indicated that not all required corporate approvals had been obtained as of the initially recorded measurement date. The Company adopted a methodology to remeasure these option grants to a revised measurement
date, as described below, and accounted for these grants as fixed awards under Accounting Principles Board Opinion (APB) No. 25 Accounting for Stock Issued to Employees, or APB 25.

Accelerated vesting and extended exercisabilityThese adjustments were made as a result of the acceleration of stock option vesting upon
termination and the extension of the exercisability of certain options held by a few employees.

Payroll taxes, interest and
penaltiesIn connection with the stock-based compensation adjustments, the Company determined that certain options previously classified as Incentive Stock Options under the U.S. Internal Revenue Code (IRC), or ISOs, were
determined to have been granted with an exercise price below the fair market value of our stock on the revised measurement date (see discussion under Accounting Considerations below). Under IRC tax regulations, ISOs may not be granted
with an exercise price less than the fair market value on the date of grant, and therefore these grants might not qualify for ISO tax treatment. These stock options are referred to as the Affected ISOs. The potential disqualification of
ISO status exposes the Company to additional payroll-related withholding taxes on the exercise of options granted to U.S. employees, and penalties and interest for failing to properly withhold taxes on exercise of those options. As of
February 3, 2007, the Company has recorded a net liability of approximately $3.9 million in connection with the potential disqualification of ISO tax treatment for option awards. The payroll tax, interest and penalty expenses were recorded in
the periods in which the underlying stock options were exercised. Then, in subsequent periods in which the liabilities were legally extinguished due to expiration of statutes of limitations, the expenses were reversed, and recognized as a reduction
in the related functional expense category in the Companys consolidated statements of operations.

Because virtually all holders of
options issued by the management of the Company were not involved in or aware of the incorrect pricing of the Affected ISOs, management has taken certain actions and is considering possible additional actions to address the impact of certain adverse
tax consequences, including under IRC Section 409A, that may result from the exercise price of stock options being less than the fair market value of the Companys common stock on the Deemed Measurement Date, as defined below. IRC
Section 409A (and, as applicable, similar tax laws in California and other states) imposes penalty taxes on our employees on stock options granted with an exercise price lower than the fair market value on the date of grant that vest after
December 31, 2004 (the 409A Affected Options). The Internal Revenue Service (IRS) has issued transition rules under IRC Section 409A that allows for a correction, or cure, for 409A Affected Options. In December
2006, the Company entered into agreements with each of its executive officers to amend the 409A Affected Options held by such person to limit the period of exercisability to a defined calendar year. Further, prior to December 31, 2007, the
Company may offer other holders of 409A Affected Options the opportunity to effect a cure of all such options by either increasing the exercise price to the market price on the actual grant date or, if lower, the market price at the time of the
amendment or limiting the period of exercisability to a defined calendar year. The Company may approve bonuses payable to holders of the amended options to compensate them for the resulting increase in their option exercise price. The amount of
these bonuses would be effectively repaid to the Company if and when the options are exercised and the increased exercise price is paid (although there is no assurance that the options will be exercised). If necessary to comply with applicable law,
such cure will be effected as a tender offer. In connection with such cure, the Company may pay approximately $2.5 million in 2008 to non-officer employees of the Company. For those employees who exercised a 409A Affected Option during 2006, as a
precautionary measure, we have sent the IRS and California Franchise Tax Board (FTB) notices of our intent to participate in settlement programs they have developed to allow employers to pay certain taxes on behalf of employees to settle
potential taxes resulting from the exercise of these 409A Affected Options during 2006. In connection with the Companys proposed participation in these programs, the Company may pay



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##### Table of Contents

an aggregate of approximately $0.3 million to the IRS and FTB. The Company may also approve bonuses of an aggregate of approximately $0.2 million payable to
these effected employees to compensate them for additional income tax imposed on them as a result of the payments the Company may make on their behalf to the IRS and FTB.

Income tax benefit (provision)Because of the potential impact of the measurement date changes on the qualified status of Affected ISOs, the Company has determined that all Affected ISOs might not be
qualified as ISOs under IRS regulations, and therefore should be accounted for as if they were Nonstatutory Stock Options under the IRC, or NSOs, for income tax accounting purposes. However, the Company recorded no income tax benefit associated with
stock-based compensation and related charges because of valuation allowances provided against the resulting deferred tax assets, as the Company believes that sufficient doubt exists that it will be able to realize the value of those assets.

Other Accounting Adjustments

In addition to the stock-based compensation adjustments described above, we also made certain other adjustments to our previously-reported net income (loss):



| |  |  | During our fiscal 2007 audit, we determined that incorrect measurement dates were used to value stock options exchanged with the employees previously with Blue7
employees upon the acquisition. As a result, the increase in purchase price of $0.7 million was recorded as an increase to both goodwill and future stock-based compensation expense as of the date of acquisition. This compensation expense will be
amortized to our consolidated statement of operations over the remaining vesting period of the related options. For the first quarter of fiscal 2007, we recorded incremental stock-based compensation expense of $40,000.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During our fiscal 2007 audit, we determined that the collection of our French research and development tax credit was reasonably assured and, therefore, should have
been accounted for using the accrual method, whereas such credits were previously recorded upon the receipt of cash. As a result, we restated our previously-reported operating results for fiscal years 2001 through 2006 to record aggregate income of
$217,000 in Interest and other income.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For fiscal 2005 and prior years we accrued and expensed estimated audit and tax professional fees ratably during the fiscal year prior to such services being
actually performed. As a result, we restated fiscal years 2003 through 2006 to reflect the expensing of such audit and tax professional fees as the services were performed. The restatement for this element resulted in increases (decreases) in
General and administrative expenses of zero, $224,000, and $(105,000) for each of fiscal year 2007, 2006, and 2005, respectively.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During our fiscal 2007 audit, we restated our previously-reported operating results for fiscal years 2001 through 2006 to record certain adjustments to
previously-provided income taxes. These adjustments amounted to an aggregate increase in income tax provision and income taxes payable of $326,000 to reflect income taxes related to our foreign subsidiaries.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During our fiscal 2007 audit, we restated our previously-reported operating results for the first quarter of fiscal 2007 to record an increase to our warranty
reserve and warranty expense of $27,000.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition to the above adjustments, reclassifications have been made to prior
year balances to conform to the current year presentation.



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##### Table of Contents

Impact of the Restatement Adjustments on the Consolidated Financial Statements

The following table presents the impact of the financial statement restatement adjustments on the Companys previously reported consolidated
statements of income for the years ended January 28, 2006 and January 29, 2005 (in thousands).



|                                       |  |                      |        |   |                  |   |        |            |  |   |                      |   |             |   |        |            |   |        |      |  |   |        |  
|-------------------------------------- |  | -------------------- | ------ | - | ---------------- | - | ------ | ---------- |  | - | -------------------- | - | ----------- | - | ------ | ---------- | - | ------ | ---- |  | - | ------ | -
|                                       |  | Years Ended          |       
|                                       |  | January 28, 2006     |        |   | January 29, 2005 |  
|                                       |  | AsPreviouslyReported |        |   | Adjustments      |   |        | AsRestated |  |   | AsPreviouslyReported |   | Adjustments |   |        | AsRestated |  
|NET REVENUES                           |  | $                    | 33,320 |   |                  | $ |       |            |  | $ | 33,320               |   |             | $ | 31,437 |            | $ | (39    | )    |  | $ | 31,398 |  
|COST OF REVENUES                       |  |                      | 11,552 |   |                  |   | 373    | (1)        |  |   | 11,925               |   |             |   | 9,527  |            |   | 140    | (1)  |  |   | 9,667  |  
|                                       |  |                      |        |   |                  |   |        |            |  |   |                      |   |             |   |        |            |   |        |      |  |   |        |  
|GROSS PROFIT                           |  |                      | 21,768 |   |                  |   | (373   | )          |  |   | 21,395               |   |             |   | 21,910 |            |   | (179   | )    |  |   | 21,731 |  
|OPERATING EXPENSES:                    |  |                      |        |   |                  |   |        |            |  |   |                      |   |             |   |        |            |   |        |      |  |   |        |  
|Research and development               |  |                      | 14,041 |   |                  |   | 999    | (1)        |  |   | 15,040               |   |             |   | 11,648 |            |   | 640    | (1)  |  |   | 12,288 |  
|Sales and marketing                    |  |                      | 5,076  |   |                  |   | 980    | (1)        |  |   | 6,056                |   |             |   | 4,804  |            |   | 464    | (1)  |  |   | 5,268  |  
|General and administrative             |  |                      | 4,131  |   |                  |   | 737    | (1)        |  |   | 4,868                |   |             |   | 4,209  |            |   | 322    | (1)  |  |   | 4,531  |  
|                                       |  |                      |        |   |                  |   |        |            |  |   |                      |   |             |   |        |            |   |        |      |  |   |        |  
|Operating expenses                     |  |                      | 23,248 |   |                  |   | 2,716  |            |  |   | 25,964               |   |             |   | 20,661 |            |   | 1,426  |      |  |   | 22,087 |  
|                                       |  |                      |        |   |                  |   |        |            |  |   |                      |   |             |   |        |            |   |        |      |  |   |        |  
|INCOME (LOSS) FROM OPERATIONS          |  |                      | (1,480 | ) |                  |   | (3,089 | )          |  |   | (4,569               | ) |             |   | 1,249  |            |   | (1,605 | )    |  |   | (356   | )
|Gain on sales of long-term investments |  |                      | 2,549  |   |                  |   |       |            |  |   | 2,549                |   |             |   |       |            |   |       |      |  |   |       |  
|Interest income and other income, net  |  |                      | 823    |   |                  |   | (294   | )(2)       |  |   | 529                  |   |             |   | 595    |            |   | (301   | )(2) |  |   | 294    |  
|                                       |  |                      |        |   |                  |   |        |            |  |   |                      |   |             |   |        |            |   |        |      |  |   |        |  
|INCOME (LOSS) BEFORE INCOME TAXES      |  |                      | 1,892  |   |                  |   | (3,383 | )          |  |   | (1,491               | ) |             |   | 1,844  |            |   | (1,906 | )    |  |   | (62    | )
|PROVISION FOR INCOME TAXES             |  |                      | 8      |   |                  |   | 62     |            |  |   | 70                   |   |             |   | 4      |            |   | 59     |      |  |   | 63     |  
|                                       |  |                      |        |   |                  |   |        |            |  |   |                      |   |             |   |        |            |   |        |      |  |   |        |  
|NET INCOME (LOSS)                      |  | $                    | 1,884  |   |                  | $ | (3,445 | )          |  | $ | (1,561               | ) |             | $ | 1,840  |            | $ | (1,965 | )    |  | $ | (125   | )
|                                       |  |                      |        |   |                  |   |        |            |  |   |                      |   |             |   |        |            |   |        |      |  |   |        |  
|NET INCOME (LOSS) PER SHARE:           |  |                      |        |   |                  |   |        |            |  |   |                      |   |             |   |        |            |   |        |      |  |   |        |  
|Basic                                  |  | $                    | 0.09   |   |                  | $ | (0.16  | )          |  | $ | (0.07                | ) |             | $ | 0.09   |            | $ | (0.10  | )    |  | $ | (0.01  | )
|Diluted                                |  | $                    | 0.08   |   |                  | $ | (0.15  | )          |  | $ | (0.07                | ) |             | $ | 0.08   |            | $ | (0.09  | )    |  | $ | (0.01  | )
|SHARES USED IN COMPUTATION:            |  |                      |        |   |                  |   |        |            |  |   |                      |   |             |   |        |            |   |        |      |  |   |        |  
|Basic                                  |  |                      | 21,412 |   |                  |   |        |            |  |   | 21,412               |   |             |   | 20,809 |            |   |        |      |  |   | 20,809 |  
|Diluted                                |  |                      | 23,667 |   |                  |   |        |            |  |   | 21,412               |   |             |   | 23,529 |            |   |        |      |  |   | 20,809 |  

---

|(1) | Includes the impact of stock-based compensation charges and related payroll taxes.
|--- | ----------------------------------------------------------------------------------

|(2) | Includes the impact of penalties and interest in connection with payroll tax liabilities recorded.
|--- | --------------------------------------------------------------------------------------------------



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##### Table of Contents

The following table presents the impact of the financial statement restatement adjustments on the
Companys previously reported consolidated balance sheet as of January 28, 2006 (in thousands).



|                                                                                       |  |                      |         |   |             |   |         |            |  |   |         |  
|-------------------------------------------------------------------------------------- |  | -------------------- | ------- | - | ----------- | - | ------- | ---------- |  | - | ------- | -
|                                                                                       |  | AsPreviouslyReported |         |   | Adjustments |   |         | AsRestated | 
|ASSETS                                                                                 |  |                      |         |   |             |   |         |            |  |   |         |  
|CURRENT ASSETS:                                                                        |  |                      |         |   |             |   |         |            |  |   |         |  
|Cash and cash equivalents                                                              |  | $                    | 16,827  |   |             | $ |        |            |  | $ | 16,827  |  
|Short-term investments                                                                 |  |                      | 9,525   |   |             |   |        |            |  |   | 9,525   |  
|Accounts receivable (net of allowances of $1,491)                                      |  |                      | 4,951   |   |             |   |        |            |  |   | 4,951   |  
|Note receivablerelated party                                                          |  |                      | 900     |   |             |   |        |            |  |   | 900     |  
|Inventories                                                                            |  |                      | 3,830   |   |             |   |        |            |  |   | 3,830   |  
|Prepaid expenses and other current assets                                              |  |                      | 1,001   |   |             |   | 137     |            |  |   | 1,138   |  
|                                                                                       |  |                      |         |   |             |   |         |            |  |   |         |  
|Total current assets                                                                   |  |                      | 37,034  |   |             |   | 137     |            |  |   | 37,171  |  
|EQUIPMENT AND LEASEHOLD IMPROVEMENTSnet                                               |  |                      | 1,474   |   |             |   |        |            |  |   | 1,474   |  
|LONG-TERM INVESTMENTS                                                                  |  |                      | 1,282   |   |             |   |        |            |  |   | 1,282   |  
|OTHER NON- CURRENT ASSETS                                                              |  |                      | 169     |   |             |   | 261     |            |  |   | 430     |  
|                                                                                       |  |                      |         |   |             |   |         |            |  |   |         |  
|TOTAL ASSETS                                                                           |  | $                    | 39,959  |   |             | $ | 398     |            |  | $ | 40,357  |  
|                                                                                       |  |                      |         |   |             |   |         |            |  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY CURRENT LIABILITIES:                              |  |                      |         |   |             |   |         |            |  |   |         |  
|Accounts payable                                                                       |  | $                    | 3,467   |   |             | $ |        |            |  | $ | 3,467   |  
|Accrued liabilities and other                                                          |  |                      | 2,031   |   |             |   | 3,636   | (2)        |  |   | 5,667   |  
|Current portion of bank term loan                                                      |  |                      | 211     |   |             |   |        |            |  |   | 211     |  
|                                                                                       |  |                      |         |   |             |   |         |            |  |   |         |  
|Total current liabilities                                                              |  |                      | 5,709   |   |             |   | 3,636   |            |  |   | 9,345   |  
|BANK TERM LOAN                                                                         |  |                      | 233     |   |             |   |        |            |  |   | 233     |  
|OTHER LONGTERM LIABILITIES                                                            |  |                      | 102     |   |             |   |        |            |  |   | 102     |  
|                                                                                       |  |                      |         |   |             |   |         |            |  |   |         |  
|Total liabilities                                                                      |  |                      | 6,044   |   |             |   | 3,636   |            |  |   | 9,680   |  
|COMMITMENTS AND CONTINGENCIES SHAREHOLDERS EQUITY:                                    |  |                      |         |   |             |   |         |            |  |   |         |  
|Common stockno par value: 35,000,000 shares authorized; 21,945,874 shares outstanding |  |                      | 91,131  |   |             |   | 16,569  | (1)        |  |   | 107,700 |  
|Shareholder notes receivables                                                          |  |                      |        |   |             |   | (58     | )(1)       |  |   | (58     | )
|Deferred compensation                                                                  |  |                      |        |   |             |   | (4,303  | )(1)       |  |   | (4,303  | )
|Accumulated other comprehensive income                                                 |  |                      | 23      |   |             |   | 181     |            |  |   | 204     |  
|Accumulated deficit                                                                    |  |                      | (57,239 | ) |             |   | (15,627 | )(1)(2)    |  |   | (72,866 | )
|                                                                                       |  |                      |         |   |             |   |         |            |  |   |         |  
|Total shareholders equity                                                             |  | $                    | 33,915  |   |             | $ | (3,238  | )          |  | $ | 30,677  |  
|                                                                                       |  |                      |         |   |             |   |         |            |  |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                             |  | $                    | 39,959  |   |             | $ | 398     |            |  | $ | 40,357  |  
|                                                                                       |  |                      |         |   |             |   |         |            |  |   |         |  

---

|(1) | Includes the impact of stock-based compensation charges.
|--- | --------------------------------------------------------

|(2) | Includes the impact of payroll taxes and related penalties and interest.
|--- | ------------------------------------------------------------------------



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3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash, cash equivalents and short-term investments consisted of the following (in thousands):



|                                                  |  |                  |        |                  |   |    |                 |  |              |        |                |   |        |                 |   |     |   |  |   |       
|------------------------------------------------- |  | ---------------- | ------ | ---------------- | - | -- | --------------- |  | ------------ | ------ | -------------- | - | ------ | --------------- | - | --- | - |  | - | ------
|                                                  |  | February 3, 2007 |        | January 28, 2006
|                                                  |  | AdjustedCost     |        | Unrealizedloss   |   |    | Fairmarketvalue |  | AdjustedCost |        | Unrealizedloss |   |        | Fairmarketvalue
|Money market funds                                |  | $                | 13,552 |                  | $ |   |                 |  | $            | 13,552 |                | $ | 586    |                 | $ |    |   |  | $ | 586   
|Certificate of Deposits                           |  |                  |       |                  |   |   |                 |  |              |       |                |   | 399    |                 |   | (1  | ) |  |   | 398   
|Corporate commercial paper                        |  |                  | 1,734  |                  |   |   |                 |  |              | 1,734  |                |   | 4,095  |                 |   | (1  | ) |  |   | 4,094 
|Corporate bonds                                   |  |                  | 724    |                  |   |   |                 |  |              | 724    |                |   | 4,300  |                 |   | (11 | ) |  |   | 4,289 
|US agency discount notes                          |  |                  |       |                  |   |   |                 |  |              |       |                |   | 565    |                 |   | (1  | ) |  |   | 564   
|US agency non callable                            |  |                  | 2,000  |                  |   | (1 | )               |  |              | 1,999  |                |   | 2,426  |                 |   | (6  | ) |  |   | 2,420 
|Auction rate securities                           |  |                  | 5,175  |                  |   |   |                 |  |              | 5,175  |                |   |       |                 |   |    |   |  |   |      
|                                                  |  |                  |        |                  |   |    |                 |  |              |        |                |   |        |                 |   |     |   |  |   |       
|Total cash equivalents and short-term investments |  | $                | 23,185 |                  | $ | (1 | )               |  |              | 23,184 |                | $ | 12,371 |                 | $ | (20 | ) |  |   | 12,351
|Cash on hand held in the United States            |  |                  |        |                  |   |    |                 |  |              | 8,985  |                |   |        |                 |   |     |   |  |   | 13,199
|Cash on hand held overseas                        |  |                  |        |                  |   |    |                 |  |              | 1,035  |                |   |        |                 |   |     |   |  |   | 802   
|                                                  |  |                  |        |                  |   |    |                 |  |              |        |                |   |        |                 |   |     |   |  |   |       
|Total cash on hand                                |  |                  |        |                  |   |    |                 |  |              | 10,020 |                |   |        |                 |   |     |   |  |   | 14,001
|                                                  |  |                  |        |                  |   |   
|                                                  |  |                  |        |                  |   |    |                 |  | $            | 33,204 |                |   |        |                 |   |     |   |  | $ | 26,352
|                                                  |  |                  |        |                  |   |    |                 |  |              |        |                |   |        |                 |   |     |   |  |   |       
|Reported as:                                      |  |                  |        |                  |   |    |                 |  |              |        |                |   |        |                 |   |     |   |  |   |       
|Cash and cash equivalents                         |  |                  |        |                  |   |    |                 |  | $            | 24,413 |                |   |        |                 |   |     |   |  | $ | 16,827
|Short-term investments                            |  |                  |        |                  |   |    |                 |  |              | 8,791  |                |   |        |                 |   |     |   |  |   | 9,525 
|                                                  |  |                  |        |                  |   |    |                 |  |              |        |                |   |        |                 |   |     |   |  |   |       
|                                                  |  |                  |        |                  |   |    |                 |  | $            | 33,204 |                |   |        |                 |   |     |   |  | $ | 26,352
|                                                  |  |                  |        |                  |   |    |                 |  |              |        |                |   |        |                 |   |     |   |  |   |       

The amortized cost and estimated market value of investments, by contractual maturity, are shown
below (in thousands). Actual maturities may differ from contractual maturities.



|                           |  |                  |        |                      |   |               |  |                      |        |  |   |       
|-------------------------- |  | ---------------- | ------ | -------------------- | - | ------------- |  | -------------------- | ------ |  | - | ------
|                           |  | February 3, 2007 |        | January 28, 2006    
|                           |  | Amortizedcost    |        | Estimatedmarketvalue |   | Amortizedcost |  | Estimatedmarketvalue
|Due in 1 year or less      |  | $                | 23,185 |                      | $ | 23,184        |  | $                    | 12,371 |  | $ | 12,351
|Due in greater than 1 year |  |                  |       |                      |   |              |  |                      |       |  |   |      
|                           |  |                  |        |                      |   |               |  |                      |        |  |   |       
|TOTAL                      |  | $                | 23,185 |                      | $ | 23,184        |  | $                    | 12,371 |  | $ | 12,351
|                           |  |                  |        |                      |   |               |  |                      |        |  |   |       

4. INVENTORIES

Inventories consist of (in thousands):



|                |  |                 |        |                 |   |      
|--------------- |  | --------------- | ------ | --------------- | - | -----
|                |  | February 3,2007 |        | January 28,2006
|Raw materials   |  | $               | 7,696  |                 | $ | 817  
|Work in process |  |                 | 1,680  |                 |   | 552  
|Finished goods  |  |                 | 6,627  |                 |   | 2,461
|                |  |                 |        |                 |   |      
|TOTAL           |  | $               | 16,003 |                 | $ | 3,830
|                |  |                 |        |                 |   |      



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5. EQUIPMENT AND LEASEHOLD IMPROVEMENTSNET

Equipment and leasehold improvements consist of (in thousands):



|                                          |  |                 |        |   |                 |   |        |  
|----------------------------------------- |  | --------------- | ------ | - | --------------- | - | ------ | -
|                                          |  | February 3,2007 |        |   | January 28,2006 |  
|Computers and test equipment              |  | $               | 2,794  |   |                 | $ | 2,262  |  
|Software                                  |  |                 | 3,138  |   |                 |   | 1,109  |  
|Furniture and fixtures                    |  |                 | 1,352  |   |                 |   | 1,177  |  
|Other                                     |  |                 | 145    |   |                 |   | 122    |  
|                                          |  |                 |        |   |                 |   |        |  
|Total                                     |  |                 | 7,429  |   |                 |   | 4,670  |  
|Accumulated depreciation and amortization |  |                 | (4,065 | ) |                 |   | (3,196 | )
|                                          |  |                 |        |   |                 |   |        |  
|TOTAL                                     |  | $               | 3,364  |   |                 | $ | 1,474  |  
|                                          |  |                 |        |   |                 |   |        |  

Furniture and fixtures at cost included $761,000 and $725,000 of leasehold improvements as of
February 3, 2007 and January 28, 2006, respectively. Depreciation and leasehold amortization expense for fiscal 2007, 2006 and 2005 was $1,089,000, $938,000 and $492,000, respectively. The increased depreciation expense in fiscal 2006
included $130,000 of accelerated depreciation of certain test equipment due to reduction of their estimated useful lives.

6. LONG-TERM INVESTMENTS

Long-term investments consist of (in thousands):



|                                                         |  |                 |     |                 |   |      
|-------------------------------------------------------- |  | --------------- | --- | --------------- | - | -----
|                                                         |  | February 3,2007 |     | January 28,2006
|Blue7 Communications (Blue7)                           |  | $               |    |                 | $ | 1,000
|Local MPEG-4 system provider Envivio, Inc. (see Note 17) |  |                 | 263 |                 |   | 263  
|NETAV                                                    |  |                 |    |                 |   | 19   
|                                                         |  |                 |     |                 |   |      
|TOTAL                                                    |  | $               | 263 |                 | $ | 1,282
|                                                         |  |                 |     |                 |   |      

On February 26, 2006, the Company acquired Blue7. (See Note 15)

In fiscal 2007, the Company recorded a $19,000 impairment loss to writeoff the remaining value of its investment in NETAV. In fiscal 2006, the Company
recorded a $31,000 impairment loss to this investment due primarily to the dissolution of NETAV.

7. GOODWILL AND OTHER INTANGIBLES

During the first quarter of fiscal 2007, we recorded goodwill of $5.0 million in connection with the acquisition of Blue7. Refer to Note 15 for further
information regarding this acquisition.

Acquired intangible assets, subject to amortization, were as follows as of February 3, 2007
(in thousands):



|                        |  |      |       |                         |   |        |     |  |   |      
|----------------------- |  | ---- | ----- | ----------------------- | - | ------ | --- |  | - | -----
|                        |  | Cost |       | AccumulatedAmortization |   |        | Net
|Developed Technology    |  |      | 5,300 |                         |   | (726   | )   |  |   | 4,574
|Noncompete Agreements   |  |      | 1,400 |                         |   | (447   | )   |  |   | 953  
|                        |  |      |       |                         |   |        |     |  |   |      
|Total intangible assets |  | $    | 6,700 |                         | $ | (1,173 | )   |  | $ | 5,527
|                        |  |      |       |                         |   |        |     |  |   |      



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Amortization expense related to the acquired intangible assets was $1.2 million for fiscal 2007. As of
February 3, 2007, we expect amortization expense in future periods to be as shown below (in thousands):



|            |  |                     |       |                      |   |       |  |   |      
|----------- |  | ------------------- | ----- | -------------------- | - | ----- |  | - | -----
|Fiscal Year |  | DevelopedTechnology |       | NoncompeteAgreements |   | Total
|2008        |  | $                   | 757   |                      | $ | 467   |  | $ | 1,224
|2009        |  |                     | 757   |                      |   | 467   |  |   | 1,224
|2010        |  |                     | 757   |                      |   | 19    |  |   | 776  
|2011        |  |                     | 757   |                      |   |      |  |   | 757  
|2012        |  |                     | 757   |                      |   |      |  |   | 757  
|Thereafter  |  |                     | 789   |                      |   |      |  |   | 789  
|            |  |                     |       |                      |   |       |  |   |      
|            |  | $                   | 4,574 |                      | $ | 953   |  | $ | 5,527
|            |  |                     |       |                      |   |       |  |   |      

8. ACCRUED LIABILITIES

Accrued liabilities consist of (in thousands):



|                              |  |                 |       |                  |   |      
|----------------------------- |  | --------------- | ----- | ---------------- | - | -----
|                              |  | February 3,2007 |       | January 28,2006 
|                              |  |                 |       | (As Restated)(1)
|Accrued salaries and benefits |  | $               | 889   |                  | $ | 642  
|Accrued payroll taxes         |  |                 | 4,562 |                  |   | 3,568
|Deferred revenues             |  |                 | 755   |                  |   | 211  
|Accrued royalties             |  |                 | 410   |                  |   | 147  
|Accrued commissions           |  |                 | 277   |                  |   | 92   
|Accrued warranty              |  |                 | 556   |                  |   | 289  
|Income taxes payable          |  |                 | 465   |                  |   | 336  
|Customer deposits             |  |                 | 85    |                  |   | 35   
|Other accrued liabilities     |  |                 | 801   |                  |   | 347  
|                              |  |                 |       |                  |   |      
|TOTAL                         |  | $               | 8,800 |                  | $ | 5,667
|                              |  |                 |       |                  |   |      

---

|(1) | See Note 2, Restatement of Consolidated Financial Statements, of the Notes to Consolidated Financial Statements.
|--- | ------------------------------------------------------------------------------------------------------------------

9. PRODUCT WARRANTY

In general, the Company sells
products with a one-year limited warranty that the Companys products will be free from defects in materials and workmanship. Warranty cost is estimated at the time revenue is recognized, based on historical activity. Accrued warranty cost
includes both hardware repair and/or replacement and software support costs and is included in accrued liabilities and other on the balance sheets.

Details of the change in accrued warranty for fiscal years 2007, 2006 and 2005 are as follows (in thousands):



|             |  |                           |     |           |   |            |  |   |                     |   |  |   |    
|------------ |  | ------------------------- | --- | --------- | - | ---------- |  | - | ------------------- | - |  | - | ---
|             |  | BalanceBeginningof Period |     | Additions |   | Deductions |  |   | BalanceEnd ofPeriod
|Fiscal Years |  |                           |     |          
|2007         |  | $                         | 289 |           | $ | 599        |  | $ | (332                | ) |  | $ | 556
|2006         |  | $                         | 191 |           | $ | 187        |  | $ | (89                 | ) |  | $ | 289
|2005         |  | $                         | 134 |           | $ | 177        |  | $ | (120                | ) |  | $ | 191



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##### Table of Contents

10. COMMITMENTS AND CONTINGENCIES

The Companys standard terms and conditions of sale include a patent infringement indemnification provision for claims from third parties related to the Companys intellectual property. The terms and
conditions of sale generally limit the scope of the available remedies to a variety of industry-standard methods including, but not limited to, a right to control the defense or settlement of any claim, procure the right for continued usage, and a
right to replace or modify the infringing products to make them non-infringing. Such indemnification provisions are accounted for in accordance with SFAS No. 5 Accounting for Contingencies. To date, the Company has not incurred or accrued any
costs related to any claims under such indemnification provisions.

LeasesThe Companys primary facilities are leased
under a non-cancelable lease which expires in September 2007. In February 2007, the Company entered into a new lease agreement for a facility to which the Company intends to relocate its headquarters. The new lease will expire in September 2012.
Future minimum annual payments under operating leases are as follows (in thousands):



|                             |  |                 |      
|---------------------------- |  | --------------- | -----
|Fiscal Years                 |  | OperatingLeases
|2008                         |  |                 | 730  
|2009                         |  |                 | 605  
|2010                         |  |                 | 626  
|2011                         |  |                 | 665  
|2012                         |  |                 | 705  
|Thereafter                   |  |                 | 448  
|                             |  |                 |      
|TOTAL MINIMUM LEASE PAYMENTS |  | $               | 3,779
|                             |  |                 |      

Rent expense was $749,000, $670,000 and $692,000 for fiscal 2007, 2006 and 2005, respectively, net
of sublease income of approximately $7,000, $33,000 and $54,000 for fiscal 2007, 2006 and 2005, respectively.

The Company currently places
non-cancelable orders to purchase semiconductor products from its suppliers on an eight to twelve week lead-time basis. As of February 3, 2007, the total amount of outstanding non-cancelable purchase orders was approximately $4.6 million.

RoyaltiesThe Company pays royalties for the right to sell certain products under various license
agreements. During fiscal 2007, 2006 and 2005, the Company recorded royalty expense of $1.3 million, $490,000 and $270,000, respectively.

Benefit PlanThe Company sponsors a 401(k) savings plan in which most employees are eligible to participate. The plan commenced in fiscal 1994. The Company is not obligated to make contributions to the plan and no
contributions have been made by the Company.

Legal Proceedings

Certain current and former directors and officers of the Company have been named as defendants in several shareholder derivative actions filed in the
United States District Court for the Northern District of California, which have been consolidated under the caption In re Sigma Designs, Inc. Derivative Litigation (the Federal Action) and in a substantially similar shareholder
derivative action filed in the Superior Court for Santa Clara County, California captioned Korsinsky v. Tran, et al. (the State Action).

Plaintiffs in the Federal and State Actions allege that the individual defendants breached their fiduciary duties to the Company in connection with the alleged backdating of stock option grants during the period from
1994 through 2005 and that certain defendants were unjustly enriched. Plaintiffs in the Federal Action assert derivative claims against the individual defendants based on alleged violations of Sections 10(b), 14(a) and 20(a) of the Securities
Exchange Act of 1934, and Rules 10b-5 and 14a-9 promulgated thereunder. They also allege



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##### Table of Contents

that the individual defendants aided and abetted one anothers alleged breaches of fiduciary duty and violated California Corporations Code section
25402 and bring claims for an accounting and rescission. In the State Action, plaintiffs also allege that the individual defendants wasted corporate assets. Both Actions seek to recover unspecified money damages, disgorgement of profits and benefits
and equitable relief. The Federal Action also seeks treble damages, rescission of certain defendants option contracts, imposition of a constructive trust over executory option contracts and attorneys fees. The Company is named as a
nominal defendant in both the Federal and State Actions; thus, no recovery against the Company is sought.

The Company has filed a motion
to dismiss the Federal Action on the ground that the plaintiffs had not made a pre-litigation demand on the Companys Board of Directors and had not demonstrated that such a demand would have been futile. The defendant directors and officers
joined in that motion, and filed a motion to dismiss the Federal Action for failure to state a claim against each of them. The Company has also filed a motion to dismiss or stay the State Action in favor of the earlier-filed Federal Action. The
defendant directors and officers joined in that motion. Pursuant to a joint stipulation, the court ordered that the State Action be stayed in favor of the earlier-filed Federal Action.

The Company has previously disclosed in press releases that the Securities and Exchange Commission (SEC) has initiated an informal inquiry
into the Companys stock option granting practices. The SEC has requested that the Company voluntarily produce documents relating to, among other things, our stock option practices. The Company is cooperating with the SEC.

11. CURRENT AND LONG-TERM DEBT

On August 12,
2005, the Company entered into a Loan and Security Agreement (the Loan Agreement) with United Commercial Bank (the Bank). The Loan Agreement provides for a maximum borrowing amount of approximately $15.5 million across three
credit facilities consisting of two 2-year Lines of Credit and a 36-month Term Loan of $500,000.

The first 2-year Line of Credit allows
the Company to borrow up to 80% of its accounts receivable to a maximum of $15 million and, has a floating interest rate of the Wall Street Journal Prime Rate plus 0.25% per annum. The second 2-year Line of Credit allows the Company to borrow
up to $5 million as long as (1) unrestricted cash at the Bank exceeds $10 million, (2) the credit limit of the first 2-year Line of Credit is utilized and (3) the total outstanding balances under both 2-year Lines of Credit cannot
exceed $15 million at any one time. The second 2-year Line of Credit has a floating interest rate of the Wall Street Journal Prime Rate plus 0.25% per annum. The Companys obligations under the Loan Agreement are secured by substantially
all of the Companys assets, including its intellectual property. Both Lines of Credit expire and are payable in full on August 12, 2007. At the Companys option, the loans under the Loan Agreement can be repaid without premium or
penalty. As of February 3, 2007, the Company had no amounts outstanding under these two Lines of Credit but had availability to draw down approximately $8.5 million. On February 8, 2006, the Company utilized $2.4 million of the first
2-year Line of Credit for a standby letter of credit to a supplier.

Principal amounts under the Term Loan will become due and payable on a
monthly basis such that the Term Loan will be fully repaid in February 2008. The monthly payment including interest of the Term Loan is approximately $18,000. The Term Loan has a floating interest rate of the Wall Street Journal Prime Rate plus
0.5% per annum. The effective average interest rate paid on the Term Loan from January 29, 2006 to February 3, 2007, was approximately 8.54%. As of February 3, 2007, the Company had $241,000 outstanding under the Term Loan. The
amounts of the Term Loan mature as follows (in thousands):



|            |  |             |    
|----------- |  | ----------- | ---
|Maturities  |  | LoanPayment
|Fiscal 2008 |  | $           | 226
|Fiscal 2009 |  |             | 15 
|            |  |             |    
|Total       |  | $           | 241
|            |  |             |    



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##### Table of Contents

Under the Loan Agreement, the Company is subject to certain financial covenants. As of February 3,
2007, the Company was not in compliance with all of the covenants contained in the Loan Agreement, and is seeking a waiver from the lender.

12. NET
INCOME (LOSS) PER SHARE

Basic earnings per share (EPS) excludes dilution and is computed by dividing net income (loss) by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock.

The reconciliation of the denominators of the basic and diluted net income per share computations for the fiscal years 2007, 2006 and 2005 is shown in
the following table (in thousands, except per share data):



|                                                                      |  |              |        |                  |   |        |                  |  |   |        |  
|--------------------------------------------------------------------- |  | ------------ | ------ | ---------------- | - | ------ | ---------------- |  | - | ------ | -
|                                                                      |  | Fiscal Years |       
|                                                                      |  | 2007         |        | 2006             |   |        | 2005             | 
|                                                                      |  |              |        | (As Restated)(1) |   |        | (As Restated)(1) | 
|Numerator:                                                            |  |              |        |                  |   |        |                  |  |   |        |  
|Net income (loss) available to common shareholders, Basic and diluted |  | $            | 6,244  |                  | $ | (1,561 | )                |  | $ | (125   | )
|                                                                      |  |              |        |                  |   |        |                  |  |   |        |  
|Denominator:                                                          |  |              |        |                  |   |        |                  |  |   |        |  
|Weighted average common shares outstanding                            |  |              | 22,683 |                  |   | 21,412 |                  |  |   | 20,809 |  
|                                                                      |  |              |        |                  |   |        |                  |  |   |        |  
|Shares used in computation, basic                                     |  |              | 22,683 |                  |   | 21,412 |                  |  |   | 20,809 |  
|Escrowed shares related to Blue7 acquisition                          |  |              | 94     |                  |   |       |                  |  |   |       |  
|Effect of dilutive securities:                                        |  |              |        |                  |   |        |                  |  |   |        |  
|Stock options                                                         |  |              | 2,893  |                  |   |       |                  |  |   |       |  
|                                                                      |  |              |        |                  |   |        |                  |  |   |        |  
|Shares used in computation, diluted                                   |  |              | 25,670 |                  |   | 21,412 |                  |  |   | 20,809 |  
|                                                                      |  |              |        |                  |   |        |                  |  |   |        |  
|Net income per share:                                                 |  |              |        |                  |   |        |                  |  |   |        |  
|Basic                                                                 |  | $            | 0.28   |                  | $ | (0.07  | )                |  | $ | (0.01  | )
|                                                                      |  |              |        |                  |   |        |                  |  |   |        |  
|Diluted                                                               |  | $            | 0.24   |                  | $ | (0.07  | )                |  | $ | (0.01  | )
|                                                                      |  |              |        |                  |   |        |                  |  |   |        |  
|Dilutive shares not included in loss years                            |  |              |       |                  |   | 2,621  |                  |  |   | 2,720  |  
|                                                                      |  |              |        |                  |   |        |                  |  |   |        |  

---

|(1) | See Note 2, Restatement of Consolidated Financial Statements, of the Notes to Consolidated Financial Statements.
|--- | ------------------------------------------------------------------------------------------------------------------

A summary of the excluded potential dilutive securities as of the end of each fiscal year follows (in thousands):



|              |  |                 |  |                 |  |                
|------------- |  | --------------- |  | --------------- |  | ---------------
|              |  | Years Ended    
|              |  | February 3,2007 |  | January 28,2006 |  | January 29,2005
|Stock options |  | 489             |  | 2               |  | 20             



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##### Table of Contents

13. SHAREHOLDERS EQUITY

Comprehensive Income

The reconciliation of net income (loss) to total comprehensive income (loss) is as follows (in
thousands):



|                                                        |  |                 |       |                   |   |        |                   |  |   |      |  
|------------------------------------------------------- |  | --------------- | ----- | ----------------- | - | ------ | ----------------- |  | - | ---- | -
|                                                        |  | Years Ended     |       |                   |   |       
|                                                        |  | February 3,2007 |       | January 28,2006   |   |        | January 29,2005   | 
|                                                        |  |                 |       | (As Restated) (1) |   |        | (As Restated) (1) | 
|Net income (loss)                                       |  | $               | 6,244 |                   | $ | (1,561 | )                 |  | $ | (125 | )
|Other comprehensive income                              |  |                 |       |                   |   |        |                   |  |   |      |  
|Unrealized gain (loss) on available-for-sale securities |  |                 | 35    |                   |   | 5      |                   |  |   | (24  | )
|Cumulative foreign currency translation adjustment      |  |                 | 112   |                   |   | (53    | )                 |  |   | 28   |  
|                                                        |  |                 |       |                   |   |        |                   |  |   |      |  
|Total comprehensive income (loss)                       |  | $               | 6,391 |                   | $ | (1,609 | )                 |  | $ | (121 | )
|                                                        |  |                 |       |                   |   |        |                   |  |   |      |  

---

|(1) | See Note 2, Restatement of Consolidated Financial Statements, of the Notes to Consolidated Financial Statements.
|--- | ------------------------------------------------------------------------------------------------------------------

Stock Option Plans

2003 Director Stock
Option Plan (the 2003 Director Plan): During fiscal 2004, the Company adopted the 2003 Director Stock Option Plan to replace the predecessor 1994 Director Stock Option Plan which expired in fiscal 2005. A total of 207,500 shares of
common stock are currently reserved for issuance under the 2003 Director Plan of which 65,000 have been granted as of February 3, 2007.

2001 Employee Stock Option Plan (the 2001 Option Plan): During fiscal 2002, the Company adopted the 2001 Employee Stock Option Plan (the 2001 Option Plan) and reserved 500,000 shares of the Companys
common stock for issuance under the plan, with automatic annual increases on the first day of the Companys fiscal year equal to the lesser of (i) 1,000,000 shares, (ii) 4% of the Companys outstanding common stock on such date
or (iii) a lesser number of shares as determined by the Board of Directors, commencing February 1, 2002. On March 8, 2006, an additional 877,834 shares resulting from the automatic annual increase of 4% of the Companys
outstanding common stock were added to the shares available for issuance under the 2001 Employee Stock Option Plan. As of February 3, 2007, the Company reserved a total of 3.8 million shares of common stock for issuance under this plan.
Generally, the plan provides for the granting of options to purchase shares of common stock at the fair market value on the date of grant. Options granted under the plan become exercisable over a five-year period and expire no more than ten years
from the date of grant (all options outstanding at February 3, 2007 expire ten years from date of grant). The 2001 plan replaced the predecessor 1994 Option Plan which expired in fiscal 2005.



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##### Table of Contents

The total stock option activities and balances of the Companys stock option plans are summarized as
follows:



|                                                                                       |  |                            |   |  |                                          |       |                                                  |      |                                       |   |        
|-------------------------------------------------------------------------------------- |  | -------------------------- | - |  | ---------------------------------------- | ----- | ------------------------------------------------ | ---- | ------------------------------------- | - | -------
|                                                                                       |  | Number ofSharesOutstanding |   |  | Weighted AverageExercise PricesPer Share |       | Weighted AverageRemainingContractual Term(Years) |      | AggregateIntrinsicValue(in thousands)
|Balance, January 31, 2004 (2,551,665 exercisable at a weighted-average price of $2.65) |  | 4,264,436                  |   |  | $                                        | 2.77  |                                                  |      |                                       |   |        
|Granted (weighted-average fair value of $2.98)                                         |  | 933,500                    |   |  |                                          | 5.55  |                                                  |      |                                       |   |        
|Cancelled                                                                              |  | (28,428                    | ) |  |                                          | 2.58  |                                                  |      |                                       |   |        
|Exercised                                                                              |  | (334,169                   | ) |  |                                          | 2.46  |                                                  |      |                                       |   |        
|                                                                                       |  |                            |   |  |                                          |       |                                                  |      |                                       |   |        
|Balance, January 29, 2005 (2,853,801 exercisable at a weighted-average price of $2.79) |  | 4,835,339                  |   |  |                                          | 3.33  |                                                  |      |                                       |   |        
|Granted (weighted-average fair value of $5.26)                                         |  | 967,900                    |   |  |                                          | 10.36 |                                                  |      |                                       |   |        
|Cancelled                                                                              |  | (92,679                    | ) |  |                                          | 5.89  |                                                  |      |                                       |   |        
|Exercised                                                                              |  | (825,343                   | ) |  |                                          | 2.89  |                                                  |      |                                       |   |        
|                                                                                       |  |                            |   |  |                                          |       |                                                  |      |                                       |   |        
|Balance, January 28, 2006 (2,745,101 exercisable at a weighted-average price of $2.99) |  | 4,885,217                  |   |  |                                          | 4.75  |                                                  |      |                                       |   |        
|Granted (weighted-average fair value of $9.58)                                         |  | 1,092,837                  |   |  |                                          | 10.51 |                                                  |      |                                       |   |        
|Cancelled                                                                              |  | (173,783                   | ) |  |                                          | 8.14  |                                                  |      |                                       |   |        
|Exercised                                                                              |  | (337,909                   | ) |  |                                          | 2.74  |                                                  |      |                                       |   |        
|                                                                                       |  |                            |   |  |                                          |       |                                                  |      |                                       |   |        
|Balance, February 3, 2007                                                              |  | 5,466,362                  |   |  | $                                        | 5.92  |                                                  | 5.93 |                                       | $ | 108,137
|                                                                                       |  |                            |   | 
|Ending Vested & Expected to Vest                                                       |  | 5,278,232                  |   |  | $                                        | 5.76  |                                                  | 5.83 |                                       | $ | 105,268
|Ending Exercisable                                                                     |  | 3,243,508                  |   |  | $                                        | 3.53  |                                                  | 4.17 |                                       | $ | 71,908 
|                                                                                       |  |                            |   |  |                                          |       |                                                  |      |                                       |   |        

The aggregate intrinsic value in the table above represents the total pretax intrinsic value,
based on our closing stock price of $25.70 as of February 3, 2007, which would have been received by the option holders had all options holders exercised their options as of that date. The aggregate exercise date intrinsic value of options that
were exercised during fiscal 2007 equaled $3.7 million. The total fair value of options which vested during fiscal 2007 equaled $5.5 million.

At February 3, 2007, options to purchase 232,644 shares were available for future grant.



|                         |  |                                      |  |                                 |  |                                 |       |                                       |           |                                 |   |      
|------------------------ |  | ------------------------------------ |  | ------------------------------- |  | ------------------------------- | ----- | ------------------------------------- | --------- | ------------------------------- | - | -----
|Options Outstanding      |  | Options Exercisable                 
|Range of Exercise Prices |  | NumberOutstanding at February 3,2007 |  | Weighted Average Remaining Life |  | Weighted Average Exercise Price |       | Number Exercisable atFebruary 3, 2007 |           | Weighted Average Exercise Price
|$  0.95  $  1.69        |  | 903,608                              |  | 5.05                            |  | $                               | 1.42  |                                       | 818,351   |                                 | $ | 1.40 
|$  1.71  $  1.71        |  | 42,248                               |  | 8.28                            |  |                                 | 1.71  |                                       | 28,059    |                                 |   | 1.71 
|$  2.31  $  2.31        |  | 547,156                              |  | 0.21                            |  |                                 | 2.31  |                                       | 547,156   |                                 |   | 2.31 
|$  2.34  $  3.40        |  | 771,043                              |  | 4.22                            |  |                                 | 3.06  |                                       | 637,003   |                                 |   | 3.01 
|$  3.50  $  5.38        |  | 444,922                              |  | 3.43                            |  |                                 | 3.84  |                                       | 432,605   |                                 |   | 3.79 
|$  5.43  $  5.43        |  | 659,838                              |  | 7.4                             |  |                                 | 5.43  |                                       | 301,735   |                                 |   | 5.43 
|$  5.60  $  9.57        |  | 491,447                              |  | 6.41                            |  |                                 | 6.56  |                                       | 289,115   |                                 |   | 6.16 
|$  9.89  $  9.89        |  | 711,400                              |  | 8.65                            |  |                                 | 9.89  |                                       | 166,187   |                                 |   | 9.89 
|$11.06  $11.06          |  | 605,000                              |  | 9.5                             |  |                                 | 11.06 |                                       | 0         |                                 |   |     
|$12.54  $25.70          |  | 289,700                              |  | 9.31                            |  |                                 | 17.70 |                                       | 23,297    |                                 |   | 15.77
|                         |  |                                      |  |                                 |  |                                 |       |                                       |           |                                 |   |      
|$  0.95  $25.70         |  | 5,466,362                            |  | 5.93                            |  | $                               | 5.92  |                                       | 3,243,508 |                                 | $ | 3.53 
|                         |  |                                      |  |                                 |  |                                 |       |                                       |           |                                 |   |      



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##### Table of Contents

As of February 3, 2007, the unrecorded stock-based compensation balance related to stock options
outstanding excluding estimated forfeitures was $12.3 million and will be recognized over an estimated weighted average amortization period of 2.70 years. The amortization period is based on the expected vesting term of the option.

Preferred Stock Rights Plan

On
May 28, 2004, the Companys Board of Directors adopted a Preferred Stock Rights Plan. Under the plan, the Company declared a dividend of one Preferred Share Purchase Right (the Rights) for each share of Common Share held by
stockholders of record as of the close of business on June 18, 2004. Each Right initially entitles stockholders to purchase a fractional share of the Companys Preferred Stock at $58 per share. However, the rights are not immediately
exercisable and will become exercisable only upon the occurrence of certain events. If a person or group acquires or announces a tender or exchange offer that would result in the acquisition of 15 percent or more of the Companys common
stock while the stockholder rights plan remains in place, then, unless the rights are redeemed by the Company for $0.001 per right, the rights will become exercisable by all rights holders except the acquiring person or group for shares of the
Company or the third party acquirer having a value of twice the rights then-current exercise price. Absent of the aforementioned triggering events, the Rights will expire on June 18, 2014. The rights may have the effect of deterring or
delaying a change in control of the Company.

Employee Stock Purchase Plan

During fiscal 2002, the Company adopted the 2001 Employee Stock Purchase Plan (the 2001 Purchase Plan) and reserved 100,000 shares of
the Companys common stock for issuance under the plan, with an automatic annual increase on the first day of the Companys fiscal year equal to the lesser of (i) 500,000 shares, (ii) 2% of the Companys outstanding common
stock on such date or (iii) a lesser number of shares as determined by the Board of Directors. On February 1, 2005, the Board of Directors approved an additional 25,000 shares to be reserved under the 2001 Purchase Plan. Under this plan,
eligible employees may authorize payroll deductions of up to 10% of their regular base salaries to purchase common stock at 85% of the fair market value at the beginning or end of each six-month offering period. During fiscal 2007, 2006 and 2005,
36,277, 81,569 and 66,798 shares of the Companys common stock were purchased at an average price of $8.02, $6.59 and $6.58 per share, respectively. At February 3, 2007, 226,292 shares under the 2001 Purchase Plan remain available for
future purchase.

Stock-Based Compensation

Valuation Assumptions

The fair value of share-based compensation awards is estimated at the grant date using the
Black-Scholes option valuation model. The determination of fair value of share-based compensation awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex
and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual employee stock option exercise behavior.

In connection with the adoption of SFAS 123(R), we reassessed our valuation technique and related assumptions. We estimate the fair value of stock
options using a Black-Scholes valuation model, consistent with the provisions of SFAS 123(R), SAB No. 107 and our prior period pro forma disclosures of net earnings, including stock-based compensation expense (determined under a fair
value method as prescribed by SFAS 123). The weighted-average estimated values of employee stock options granted during fiscal 2007, 2006, and 2005 were $9.58, $6.22, and $5.02 per share, respectively. The weighted-average estimated fair value
of employee stock purchase rights granted pursuant to the ESPP during fiscal 2007 was $5.93, per share, respectively. The fair



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##### Table of Contents

value of each option and employee stock purchase right grant is estimated on the date of grant using the Black-Scholes option valuation model with the
following weighted-average assumptions:



|                                                        |  |                 |   |  |                   |   |  |                   |  
|------------------------------------------------------- |  | --------------- | - |  | ----------------- | - |  | ----------------- | -
|                                                        |  | Years Ended     |  
|                                                        |  | February 3,2007 |   |  | January 28,2006   |   |  | January 31,2005   |  
|                                                        |  |                 |   |  | (As Restated) (1) |   |  | (As Restated) (1) |  
|Stock Options                                           |  |                 |   |  |                   |   |  |                   |  
|Expected volatility                                     |  | 69.98           | % |  | 61.10             | % |  | 75.57             | %
|Risk free interest rate                                 |  | 4.77            | % |  | 4.29              | % |  | 2.61              | %
|Expected term of options and purchase rights (in years) |  | 5.90            |   |  | 1.43              |   |  | 1.41              |  
|Dividend yield                                          |  | None            |   |  | None              |   |  | None              |  
|                                                        |  |                 |  
|Employee Stock Purchase Plan                            |  |                 |   |  |                   |   |  |                   |  
|Expected volatility                                     |  | 54.55           | % |  | 62.10             | % |  | 67.68             | %
|Risk free interest rate                                 |  | 4.66            | % |  | 3.10              | % |  | 1.37              | %
|Expected term of options and purchase rights (in years) |  | 0.50            |   |  | 0.50              |   |  | 0.50              |  
|Dividend yield                                          |  | None            |   |  | None              |   |  | None              |  

The computation of the expected volatility assumptions used in the Black-Scholes calculations for
new grants and purchase rights is based on the historical volatility of our stock price, measured over a period equal to the expected term of the grant or purchase right. The risk-free interest rate is based on the yield available on
U.S. Treasury Strips with an equivalent remaining term. The expected life of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding and was determined based on historical
experience of similar awards, giving consideration to the contractual terms of the stock-based awards and vesting schedules. The expected life of purchase is the period of time remaining in the current offering period. The dividend yield assumption
is based on our history of not paying dividends and assumption of not paying dividends in the future.

As the stock-based compensation
expense recognized in the consolidated statement of operations for fiscal 2007 is based on awards ultimately expected to vest, such amount has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on our historical experience. Prior to fiscal 2007, the expected forfeitures of employee stock options were
accounted for on an as-incurred basis.

14. INCOME TAXES

Income before provision for income taxes consisted of the following (in thousands):



|              |  |                 |       |                 |   |        |                 |  |   |      |  
|------------- |  | --------------- | ----- | --------------- | - | ------ | --------------- |  | - | ---- | -
|              |  | Years Ended     |      
|              |  | February 3,2007 |       | January 28,2006 |   |        | January 29,2005 | 
|              |  |                 |       | (As Restated)   |   |        | (As Restated)   | 
|United States |  | $               | 6,135 |                 | $ | (1,962 | )               |  | $ | (447 | )
|International |  |                 | 537   |                 |   | 471    |                 |  |   | 385  |  
|              |  |                 |       |                 |   |        |                 |  |   |      |  
|Total         |  | $               | 6,672 |                 | $ | (1,491 | )               |  | $ | (62  | )
|              |  |                 |       |                 |   |        |                 |  |   |      |  



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##### Table of Contents

The federal, state and foreign income tax provision is summarized as follows (in thousands):



|                |  |                 |     |                 |   |                 |  |   |   
|--------------- |  | --------------- | --- | --------------- | - | --------------- |  | - | --
|                |  | Years Ended    
|                |  | February 3,2007 |     | January 28,2006 |   | January 29,2005
|                |  |                 |     | (As Restated)   |   | (As Restated)  
|Current         |  |                 |     |                 |   |                 |  |   |   
|Federal         |  | $               | 314 |                 | $ |                |  | $ |  
|State           |  |                 | 64  |                 |   | 6               |  |   | 2 
|Foreign         |  |                 | 50  |                 |   | 64              |  |   | 61
|                |  |                 |     |                 |   |                 |  |   |   
|Total Current   |  |                 | 428 |                 |   | 70              |  |   | 63
|                |  |                 |     |                 |   |                 |  |   |   
|Deferred        |  |                 |     |                 |   |                 |  |   |   
|Federal         |  |                 |    |                 |   |                |  |   |  
|State           |  |                 |    |                 |   |                |  |   |  
|Foreign         |  |                 |    |                 |   |                |  |   |  
|                |  |                 |     |                 |   |                 |  |   |   
|Total Deferred  |  |                 |    |                 |   |                |  |   |  
|                |  |                 |     |                 |   |                 |  |   |   
|Total Provision |  | $               | 428 |                 | $ | 70              |  | $ | 63
|                |  |                 |     |                 |   |                 |  |   |   

The tax effects of significant items comprising the Companys deferred tax assets and
liabilities are as follows (in thousands):



|                                                |  |                 |         |   |                  |   |         |  
|----------------------------------------------- |  | --------------- | ------- | - | ---------------- | - | ------- | -
|                                                |  | Years Ended     |        
|                                                |  | February 3,2007 |         |   | January 28, 2006 |  
|                                                |  |                 |         |   | (As Restated)    |  
|Deferred tax assets:                            |  |                 |         |   |                  |   |         |  
|Net operating losses and credits carry forwards |  | $               | 16,077  |   |                  | $ | 24,420  |  
|Allowance, reserve and other                    |  |                 | 8,773   |   |                  |   | 6,516   |  
|Depreciation                                    |  |                 | 284     |   |                  |   | 291     |  
|Tax Credits                                     |  |                 | 10,727  |   |                  |   | 8,854   |  
|                                                |  |                 |         |   |                  |   |         |  
|Total gross deferred tax assets                 |  |                 | 35,861  |   |                  |   | 40,081  |  
|Valuation allowance                             |  |                 | (33,653 | ) |                  |   | (40,081 | )
|                                                |  |                 |         |   |                  |   |         |  
|Total net deferred tax assets                   |  |                 | 2,208   |   |                  |   |        |  
|Deferred tax liabilities:                       |  |                 |         |   |                  |   |         |  
|Acquired intangibles                            |  |                 | (2,208  | ) |                  |   |        |  
|                                                |  |                 |         |   |                  |   |         |  
|Total net deferred tax assets                   |  | $               |        |   |                  | $ |        |  
|                                                |  |                 |         |   |                  |   |         |  

At February 3, 2007, undistributed earnings of the Companys French operations totaling
$2.7 million were considered to be permanently reinvested. No deferred tax liability has been recognized for the remittance of such earnings to the U.S. since it is managements intention to utilize those earnings in the foreign operations.
Generally, such earnings become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability on such undistributed earnings.

We have elected to track the portion of our federal and state net operating loss carryforwards attributable to stock option benefits, in a separate memo
account pursuant to SFAS No. 123(R). Therefore, these amounts are no longer included in our gross or net deferred tax assets. Pursuant to SFAS No. 123(R), footnote 82, the benefit of these net operating loss carryforwards will only be
recorded to equity when they reduce cash taxes payable. The amounts removed to the memo account as of 2/3/2007 are $5.8 million for federal and $0.3 million for state tax purposes, respectively.



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##### Table of Contents

On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No.
FAS 123(R)-3 Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards. The Company has elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects
of stock-based compensation pursuant to SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of
employee stock-based compensation and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R).

SFAS No. 109 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an
asset to the extent that management assesses that realization is more likely than not. Realization of the future tax benefits is dependent on the Companys ability to generate sufficient taxable income within the carryforward
period. Because of the Companys recent history of operating losses, risks associated with its new product introduction including the dependence on rapid acceptance of new technology, the dependence on development of complimentary software by
third parties and other risks, such as technological change in the industry, short product life cycles and reliance on a limited number of suppliers and manufacturing contractors, management believes that recognition of the deferred tax assets
arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a full valuation allowance.

Net operating losses and tax credit carry forwards as of February 3, 2007 are as follows (in thousands):



|                              |  |        |        |                 |                     
|----------------------------- |  | ------ | ------ | --------------- | --------------------
|                              |  | Amount |        | ExpirationYears
|Net operating losses, federal |  | $      | 56,284 |                 | Thru 2024           
|Net operating losses, state   |  |        | 4,525  |                 | Thru 2014           
|Tax credits, federal          |  |        | 7,408  |                 | Thru 2027           
|Tax credits, state            |  |        | 3,266  |                 | Thru 2014-Indefinite
|Tax credits, foreign          |  |        | 54     |                 | Indefinite          

Current federal and California tax laws include substantial restrictions on the utilization of net
operating losses and tax credits in the event of an ownership change of a corporation. Accordingly, the Companys ability to utilize net operating loss and tax credit carryforwards may be limited as a result of such ownership
changes. Such a limitation could result in the expiration of carryforwards before they are utilized.

The effective tax rate of the
Companys provision (benefit) for income taxes differs from the federal statutory rate as follows (in thousands):



|                                                                 |  |      |        |   |      |   |      |      |  |   |      |  
|---------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                                 |  | 2007 |        |   | 2006 |   |      | 2005 | 
|Computed at 35%                                                  |  | $    | 2,336  |   |      | $ | (444 | )    |  | $ | (13  | )
|State taxes net of federal benefit                               |  |      | 42     |   |      |   | 4    |      |  |   | 1    |  
|Difference between statutory rate and foreign effective tax rate |  |      | (109   | ) |      |   | (101 | )    |  |   | (54  | )
|Expenses not deductible for tax purposes                         |  |      | 235    |   |      |   | 615  |      |  |   | 65   |  
|Stock based compensation expense                                 |  |      | 554    |   |      |   |     |      |  |   |     |  
|Change in valuation allowance, federal effect only               |  |      | (1,505 | ) |      |   | 685  |      |  |   | 525  |  
|Tax credit                                                       |  |      | (1,125 | ) |      |   | (689 | )    |  |   | (461 | )
|                                                                 |  |      |        |   |      |   |      |      |  |   |      |  
|TOTAL                                                            |  | $    | 428    |   |      | $ | 70   |      |  | $ | 63   |  
|                                                                 |  |      |        |   |      |   |      |      |  |   |      |  

15. ACQUISITION

On February 16, 2006, we completed the acquisition of Blue7 for $11.9 million. Blue7s results of operations are included in statement of operations from the acquisition date. Prior to the acquisition, Sigma
held



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##### Table of Contents

approximately 17% of the outstanding shares of Blue7 and provided loans totaling $900,000 to Blue7. Blue7 focuses on the development of advanced wireless
technologies and Ultra-Wideband (UWB) semiconductor products. The transaction was accounted for using the purchase method of accounting in accordance with SFAS No. 141, Business Combinations.

Assets acquired and liabilities assumed were recorded at their fair values as of February 16, 2006. The total $11.9 million purchase price is
comprised of the following (in thousands):



|                                                                             |  |   |        |  
|---------------------------------------------------------------------------- |  | - | ------ | -
|Value of Sigma stock issued                                                  |  | $ | 8,190  |  
|Fair value of vested stock options assumed                                   |  |   | 1,091  |  
|Retirement of note receivables                                               |  |   | 400    |  
|Retirement of interest receivable                                            |  |   | 25     |  
|Investment in Blue7 prior to the acquisition                                 |  |   | 1,000  |  
|Note receivable converted to Blue7 preferred shares prior to the acquisition |  |   | 500    |  
|Cash acquired from Blue7 acquisition                                         |  |   | (147   | )
|Direct costs                                                                 |  |   | 804    |  
|                                                                             |  |   |        |  
|Total estimated purchase price                                               |  | $ | 11,863 |  
|                                                                             |  |   |        |  

As a result of the acquisition, we issued approximately 583,870 shares of Sigma common stock based
on an exchange ratio of 0.0529101 shares of Sigma common stock for each outstanding share of Blue7 common stock. Of the 583,870 shares of Sigma common stock issued, 98,470 shares were held in escrow until March, 2007 to satisfy any obligations of
Blue7 to indemnify Sigma against any claims against Blue7 for any breaches of its representations or warranties contained in or made pursuant to the merger agreement and certain other matters set forth in the Merger Agreement. The common stock
issued in the acquisition was valued at $14.03 which was the average closing sales prices of Sigma common stock for five consecutive trading days from December 13, 2005 to December 19, 2005 surrounding the announcement date (December 15,
2005) of the proposed transaction.

Under the terms of the merger agreement, each Blue7 stock option that was outstanding and unexercised
was converted into an option to purchase Sigma common stock based on the 0.0529101 exchange ratio and we assumed those stock options in accordance with the terms of the applicable Blue7 stock option plan and related stock option agreements. Based on
Blue7s stock options outstanding at February 16, 2006, we converted options to purchase approximately 4.8 million shares of Blue7 common stock into options to purchase approximately 231,137 shares of Sigma common stock. The fair
value of options assumed was determined using the Black-Scholes valuation model and the following assumptions:



|                         |  |            |  
|------------------------ |  | ---------- | -
|Expected term (in years) |  | 5.13 years |  
|Volatility               |  | 74         | %
|Risk free interest rate  |  | 4.59       | %

Direct costs of $804,000 include mainly legal and accounting fees, business valuation, and other
external costs directly related to the acquisition.

Purchase Price Allocation:

In accordance with SFAS No. 141 the total purchase price was allocated to Blue7s net tangible and intangible assets based upon their
estimated fair values as of February 16, 2006. The excess purchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill. The fair values assigned to tangible and intangible assets acquired and
liabilities assumed are based on estimates and assumptions of management.



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##### Table of Contents

The following represents the allocation of the purchase price to the acquired net assets of Sigma and the
associated estimated useful lives:



|                                |  |                |        |                      |               
|------------------------------- |  | -------------- | ------ | -------------------- | --------------
|                                |  | Amount         |        | EstimatedUseful Life
|                                |  | (in thousands) |        |                     
|Net tangible assets             |  | $              | 104    |                      |               
|Identifiable intangible assets: |  |                |        |                      |               
|Licensing agreements            |  |                | 39     |                      | 6 to 15 months
|Developed technology            |  |                | 5,300  |                      | 7 years       
|Noncompete agreements           |  |                | 1,400  |                      | 3 years       
|Goodwill                        |  |                | 5,020  |                      |               
|                                |  |                |        |                      |               
|Total purchase price            |  | $              | 11,863 |                      |               
|                                |  |                |        |                      |               

Identifiable intangible assetsDeveloped technology consists of products that have
reached technological feasibility and includes products in the acquired product lines. Developed technology was valued using the discounted cash flow (DCF) method. This method calculates the value of the intangible asset as being the
present value of the after tax cash flows potentially attributable to it, net of the return on fair value attributable to tangible and other intangible assets.

The results of operations of Blue7 have been included in the Companys consolidated financial statements subsequent to the date of acquisition. The financial information in the table below summarizes the reported
results of operations, as well as the pro forma combined results of operations of the Company and Blue7 as though the companies had been combined as of the beginning of the year presented (in thousands, except per share amounts):



|                                               |  |                               |        |  
|---------------------------------------------- |  | ----------------------------- | ------ | -
|                                               |  | Fiscal Year EndedJan 28, 2006 |       
|Reported revenue                               |  | $                             | 33,320 |  
|Reported net loss                              |  | $                             | (1,561 | )
|Reported net loss per sharebasic and diluted  |  | $                             | (0.07  | )
|                                               | 
|Pro forma revenue                              |  | $                             | 33,553 |  
|Pro forma net loss                             |  | $                             | (3,770 | )
|Pro forma net loss per sharebasic and diluted |  | $                             | (0.17  | )

The pro forma financial information is presented for informational purposes only and is not
indicative of the results of operations that would have been achieved if the merger had taken place at the beginning of the year presented.

16. MAJOR
CUSTOMERS

Major customers that accounted for over 10% of our total net revenues are as follows:



|                         |  |                       |  |             |   |  |             |     |  |             |  
|------------------------ |  | --------------------- |  | ----------- | - |  | ----------- | --- |  | ----------- | -
|Customers                |  | Regions               |  | Fiscal 2007 |   |  | Fiscal 2006 |     |  | Fiscal 2005 |  
|Freebox SA               |  | Europe                |  | 20          | % |  |            |     |  |            |  
|Uniquest                 |  | Asia                  |  | 17          | % |  | 26          | %   |  | 15          | %
|Cisco / Kiss Technology* |  | North America /Europe |  | 3           | % |  | Less than 1 | % * |  | 14          | %



---

|* | Cisco, a North American company, acquired our customer Kiss Technologies, formally a European company, in fiscal 2006
|- | ---------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

No domestic customers accounted for more than 10% of total accounts receivable at February 3, 2007
and January 28, 2006. Four international customers accounted for 24%, 18%, 15% and 12% respectively, of total accounts receivables at February 3, 2007. Two international customers accounted for 30% and 12% respectively, of total accounts
receivables at January 28, 2006.

17. RELATED PARTY TRANSACTIONS

On April 10, 2006, the Company entered into a sublease agreement to rent approximately 2,500 square feet of a facility from a start-up company founded by a member of the Companys board of directors. This is
a month-to-month operating lease with base rent of $4,000 plus proportionate share of operating costs commencing April 1, 2006.

During June 2005, the Company loaned $500,000 to Blue7, a California corporation, in which the Company had invested $1.0 million, for an approximately 17% ownership interest. One of the Companys board members had invested $100,000 for
a 2% ownership interest during fiscal 2005. In November 2005 and January 2006, the Company loaned an additional $250,000 and $150,000 to Blue7. As of January 28, 2006, the total outstanding loan balance was $900,000. As of February 3,
2007, the total loan balance of $900,000 was forgiven and accounted as part of the Blue7 acquisition cost.

The Company had an ownership
interest of less than 10% in an original equipment manufacturer (the OEM) headquartered in Europe which was accounted for using the cost method. The Company sold its ownership interest with a carrying cost of $2.0 million in this OEM for
approximately $3.5 million in September 2005, resulting a gain on sale of investment of approximately $1.5 million. During fiscal 2006 and 2005, the Company had product revenues of $123,000 and $4.5 million, respectively, from this OEM.

The Company maintains an investment in Envivio, Inc., (see Note 6) in which the Company has current invested capital of $263,000 for an ownership
fraction of less than 1% ownership position. Three of the Companys board members have investments in this same firm, with an aggregate ownership fraction of less than 1% ownership position. The Companys Chairman and CEO, Thinh Tran, is a
member of Envivios board of directors.

18. SEGMENT AND GEOGRAPHICAL INFORMATION

Geographic Operating InformationSFAS No. 131, Disclosures About Segments of an Enterprise and Related Information,
provides annual and interim reporting standards for an enterprises business segments and related disclosures about its products, services, geographical areas and major customers. The Company operates in one reportable segment.

All such operating entities segments have similar economic characteristics, as defined in SFAS No. 131. Accordingly, the Company operates in one
reportable segment: the development, manufacturing and marketing of multimedia computer devices and products. The Companys chief operating decision-maker is its Chief Executive Officer.

For fiscal 2007, 2006 and 2005, the Company recorded sales to customers throughout the United States and Canada, France, Korea, China, Singapore, Japan,
Taiwan, Hong Kong, Denmark; Belgium, Greece, Italy, Hungary, Germany, the United Kingdom, Finland, The Netherlands, Norway, Sweden, Spain, Portugal, Scotland, and Croatia (collectively referred to as Rest of Europe); Malaysia, Thailand,
New Zealand, Turkey, Israel, Australia, South American and South Africa (collectively Rest of Asia/New Zealand/Other Region).



F-33



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##### Table of Contents

The following table summaries total net revenues attributed to each product group (in thousands):



|                   |  |                 |        |                 |   |                 |  |   |       
|------------------ |  | --------------- | ------ | --------------- | - | --------------- |  | - | ------
|                   |  | Years Ended    
|                   |  | February 3,2007 |        | January 28,2006 |   | January 29,2005
|Chipsets           |  | $               | 86,984 |                 | $ | 28,198          |  | $ | 26,341
|Boards             |  |                 | 2,944  |                 |   | 3,514           |  |   | 3,280 
|Other              |  |                 | 1,290  |                 |   | 1,608           |  |   | 1,777 
|                   |  |                 |        |                 |   |                 |  |   |       
|TOTAL NET REVENUES |  | $               | 91,218 |                 | $ | 33,320          |  | $ | 31,398
|                   |  |                 |        |                 |   |                 |  |   |       

The following table summarizes total net revenues attributable to each market segment (in
thousands):



|                              |  |                 |        |                 |   |                 |  |   |       
|----------------------------- |  | --------------- | ------ | --------------- | - | --------------- |  | - | ------
|                              |  | Years Ended    
|                              |  | February 3,2007 |        | January 28,2006 |   | January 29,2005
|IP video technology market    |  | $               | 61,501 |                 | $ | 19,170          |  | $ | 18,024
|Connected media player market |  |                 | 24,698 |                 |   | 11,227          |  |   | 10,379
|HDTV product market           |  |                 | 1,657  |                 |   | 797             |  |   | 362   
|PC add-in and other markets   |  |                 | 3,362  |                 |   | 2,126           |  |   | 2,633 
|                              |  |                 |        |                 |   |                 |  |   |       
|TOTAL NET REVENUES            |  | $               | 91,218 |                 | $ | 33,320          |  | $ | 31,398
|                              |  |                 |        |                 |   |                 |  |   |       

The following table sets forth our net revenues by geographic region, and the percentage of total
net revenues represented by each geographic region, for each of the last three fiscal years (in thousands):



|                   |  |             |        |  |             |   |  |             |        |  |    |   |  |   |        |  |    |  
|------------------ |  | ----------- | ------ |  | ----------- | - |  | ----------- | ------ |  | -- | - |  | - | ------ |  | -- | -
|                   |  | Fiscal 2007 |        |  | Fiscal 2006 |   |  | Fiscal 2005 |       
|Asia               |  | $           | 48,386 |  | 53          | % |  | $           | 27,293 |  | 82 | % |  | $ | 20,532 |  | 65 | %
|North America      |  |             | 9,607  |  | 11          | % |  |             | 3,944  |  | 12 | % |  |   | 4,401  |  | 14 | %
|Europe             |  |             | 33,109 |  | 36          | % |  |             | 2,081  |  | 6  | % |  |   | 6,462  |  | 21 | %
|Other regions      |  |             | 116    |  |            | % |  |             | 2      |  |   | % |  |   | 3      |  |   | %
|                   |  |             |        |  |             |   |  |             |        |  |    |   |  |   |        |  |    |  
|TOTAL NET REVENUES |  | $           | 91,218 |  |             |   |  | $           | 33,320 |  |    |   |  | $ | 31,398 |  |    |  
|                   |  |             |        |  |             |   |  |             |        |  |    |   |  |   |        |  |    |  



F-34



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##### Table of Contents

The following table summarizes total net revenues and long-lived assets attributable to significant
countries (in thousands):



|                                      |  |                 |        |                 |   |                 |  |   |       
|------------------------------------- |  | --------------- | ------ | --------------- | - | --------------- |  | - | ------
|                                      |  | Years Ended    
|                                      |  | February 3,2007 |        | January 28,2006 |   | January 29,2005
|Net revenues:                         |  |                 |        |                 |   |                 |  |   |       
|France                                |  | $               | 26,836 |                 | $ | 268             |  | $ | 67    
|Korea                                 |  |                 | 15,616 |                 |   | 8,548           |  |   | 5,024 
|China                                 |  |                 | 9,767  |                 |   | 7,125           |  |   | 6,695 
|United States                         |  |                 | 9,498  |                 |   | 3,816           |  |   | 4,346 
|Singapore                             |  |                 | 7,403  |                 |   | 256             |  |   | 123   
|Japan                                 |  |                 | 7,286  |                 |   | 2,859           |  |   | 1,914 
|Rest of Europe                        |  |                 | 6,243  |                 |   | 1,690           |  |   | 1,618 
|Taiwan                                |  |                 | 4,368  |                 |   | 4,823           |  |   | 5,376 
|Hong Kong                             |  |                 | 3,675  |                 |   | 3,206           |  |   | 1,056 
|Rest of Asia/New Zealand/Other Region |  |                 | 387    |                 |   | 478             |  |   | 346   
|Canada                                |  |                 | 109    |                 |   | 128             |  |   | 56    
|Denmark                               |  |                 | 30     |                 |   | 123             |  |   | 4,777 
|                                      |  |                 |        |                 |   |                 |  |   |       
|TOTAL NET REVENUES *                  |  | $               | 91,218 |                 | $ | 33,320          |  | $ | 31,398
|                                      |  |                 |        |                 |   |                 |  |   |       
|                                      | 
|                                      |  | Years Ended    
|                                      |  | February 3,2007 |        | January 28,2006 |   | January 29,2005
|Long-lived assets:                    |  |                 |        |                 |   |                 |  |   |       
|United States                         |  | $               | 1,711  |                 | $ | 1,318           |  | $ | 1,656 
|France                                |  |                 | 140    |                 |   | 152             |  |   | 87    
|Hong Kong                             |  |                 | 9      |                 |   | 4               |  |   | 13    
|                                      |  |                 |        |                 |   |                 |  |   |       
|TOTAL LONG-LIVED ASSETS               |  | $               | 1,860  |                 | $ | 1,474           |  | $ | 1,756 
|                                      |  |                 |        |                 |   |                 |  |   |       

---

|* | Net revenues are attributable to countries based on invoicing location of customer.
|- | -----------------------------------------------------------------------------------

19. QUARTERLY FINANCIAL INFORMATION

The following table presents unaudited quarterly financial
information for each of the Companys last eight quarters ended February 3, 2007 (unaudited, in thousands, except per share data). For more information on these matters, please refer to Note 2, Restatement of Consolidated Financial
Statements



|                              |  |                |        |             |   |             |  |                |        |  |                |        |   |                   |   |        |                |  |   |                   |   |  |   |       |   |  |   |        |  
|----------------------------- |  | -------------- | ------ | ----------- | - | ----------- |  | -------------- | ------ |  | -------------- | ------ | - | ----------------- | - | ------ | -------------- |  | - | ----------------- | - |  | - | ----- | - |  | - | ------ | -
|                              |  | Quarters Ended |       
|                              |  | Feb 3,2007     |        | Oct 28,2006 |   | Jul 29,2006 |  | Apr 29, 2006   |        |  | Jan 28, 2006   |        |   | Oct 29, 2005      |   |        | Jul 30, 2005   |  |   | Apr 30, 2005      |  
|                              |  |                |        |             |   |             |  | (Restated) (1) |        |  | (Restated) (1) |        |   | (Restated) (1)(2) |   |        | (Restated) (1) |  |   | (Restated) (1)(2) |  
|Net revenues                  |  | $              | 31,228 |             | $ | 25,055      |  | $              | 20,136 |  | $              | 14,799 |   |                   | $ | 10,487 |                |  | $ | 8,497             |   |  | $ | 7,961 |   |  | $ | 6,375  |  
|Gross profit                  |  |                | 16,005 |             |   | 12,038      |  |                | 8,962  |  |                | 7,430  |   |                   |   | 6,096  |                |  |   | 5,799             |   |  |   | 5,512 |   |  |   | 3,988  |  
|Income (loss) from operations |  |                | 4,623  |             |   | 2,697       |  |                | 68     |  |                | (1,530 | ) |                   |   | (865   | )              |  |   | (435              | ) |  |   | (347  | ) |  |   | (2,922 | )
|Net income (loss)             |  |                | 4,643  |             |   | 2,742       |  |                | 216    |  |                | (1,356 | ) |                   |   | (715   | )              |  |   | 1,167             |   |  |   | (254  | ) |  |   | (1,759 | )
|Net income (loss) per share:  |  |                |        |             |   |             |  |                |        |  |                |        |   |                   |   |        |                |  |   |                   |   |  |   |       |   |  |   |        |  
|Basic                         |  | $              | 0.20   |             | $ | 0.12        |  | $              | 0.01   |  | $              | (0.06  | ) |                   | $ | (0.03  | )              |  | $ | 0.05              |   |  | $ | (0.01 | ) |  | $ | (0.08  | )
|Diluted                       |  | $              | 0.18   |             | $ | 0.11        |  | $              | 0.01   |  | $              | (0.06  | ) |                   | $ | (0.03  | )              |  | $ | 0.05              |   |  | $ | (0.01 | ) |  | $ | (0.08  | )

---

|(1) | The unaudited selected financial data for the quarters ended April 29, 2006, January 28, 2006, October 29, 2005, July 30, 2005
and April 30, 2005 has been restated to reflect adjustments related to the stock option
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | restatement as more fully described in Note 2, Restatement of Consolidated Financial Statements, of the Notes to Consolidated Financial
Statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | During the first and third quarter of fiscal 2006, the Company recorded approximately $1.0 million and $1.5 million of long-term investment gains, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table presents the impact of the financial statement restatement adjustments on the Companys previously
reported consolidated statements of operations (unaudited, in thousands, except per share data):



|                              |  |                                       |        |   |             |   |        |             |  |   |             |   |  |             |       |   |  |   |        |  
|----------------------------- |  | ------------------------------------- | ------ | - | ----------- | - | ------ | ----------- |  | - | ----------- | - |  | ----------- | ----- | - |  | - | ------ | -
|                              |  | As Previously Reported Quarters Ended |       
|                              |  | Apr 29,2006                           |        |   | Jan 28,2006 |   |        | Oct 29,2005 |  |   | Jul 30,2005 |   |  | Apr 30,2005 |      
|Net revenues                  |  | $                                     | 14,799 |   |             | $ | 10,487 |             |  | $ | 8,497       |   |  | $           | 7,961 |   |  | $ | 6,375  |  
|Gross Profits                 |  |                                       | 7,669  |   |             |   | 6,284  |             |  |   | 5,831       |   |  |             | 5,540 |   |  |   | 4,113  |  
|Income (loss) from operations |  |                                       | (770   | ) |             |   | 302    |             |  |   | 79          |   |  |             | 38    |   |  |   | (1,899 | )
|Net income (loss)             |  |                                       | (562   | ) |             |   | 490    |             |  |   | 1,948       |   |  |             | 163   |   |  |   | (717   | )
|Net income (loss) per share:  |  |                                       |        |   |             |   |        |             |  |   |             |   |  |             |       |   |  |   |        |  
|Basic                         |  | $                                     | (0.03  | ) |             | $ | 0.02   |             |  | $ | 0.09        |   |  | $           |      |   |  | $ | (0.03  | )
|Diluted                       |  | $                                     | (0.03  | ) |             | $ | 0.02   |             |  | $ | 0.08        |   |  | $           |      |   |  | $ | (0.03  | )
|                              | 
|                              |  | Adjustments Quarters Ended            |       
|                              |  | Apr 29,2006                           |        |   | Jan 28,2006 |   |        | Oct 29,2005 |  |   | Jul 30,2005 |   |  | Apr 30,2005 |      
|Net revenues                  |  | $                                     |       |   |             | $ |       |             |  | $ |            |   |  | $           |      |   |  | $ |       |  
|Gross Profits                 |  |                                       | (239   | ) |             |   | (188   | )           |  |   | (32         | ) |  |             | (28   | ) |  |   | (125   | )
|Income (loss) from operations |  |                                       | (760   | ) |             |   | (1,167 | )           |  |   | (514        | ) |  |             | (385  | ) |  |   | (1,023 | )
|Net income (loss)             |  |                                       | (794   | ) |             |   | (1,205 | )           |  |   | (781        | ) |  |             | (417  | ) |  |   | (1,042 | )
|Net income (loss) per share:  |  |                                       |        |   |             |   |        |             |  |   |             |   |  |             |       |   |  |   |        |  
|Basic                         |  | $                                     | (0.03  | ) |             | $ | (0.05  | )           |  | $ | (0.04       | ) |  | $           | (0.01 | ) |  | $ | (0.05  | )
|Diluted                       |  | $                                     | (0.03  | ) |             | $ | (0.05  | )           |  | $ | (0.03       | ) |  | $           | (0.01 | ) |  | $ | (0.05  | )
|                              | 
|                              |  | As Restated Quarters Ended            |       
|                              |  | Apr 29,2006                           |        |   | Jan 28,2006 |   |        | Oct 29,2005 |  |   | Jul 30,2005 |   |  | Apr 30,2005 |      
|Net revenues                  |  | $                                     | 14,799 |   |             | $ | 10,487 |             |  | $ | 8,497       |   |  | $           | 7,961 |   |  | $ | 6,375  |  
|Gross Profit                  |  |                                       | 7,430  |   |             |   | 6,096  |             |  |   | 5,799       |   |  |             | 5,512 |   |  |   | 3,988  |  
|Income (loss) from operations |  |                                       | (1,530 | ) |             |   | (865   | )           |  |   | (435        | ) |  |             | (347  | ) |  |   | (2,922 | )
|Net income (loss)             |  |                                       | (1,356 | ) |             |   | (715   | )           |  |   | 1,167       |   |  |             | (254  | ) |  |   | (1,759 | )
|Net income (loss) per share:  |  |                                       |        |   |             |   |        |             |  |   |             |   |  |             |       |   |  |   |        |  
|Basic                         |  | $                                     | (0.06  | ) |             | $ | (0.03  | )           |  | $ | 0.05        |   |  | $           | (0.01 | ) |  | $ | (0.08  | )
|Diluted                       |  | $                                     | (0.06  | ) |             | $ | (0.03  | )           |  | $ | 0.05        |   |  | $           | (0.01 | ) |  | $ | (0.08  | )



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##### Table of Contents

The following table presents the impact of the financial statement restatement adjustments on the
Companys previously reported condensed consolidated balance sheets line items (unaudited, in thousands):



|                                           |  |                                       |         |   |             |   |         |             |  |   |             |   |  |             |         |   |  |   |         |  
|------------------------------------------ |  | ------------------------------------- | ------- | - | ----------- | - | ------- | ----------- |  | - | ----------- | - |  | ----------- | ------- | - |  | - | ------- | -
|                                           |  | As Previously Reported Quarters Ended |        
|                                           |  | Apr 29,2006                           |         |   | Jan 28,2006 |   |         | Oct 29,2005 |  |   | Jul 30,2005 |   |  | Apr 30,2005 |        
|Prepaid expenses and other current assets  |  | $                                     | 780     |   |             | $ | 1,001   |             |  | $ | 648         |   |  | $           | 603     |   |  | $ | 613     |  
|Total current assets                       |  |                                       | 42,214  |   |             |   | 37,034  |             |  |   | 33,119      |   |  |             | 28,697  |   |  |   | 28,319  |  
|Goodwill                                   |  |                                       | 4,493   |   |             |   |        |             |  |   |            |   |  |             |        |   |  |   |        |  
|Total assets                               |  |                                       | 55,531  |   |             |   | 39,959  |             |  |   | 36,329      |   |  |             | 33,954  |   |  |   | 33,676  |  
|Accrued liabilities and other              |  |                                       | 2,791   |   |             |   | 2,031   |             |  |   | 2,037       |   |  |             | 1,943   |   |  |   | 2,207   |  
|Total current liabilities                  |  |                                       | 11,823  |   |             |   | 5,709   |             |  |   | 4,011       |   |  |             | 4,090   |   |  |   | 4,191   |  
|Total liabilities                          |  |                                       | 12,080  |   |             |   | 6,044   |             |  |   | 4,426       |   |  |             | 4,581   |   |  |   | 4,756   |  
|Common stock                               |  |                                       | 102,535 |   |             |   | 91,131  |             |  |   | 89,618      |   |  |             | 89,034  |   |  |   | 88,737  |  
|Shareholder notes receivable               |  |                                       |        |   |             |   |        |             |  |   |            |   |  |             |        |   |  |   |        |  
|Accumulated deficit                        |  |                                       | (57,802 | ) |             |   | (57,239 | )           |  |   | (57,729     | ) |  |             | (59,677 | ) |  |   | (59,841 | )
|Total shareholders equity                 |  |                                       | 43,451  |   |             |   | 33,915  |             |  |   | 31,903      |   |  |             | 29,373  |   |  |   | 28,920  |  
|Total liabilities and shareholders equity |  | $                                     | 55,531  |   |             | $ | 39,959  |             |  | $ | 36,329      |   |  | $           | 33,954  |   |  | $ | 33,676  |  
|                                           | 
|                                           |  | Adjustments Quarters Ended            |        
|                                           |  | Apr 29,2006                           |         |   | Jan 28,2006 |   |         | Oct 29,2005 |  |   | Jul 30,2005 |   |  | Apr 30,2005 |        
|Prepaid expenses and other current assets  |  | $                                     | 137     |   |             | $ | 137     |             |  | $ |            |   |  | $           | 253     |   |  | $ | 253     |  
|Total current assets                       |  |                                       | 137     |   |             |   | 137     |             |  |   |            |   |  |             | 253     |   |  |   | 253     |  
|Goodwill                                   |  |                                       | 654     |   |             |   |        |             |  |   |            |   |  |             |        |   |  |   |        |  
|Total assets                               |  |                                       | 1,026   |   |             |   | 398     |             |  |   | 362         |   |  |             | 615     |   |  |   | 615     |  
|Accrued liabilities and other              |  |                                       | 4,035   |   |             |   | 3,636   |             |  |   | 2,789       |   |  |             | 2,617   |   |  |   | 2,580   |  
|Total current liabilities                  |  |                                       | 4,035   |   |             |   | 3,636   |             |  |   | 2,789       |   |  |             | 2,617   |   |  |   | 2,580   |  
|Total liabilities                          |  |                                       | 4,035   |   |             |   | 3,636   |             |  |   | 2,789       |   |  |             | 2,617   |   |  |   | 2,580   |  
|Common stock                               |  |                                       | 13,934  |   |             |   | 16,569  |             |  |   | 15,546      |   |  |             | 15,522  |   |  |   | 15,538  |  
|Shareholder notes receivable               |  |                                       | (58     | ) |             |   | (58     | )           |  |   | (58         | ) |  |             | (29     | ) |  |   | (29     | )
|Accumulated deficit                        |  |                                       | (16,421 | ) |             |   | (15,627 | )           |  |   | (14,422     | ) |  |             | (13,641 | ) |  |   | (13,224 | )
|Total shareholders equity                 |  |                                       | (3,009  | ) |             |   | (3,238  | )           |  |   | (2,427      | ) |  |             | (2,002  | ) |  |   | (1,965  | )
|Total liabilities and shareholders equity |  | $                                     | 1,026   |   |             | $ | 398     |             |  | $ | 362         |   |  | $           | 615     |   |  | $ | 615     |  
|                                           | 
|                                           |  | As Restated Quarters Ended            |        
|                                           |  | Apr 29,2006                           |         |   | Jan 28,2006 |   |         | Oct 29,2005 |  |   | Jul 30,2005 |   |  | Apr 30,2005 |        
|Prepaid expenses and other current assets  |  | $                                     | 917     |   |             | $ | 1,138   |             |  | $ | 648         |   |  | $           | 856     |   |  | $ | 866     |  
|Total current assets                       |  |                                       | 42,351  |   |             |   | 37,171  |             |  |   | 33,119      |   |  |             | 28,950  |   |  |   | 28,572  |  
|Goodwill                                   |  |                                       | 5,147   |   |             |   |        |             |  |   |            |   |  |             |        |   |  |   |        |  
|Total assets                               |  |                                       | 56,557  |   |             |   | 40,357  |             |  |   | 36,691      |   |  |             | 34,569  |   |  |   | 34,291  |  
|Accrued liabilities and other              |  |                                       | 6,826   |   |             |   | 5,667   |             |  |   | 4,826       |   |  |             | 4,560   |   |  |   | 4,787   |  
|Total current liabilities                  |  |                                       | 15,858  |   |             |   | 9,345   |             |  |   | 6,800       |   |  |             | 6,707   |   |  |   | 6,771   |  
|Total liabilities                          |  |                                       | 16,115  |   |             |   | 9,680   |             |  |   | 7,215       |   |  |             | 7,198   |   |  |   | 7,336   |  
|Common stock                               |  |                                       | 116,469 |   |             |   | 107,700 |             |  |   | 105,164     |   |  |             | 104,556 |   |  |   | 104,275 |  
|Shareholder notes receivable               |  |                                       | (58     | ) |             |   | (58     | )           |  |   | (58         | ) |  |             | (29     | ) |  |   | (29     | )
|Accumulated deficit                        |  |                                       | (74,223 | ) |             |   | (72,866 | )           |  |   | (72,151     | ) |  |             | (73,318 | ) |  |   | (73,065 | )
|Total shareholders equity                 |  |                                       | 40,442  |   |             |   | 30,677  |             |  |   | 29,476      |   |  |             | 27,371  |   |  |   | 26,955  |  
|Total liabilities and shareholders equity |  | $                                     | 56,557  |   |             | $ | 40,357  |             |  | $ | 36,691      |   |  | $           | 34,569  |   |  | $ | 34,291  |  



F-37



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##### Table of Contents

20. SUBSEQUENT EVENTS

Chief Financial Officer:

Effective February 5, 2007, Kit Tsui resigned from her position as the Companys Chief
Financial Officer and Secretary, and assumed the new role of Vice President of Planning and Administration. On the same day, the Company appointed Mark Kent to serve as its Chief Financial Officer and Secretary. From September 2004 to May 2006,
Mr. Kent served as the Chief Financial Officer of Transmeta Corporation, a semiconductor microprocessor company. From February 2001 to January 2004, Mr. Kent served as the Chief Financial Officer in Residence of Oak Investment Partners, a
venture capital firm, where he served as interim Chief Financial Officer for several portfolio companies. From April 1999 to January 2001, Mr. Kent served as Chief Financial Officer of Crossworlds Software, Inc., an integration software
company. From December 1994 to March 1999, Mr. Kent served as the Treasurer of LSI Logic Corporation, a semiconductor company.

Lease
Agreement:

On February 22, 2007, the Company entered into a new lease agreement for a 66,000 square foot facility in Milpitas,
California in which the Company intends to relocate its headquarters sometime before the expiration of the current lease. This new lease will commence on June 30, 2007 and expire in September 2012. The Company is obligated to pay a monthly base
rent plus common area maintenance and building operating expenses. The monthly base rent ranges from approximately $42,000 to $55,000, with free base rent for the initial three months.



F-38



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the
Registrant has duly caused this Amendment Number 1 to Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Milpitas, State of California, on the 8th day of August, 2007.



SIGMA DESIGNS, INC.By:

/s/    THINH Q. TRANThinh Q. TranChairman of the Board,President and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this Amendment
Number 1 to its Annual Report on Form 10-K has been signed below by the following persons in the capacities and on the dates indicated.



|                                |  |                                                                                             |  |               
|------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------
|Signature                       |  | Title                                                                                       |  | Date          
|                                |  |                                                                                            
|/S/ THINH Q. TRAN Thinh Q. Tran |  | Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer) |  | August 8, 2007
|                                |  |                                                                                            
|/S/ THOMAS E. GAY Thomas E. Gay |  | Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)          |  | August 8, 2007
|                                |  |                                                                                            
|* William J. Almon              |  | Director                                                                                    |  | August 8, 2007
|                                |  |                                                                                            
|* Julien Nguyen                 |  | Director                                                                                    |  | August 8, 2007
|                                |  |                                                                                            
|* Lung
C. Tsai                  |  | Director                                                                                    |  | August 8, 2007

|     |  |                               
|---- |  | ------------------------------
|     | 
|* By |  | /S/    THINH Q.
TRAN          
|     |  | Thinh Q. Tran Attorney-in-Fact



S-1



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##### Table of Contents

INDEX TO EXHIBITS



|              |  |                                                                                                                               |  |                                                      
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                   |  | Filed Herewith or Incorporated Herein by Reference
to
|              |  |                                                                                                                              
|23.1          |  | Consent of Independent Registered Public Accounting Firm (Armanino McKenna LLP)                                               |  | Filed herewith                                       
|              |  |                                                                                                                              
|31.1          |  | Certification of the President and Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a). |  | Filed herewith                                       
|              |  |                                                                                                                              
|31.2          |  | Certification of the Chief Financial Officer and Secretary pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a). |  | Filed herewith