Table of Contents





UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-K
 
 (Mark
One)
 x
                Annual Report pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of
      1934
 
 For
the fiscal year ended: January 31, 2009
 
 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
 
 SIGMA
DESIGNS, INC.
 (Exact
name of Registrant as specified in its charter)
 
 California
                  94-2848099(State or other jurisdiction
      of incorporation
      or organization)
                  (I.R.S.
      Employer Identification Number)1778
      McCarthy Blvd 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 registeredCommon
      Stock, no par value
                      
                      The
      NASDAQ Stock Market
LLC
 
 Securities
registered pursuant to Section 12(g) of the Act: None
 
 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.  x
 
 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   ̈            Smaller
reporting company   ̈
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
 
 Yes   ̈               No  x
 
 1
 Table of Contents
 The
aggregate market value of the registrant’s common stock, no par value, held by
non-affiliates of the registrant on August 2, 2008, the last business day of the
registrant’s most recently completed second fiscal quarter, was approximately
$433,890,122 based on the closing sale price of $17.21 per share on that
date.  Shares of common stock held by each executive officer, director
and shareholders known by the registrant to own 10% 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 26,604,647 shares of the Registrant’s Common Stock outstanding on March 13,
2009.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
  Items 10
(as to directors and Section 16(a) Beneficial Ownership Reporting Compliance),
11, 12, 13 and 14 of Part III incorporate by reference information from the
registrant’s proxy statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the Registrant’s
2009 Annual Meeting of Shareholders to be filed on or before May 29,
2009.
 
 2
 SigmaDesigns, Inc.
 2009
ANNUAL REPORT ON FORM 10-K
 TABLE
OF CONTENTS
  Page NoPART
      IItem 1.
                    Business
                    5Item 1A.
                    Risk Factors
                    14Item 1B.
                    Unresolved Staff Comments
                    25Item 2.
                    Properties
                    25Item 3.
                    Legal Proceedings
                    25Item 4.
                    Submission of Matters to a Vote of Security
      Holders
                    26PART
      IIItem 5.
                    Market for the Registrant’s Common Equity, Related
      Shareholder Matters and Issuer Purchases of Equity
      Securities
                    26Item 6.
                    Selected Consolidated Financial Data
                    26Item 7.
                    Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                    27Item 7A.
                    Quantitative and Qualitative Disclosures About Market
      Risk
                    42Item 8.
                    Financial Statements and Supplementary
    Data
                    44Item 9.
                    Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
                    72Item 9A.
                    Controls and Procedures
                    72Item 9B.
                    Other Matters
                    73PART
      IIIItem 10.
                    Directors, Executive Officers of the Registrant and
      Corporate Governance
                    73Item 11.
                    Executive Compensation
                    73Item 12.
                    Security Ownership of Certain Beneficial Owners and
      Management and Related Shareholder Matters
                    74Item 13.
                    Certain Relationships and Related Transactions and Director
      Independence
                    74Item 14.
                    Principal Accounting Fees and Services
                    74PART
      IVItem 15.
                    Exhibits and Financial Statement
    Schedules
                    75Signatures
                    76
  3
 Table of Contents
 FORWARD-LOOKING
INFORMATION
 
 Throughout
this report, we refer to Sigma Designs, Inc., together with its subsidiaries, as
“we,” “us,” “our,” “our company,” “Sigma” or “the Company.”
 
 This Form
10-K for the year ended January 31, 2009 contains forward-looking statements
that involve risks and uncertainties.  The forward-looking statements
are contained principally in the sections entitled "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business.”  These statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performances
or achievements expressed or implied by the forward-looking
statements.  Forward-looking statements include, but are not limited
to, statements about:
 
 •
                anticipated
      trends and challenges in our business and the markets in which we
      operate;
 
 •
                our
      expectations regarding our expenses and international
    sales;
 
 •
                plans
      for future products and services and for enhancements of existing products
      and services;
 
 •
                our
      plans relating to the VXP image processing and Z-wave technology that we
      recently acquired;
 
 •
                our
      research and development;
 
 •
                our
      ability to retain and attract
employees;
 
 •
                our
      anticipated cash needs and our estimates regarding our capital
      requirements and our needs for additional
  financing;
 
 •
                our
      anticipated growth strategies;
 
 •
                our
      intellectual property;
 
 •
                our
      ability to attract customers; and
 
 •
                sources
      of new revenue.
 
 In some
cases, you can identify forward-looking statements by terms such as "may,"
"might," "will," "objective," "intend," "should," "could," "can," "would,"
"expect," "believe," "estimate," "predict," "potential," "plan," or the negative
of these terms, and similar expressions intended to identify forward-looking
statements.  These statements reflect our current views with respect
to future events and are based on assumptions and subject to risks and
uncertainties.  Given these uncertainties, you should not place undue
reliance on these forward-looking statements.  We discuss many of
these risks in this 10-K in greater detail under the heading "Risk
Factors.”  Also, these forward-looking statements represent our
estimates and assumptions only as of the date of this 10-K.  Unless
required by U.S. federal securities laws, we do not intend to update any of
these forward-looking statements to reflect circumstances or events that occur
after the statement is made.
 
 You
should read this 10-K and the documents that we reference in this 10-K
completely and with the understanding that our actual future results may be
materially different from what we expect.  We qualify all of our
forward-looking statements by these cautionary statements.
 
 4
 Table of Contents
 PART
I
  ITEM1.          BUSINESS
 
 Overview
 
 We are a
leading fabless provider of highly integrated circuits including system-on-chip,
or SoC, solutions that are used to deliver multimedia entertainment throughout
the home.  We currently offer four distinct technologies that we
market as separate product lines: media processors, VXP video image processing,
Ultra-wideband devices and Z-wave devices.  Each of these technologies
also contributes to our fully integrated SoC offerings.
 
 Our media
processor product line represents a family of SoC solutions that combine our
semiconductors and software and are a critical component of multiple
high-growth, consumer applications that process digital video and audio content,
including internet protocol TV, or IPTV, connected media player, high definition
TVs, or HDTVs, and portable media players.  Our media processors
provide high definition digital video decoding for multiple compression
standards, graphics acceleration, audio decoding, a central processing unit, or
CPU, and display control.  Our software provides control of media
processing and system security management.  Together, our media
processor semiconductors and software form a complete SoC solution that we
believe provides our customers with a foundation from which they can quickly
develop feature-rich consumer entertainment products.
 
 Our VXP
video image processing product line provides a high performance silicon solution
that enables studio-quality video output for professional and prosumer
applications, such as audio video receivers, broadcast studios, digital cinema,
digital signage, front-projection home theatre televisions, HDTV, medical
imaging and video conferencing systems.
 
 Our
Ultra-wideband, or UWB, devices product line provides a high bandwidth radio
frequency, or RF, communication solution, based on the WiMedia standard, to
enable home networking and connectivity of high definition video signals using
wireless and coax mediums.
 
 Our
Z-wave devices product line provides a low-bitrate, low-power, low-cost RF
communication solution that provides for ubiquitous home control of security,
monitoring, and automation, or SMA.
 
 We
believe we are the leading provider of digital media processor SoCs for set-top
boxes in the IPTV market in terms of units shipped.  For set-top boxes
in the IPTV market, we believe we are currently the only provider qualified to
ship digital media processor SoCs based on the Microsoft IPTV
platform.  Our SoC solutions are used by leading IPTV set-top box
providers, such as Cisco Systems/Scientific Atlanta, Motorola, Netgem and
UTStarcom.  IPTV set-top boxes incorporating our SoC solutions are
deployed by telecommunications carriers globally, including carriers in Asia,
Europe and North America, such as AT&T, British Telecom, Deutsche Telekom
and Freebox.  We work closely with these carriers and set-top box
providers, as well as with systems software providers, such as Microsoft, to
design solutions that address the carriers' specific requirements regarding
features and performance.  Our media processor products are also used
by consumer electronics providers, such as D-Link, Netgear, Panasonic, Pioneer,
Sharp, Sony and Toshiba, in applications such as Blu-ray DVD players, HDTVs and
portable media players.  Our VXP products are one of the leading
solutions for studio-quality video image processing and are used by leading
industry participants such as Polycom, Sony and Panasonic.  Our UWB
and Z-wave devices product lines target emerging markets and, while they are in
production now, we have not yet experienced significant orders from our
customers.
 
 We have
been providing video and audio solutions for over 15 years.  We began
volume shipments in January 2006 of our SMP8630 series, our fourth
generation SoC solution serving the IPTV, connected media player and HDTV
markets and began initial shipments of our next generation SMP8650 series in
January 2009.
 
 We were
incorporated in California in January 1982.  Our principal offices are
located at 1778 McCarthy Blvd, Milpitas, California 95035, and our telephone
number at that location is (408) 262-9003.  Our website is located at
www.sigmadesigns.com; however, the information in, or that can be accessed
through, our website is not part of this report.  Our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to such reports are available, free of charge,
through the “Investors” section of our website as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the
SEC.  Additionally, copies of materials filed by us with the SEC may
be accessed at the SEC’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549 or at www.sec.gov.  For
information about the SEC’s Public Reference Room, contact 1-800-SEC-0330, send
an electronic message to SEC at publicinfo@sec.gov or
by sending a fax to 1-202-777-1027.
 
 Industry
Background
 
 The
growth of the Internet, proliferation of rich multimedia content, advances in
communications infrastructure, digital video and audio compression technologies
and improvements in television displays have resulted in significant demand for
the applications that we primarily target, which are IPTV, connected media
player and HDTVs.
 
 5
 Table of Contents
 The IPTV
market consists of consumer and commercial products that receive and distribute
streaming video using IP.  IPTV is emerging as an important consumer
multimedia application as it allows telecommunications carriers to deliver
advanced video services to consumers using existing telecommunications
infrastructure.  These carriers are actively pursuing the deployment
of IPTV because it enables them to offer attractive video, voice and data, or
triple play, services and increase their revenue per subscriber.  The
key challenge faced in delivering high-quality video content to end users across
existing copper-based telecommunications infrastructure is limited
bandwidth.  This challenge is addressed by advancing video compression
technologies along with advancing high speed communication technologies, which
together bridge the gap required to deliver home high definition video service
throughout the home.  Currently, IPTV set-top boxes use one of two
platforms based on software developed by either Microsoft or various Linux
providers, each of which offers certain advantages and
disadvantages.
 
 The
connected media player market consists of Blu-ray players, digital media
adapters and portable players.  Now that the Blu-ray format has become
the standard technology used for high definition DVD players, Blu-ray DVD
players are becoming increasingly popular among consumers.  This is
driven primarily by the superior video and audio quality they provide relative
to standard definition DVD players, the increasing availability of high
definition prerecorded content, the proliferation of HDTVs enabling display of
this content and the steadily declining prices of the Blu-ray DVD players and
the HDTVs themselves.  We believe the demand for digital media
adapters is continuing to gradually increase as these products are becoming
easier for consumers to use and increased bandwidth within homes facilitates
movie downloading.  Portable players remain popular in selected
foreign markets, but have yet to gain popularity in the U.S.
 
 The
proliferation of HDTVs is being driven by consumer demand for higher quality
video, increasing availability of higher definition content, improved television
displays, declining prices and various mandates to shift from analog to digital
broadcast worldwide.  This is creating an opportunity for SoC
suppliers to provide technology that enables consumers to enjoy multi-format
content on their HDTVs, including content from the Internet, stored video
sources and Blu-ray players.
 
 In
addition to the growing popularity of HDTVs with consumers, we believe demand
for improved video image processing continues to increase from both industrial
customers and consumers focused on high-end products, or
prosumers.  These industrial and prosumer customers are increasingly
expecting high-definition content that looks perfect, DVD content that looks
like high-definition, and online content that looks as enjoyable as
possible.  As a result, we believe standalone and integrated video
image processors are likely to be incorporated into an increasing number of
video-centric products over time.
 
 As
consumers begin to demand more from their viewing experience, we believe the
ability to deliver these technologies within the home will be critical to a
successful solution.  Ultra-wideband technology is one of several
competing wireless technologies designed to distribute high definition video and
audio throughout the home.  We believe eventually that consumers will
demand wireless functionality for high-end applications, such as high definition
content made available to essentially all locations within the home via high
speed two-way communications.
 
 The home
control and automation market continues to experience increasing consumer
awareness and adoption, although current worldwide penetration rates remain
low.  Much of the early adoption for this technology has come from
usage in new home construction.  We believe potential deployment by an
increasing number of larger system integrators and service providers in the
future could drive a broader cycle of adoption.  The functionality
provided by the low frequency, low power solutions in this market can offer
consumers cost efficient ways to monitor and conserve energy usage, protect
homes from theft and damage and improve the convenience of performing certain
household activities.
 
 The
consumer multimedia entertainment applications that we target increasingly
require video and audio data to be processed, transmitted, stored and displayed
in an efficient and secure manner, while simultaneously maintaining high
resolution, multi-channel video and audio and providing the end-user a variety
of interactive options.  In order to provide this increased
functionality in a cost-effective manner, manufacturers of consumer electronics
demand semiconductors that integrate more features on a single chip, as well as
reduce their costs, time-to-market and power consumption.  We believe
the challenge to manufacturers of digital media processor SoCs is to balance the
integration of more functionality with lower costs and shorter development
cycles.
 
 Our
Solutions
 
 We
provide SoC solutions that consist of highly integrated semiconductors and a
rich suite of software that enables real-time processing of digital video and
audio content, which we refer to as real-time software.  Our real-time
software is readily customizable by our customers and is interoperable with
multiple standard operating systems.  As a result, we believe our SoC
solutions enable consumer multimedia devices to be quickly brought to
market.  We believe IPTV set-top box and connected media player
designers and consumer device manufacturers select our SoC solutions because of
the compelling nature of their performance and ease of
integration.  Our highly integrated products have replaced a number of
single function semiconductors with a multi-function SoC, which significantly
improves performance and lowers power consumption and cost.
 
 6
 Table of Contents
 We
believe our SoCs have been able to deliver industry-leading performance in video
decoding, graphics acceleration and audio decoding, which allows our customers
to offer consumers a high-quality viewing experience.  We surround
this media processing functionality with a robust security management solution,
an on-chip CPU, a high-speed memory interface and complementary system
peripherals.  Our VXP line of video image processors complements this
core capability with studio-quality video.  Currently, these devices
can be used by our customers as either stand alone products or in combination
with products that we sell into our other target markets, such as our SoCs for
IPTV, connected media players and HDTV.  We plan to integrate our VXP
technology into our other SoCs designed primarily for other target
markets.  This SoC architecture with memory components establishes a
complete hardware development platform for our target
applications.  We also offer a suite of real-time software that
reduces the complexity of our SoC architecture and enables our customers to
quickly design consumer multimedia devices.  Our software includes an
industry standard operating system, embedded software tools and development kits
that enable our customers to easily port their software to run on our
processors.
 
 Our UWB
products are designed to provide connectivity solutions between high definition
video and audio sources, respectively, and HDTVs and speakers.  We
believe these connectivity solutions give consumers additional connection
choices with greater flexibility, and allow system integrators and service
providers an opportunity to reduce their time and cost of home networking
installations.  Our Z-Wave products are designed to offer consumers
advanced automation and control functionality, such as energy management,
security and environmental monitoring, within new and existing
homes.
 
 Our
Strengths
 
 We have
internally developed the core technologies, expertise and capabilities necessary
to provide a complete digital media processing SoC solution.  We
believe we have the following strengths:
 
 •
                Strong Position within IPTV
      and Connected Media Player Markets.  We believe we are
      the leading provider of digital media processor SoCs for set-top boxes in
      the IPTV market and a high quality provider of such SoCs in the connected
      media player market, in terms of units shipped.  For set-top
      boxes in the IPTV market, we believe we are currently the only provider
      qualified to ship digital media processing solutions based on the
      Microsoft IPTV platform.  We have built this position, in part,
      by being one of the first multimedia processing semiconductor providers to
      work extensively with IPTV set-top box manufacturers as well as
      telecommunications carriers to design solutions that address their
      specific feature and performance requirements.  Through this
      process, we have gained valuable insight into the challenges of our
      customers and such carriers and have gained visibility into their product
      development plans.  As a result, we believe we are able to
      provide our customers with a stable and reliable source of field-proven
      digital media processing solutions that our competitors cannot easily
      replicate.
 
 •
                Highly Integrated SoC
      Leveraged Across Multiple Consumer Applications.  We have
      developed a proprietary SoC architecture that allows us to integrate
      high-performance digital video and audio decoding and graphics processing
      with security management, memory control, a CPU and complementary
      peripheral interfaces.  Our SoCs can replace a number of single
      function semiconductors, which significantly improves performance and
      lowers power consumption and cost to our
      customers.  Furthermore, all of these functions can be performed
      synchronously at high processing speeds, typically up to 200
      Megahertz.  Our ability to integrate these multiple functions
      into a single, high-speed semiconductor allows us to satisfy many
      different consumer multimedia entertainment applications with the same
      hardware platform.
 
 •
                Differentiated Software
      Development Capabilities.  As a result of our 15 years of
      experience in delivering video and audio solutions, we have developed
      expertise in real-time software that synchronizes and controls the
      playback of video and audio from a variety of sources.  This
      software translates the complex silicon architecture of our SoCs into a
      much simpler application programming interface.  Using this
      interface, our customers are able to program under industry standard
      operating systems, enabling them to easily customize our solutions and
      reduce their time to market.  The majority of our engineering
      personnel are dedicated to software
development.
 
 •
                Multi-Standard
      Functionality.  Our SoC solutions are designed to support
      multiple industry standards that are used in the consumer applications we
      target.  For example, there are over a dozen different video and
      audio standards used in current consumer applications, including video
      standards, such as H.264, MPEG-4, MPEG-2, MPEG-1 and WMV9, and audio
      standards, such as Dolby, DTS and MP3.  Beyond this, there are a
      range of digital rights management security standards such as AES, RSA and
      MSDRM.  Additionally, there are two primary operating systems,
      Microsoft Windows CE and Linux, that each has its own middleware
      standards.  We support all of these
  standards.
 
 7
 Table of Contents
 •
                Breadth and Depth of
      Relationships within the IPTV Ecosystem.  In order to
      provide a complete system-level solution for the IPTV market, we have
      developed strong relationships with industry leaders that form the
      ecosystem required to deliver an end-to-end solution, from content
      creation to content display.  The IPTV ecosystem consists of
      providers of middleware, encoders and security solutions.  For
      middleware and server software, interoperability with products provided by
      Alcatel, Microsoft and Siemens, among others, is required.  For
      encoders, providers such as Harmonic, Tandberg and Modulus Video (now part
      of Motorola) must design products that operate compatibly with digital
      media processors such as ours.  For security solutions, there
      are also a range of providers, including Microsoft, Nagra and
      NDS.  Our strong position in the IPTV market has enabled us to
      develop and maintain relationships with these providers and offer
      solutions that are interoperable with their
  products.
 
 Our
Strategy
 
 Our
objective is to be the leading provider of digital media processing SoCs for
multiple consumer applications.  To achieve this objective, we expect
to continue to pursue the following strategies:
 
 •
                Extend our Leadership Position
      in the IPTV Market.  We have achieved a significant share
      in the IPTV market by providing our customers with highly integrated
      digital media processor SoCs that are readily customizable.  In
      addition, our solutions work effectively across different platforms and
      standards in this market.  Furthermore, we intend to target some
      of the largest cable Multiple System Operators as a part of their
      anticipated technology transition to tru2way and IPTV
      delivery.  Tru2way is a trademark of CableLabs, which is used to
      describe the delivery of interactive digital cable services over the cable
      video network.  We intend to provide the most compelling
      integrated digital media processing solutions to our customers and support
      multiple standards in this end market in order to maintain our high market
      share in the IPTV market as well as extend our product strengths into the
      next generation of set top boxes for the cable
  industry.
 
 •
                Enhance our Software
      Development Advantage.  We believe our software provides
      a suite of capabilities that are not currently available from our
      competitors.  Our software is integrated and embedded into our
      customers' products during their product design stage.  As a
      result, once we are designed into our customers' product, we believe it is
      difficult for our competitors to displace us.  We intend to
      leverage our software development capabilities and continue to invest
      significant resources in recruiting and developing additional expertise in
      the area of high-performance software
  development.
 
 •
                Increase Penetration in
      HDTVs.  We have successfully penetrated high-end HDTVs
      that, as a key feature, enable Internet connectivity and wired or wireless
      networking with media centers and other consumer electronics
      devices.  Our SoC solutions incorporate software that enables
      the interoperability of HDTVs with standards such as Intel's Viiv,
      Microsoft's Media Center Extender and the Digital Living Network
      Alliance.  We believe our software, which fully supports the
      various standards and technologies required to provide Internet
      connectivity and networking functionality, differentiates us from our
      competitors.  We intend to leverage our semiconductor and
      software expertise to develop additional SoC solutions targeted
      specifically towards HDTVs such that we are able to increase our
      penetration in the HDTV market as a
whole.
 
 •
                Expand into Complementary
      Technologies and Products.  We will continue to evaluate
      opportunities to expand, whether through acquisition or internal
      development, into technologies and products that are complementary to the
      applications we target.  In December 2008, we acquired Zensys
      Holdings Corporation, a privately held company that developed the Z-wave
      brand of RF devices that have demonstrated significant penetration into
      the home control market.  We believe that the Z-wave home
      control products will enable us to offer another layer to our value
      proposition to telecommunications and cable operators, thus helping us to
      differentiate our complete solution as competition in the marketplace
      increases.  In February 2008, we acquired certain assets of the
      VXP Group from Gennum Corporation.  We intend to leverage the
      VXP image processing technology and skilled VXP design team to expand into
      the professional video market and add broadcast studio quality capability
      to our product offerings for high-volume consumer applications in set-top
      boxes for IPTV, connected media player and HDTVs.  In 2006, we
      acquired Blue7, a developer of advanced UWB technologies, in order to
      extend our product offerings into wireless solutions for the home
      entertainment environment.  We believe that the combination of
      wireless communication technologies with our existing media processing SoC
      solutions will enable us to increase the value we deliver to our
      customers.
 
 •
                Leverage Existing Partner and
      Customer Relationships.  We have developed partnerships
      with standards and platform defining entities like Microsoft, which enable
      us to win new customers effectively.  We also have strong
      customer relationships with many IPTV set-top box and connected media
      player designers and consumer device manufacturers.  We also
      work closely with telecommunications carriers to understand their needs in
      advance of our customer’s product development cycle.  We intend
      to leverage our existing position with our partners and customers to
      identify and secure new market
opportunities.
 
 8
 Table of Contents
 Our
Products
 
 We offer
semiconductors along with real-time software that together enable digital media
processing solutions for consumer entertainment products.  We believe
our line of digital media processor SoCs features industry leading performance
and video/audio quality.  We complement our semiconductors with a
suite of real-time software that enables synchronous processing of video, audio
and graphics streams for a wide range of applications.  Our software
is currently available under Microsoft WinCE and Linux operating systems with
support for applications such as IP video streaming, video-on-demand, DVD
navigation, personal-video-recording, multi-window video and terrestrial
broadcast reception.  In addition, we provide reference platforms
designed around our silicon and software as a convenient basis for customer
development.
 
 The
following table sets forth the key performance features of, and target
applications for, selected SoCs in our suite of products:
  Product
      Series
                                                
                                                
                                                Key
      Performance Features
                                                
                                                Target
      Applications
 SMP8650
                                High
      performance, fully integrated SoC - our second generation secure digital
      media processor aimed at the IPTV and set-top box market.
                              
                              •
                              High-definition
      multi-stream video decoding of MPEG-4.10 (H.264), SMPTE 421M (VC-1), WMV9,
      MPEG-4.2 and MPEG-2
                              
                              •  IPTV
      set-top box
                                •  Cable
      set-top box
                                •  Digital
      media adapters•
                              Secure
      media processing with a wide variety of Digital Rights Management (DRM)
      and Conditional Access (CA)•
                              Programmable
      audio decoding with support for all audio formats•
                              High
      performance 2D graphics acceleration with alpha blending and
      scaling•
                              Display
      output control including de-interlacing, HDMI and NTSC/PAL•
                              Increased
      CPU performance (500 MHz) along with expanded system connectivity
      interfaces (Ethernet, USB, SATA, IR, IIC)SMP8640
                                High
      performance, fully integrated SoC - our second generation secure digital
      media processor aimed at the Blu-ray and set-top box
    market.
                              
                              •
                              High-definition
      multi-stream video decoding of MPEG-4.10 (H.264), SMPTE 421M (VC-1), WMV9,
      MPEG-4.2 and MPEG-2
                              
                              •  IPTV
      set-top box
                                •  Cable
      set-top box
                                •  Blu-ray
      players/recorders•
                              Secure
      media processing with a wide variety of Digital Rights Management (DRM)
      and Conditional Access (CA)•
                              Programmable
      audio decoding with support for all audio formats•
                              High
      performance 2D graphics acceleration with alpha blending and
      scaling•
                              Display
      output control including de-interlacing, HDMI and NTSC/PAL•
                              Increased
      CPU performance (667 MHz) along with expanded system connectivity
      interfaces (Ethernet, USB, SATA, IR, IIC, SD Card)SMP8630
                                High
      definition, fully integrated, secure digital media processor SoC—our
      leading product for IPTV and Blu-ray player markets
                              
                              •
                              High-definition
      multi-stream video decoding of MPEG-4.10 (H.264), SMPTE 421M (VC-1), WMV9,
      MPEG-4.2 and MPEG-2
                              
                              •  IPTV
      set-top box
                                •  Blu-ray
      players/recorders
                                •  HDTV•
                              Secure
      media processing with a wide variety of Digital Rights Management (DRM)
      and Conditional Access (CA)•
                              Programmable
      audio decoding with support for all audio formats•
                              High
      performance 2D graphics acceleration with alpha blending and
      scaling•
                              Display
      output control including de-interlacing, HDMI and NTSC/PAL•
                              Integrated
      high performance CPU and system connectivity interfaces (Ethernet, USB,
      IDE, IR, IIC)                                                9
 Table of Contents
 Product
      Series
                                                
                                                
                                                Key
      Performance Features
                                                
                                                Target
      Applications
 EM8620L
                                  High
      definition digital media processor SoC—our mid-range product for
      multi-format applications
                                
                                •
                                High-definition
      decoding of MPEG-4.10 (H.264), SMPTE 421M (VC-1), WMV9, MPEG-4.2 and
      MPEG-2
                                
                                •  IPTV
      set-top box
                                  •  Digital
      media adapters
                                  •  HDTV•
                                Selected
      DRM decryption support•
                                Programmable
      audio decoding with support for all formats•
                                2D
      graphics acceleration with alpha-blending and scaling•
                                Display
      output control including de-interlacing and NTSC/PAL•
                                Integrated
      CPU, Ethernet, and IDECoAir®
                                  UWB
      dual chip solution—for A/V streaming over ethernet and coax cable,
      currently in customer sampling phase
                                
                                •
                                Based
      on the WiMedia® Alliance Multi-band OFDM (MBOA) PHY v1.1 and MAC v1.0
      Specifications and is comprised of two devices: CoAir® RF IC (B7CW101) and
      CoAir® Baseband IC (B7CC401)
                                
                                •  IPTV
      set-top box
                                  •  Blu-ray
      players/recorders
                                  •  HDTV
                                  •  Digital
      media adapters
                                  •  PCs
      and peripherals•
                                Enables
      adding high-speed wireless, Ethernet, and coax access to the next
      generation of consumer electronics productsWindeo®
                                  UWB
      dual chip solution—for high bandwidth cable replacement applications,
      currently in customer sampling phase
                                
                                •
                                Based
      on the WiMedia® Alliance Multi-band OFDM (MBOA) PHY v1.1 and MAC v1.0
      Specifications and is comprised of two devices: Windeo® RF IC (B7CW101)
      and Windeo® Baseband IC (B7CW201)
                                
                                •  IPTV
      set-top box
                                  •  Blu-ray
      players/recorders
                                  •  HDTV
                                  •  Digital
      media adapters
                                  •  PCs
      and peripherals•
                                Enables
      adding high-speed wireless access to the next generation of consumer
      electronics productsGF9450
                                  VXP®
      Studio broadcast quality 12 bit or 10 bit dual input and single or dual
      output image processor aimed at high end and professional
      markets.
                                
                                •
                                Provides
      VXP® Visual Excellence image processing for up to 2k x 2k dual images with
      full processing on both image inputs and full picture in picture
      capability and for up to 4k x 2k single images
                                
                                •  High
      end HDTVs
                                  •  Home
      Theatre
                                  •  AV
      Receivers
                                  •  Broadcast
                                  •  Video
      Conferencing
                                  •  Medical
      Monitors
                                  •  Digital
      Cinema•
                                High
      quality motion and speed adaptive de-interlacing for progressive
      displays•
                                Advanced
      film mode detection and compensation•
                                Adaptive  2D
      and 3D noise reduction•
                                Compression
      artifact reduction for both Mosquito noise and block
    artifacts•
                                Adaptive
      detail enhancement with separate texture enhancement and
      control•
                                Adaptive
      contrast enhancement•
                                Frame
      rate conversion with full support for GENLOCK and frame-lock
      operation•
                                Comprehensive
      video and graphics standards support with automatic detection and
      adaptationZW0301
                                  Z-wave
      single-chip
                                  Wireless
      controller
                                
                                •
                                Enables
      adding Z-Wave® control and status capabilities to RF remote controls,
      set-top boxes, CE products, and home automation, home security monitoring
      and home energy management products.
                                
                                •
      RF remote control
                                  •
      Home automation
                                  •
      Home security
                                  •
      Home monitoring
                                  •
      Home energy management•
                                Wireless
      mesh technology eliminates RF dead spots in the home•
                                Low
      power consumption for long battery life•
                                Seamless
      interoperability between multiple vendors and applications•
                                Integration
      of home, entertainment, security and energy management
    control
 10
 Table of
Contents
  Our SoCs
accounted for 99%, 98% and 95% of our net revenue for fiscal 2009, 2008 and
2007, respectively.
 
 The
VXP9450 and Z-Wave product series were added to our product suite as a result of
the VXP and Zensys acquisitions completed in February 2008 and December 2008,
respectively.
 
 Complementing
our semiconductor platforms, the following software elements perform the
essential control and processing functions that are common to most consumer
entertainment devices:
 
 •
                Multimedia
      Library:    This software forms the basis of
      the on-chip media processing control of our SoCs and is essential to the
      operation of our SoCs.  We provide this software in the form of
      a large suite of interactive library functions that together create the
      real-time control center for all video, graphics and audio
      activities.  It performs the following primary functions: video
      decoding, graphics acceleration, display output, audio decoding, transport
      demultiplexing and sample playback
applications.
 
 •
                Security
      Management:    This software is designed to
      protect the application that incorporates our SoC and the digital content
      processed through the application from external attack.  It
      includes the following features: an XOS operating system that boots the
      system, controls the separate secure CPU, and provides a secure
      programming environment and X-task (security function) source code samples
      and tools to build customized security procedures, as well as sample keys
      and certificates.
 
 •
                Porting
      Adaptations:    This software is ported to one
      of our SoCs from a customer's general operating system and represents the
      customer's development environment.  It includes the following
      elements: operating system kernel, peripheral hardware drivers, such as
      Ethernet, USB and IDE and a bootloader that contains system initialization
      and related utilities.
 
 These
software elements, used with our hardware reference design boards, are packaged
into the following application specific development kits for each of our target
markets:
 
 •
                MicrosoftTV
      set-top box kit;
 
 •
                Linux-based
      IPTV set-top box kit;
 
 •
                Connected
      media player kit;
 
 •
                Digital
      media adapter kit;
 
 •
                Microsoft
      WinCE general development kit;
 
 •
                HDTV
      television kit; and
 
 •
                Portable
      media device kit.
 
 As legacy
products, we also offer a series of PC-based solutions, under the NetStream and
REALmagic Xcard brand names, that are sold into the commercial streaming and PC
add-in markets, respectively.
 
 Customers
 
 We sell
our products principally to designers and manufacturers and to distributors who,
in turn, sell to manufacturers.  Typically, when we sell to
distributors, they typically have already received an order for our products
directly from a manufacturer.  Our sales to our customers are
typically accomplished on a purchase order basis.
 
 For the
year ended January 31, 2009, MTC Singapore and Cisco Systems, Inc. accounted for
21% and 22%, respectively, of our net revenue.  For fiscal 2008, MTC
Singapore, Uniquest and Macnica accounted for 23%, 19% and 12%, respectively, of
our net revenue.  For fiscal 2007, Freebox and Uniquest accounted for
20% and 17%, respectively, of our net revenue.  Our distributor
customers, such as Macnica and Uniquest, in turn sell our products to multiple
designers and manufacturers that produce our target applications
devices.
 
 A
substantial portion of our product shipments are to customers outside of North
America.  In fiscal 2009, 2008 and 2007, billings to customers outside
of North America accounted for 94%, 95% and 89% of our net revenue,
respectively.  Revenue from our customers in Asia accounted for 56%,
69% and 53% of our net revenue in fiscal 2009, 2008 and 2007,
respectively.
 
 Sales
and Marketing
 
 We sell
our products worldwide through multiple channels, including our direct sales
force, manufacturer representatives and independent distributors strategically
located in many countries around the world.  Members of our direct
sales force are based in the United States, Hong Kong and
Singapore.  Our sales are also supported by representatives, resellers
and distributors in other key markets such as China, Japan and
Korea.
 
 11
 Table of Contents
 Our sales
cycle typically ranges from nine to eighteen months, but may last longer, and
depends on a number of factors, including the technical capabilities of the
customer, the customer's need for customization of our SoCs and the customer's
evaluation and qualification process.  We generally plan the
fabrication of our products based on customer forecasts.
 
 For our
larger volume designer and manufacturer customers, purchase orders for our
products are generally non-cancelable between four and twelve weeks before our
scheduled delivery dates and not subject to rescheduling within four weeks of
scheduled delivery dates.
 
 Competition
 
 The
market for digital media processors is highly competitive and is characterized
by rapid technological change, evolving standards and decreasing average selling
prices per unit.  We believe that the principal factors on which we
compete include time-to-market for new product introductions, product
performance, industry standards compatibility, software functionality, price,
and marketing and distribution resources.
 
 We
believe our primary competitors include Broadcom, Conexant Systems, Mediatek,
NEC, NXP Semiconductors, Panasonic, RealTek, and ST Microelectronics for our
media processors; Amimon, SiBeam and Entropic for our UWB products; Zigbee for
our Z-wave products; and Silicon Optix for our VXP products.  Many of
these companies have higher profiles, larger financial resources and greater
marketing resources than we do and may develop a competitive product that may
inhibit the wide acceptance of our products.  We believe that other
manufacturers are developing products that will compete directly with our
products in the near future.
 
 Research
and Development
 
 We focus
our development efforts primarily on three areas: video/audio decoder
technologies, secure media processing and fully integrated SoC
solutions.  To achieve and maintain technology leadership, we intend
to continue to make advancements in the areas of video and audio compression and
decompression, as well as wireless connectivity.  We expect these
advancements will include maintaining compatibility with emerging standards and
multiple platforms, and making improvements to the current
architecture.
 
 We have
invested, and expect that we will continue to invest, substantial resources to
research and development of performance enhancements, cost reductions and
additional features for future generations of Motion Picture Expert Group, or
MPEG and other multimedia technologies.  During fiscal 2009, 2008 and
2007, our research and development expenses were $43.6 million, $31.4 million
and $22.5 million, respectively.
 
 We have
assembled a large team of experienced engineers and technologists.  As
of January 31, 2009, we had 216 research and development
employees.  These personnel conduct all of our product development
along with the assistance of a number of independent contractors and
consultants.
 
 Intellectual
Property
 
 Our
success and future revenue growth depend, in part, on our ability to protect our
intellectual property.  We rely primarily on patent, copyright,
trademark and trade secret laws as well as agreements with customers, suppliers
and employees, to protect our proprietary technologies and
processes.
 
 As of
January 31, 2009, we held 68 issued patents and we had 32 patent applications
pending for our technology.  The termination dates of these patents
range from five to eighteen years.  We cannot assure you that more
patents will be issued or that such patents, even if issued, or our existing
patents will provide adequate protection for our competitive
position.  Although we intend to protect our rights vigorously, we
cannot assure you that these measures will be successful.
 
 Manufacturing
 
 We are a
fabless semiconductor company and we do not own or operate a fabrication,
packaging or testing facility.  We depend on third-party vendors to
manufacture, package and test our products.  By outsourcing
manufacturing, we are able to avoid the costs associated with owning and
operating our own manufacturing facility.  This allows us to focus our
efforts on the design and marketing of our products.
 
 12
 Table of Contents
 Semiconductor
fabrication
 
 We rely
on Taiwan Semiconductor Manufacturing Company, or TSMC, to fulfill substantially
all of our semiconductor manufacturing needs, including SoC
manufacturing.  We believe that our fabless manufacturing approach
provides us with the benefits of superior manufacturing capability as well as
flexibility to move the manufacturing, assembly and testing of our products to
those vendors that offer the best capability at an attractive
price.  Nevertheless, because we do not have a formal, long-term
pricing agreement with our third-party manufacturers, our costs and services are
subject to sudden price fluctuations based on the cyclical demand for
semiconductors.
 
 Assembly
and test
 
 Once our
products have been manufactured, we have them packaged and
tested.  Our products are shipped from TSMC and our other third-party
manufacturers to sort, assembly and test facilities where they are assembled
into finished semiconductor packages and tested.  We outsource all
packaging and testing of our products to third-party assembly and test
facilities, primarily to Advanced Semiconductor Engineering, Inc., or ASE, in
Taiwan.  Our products are designed to use low-cost, standard packages
and to be tested with widely available test equipment.
 
 Quality
assurance
 
 We are
committed to maintaining the highest level of quality in our
products.  We have designed and implemented a quality management
system that provides the framework for continual improvement of products,
processes and customer service to ensure customer satisfaction.  We
also rely on in-depth simulation studies, design review and verification during
our design phase, bench testing to perform design validation, product
reliability qualification to verify the product’s quality and manufacturing
testing when the products are in production.  To ensure consistent
product quality, reliability and yield, together with our manufacturing
logistics partners, we closely monitor the production cycle by reviewing
manufacturing process data from each wafer foundry and assembly
subcontractor.  Both TSMC and ASE have been awarded ISO 9000
certificates.
 
 Backlog
 
 The
amount of backlog at any date depends upon various factors, including the timing
of the receipt of orders, fluctuations in orders of existing product lines and
the introduction of any new lines.  Accordingly, we believe that the
amount of our backlog at any date is not a useful measure of our future
sales.
 
 Employees
 
 As of
January 31, 2009, we had 326 full-time employees worldwide, including 216 in
research and development, 43 in sales and marketing, 19 in operations and
quality assurance, and 48 in finance and administration.
 
 Our
future success will depend, in part, on our ability to continue to attract,
retain and motivate highly qualified technical, marketing, engineering and
management personnel, who are in great demand.  Our employees are not
represented by any collective bargaining unit and we have never experienced a
work stoppage.  We believe that our employee relations are
satisfactory.
 
 Executive
Officers of the Registrant
 
 The
following table sets forth certain information concerning our executive officers
as of April 1, 2009:
  Name
                              Age
                              PositionThinh
      Q. Tran
                              55
                              Chairman
      of the Board, President and Chief Executive OfficerThomas
      E. Gay III
                              60
                              Chief
      Financial Officer and SecretaryDavid
      Lynch
                              53
                              Senior
      Vice President of Sales and MarketingJacques
      Martinella
                              53
                              Vice
      President of EngineeringKenneth
      Lowe
                              53
                              Vice
      President of Strategic
Marketing
 
 Mr. Tran,
one of our founders, has served as our President and Chief Executive Officer and
as Chairman of our Board of Directors since February 1982.  Prior to
joining us, Mr. Tran was employed by Amdahl Corporation and Trilogy Systems
Corporation, both of which were involved in the IBM-compatible mainframe
computer market.
 
 13
 Table of Contents
 Mr. Gay
has served as our Chief Financial Officer and Secretary since June
2007.  From May 1998 to May 2007, Mr. Gay served as the Vice President
of Finance and Administration and Chief Financial Officer of Catalyst
Semiconductor, Inc., a memory and analog/mixed-signal semiconductor
company.  Prior to joining Catalyst Semiconductor, Inc., Mr. Gay held
positions at Wireless Access, Inc., a communications device manufacturing
company, where he was Controller, and Sanmina Corporation, a contract
manufacturer, where he was the Corporate Controller.
 
 Mr. Lynch
has served as our Senior Vice President of Sales and Marketing since September
2008, after joining us as Vice President and General Manager of our VXP Division
in February 2008.  Prior to this, Mr. Lynch worked at Gennum
Corporation, a semiconductor company, as Senior Vice President and General
Manager of Image Processing from August 2007 to February 2008,  Senior
Vice President and General Manager of the Video Products Division from February
2004 to August 2007 with the additional role of Chief Technology Officer added
in January 2007,  VP and General Manager of Video Products Division
from June 2000 to February 2004 and Vice President of Research and Development
from April 1994 to June 2000.  From 1978 to 1994, Mr. Lynch worked for
the semiconductor design group in Bell Northern Research in a variety of senior
engineering management and staff positions.
 
 Mr.
Martinella has served as our Vice President of Engineering since December
1995.  Prior to his current position Mr. Martinella served as our
Director of VLSI Engineering beginning in May 1994 when he joined
us.  From June 1990 to April 1994, Mr. Martinella served in
engineering and management positions at Weitek, a microchip
manufacturer.  In addition, Mr. Martinella was an engineer at National
Semiconductor, a semiconductor manufacturer, from June 1982 to June
1990.
 
 Mr. Lowe
has served as our Vice President of Strategic Marketing since December
2000.  He joined us in May 2000 as our Vice President of
Marketing.  From August 1998 to May 2000, Mr. Lowe served as the
Director of Multimedia Marketing for Cadence Design Systems, a design automation
software company.  From 1996 to 1998, Mr. Lowe served as the Vice
President of Marketing for Chrontel, Inc., a digital video semiconductor
company.  Prior to 1996, Mr. Lowe held various marketing management
positions at Sierra Semiconductor, Dataquest, Personal CAD Systems, Performix
and Gould-Biomation.  In the late 1980's, Mr. Lowe served as our
Product Marketing Director.
 
 There are
no family relationships among any of our directors and executive
officers.
 
 ITEM1A.          RISK
FACTORS
 
 If
any of the following risks actually occurs, our business, financial condition
and results of operations could be harmed.  In that case, the trading
price of our common stock could decline and you might lose all or part of your
investment in our common stock.  The risks and uncertainties described
below are not the only ones we face.  You should also refer to the
other information set forth in this 10-K, including our consolidated financial
statements and the related notes.  Additional risks and uncertainties
not presently known to us or that we currently deem immaterial may also impair
our business operations.
 
 Risks
Related to Our Business and Our Industry
 
 If
we do not successfully anticipate market needs and develop products and product
enhancements in a timely manner that meet those needs, or if those products do
not gain market acceptance, we may not be able to compete effectively and our
ability to generate revenue will suffer.
 
 We may
not be able to accurately anticipate future market needs or be able to develop
new products or product enhancements to meet such needs or to meet them in a
timely manner.
 
 Our
ability to develop and deliver new products successfully will depend on various
factors, including our ability to:
 
 •
                accurately
      predict market requirements and evolving industry
    standards;
 
 •
                accurately
      design new SoC products;
 
 •
                timely
      complete and introduce new product
designs;
 
 •
                timely
      qualify and obtain industry interoperability certification of our products
      and the equipment into which our   products will be
      incorporated;
 
 •
                ensure
      that our subcontractors have sufficient foundry, assembly and test
      capacity and packaging materials and achieve acceptable manufacturing
      yields;
 
 14
 Table of Contents
 •
                shift
      our products to smaller geometry process technologies to achieve lower
      cost and higher levels of design integration;
  and
 
 •
                gain
      market acceptance of our products and our customers'
    products.
 
 If we
fail to anticipate market requirements or to develop new products or product
enhancements to meet those needs in a cost-effective and timely manner, it could
substantially decrease market acceptance and sales of our present and future
products and we may be unable to attract new customers or retain our existing
customers, which would significantly harm our business and financial
results.
 
 Even if
we are able to anticipate, develop and commercially introduce new products and
enhancements, our new products or enhancements may not achieve widespread market
acceptance.  Any failure of our products to achieve market acceptance
could adversely affect our business and financial results.
 
 Our
industry is highly competitive and we may not be able to compete effectively,
which would harm our market share and cause our revenue to decline.
 
 The
markets in which we operate are extremely competitive and are characterized by
rapid technological change, continuously evolving customer requirements and
declining average selling prices.  We may not be able to compete
successfully against current or potential competitors.  Most of our
products compete with large semiconductor providers that have substantial
experience and expertise in video, audio and multimedia technology and in
selling to consumer equipment providers.  Many of these companies have
substantially greater engineering, marketing and financial resources than we
have.  As a result, our competitors may be able to respond better to
new or emerging technologies or standards and to changes in customer
requirements.  Further, some of our competitors are in a better
financial and marketing position from which to influence industry acceptance of
a particular industry standard or competing technology than we
are.  Our competitors may also be able to devote greater resources to
the development, promotion and sale of products, and may be able to deliver
competitive products at a lower price.  We also may face competition
from newly established competitors, suppliers of products based on new or
emerging technologies and customers who choose to develop their own
SoCs.  Additionally, some of our competitors operate their own
fabrication facilities or may have stronger manufacturing partner relationships
than we have.  We expect our current customers, particularly in the
IPTV and connected media player markets, to seek additional suppliers of SoCs
for inclusion in their products, which will increase competition and could
reduce our market share.  If we do not compete successfully, our
market share and net revenue could decline.
 
 We
may not be able to effectively manage our growth or develop our financial and
managerial control and reporting systems, and we may need to incur significant
expenditures to address the additional operational and control requirements of
our growth, either of which could harm our business and operating
results.
 
 To
continue to grow, we must continue to expand and improve our operational,
engineering, accounting and financial systems, procedures, controls and other
internal management systems.  This may require substantial managerial and
financial resources, and our efforts in this regard may not be successful. 
Our current systems, procedures and controls may not be adequate to support our
future operations.  For example, we recently implemented a new enterprise
resource management system.  If we fail to adequately manage our
growth, or to improve and develop our operational, financial and management
information systems, or fail to effectively motivate or manage our current and
future employees, the quality of our products and the management of our
operations could suffer, which could adversely affect our operating
results.
 
 To
remain competitive, we need to continue to transition our SoCs to increasingly
smaller sizes while maintaining or increasing functionality, and our failure to
do so may harm our business.
 
 We
periodically evaluate the benefits, on a product-by-product basis, of migrating
to more advanced technology to reduce the size of our SoCs.  The
smaller SoC size reduces our production and packaging costs, which enables us to
be competitive in our pricing.  We also continually strive to increase
the functionality of our SoCs, which is essential to competing effectively in
our target markets.  The transition to smaller geometries while
maintaining or increasing functionality requires us to work with our contractors
to modify the manufacturing processes for our products and to redesign some
products.  This effort requires considerable development investment
and a risk of reduced yields as a new process is brought to acceptable levels of
operating and quality efficiency.  In the past, we have experienced
some difficulties in shifting to smaller geometry process technologies or new
manufacturing processes, which resulted in reduced manufacturing yields, delays
in product deliveries and increased expenses.  We may face similar
difficulties, delays and expenses as we continue to transition our products to
smaller geometry processes, all of which could harm our relationships with our
customers, and our failure to do so would impact our ability to provide
competitive prices to our customers, which would have a negative impact on our
sales.
 
 15
 Table of Contents
 If
our third-party manufacturers do not achieve satisfactory yields or quality, our
relationships with our customers and our reputation will be harmed, which in
turn would harm our operating results and financial performance.
 
 The
fabrication of semiconductors is a complex and technically demanding
process.  Minor deviations in the manufacturing process can cause
substantial decreases in yields and, in some cases, cause production to be
stopped or suspended.  Although we work closely with our third-party
manufacturers to minimize the likelihood of reduced manufacturing yields, their
facilities have from time to time experienced lower than anticipated
manufacturing yields that have resulted in our inability to meet our customer
demand.  It is not uncommon for yields in semiconductor fabrication
facilities to decrease in times of high demand, in addition to reduced yields
that may result from normal wafer lot loss due to workmanship or operational
problems at these facilities.  When these events occur, especially
simultaneously, as happens from time to time, we may be unable to supply our
customers' demand.  Many of these problems are difficult to detect at
an early stage of the manufacturing process and may be time consuming and
expensive to correct.  Poor yields from the wafer foundries or
defects, integration issues or other performance problems in our products could
cause us significant customer relations and business reputation problems, or
force us to sell our products at lower gross margins and therefore harm our
financial results.
 If
we fail to achieve initial design wins for our products, we may be unable to
recoup our investments in our products and revenue could decline.
 
 We expend
considerable resources in order to achieve design wins for our products,
especially our new products and product enhancements, without any assurance that
a customer will select our product.  Once a customer designs a
semiconductor into a product, it is likely to continue to use the same
semiconductor or enhanced versions of that semiconductor from the same supplier
across a number of similar and successor products for a lengthy period of time
due to the significant costs and risks associated with qualifying a new supplier
and potentially redesigning the product to incorporate a different
semiconductor.  As a result, if we fail to achieve an initial design
win in a customer's qualification process, we may lose the opportunity for
significant sales to that customer for a number of its products and for a
lengthy period of time, or we would only be able to sell our products to these
customers as a second source, which usually means we would only be able to sell
a limited amount of product to them.  Also, even if we achieve new
design wins with customers, these manufacturers may not purchase our products in
sufficient volumes to recoup our development costs, and they can choose at any
time to stop using our products, for example, if their own products are not
commercially successful.  This may cause us to be unable to recoup our
investments in the development of our products and cause our revenue to
decline.
 
 We
base orders for inventory on our forecasts of our customers' demand and if our
forecasts are inaccurate, our financial condition and liquidity would
suffer.
 
 We place
orders with our suppliers based on our forecasts of our customers' demand. 
Our forecasts are based on multiple assumptions, each of which may introduce
errors into our estimates.  When the demand for our customers' products
increases significantly, we may not be able to meet demand on a timely basis and
we may need to expend a significant amount of time working with our customers to
allocate a limited supply and maintain positive customer relations.  If we
underestimate customer demand, we may forego revenue opportunities, lose market
share and damage our customer relationships.  Conversely, if we
overestimate customer demand, we may allocate resources to manufacturing
products that we may not be able to sell when we expect to or at all.  As a
result, we would have excess or obsolete inventory, resulting in a decline in
the value of our inventory, which would increase our cost of revenue and create
a drain on our liquidity.
 
 If
demand for our SoCs declines or does not grow, we will be unable to increase or
sustain our net revenue.
 
 We expect
our SoCs to account for a substantial majority of our net revenue for the
foreseeable future.  For fiscal 2009, sales of our SoCs represented
99% of our net revenue.  Even if the consumer electronic markets that
we target continue to expand, manufacturers of consumer products in these
markets may not choose to utilize our SoCs in their products.  The
markets for our products are characterized by frequent introduction of new
technologies, short product life cycles and significant price
competition.  If we or our customers are unable to manage product
transitions in a timely and cost effective manner, our net revenue would
suffer.  In addition, frequent technological changes and introduction
of next generation products may result in inventory obsolescence which would
increase our cost of revenue and adversely affect our operating
performance.  If demand for our SoCs declines or fails to grow or we
are unable to develop new products to meet our customers' demand, our net
revenue could be harmed
 
 The
complexity of our international operations may increase our operating expenses
and disrupt our business.
 
 We
transact business and have operations worldwide.  For example, we
derive a substantial portion of our net revenue from our customers outside of
North America and we plan to continue expanding our business in international
markets in the future.  For fiscal 2009, we derived 94% of our revenue
from customers outside of North America.  We also have significant
international operations, including a significant newly established operation in
Singapore, research and development facilities in France, Canada and Denmark and
a sales and distribution facility in Hong Kong.  As a result of our
international business, we are affected by economic, regulatory and political
conditions in foreign countries, including the imposition of government
controls, changes or limitations in trade protection laws, unfavorable changes
in tax treaties or laws, varying statutory equity requirement, difficulties in
collecting receivables and enforcing contracts, natural disasters, labor unrest,
earnings expatriation restrictions, misappropriation of intellectual property,
changes in import/export regulations, tariffs and freight rates, economic
instability, public health crises, acts of terrorism and continued unrest in
many regions and other factors, which could have a material impact on our
international revenue and operations. In particular, in some countries we may
experience reduced intellectual property protection.  Our results of
operations could also be adversely affected by exchange rate fluctuations, which
could increase the sales price in local currencies of our products in
international markets.  Overseas sales and purchases to date have been
denominated in U.S. dollars.  We do not currently engage in any
hedging activities to reduce our exposure to exchange rate
risks.  Moreover, local laws and customs in many countries differ
significantly from those in the United States.  We also face
challenges in staffing and managing our global operations.  If we are
unable to manage the complexity of our global operations successfully, our
financial performance and operating results could suffer.
 
 16
 Table of Contents
 The
average selling prices of semiconductor products have historically decreased
rapidly and will likely do so in the future, which could harm our revenue and
gross margins.
 
 The
semiconductor industry, in general, and the consumer electronics markets that we
target, specifically, are characterized by intense price competition, frequent
introductions of new products and short product life cycles, which can result in
rapid price erosion in the average selling prices for semiconductor
products.  A decline in the average selling prices of our products
could harm our revenue and gross margins.  The willingness of
customers to design our SoCs into their products depends to a significant extent
upon our ability to sell our products at competitive prices.  In the
past, we have reduced our prices to meet customer requirements or to maintain a
competitive advantage.  Reductions in our average selling prices to
one customer could impact our average selling prices to all
customers.  If we are unable to reduce our costs sufficiently to
offset declines in product prices or are unable to introduce more advanced
products with higher margins in a timely manner, we could experience declines in
our net revenue and gross margins.
 
 The
complexity of our products could result in unforeseen delays or expenses and in
undetected defects, which could damage our reputation with current or
prospective customers, adversely affect the market acceptance of new products
and result in warranty claims.
 
 Highly
complex products, such as those that we offer, frequently contain defects,
particularly when they are first introduced or as new versions are
released.  Our SoCs contain highly sophisticated silicon technology
and complex software.  In the past we have experienced, and may in the
future experience, defects in our products, both with our SoCs and the related
software products we offer.  If any of our products contain defects or
have reliability, quality or compatibility problems, our reputation may be
damaged and our customers may be reluctant to buy our products, which could harm
our ability to retain existing customers and attract new
customers.  In addition, these defects could interrupt or delay sales
or shipment of our products to our customers.  Manufacturing defects
may not be detected by the testing process performed by our
subcontractors.  If defects are discovered after we have shipped our
products, it could result in unanticipated costs, order cancellations or
deferrals and product recalls, harm to our reputation and a decline in our net
revenue, income from operations and gross margins.
 
 In
addition, our agreements with some customers contain warranty provisions, which
provide the customer with a right to damages if a defect is traced to our
products or if we cannot correct errors in our product reported during the
warranty period, and other limitations to our liability.  However, our
contractual limitations to our liability may be unenforceable in a particular
jurisdiction.  We do not have insurance coverage for any warranty or
product liability claims, and a successful claim could require us to pay
substantial damages.  A successful warranty or product liability claim
against us, or a requirement that we participate in a product recall, could have
adverse effects on our business results.
 
 We
depend on a limited number of customers and any reduction, delay or cancellation
of an order from these customers or the loss of any of these customers could
cause our revenue to decline.
 
 Our
dependence on a limited number of customers means that the loss of a major
customer or any reduction in orders by a major customer could materially reduce
our net revenue and adversely affect our results of operations.  We
expect that sales to relatively few customers will continue to account for a
significant percentage of our net revenue for the foreseeable
future.  We have no firm, long-term volume commitments from any of our
major customers and we generally accept purchase commitments from our customers
based upon their purchase orders.  Customer purchase orders may be
cancelled and order volume levels can be changed, cancelled or delayed with
limited or no penalties.  We have experienced fluctuations in order
levels from period to period and expect that we will continue to experience such
fluctuations and may experience cancellations in the future.  We may
not be able to replace the cancelled, delayed or reduced purchase orders with
new orders.  Any difficulty in the collection of receivables from key
customers could also harm our business.
 
 For
fiscal 2009, MTC Singapore and Cisco accounted for 21% and 22%, respectively, of
our net revenue.  For fiscal 2008, MTC Singapore, Uniquest and Macnica
accounted for 23%, 19% and 12%, respectively, of our net revenue.
 
 The
timing of our customer orders and product shipments can adversely affect our
operating results and stock price.
 
 Our net
revenue and operating results depend upon the volume and timing of customer
orders received during a given period and the percentage of each order that we
are able to ship and recognize as net revenue during each
period.  Customers may change their cycle of product orders from us,
which would affect the timing of our product shipments.  For example,
we experienced declines in orders from certain significant customers in the
first two quarters of fiscal 2009 compared to the third and fourth quarters of
fiscal 2008.  Any failure or delay in the closing of orders expected
to occur within a quarterly period, particularly from significant customers,
would adversely affect our operating results.  Further, to the extent
we receive orders late in any given quarter, we may not be able to ship products
to fill those orders during the same period in which we received the
corresponding order which could have an adverse impact on our operating results
for that period.
 
 17
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 We
may face intellectual property claims that could be costly to defend and result
in our loss of significant rights.
 
 The
semiconductor industry is characterized by frequent litigation regarding patent
and intellectual property rights.  We believe that it may be
necessary, from time to time, to initiate litigation against one or more third
parties to preserve our intellectual property rights.  From time to
time, we have received, and may receive in the future, notices that claim we
have infringed upon, misappropriated or misused other parties' proprietary
rights.  Any of the foregoing events or claims could result in
litigation.  Any such litigation could result in significant expense
to us and divert the efforts of our technical and management
personnel.  In the event of an adverse result in any such litigation,
we could be required to pay substantial damages, cease the manufacture, use and
sale of certain products or expend significant resources to develop
non-infringing technology or to obtain licenses to the technology that is the
subject of the litigation, and we may not be successful in such development or
in obtaining such licenses on acceptable terms, if at all.  In
addition, patent disputes in the electronics industry have often been settled
through cross-licensing arrangements.  Because we do not yet have a
large portfolio of issued patents, we may not be able to settle an alleged
patent infringement claim through a cross-licensing arrangement.
 
 We
rely upon patents, trademarks, copyrights and trade secrets to protect our
proprietary rights and if these rights are not sufficiently protected, it could
harm our ability to compete and to generate revenue.
 
 Our
ability to compete may be affected by our ability to protect our proprietary
information.  As of January 31, 2009, we held 68 patents and these
patents will expire within the next five to eighteen years.  These
patents cover the technology underlying our products.  We have filed
certain patent applications and are in the process of preparing
others.  We cannot assure you that any additional patents for which we
have applied will be issued or that any issued patents will provide meaningful
protection of our product innovations.  Like other semiconductor
companies, we rely primarily on trade secrets and technological know-how in the
conduct of our business.  We use measures such as confidentiality
agreements to protect our intellectual property.  However, these
methods of protecting our intellectual property may not be
sufficient.
 
 If
the growth of demand in the consumer electronics market does not continue, our
ability to increase our revenue could suffer.
 
 Our
business is highly dependent on developing sectors of the consumer electronics
market, including IPTV, connected media player, prosumer and industrial
audio/video and HDTVs.  The consumer electronics market is highly
competitive and is characterized by, among other things, frequent introductions
of new products and short product life cycles.  The consumer
electronics market may also be negatively impacted by a slowdown in overall
consumer spending.  The worldwide economy, generally, and consumer
spending, specifically, has significantly declined in recent months, which has
negatively impacted our target markets.  If our target markets do not
grow as rapidly or to the extent we anticipate, our business could
suffer.  We expect the majority of our revenue for the foreseeable
future to come from the sale of our SoC solutions for use in emerging consumer
applications.  Our ability to sustain and increase revenue is in large
part dependent on the continued growth of these rapidly evolving market sectors,
whose future is largely uncertain.  Many factors could impede or
interfere with the expansion of these consumer market sectors, including
consumer demand in these sectors, general economic conditions, other competing
consumer electronic products, delays in the deployment of telecommunications
video services and insufficient interest in new technology
innovations.  In addition, if market acceptance of the consumer
products that utilize our products does not occur as expected, our business
could be harmed.
 
 We
have a history of fluctuating operating results, including a net loss in fiscal
2006, and we may not be able to sustain or increase profitability in the future,
which may cause the market price of our common stock to decline.
 
 We have a
history of fluctuating operating results.  We reported net income of
$6.2 million in fiscal 2007, net income of $70.2 million in fiscal 2008 and net
income of $26.4 million in fiscal 2009.  To sustain or increase
profitability, we will need to successfully develop new products and product
enhancements and sustain higher revenue while controlling our cost and expense
levels.  In recent years, we made significant investments in our
product development efforts and have expended substantial funds to enhance our
sales and marketing efforts and otherwise operate our
business.  However, we may not realize the benefits of these
investments.  Although we were profitable in fiscal 2009, we may not
continue to be profitable.  For example, our net income decreased from
$70.2 million in fiscal 2008 to $26.4 million in fiscal 2009.  We may
incur operating losses in future quarterly periods or fiscal years, which in
turn could cause the price of our common stock to decline.
 
 18
 Table of Contents
 
 We
have engaged, and may in the future engage, in acquisitions of other businesses
and technologies, which could divert management's attention and prove difficult
to integrate with our existing business and technology.
 
 We
continue to consider investments in and acquisitions of other businesses,
technologies or products, to improve our market position, broaden our
technological capabilities and expand our product offerings.  For
example, we completed the acquisition of Zensys Holding Corporation in December
2008, the acquisition of certain assets and 44 new employees from the VXP Group
of Gennum Corporation in February 2008 and the acquisition of Blue7
Communications, or Blue7, in February 2006.  In the future, we may not
be able to acquire, or successfully identify, companies, products or
technologies that would enhance our business.  Once we identify a
strategic opportunity, the process to consummate a transaction could divert
management's attention from the operation of our business causing our financial
results to decline.
 
 Acquisitions
may require large one-time charges and can result in increased debt or
contingent liabilities, adverse tax consequences, additional stock-based
compensation expense, and the recording and later amortization of amounts
related to certain purchased intangible assets, any of which items could
negatively impact our results of operations.  In addition, we may
record goodwill in connection with an acquisition and incur goodwill impairment
charges in the future.
 
 We may
experience difficulties in integrating acquired
businesses.  Integrating acquired businesses involves a number of
risks, including:
 
 •
                potential
      disruption of our ongoing business and the diversion of management
      resources from other business
concerns;
 
 •
                unexpected
      costs or incurring unknown
liabilities;
 
 •
                difficulties
      relating to integrating the operations and personnel of the acquired
      businesses;
 
 •
                adverse
      effects on the existing customer relationships of acquired companies;
      and
 
 •
                adverse
      effects associated with entering into markets and acquiring technologies
      in areas in which we have little
experience.
 
 If we are
unable to successfully integrate the businesses we acquire, our operating
results could be harmed.
 
 The
recent global economic downturn could negatively affect our business, results of
operations and financial condition.
 
 Current
uncertainty in global economic conditions pose a risk to the overall economy as
consumers and businesses may defer purchases in response to tighter credit and
negative financial news, which could negatively affect demand for our products
and other related matters.  Consequently, demand for our products
could be different from our expectations due to factors including:
 
 •
                changes
      in business and economic conditions, including conditions in the credit
      market that could affect consumer
confidence;
 
 •
                customer
      acceptance of our products and those of our
  competitors;
 
 •
                changes
      in customer order patterns including order cancellations;
    and
 
 •
                changes
      in the level of inventory our customers are willing to
    hold.
 
 19
 Table of Contents
 There
could also be a number of secondary effects from the current uncertainty in
global economic conditions, such as insolvency of suppliers resulting in product
delays, an inability of our customers to obtain credit to finance purchases of
our products or a desire of our customers to delay payment to us for the
purchase of our products.  The effects, including those mentioned
above, of the current global economic environment could negatively impact our
business, results of operations and financial condition.
  Our
business may become subject to seasonality, which may cause our revenue to
fluctuate.
 
 Our
business may become subject to seasonality as a result of our target
markets.  We sell a significant number of our semiconductor products
into the consumer electronics market.  Our customers who manufacture
products for the consumer market typically experience seasonality in the sales
of their products, which in turn may affect the timing and volume of orders for
our SoCs.  Although we have not experienced seasonality to date in
sales of our products, due to the overall growth in demand for our semiconductor
products, we may, in the future, experience lower sales in our first fiscal
quarter and higher sales in our second fiscal quarter as a result of the
seasonality of demand associated with the consumer electronics markets into
which we sell our products.  As a result, our operating results may
vary significantly from quarter to quarter.
 
 Due
to the cyclical nature of the semiconductor industry, our operating results may
fluctuate significantly, which could adversely affect the market price of our
common stock.
 
 The
semiconductor industry is highly cyclical and subject to rapid change and
evolving industry standards and, from time to time, has experienced significant
downturns.  These downturns are characterized by decreases in product
demand, excess customer inventories and accelerated erosion of
prices.  These factors have caused, and could cause, substantial
fluctuations in our net revenue and in our operating results.  Any
downturns in the semiconductor industry may be severe and prolonged, and any
failure of this industry to fully recover from downturns could harm our
business.  The semiconductor industry also periodically experiences
increased demand and production capacity constraints, which may affect our
ability to ship products.  Accordingly, our operating results have
varied and may vary significantly as a result of the general conditions in the
semiconductor industry, which could cause our stock price to
decline.
 
 Our
sales cycle can be lengthy, which could result in uncertainty and delays in
generating net revenue.
 
 Because
our products are based on constantly evolving technologies, we have experienced
a lengthy sales cycle for some of our SoCs, particularly those designed for
set-top box applications in the IPTV market.  After we have delivered
a product to a customer, the customer will usually test and evaluate our product
with its service provider customer prior to the customer completing the design
of its own equipment that will incorporate our product.  Our customers
and the telecommunications carriers our customers serve may need three to more
than six months to test, evaluate and adopt our product and an additional three
to more than nine months to begin volume production of equipment that
incorporates our product.  Our complete sales cycle typically ranges
from nine to eighteen months, but could be longer.  As a result, we
may experience a significant delay between the time we increase expenditures for
research and development, sales and marketing efforts and inventory and the time
we generate net revenue, if any, from these expenditures.  In
addition, because we do not have long-term commitments from our customers, we
must repeat our sales process on a continual basis even for current customers
looking to purchase a new product.  As a result, our business could be
harmed if a customer reduces or delays its orders, chooses not to release
products incorporating our SoCs or elects not to purchase a new product or
product enhancements from us.
 
 20
 Table of Contents
 We
rely on a limited number of independent third-party manufacturers for the
fabrication, assembly and testing of our SoCs and the failure of any of these
third-party manufacturers to deliver products or otherwise perform as requested
could damage our relationships with our customers, decrease our sales and limit
our growth.
 
 We are a
fabless semiconductor company, and thus we do not own or operate a fabrication
or manufacturing facility.  We depend on independent manufacturers,
each of whom is a third-party manufacturer for numerous companies, to
manufacture, assemble and test our products.  We currently rely on
Taiwan Semiconductor Manufacturing Corporation, or TSMC, to produce
substantially all of our SoCs.  We rely on Advanced Semiconductor
Engineering, Inc., or ASE, to assemble, package and test substantially all of
our products.  These third-party manufacturers may allocate capacity
to the production of other companies' products while reducing product deliveries
or the provision of services to us on short notice, or they may increase the
prices of the products and services they provide to us with little or no
notice.  In particular, other clients that are larger and better
financed than we are or that have long-term agreements with TSMC or ASE may
cause either or both of them to reallocate capacity to those clients, decreasing
the capacity available to us.
 
 If we
fail to effectively manage our relationships with TSMC and ASE, if we are unable
to secure sufficient capacity at our third-party manufacturers' facilities or if
any of them should experience delays, disruptions or technical or quality
control problems in our manufacturing operations, or if we had to change or add
additional third-party manufacturers or contract manufacturing sites, our
ability to ship products to our customers could be delayed, our relationships
with our customers would suffer and our market share and operating results would
suffer. If our third-party manufacturers' pricing for the products and services
they provide increases and we are unable to pass along such increases to our
customers, our operating results would be adversely affected.  Also,
the addition of manufacturing locations or additional third-party subcontractors
would increase the complexity of our supply chain
management.  Moreover, all of our product manufacturing, assembly and
packaging is performed in Asian countries and is therefore subject to risks
associated with doing business in these countries, such as quarantines or
closures of manufacturing facilities due to the outbreak of viruses, such as
SARS, avian flu or any similar outbreaks.  Each of these factors could
harm our business and financial results.
  In
the event we seek or are required to use a new manufacturer to fabricate or to
assemble and test all or a portion of our SoC products, we may not be able to
bring new manufacturers on-line rapidly enough, which could damage our
relationships with our customers, decrease our sales and limit our
growth.
 
 We use a
single wafer foundry to manufacture substantially all of our products and a
single source to assemble and test substantially all of our products, which
exposes us to a substantial risk of delay, increased costs and customer
dissatisfaction in the event our third-party manufacturers are unable to provide
us with our SoC requirements.  Particularly during times when
semiconductor capacity is limited, we may seek to, and in the event that our
current foundry were to stop producing wafers for us altogether, we would be
required to, qualify one or more additional wafer foundries to meet our
requirements, which would be time consuming and costly.  In order to
bring these new foundries on-line, we and our customers would need to qualify
their facilities, which process could take as long as several
months.  Once qualified, these new foundries would then require an
additional number of months to actually begin producing SoCs to meet our needs,
by which time our perceived need for additional capacity may have passed, or the
opportunities we previously identified may have been lost to our
competitors.  Similarly, qualifying a new provider of assembly,
packaging and testing services would be a lengthy and costly process and, in
both cases, they could prove to be less reliable than our existing
manufacturers, which could result in increased costs and expenses as well as
delays in deliveries of our products to our customers.
 Changes
in our effective tax rate or tax liability may have an adverse effect on our
results of operations.
 
 As a
global company, we are subject to taxation in Singapore, the United States and
various other countries.  Significant judgment is required to
determine and estimate worldwide tax liabilities.  Any significant
change in our future effective tax rates could adversely impact our consolidated
financial position, results of operations, and cash flows.  Our future
effective tax rates may be adversely affected by a number of factors
including:
 
 •
                changes
      in tax laws in the countries in which we operate or the interpretation of
      such tax laws;
 
 •
                changes
      in the valuation of our deferred tax
assets;
 
 •
                increases
      in expenses not deductible for tax purposes, including write-offs of
      acquired in-process research and development and impairment of goodwill in
      connection with acquisitions;
 
 •
                changes
      in share-based compensation
expense;
 
 •
                changes
      in generally accepted accounting principles;
and
 
 •
                our
      ability to use our tax attributes such as research and development tax
      credits and net operating losses of acquired companies to the fullest
      extent.
 
 During
fiscal 2009, we established a foreign operating subsidiary in
Singapore.  We anticipate that our consolidated pre-tax income will be
subject to foreign tax at relatively lower tax rates when compared to the United
States federal statutory tax rate and, as a consequence, our effective income
tax rate is expected to be lower than the United States federal statutory
rate.  Our future effective income tax rates could be adversely
affected if tax authorities challenge our international tax structure or if the
relative mix of United States and international income changes for any
reason.  Accordingly, there can be no assurance that our income tax
rate will be less than the United States federal statutory rate.
 
 If
the recent worsening of credit market conditions continues or increases, it
could have a material adverse impact on our investment portfolio.
 
 Recent
U.S. sub-prime mortgage defaults have had a significant impact across various
sectors of the financial markets, causing global credit and liquidity related
difficulties.  The short-term funding markets experienced credit
issues during the second half of fiscal 2008 and continuing into fiscal 2009 and
fiscal 2010 to-date, leading to liquidity issues and failed auctions in the
auction rate securities (“ARS”) market.  If the global credit market
continues to deteriorate, the liquidity of our investment portfolio may be
impacted and we could determine that some of our investments are
impaired.  This could materially adversely impact our results of
operations and financial condition.
 
 21
 Table of Contents
 Included
in our marketable securities portfolio at January 31, 2009 were ARS that we
purchased for their par value, $43.0 million.  Subsequent to
February 2008, all auctions involving ARS have failed due to insufficient bids
from buyers.  If these auctions continue to fail and the credit
ratings of these investments deteriorate, the fair value of these ARS may
decline and we may incur impairment charges in connection with these securities,
which would negatively affect our reported earnings, cash flow and financial
condition.  Although our cash management advisor, UBS, has indicated
that absent other solutions to the limited market for our ARS, it will redeem
all these securities at par value upon our request after June 2010, there
is a risk that their intention may not be achieved for reasons outside our
control.
 
 Our
ability to develop, market and sell products could be harmed if we are unable to
retain or hire key personnel.
 
 Our
future success depends upon our ability to recruit and retain the services of
key executive, engineering, finance and accounting, sales, marketing and support
personnel.  The supply of highly qualified individuals, in particular
engineers in very specialized technical areas, or sales people specializing in
the semiconductor industry, is limited and competition for such individuals is
intense.  None of our officers or key employees is bound by an
employment agreement for any specific term.  The loss of the services
of any of our key employees, the inability to attract or retain key personnel in
the future or delays in hiring required personnel, particularly engineers and
sales people, and the complexity and time involved in replacing or training new
employees, could delay the development and introduction of new products, and
negatively impact our ability to market, sell or support our
products.
 
 Litigation
due to stock price volatility or other factors could cause us to incur
substantial costs and divert our management's attention and
resources.
 
 In the
past, securities class action litigation often has been brought against a
company following periods of volatility in the market price of its
securities.  Companies such as ours in the semiconductor industry and other
technology industries are particularly vulnerable to this kind of litigation due
to the high volatility of their stock prices.  While we are not aware of
any such contemplated class action litigation against us, we may in the future
be the target of securities litigation.  Any future lawsuits to which we
may become a party will likely be expensive and time consuming to investigate,
defend and resolve.  Such costs, which include investigation and defense,
the diversion of our management’s attention and resources, and any losses
resulting from these claims, could significantly increase our expenses and
adversely affect our profitability and cash flow.
 
 Our
ability to raise capital in the future may be limited and our failure to raise
capital when needed could prevent us from executing our growth
strategy.
 
 We
believe that our existing cash and cash equivalents, short-term and long-term
marketable securities will be sufficient to meet our anticipated cash needs for
at least the next 12 months.  The timing and amount of our working
capital and capital expenditure requirements may vary significantly depending on
numerous factors, including:
 
 •
                market
      acceptance of our products;
 
 •
                the
      need to adapt to changing technologies and technical
      requirements;
 
 •
                the
      existence of opportunities for expansion;
and
 
 •
                access
      to and availability of sufficient management, technical, marketing and
      financial personnel.
  If our
capital resources are insufficient to satisfy our liquidity requirements, we may
seek to sell additional equity securities or debt securities or obtain debt
financing.  In fiscal 2009, we announced a share repurchase program
under which our Board of Directors authorized us to repurchase up to 5.0 million
shares of our common stock.  During fiscal 2009, we used an aggregate
of $85.9 million to purchase 4.2 million shares of our common
stock.  The amount of cash we used for these repurchases could limit
our ability to execute our business plans and require us to raise additional
capital in the future in order to fund any repurchases or for other
purposes.  The sale of additional equity securities or convertible
debt securities would result in additional dilution to our
shareholders.  Additional debt would result in increased expenses and
could result in covenants that would restrict our operations.  We have
not made arrangements to obtain additional financing and there is no assurance
that financing, if required, will be available in amounts or on terms acceptable
to us, if at all.
 
 22
 Table of Contents
 We
reported material weaknesses in our controls over financial reporting in fiscal
2005 through 2007.  If we are unable to maintain effective internal
control over financial reporting, our ability to report our financial results on
a timely and accurate basis may be adversely affected, which in turn could cause
the market price of our common stock to decline.
 
 As of
January 31, 2009, our management, including our principal executive officer and
principal financial officer, assessed the effectiveness of our internal control
over financial reporting.  Based on this assessment, our management
determined that our internal control over financial reporting was effective as
of January 31, 2009.  However, prior to last fiscal year, we had
ongoing material weaknesses in our internal control over financial reporting
since the fiscal year ended January 31, 2005, the first year in which we were
required to evaluate our internal control over financial reporting under Section
404 of the Sarbanes-Oxley Act of 2002.  Further, in September 2006, we
announced that our historical financial statements should no longer be relied
upon as a result of our preliminary determination of an internal review relating
to our practices in administering stock option grants.  We continued to
have material weaknesses in our internal control over financial reporting, which
resulted from ineffective internal controls over financial reporting for the
year ended February 2, 2007.  In connection with our ongoing internal
control review procedures, we identified certain deficiencies in our internal
control over financial reporting.
 
 Effective
controls are necessary for us to provide reliable financial reports and
effectively prevent fraud.  If we cannot provide reliable financial reports
or prevent fraud, our operating results could be harmed and the market price of
our common stock could decline.  We cannot be certain that we will be able
to maintain adequate controls over our financial processes and reporting in the
future.  If we identify any material weaknesses in the future, our ability
to report our financial results on a timely and accurate basis may be adversely
affected.  In addition, if we cannot maintain effective internal control
over financial reporting and disclosure controls and procedures, investors may
lose confidence in our reported financial information, which could cause the
market price of our common stock to decline.
 
 The
review of our historical stock option granting practices and the restatement of
our prior financial statements may result in additional litigation, regulatory
proceedings and government enforcement actions, which could harm our business,
financial condition, results of operations and cash flows.
 
 Our
historical stock option granting practices and the related restatement of our
historical financial statements, which we completed in connection with the audit
of our financial statements for fiscal 2007, exposed us to greater risks
associated with litigation, regulatory proceedings and government enforcement
actions.  For more information regarding our recent litigation and
related inquiries, please see the section entitled "Legal Proceedings" under
Part I, Item 3.  We have provided the results of our internal review
and investigation of our stock option practices to the SEC, and in that regard
we have responded to informal requests for documents and additional
information.  While we do not believe that the SEC inquiry is still
active, we intend to continue to cooperate with the SEC and any other
governmental agency that may become involved in this matter.  We
cannot give any assurance regarding the outcomes from regulatory proceedings or
government enforcement actions relating to our past stock option
practices.  These matters could be time consuming, expensive and may
distract management from the conduct of our business.  Furthermore, if
we are subject to adverse findings in regulatory proceedings or government
enforcement actions, we could be required to pay damages or penalties or have
other remedies imposed, which could harm our business, financial condition,
results of operations and cash flows.
 
 Risks
Related to Our Common Stock
 
 Our
operating results are subject to significant fluctuations due to many factors
and any of these factors could adversely affect our stock price.
 
 Our
operating results have fluctuated in the past and may continue to fluctuate in
the future due to a number of factors, including:
 
 •
                new
      product introductions by us and our
competitors;
 
 •
                changes
      in our pricing models and product sales
mix;
 
 •
                unexpected
      reductions in unit sales and average selling prices, particularly if they
      occur precipitously;
 
 •
                expenses
      related to our compliance efforts with Section 404 of the Sarbanes-Oxley
      Act of 2002;
 
 •
                expenses
      related to implementing and maintaining a new enterprise resource
      management system and other information
  technologies;
 
 23
 Table of Contents
 •
                the
      level of acceptance of our products by our customers and acceptance of our
      customers' products by their end user
customers;
 
 •
                shifts
      in demand for the technology embodied in our products and those of our
      competitors;
 
 •
                the
      loss of one or more significant
customers;
 
 •
                the
      timing of, and potential unexpected delays in, our customer orders and
      product shipments;
 
 •
                inventory
      obsolescence;
 
 •
                write-downs
      of accounts receivable;
 
 •
                a
      significant increase in our effective tax rate in any particular period as
      a result of the exhaustion, disallowance or accelerated recognition of our
      net operating loss carryforwards or
otherwise;
 
 •
                an
      interrupted or inadequate supply of semiconductor chips or other materials
      included in our products;
 
 •
                technical
      problems in the development, ramp up, and manufacturing of products, which
      could cause shipping delays;
 
 •
                availability
      of third-party manufacturing capacity for production of certain
      products;
 
 •
                the
      impact of potential economic instability in the United States and
      Asia-Pacific region, including the continued effects of the recent
      worldwide economic slowdown; and
 
 •
                continuing
      impact and expenses related to our stock option review and its
      resolution.
 
 In
addition, the market prices of securities of semiconductor and other technology
companies have been volatile.  This volatility has significantly
affected the market prices of securities of many technology companies for
reasons frequently unrelated to the operating performance of the specific
companies.
 
 Accordingly,
you may not be able to resell your shares of common stock at or above the price
you paid.  In the past, we and other companies that have experienced
volatility in the market price of their securities have been, and in the future
we may be, the subject of securities class action litigation.
 
 Our
stock price has demonstrated volatility, and continued volatility in the stock
market may cause further fluctuations or decline in our stock
price.
 
 The
market for our common stock has been subject to significant volatility, which is
expected to continue.  For example, the high and low selling prices
per share of our common stock on the Nasdaq Global Market ranged from a high of
$49.62 on February 4, 2008 to a low of $6.93 on November 21, 2008 during fiscal
2009.  This volatility is often unrelated or disproportionate to our
operating performance.  These fluctuations, as well as general
economic and market conditions, could cause the market price of our common stock
to decline.
 
 If
securities or industry analysts do not publish research or reports about our
business, or if they issue an adverse opinion regarding our stock, our stock
price and trading volume could decline.
 
 The
trading market for our common stock is influenced by the research and reports
that industry or securities analysts publish about us or our
business.  If one or more of the analysts who cover us issue an
adverse opinion regarding our stock, our stock price would likely
decline.  If one or more of these analysts cease coverage of our
company or fail to regularly publish reports on us, we could lose visibility in
the financial markets, which in turn could cause our stock price or trading
volume to decline.
 
 24
 Table of Contents
 Provisions
in our organizational documents, our shareholders rights agreement and
California law could delay or prevent a change in control of our company that
our shareholders may consider favorable.
 
 Our
articles of incorporation and bylaws contain provisions that could limit the
price that investors might be willing to pay in the future for shares of our
common stock.  Our Board of Directors can authorize the issuance of
preferred stock that can be created and issued by our Board of Directors without
prior shareholder approval, commonly referred to as "blank check" preferred
stock, with rights senior to those of our common stock.  The rights of
the holders of our common stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that we may issue
in the future.  The issuance of preferred stock could have the effect
of delaying, deterring or preventing a change in control and could adversely
affect the voting power of your shares.  In addition, our Board of
Directors has adopted a rights plan that provides each share of our common stock
with an associated right to purchase from us one one-thousandth share of Series
D participating preferred stock at a purchase price of $58.00 in cash, subject
to adjustment in the manner set forth in the rights agreement.  The
rights have anti-takeover effects, in that they would cause substantial dilution
to a person or group that attempts to acquire a significant interest in our
company on terms not approved by our Board of Directors.  In addition,
provisions of California law could make it more difficult for a third party to
acquire a majority of our outstanding voting stock by discouraging a hostile
bid, or delaying or deterring a merger, acquisition or tender offer in which our
shareholders could receive a premium for their shares or a proxy contest for
control of our company or other changes in our management.
 
 ITEM1B.
                UNRESOLVED
      STAFF COMMENTS
 
 None.
 
 ITEM2.
                PROPERTIES
 
 We
currently lease an approximately 66,000 square foot facility in Milpitas,
California that is used as our headquarters.  The lease on this
facility commenced on June 30, 2007 and will expire in September
2012.  We also lease facilities for a sales office in Singapore and a
warehouse and sales office in Hong Kong.  Additionally, we lease
facilities for research and development in France, Canada and
Denmark.
 
 ITEM3.
                LEGAL
      PROCEEDINGS
 
 From time
to time, we are involved in claims and legal proceedings that arise in the
ordinary course of business.  We expect that the number and
significance of these matters will increase as our business
expands.  In particular, we could face an increasing number of patent
and other intellectual property claims as the number of products and competitors
in our industry grows.  Any claims or proceedings against us, whether
meritorious or not, could be time consuming, result in costly litigation,
require significant amounts of management time, result in the diversion of
significant operational resources, or require us to enter into royalty or
licensing agreements which, if required, may not be available on terms favorable
to us or at all.  Were an unfavorable outcome to occur against us,
there exists the possibility of a material adverse impact on our financial
position and results of operations for the period in which the unfavorable
outcome occurs, and potentially in future periods.
 
 Lawsuits
related to our historical stock option granting practices
 
 Certain
current and former directors and officers of the Company were named as
defendants in several shareholder derivative actions filed in the United States
District Court for the Northern District of California, which were 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 alleged 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
asserted 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
alleged that the individual defendants aided and abetted one another’s alleged
breaches of fiduciary duty and violated California Corporations Code section
25402 and brought claims for an accounting and rescission.  In the
State Action, plaintiffs also alleged that the individual defendants wasted
corporate assets.  Both Actions sought to recover unspecified money
damages, disgorgement of profits and benefits and equitable
relief.  The Federal Action also sought treble damages, rescission of
certain defendants’ option contracts, imposition of a constructive trust over
executory option contracts and attorney’s fees.  The Company was named
as a nominal defendant in both the Federal and State Actions; thus, no recovery
against the Company was sought.
 
 On May
28, 2008, the parties to both the Federal Action and the State Action executed a
definitive settlement agreement which, when approved, resulted in the dismissal
of both the Federal Action and the State Action.  On September 15,
2008, the Court entered an Order and Final Judgment approving the settlement and
dismissing the Federal Action with prejudice.  Pursuant to the
settlement agreement, after the Order and Final Judgment approving the
settlement was entered in the Federal Action, Plaintiff requested that the State
Action be dismissed with prejudice.  The Court granted this request on
September 22, 2008.  All amounts due under the settlement were accrued
as of February 2, 2008 and paid during the third quarter of fiscal
2009.
 
 25
 Table of Contents
 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 requested that the Company
voluntarily produce documents relating to, among other things, its stock option
practices.  The Company responded to the SEC's requests in July and
August of 2006 and has received no further requests since that
time.  While the Company has no reason to believe that the SEC inquiry
is still active, the Company intends to continue cooperating with the SEC should
the Company receive any additional requests.
 
 In May
2007, the IRS began an employment tax audit for calendar years 2004 and
2005.  The Company requested that calendar year 2006 also be
included in this audit cycle, and the IRS agreed.  The focus of the
IRS employment tax audit related to tax issues connected to its granting stock
options with exercise prices per share that were less than the fair market value
per share of the common stock underlying the option on the option's measurement
date for financial reporting purposes.  The Company recently settled
this IRS employment tax audit.  The Company paid the amounts due to
the IRS pursuant to that settlement in fiscal 2009.  The Company has
also reported these IRS adjustments to the California Employment Development
Department and has recently reached a settlement of the corresponding state tax
and interest adjustments.  The Company paid the State tax amounts due
under the settlement in March 2009, which were previously
accrued.  The Company does not expect that any further tax amounts
will be due under either settlement.
 
 In August
2007, the IRS began an income tax audit of fiscal
2005.  This audit was concluded in fiscal 2009 and did not
result in a material financial impact to our operations or financial
condition.
 
 ITEM4.
                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS
 
 No items
were submitted to a vote by our shareholders during the fourth quarter of our
fiscal year ended January 31, 2009.
 
 PART
II
 
 ITEM5.
                  MARKET
      FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY
SECURITIES
 
 Our
common stock trades on The NASDAQ Global Select under the trading symbol
“SIGM”.  The following table sets forth the high and low sales prices
per share of our common stock for each quarter in the last two fiscal
years.
 Fiscal 2009
                              
                              
                              Fiscal 2008High
                              
                              
                              Low
                              
                              
                              High
                              
                              
                              LowFirst
      fiscal quarter
                              
                              $
                              49.62
                              
                              
                              $
                              15.31
                              
                              
                              $
                              32.57
                              
                              
                              $
                              23.12Second
      fiscal quarter
                              
                              
                              26.10
                              
                              
                              
                              13.57
                              
                              
                              
                              34.00
                              
                              
                              
                              24.15Third
      fiscal quarter
                              
                              
                              20.60
                              
                              
                              
                              8.81
                              
                              
                              
                              60.65
                              
                              
                              
                              29.30Fourth
      fiscal quarter
                              
                              
                              11.85
                              
                              
                              
                              6.93
                              
                              
                              
                              73.00
                              
                              
                              
                              35.00
 
 As of
March 13, 2009, we had approximately 176 shareholders of record of our common
stock.
 
 We have
never paid cash dividends on our common stock and we do not plan to pay cash
dividends to our common shareholders in the foreseeable future.
 
 On
February 27, 2008, we announced that our Board of Directors had approved a share
repurchase program that authorized us to repurchase up to 2.0 million shares of
our common stock.  On March 18, 2008, we announced that our Board of
Directors had approved an increase of 3.0 million additional shares to the
program, resulting in a total amount authorized to be repurchased under the
share repurchase program of 5.0 million shares.  The share repurchase
program had a one-year term, and thus, terminated on March 17,
2009.  We purchased a cumulative total of approximately 4.2 million
shares of our common stock pursuant to the repurchase program for an aggregate
purchase price of $85.9 million at an average price of $20.50 per
share.  We did not repurchase any shares under this program for the
quarter ended January 31, 2009.
 
 ITEM6.          SELECTED
CONSOLIDATED FINANCIAL DATA
 
 The
following selected consolidated financial data should be read in conjunction
with our consolidated financial statements, the notes related thereto, and
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.  The consolidated statements of operations data for the
years ended January 31, 2009, February 2, 2008 and February 3, 2007, and
the consolidated balance sheets data as of January 31, 2009 and February 2, 2008
have been derived from and should be read in conjunction with our audited
consolidated financial statements and the notes thereto included elsewhere in
this Annual Report on Form 10-K.  The consolidated statements of
operations data for the years ended January 28, 2006 and January 29, 2005
and the consolidated balance sheets data as of February 3, 2007,
January 28, 2006 and January 29, 2005 are derived from
consolidated financial statements which are not included herein.
 
 26
 Table of Contents
 Reclassifications
have been made to prior year balances to conform to the current year
presentation.  For a complete description of matters affecting the
results in the tables below, see Note 1 to the “Notes to Consolidated Financial
Statements” in Item 8.
 Fiscal
      Years Ended(In
      thousands, except per share data)
                                              
                                              January
      31,
                                              
                                              
                                              February
      2,
                                              
                                              
                                              February
      3,
                                              
                                              
                                              January
      28,
                                              
                                              
                                              January
      29,2009
                                              
                                              
                                              2008
                                              
                                              
                                              2007
                                              
                                              
                                              2006
                                              
                                              
                                              2005Consolidated
      Statements of Operations Data:Net
      revenue
                                              
                                              $
                                              209,160
                                              
                                              
                                              $
                                              221,206
                                              
                                              
                                              $
                                              91,218
                                              
                                              
                                              $
                                              33,320
                                              
                                              
                                              $
                                              31,398Income
      (loss) from operations
                                              
                                              
                                              25,619
                                              
                                              
                                              
                                              57,301
                                              
                                              
                                              
                                              5,857
                                              
                                              
                                              
                                              (4,569
                                              )
                                              
                                              
                                              (356
                                              )Net
      income (loss)
                                              
                                              
                                              26,423
                                              
                                              
                                              
                                              70,209
                                              
                                              
                                              
                                              6,244
                                              
                                              
                                              
                                              (1,561
                                              )
                                              
                                              
                                              (125
                                              )Basic
      net income (loss) per share
                                              
                                              $
                                              0.98
                                              
                                              
                                              $
                                              2.73
                                              
                                              
                                              $
                                              0.28
                                              
                                              
                                              $
                                              (0.07
                                              )
                                              
                                              $
                                              (0.01
                                              )Diluted
      net income (loss) per share
                                              
                                              $
                                              0.95
                                              
                                              
                                              $
                                              2.46
                                              
                                              
                                              $
                                              0.24
                                              
                                              
                                              $
                                              (0.07
                                              )
                                              
                                              $
                                              (0.01
                                              )
  (In
      thousands)
                                              
                                              January
      31,
                                              
                                              
                                              February
      2,
                                              
                                              
                                              February
      3,
                                              
                                              
                                              January
      28,
                                              
                                              
                                              January
      29,2009
                                              
                                              
                                              2008
                                              
                                              
                                              2007
                                              
                                              
                                              2006
                                              
                                              
                                              2005Consolidated
      Balance Sheets Data:
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (Unaudited)Working
      capital
                                              
                                              $
                                              175,329
                                              
                                              
                                              $
                                              263,178
                                              
                                              
                                              $
                                              38,784
                                              
                                              
                                              $
                                              27,826
                                              
                                              
                                              $
                                              22,303Total
      assets
                                              
                                              
                                              330,947
                                              
                                              
                                              
                                              379,466
                                              
                                              
                                              
                                              76,084
                                              
                                              
                                              
                                              40,357
                                              
                                              
                                              
                                              35,553Total
      shareholders' equity
                                              
                                              
                                              305,250
                                              
                                              
                                              
                                              345,592
                                              
                                              
                                              
                                              52,972
                                              
                                              
                                              
                                              30,677
                                              
                                              
                                              
                                              27,781
 
 The
following table presents details of the total share-based compensation expense,
excluding tender offer payments associated with the adjustments to measurement
dates for option grants, that is included in each functional line item in the
consolidated statements of operations data above (in thousands):
 Fiscal
      Years EndedJanuary
      31,
                                            
                                            
                                            February
      2,
                                            
                                            
                                            February
      3,
                                            
                                            
                                            January
      28,
                                            
                                            
                                            January
      29,2009
                                            
                                            
                                            2008
                                            
                                            
                                            2007
                                            
                                            
                                            2006
                                            
                                            
                                            2005Supplemental
      Data on Share-based CompensationExpense:Cost
      of revenue
                                            
                                            $
                                            359
                                            
                                            
                                            $
                                            559
                                            
                                            
                                            $
                                            380
                                            
                                            
                                            $
                                            84
                                            
                                            
                                            $
                                            101Research
      and development
                                            
                                            
                                            5,294
                                            
                                            
                                            
                                            3,577
                                            
                                            
                                            
                                            2,815
                                            
                                            
                                            
                                            650
                                            
                                            
                                            
                                            595Selling
      and marketing
                                            
                                            
                                            2,115
                                            
                                            
                                            
                                            1,005
                                            
                                            
                                            
                                            825
                                            
                                            
                                            
                                            353
                                            
                                            
                                            
                                            344General
      and administrative
                                            
                                            
                                            4,905
                                            
                                            
                                            
                                            2,068
                                            
                                            
                                            
                                            1,246
                                            
                                            
                                            
                                            495
                                            
                                            
                                            
                                            436$
                                            12,673
                                            
                                            
                                            $
                                            7,209
                                            
                                            
                                            $
                                            5,266
                                            
                                            
                                            $
                                            1,582
                                            
                                            
                                            $
                                            1,476
 
 ITEM7.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
 
 You
should read the following discussion in conjunction with our consolidated
financial statements and related notes.  Except for historical
information, the following discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Exchange Act of 1933 and
Section 21E of the Securities Exchange Act of 1934.
 
 Overview
 
 We are a
leading fabless provider of highly integrated system-on-chip, or SoC, solutions
that are used to deliver multimedia entertainment throughout the
home.  We currently offer four distinct technologies that we market as
separate product lines: media processors, VXP video image processing,
Ultra-wideband devices and Z-wave devices.  Each of these technologies
also contributes to our fully integrated SoC offerings.  We target
five primary markets: IPTV, connected media players, prosumer and industrial
audio/video, HDTV and wireless.
 
 Our media
processor product line represents a family of SoC solutions that combine our
semiconductors and software and are a critical component of multiple
high-growth, consumer applications that process digital video and audio content,
including internet protocol TV, or IPTV, connected media player, high definition
TVs, or HDTVs, and portable media players.  Our media processors
provide high definition digital video decoding for multiple compression
standards, graphics acceleration, audio decoding, a central processing unit, or
CPU, and display control.  Our software provides control of media
processing and system security management.  Together, our media
processor semiconductors and software form a complete SoC solution that we
believe provides our customers with a foundation to quickly develop feature-rich
consumer entertainment products.  We target the IPTV, connected media
players and HDTV markets with our media processor products.
 
 27
 Table of Contents
 Our VXP
video image processing product line provides a high performance silicon solution
that enables studio-quality video output for professional and prosumer
applications, such as audio video receivers, broadcast studios, digital cinema,
digital signage, front-projection home theatre televisions, HDTV, medical
imaging and video conferencing systems.  We target the prosumer and
industrial audio/video market with our VXP image processing
products.
 
 Our
Ultra-wideband, UWB, devices product line provides a high bandwidth radio
frequency, or RF, communication solution, based on the WiMedia standard, to
enable home networking and connectivity of high definition video signals using
wireless and coax mediums.
 
 Our
Z-wave devices product line provides a low-bitrate, low-power, low-cost RF
communication solution that provides for ubiquitous home control of security,
monitoring, and automation, or SMA.  We target the wireless market
with our UWB devices and Z-wave devices.
 
 We
believe we are the leading provider of digital media processor SoCs for set-top
boxes in the IPTV market in terms of units shipped.  For set-top boxes
in the IPTV market, we believe we are currently the only provider qualified to
ship digital media processor SoCs based on the Microsoft IPTV
platform.  Our SoC solutions are used by leading IPTV set-top box
providers, such as Cisco Systems/Scientific Atlanta, Motorola, Netgem and
UTStarcom.  IPTV set-top boxes incorporating our SoC solutions are
deployed by telecommunications carriers globally, including carriers in Asia,
Europe and North America, such as AT&T, British Telecom, Deutsche Telekom
and Freebox.  We work closely with these carriers and set-top box
providers, as well as with systems software providers, such as Microsoft, to
design solutions that address the carriers' specific requirements regarding
features and performance.  Our media processor products are also used
by consumer electronics providers, such as D-Link, Linksys, Netgear, Panasonic,
Pioneer, Sharp and Sony, in applications such as Blu-ray DVD players, HDTVs and
connected media player.  Our VXP products are one of the leading
solutions for studio-quality video image processing and are used by leading
industry participants such as Polycom, Sony and Panasonic.  Our UWB
and Z-wave devices product lines target emerging markets and, while they are in
production now, we have not yet experienced significant orders from our
customers.
 
 Our
primary target markets are IPTV, connected media player, prosumer and industrial
audio/video, HDTV and wireless.  The IPTV set-top box market consists
of consumer and commercial products that distribute and receive streaming video
using internet protocol, or IP.  The connected media player market
consists primarily of Blu-ray DVD players, digital media adapters and portable
media devices that perform playback of digital media stored on optical or hard
disk formats.  The prosumer and industrial audio/video market consists
of studio quality audio/video receivers and monitors, digital projectors and
medical video monitors.  The HDTV market consists of digital
television sets offering high definition capability, including flat-panel and
projection devices.  The UWB wireless market consists of wireless HDAV
and speaker solutions and wireless home entertainment networking solutions over
coax.  The Z-Wave wireless market consists of a wide variety of home
control products such as thermostats, light switches and door
locks.  We also sell products into other markets such as the PC-based
add-in and connectivity devices markets.  We currently derive minor
revenues from sales of our products into these other markets.
 
 For
fiscal 2009 and 2008, we derived 99% and 98%, respectively, of our net revenue
from our SoC solutions.  Our SoC solutions consist of highly
integrated semiconductors and software that process digital video and audio
content.  Our net revenue from sales of our SoC solutions decreased
$10.6 million, or 5%, in fiscal 2009 compared to fiscal 2008.  This
decrease in our SoCs sales in fiscal 2009 was in part attributable to the
overall slowdown in the IPTV market as a result of macroeconomic
conditions.
 
 We do not
enter into long-term commitment contracts with our customers and receive
substantially all of our net revenue based on purchase orders.  We
forecast demand for our products based not only on our assessment of the
requirements of our direct customers, but also on the anticipated requirements
of the telecommunications carriers that our customers serve.  We work
with both our direct customers and these carriers to address the market demands
and the necessary specifications for our technologies.  However, our
failure to accurately forecast demand can lead to product shortages that can
impede production by our customers and harm our relationship with these
customers or lead to excess inventory, which could negatively impact our gross
margins in a particular period.
 
 Many of
our target markets are characterized by intense price competition.  In
addition, the semiconductor industry is highly competitive and, as a result, we
expect our average selling prices to decline over time.  However, on
occasion, we have reduced our prices for individual customer volume orders as
part of our strategy to obtain a competitive position in our target
markets.  The willingness of customers to design our SoCs into their
products depends to a significant extent upon our ability to sell our products
at competitive prices.  If we are unable to reduce our costs
sufficiently to offset any declines in product selling prices or are unable to
introduce more advanced products with higher margins in a timely manner, we
could see declines in our market share or gross margins.  We expect
our gross margins will vary from period to period due to changes in our average
selling prices, volume order discounts, mix of product sales, our costs, the
extent of development fees and provisions for inventory
obsolescence.
 
 28
 Table of Contents
 Share
Repurchase Program
 
 On
February 27, 2008, we announced that our Board of Directors had approved a share
repurchase program that authorized us to repurchase up to 2.0 million shares of
our common stock.  On March 18, 2008, we announced that our Board of
Directors had approved an increase of 3.0 million additional shares to the
program, resulting in a total amount authorized to be repurchased under the
share repurchase program of 5.0 million shares.  The share repurchase
program had a one-year term, and thus, terminated on March 17,
2009.  We purchased a cumulative total of approximately 4.2 million
shares of our common stock pursuant to the repurchase program for an aggregate
purchase price of $85.9 million at an average price of $20.50 per
share.  The most recent repurchase was transacted on July 7,
2008.
 
 Critical
Accounting Policies and Estimates
 
 The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires us to
make judgments, assumptions and estimates that affect the amounts reported in
the consolidated financial statements and accompanying notes.  Note 1
of the notes to consolidated financial statements describes the significant
accounting policies and methods used in the preparation of the consolidated
financial statements.  We consider the accounting policies described
below to be our critical accounting policies.  These critical
accounting policies are impacted significantly by judgments, assumptions, and
estimates used in the preparation of the consolidated financial statements and
actual results could differ materially from the amounts reported based on these
policies.
 
 Revenue
recognition:  We derive our revenue primarily from three
principal sources: product sales, product development contracts and service
contracts.  We generally recognize revenue 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 collectability is reasonably assured.
 
 Revenue
from product sales to OEMs, distributors and end users are generally recognized
upon shipment, as shipping terms are predominantly FOB shipping point, except
that revenue is deferred when we cannot reasonably estimate the amount of
returns or where collectability is not assured.  In those situations,
revenue is recognized when collection subsequently becomes probable and returns
are estimable.  Allowances for sales returns, discounts and warranty
costs are recorded at the time that the associated revenue is
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, Software Revenue
Recognition.  We offer post-contract customer support (“PCS”)
on a contractual basis for additional fees, typically with 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.  Development costs related to product
development agreements are classified as cost of revenue.
 
 Revenue
from service contracts consist of fees for providing engineering support
services and are recognized ratably over the contract term as services are
provided.  Expenses related to support service revenue are included in
cost of revenue.
 
 Income
taxes:Deferred income taxes
reflect the net tax effects of any temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, and any 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, Accounting for Income
Taxes.
 
 Under
this method, deferred income taxes are recognized for tax credits and net
operating losses available for carry-forwards and significant temporary
differences.  Deferred tax assets and liabilities are classified as
current or non-current based upon the classification of the related asset or
liability in the financial statements or the expected timing of their reversal
if they do not relate to a specific asset or liability.  A valuation
allowance is provided to reduce the amount of deferred tax asset if it is
considered more likely than not that some portion of, or all of the deferred tax
assets will not be realized.  Current income taxes are provided for in
accordance with the laws and regulations applicable to the entity as enacted by
the relevant tax authorities.
 
 29
 Table of Contents
 In July
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, Accounting for
Uncertainty in Income
Taxes – An
Interpretation of FASB Statement No. 109 (“FIN 48”).  FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with SFAS 109 and prescribes a
recognition threshold and measurement attributes for financial statement
disclosure of tax positions taken or expected to be taken on a tax
return.  Under FIN 48, the impact of an uncertain income tax position
on the income tax return must be recognized as the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing
authority.  An uncertain income tax position will not be recognized if
it has less than a 50% likelihood of being sustained.  Additionally,
FIN 48 provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition.  We adopted the provisions of FIN 48 on February 4, 2007,
the beginning of its fiscal 2008.
 
 Valuation of
inventories:  Inventories are
stated at the lower of standard cost, which approximates an actual cost on a
first-in, first-out basis or market value.  We evaluate our ending
inventories for excess quantities and obsolescence on a quarterly
basis.  This evaluation includes analysis of historical and forecasted
sales levels by product.  A provision is recorded for inventories on
hand in excess of forecasted demand.  In addition, we will write off
inventories that are considered obsolete.  Obsolescence is determined
from several factors, including competitiveness of product offerings, market
conditions and product life cycles.  Increases to the allowance for
excess and obsolete inventory are charged to cost of revenue.  At the
point of the loss recognition, a new, lower-cost basis for that inventory is
established, and subsequent changes in facts and circumstances do not result in
the restoration or increase in that newly established cost basis.  If
this lower-costed inventory is subsequently sold, the related allowance is
matched to the movement of related product inventory, resulting in lower costs
and higher gross margins for those products.
 
 Valuation
of Goodwill and Intangible Assets:  We review goodwill and intangible
assets with indefinite lives for impairment annually and whenever events or
changes in circumstances indicate the carrying value of goodwill may not be
recoverable in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 142,Goodwill and Other
Intangible Assets(“SFAS 142”).  Purchased intangible assets with finite useful
lives are amortized using the straight-line method over their estimated useful
lives and are reviewed for impairment under SFAS No. 144,Accounting for the
Impairment of Disposal of Long-Lived Assets(“SFAS 144”).  Determining the fair value of a reporting unit is
judgmental in nature and involves the use of significant estimates and
assumptions.  These estimates and assumptions include revenue growth
rates and forecasted operating margins used to calculate projected future cash
flows, risk-adjusted discount rates, future economic and market conditions and
determination of appropriate market comparables.  We base our fair
value estimates on assumptions we believe to be reasonable.  Actual
future results may differ from those estimates.
 
 Share-based
compensation:  Upon adoption of SFAS No. 123R, Share-Based Payment (“SFAS
123R”), as of January 29, 2006, we reassessed our equity compensation valuation
method and related assumptions.  Our determination of the fair value
of share-based payment awards on the date of grant utilizes an option-pricing
model, and is impacted by our common stock price as well as a change in
assumptions regarding a number of highly complex and subjective
variables.  These variables include, but are not limited to, our
expected common stock price volatility over the term of the option awards, as
well as the projected employee option exercise behaviors (expected period
between stock option vesting date and stock option exercise
date).  Option-pricing models have been developed for use in
estimating the value of traded options that have no vesting or hedging
restrictions and are fully transferable.  Because employee stock
options have certain characteristics that are significantly different from
traded options, and changes in the subjective assumptions can materially affect
the estimated fair value, in our opinion, the existing Black-Scholes
option-pricing model may not provide an accurate measure of the fair value of
employee stock options.  Although the fair value of employee stock
options is determined in accordance with SFAS 123R using an option-pricing
model, that value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction.
 
 Share-based
compensation expense recognized in our consolidated statements of operations for
fiscal 2007, 2008 and 2009 included a combination of payment awards granted
prior to January 29, 2006 and payment awards granted subsequent to January 29,
2006.  For share-based payment awards granted prior to
January 29, 2006, we attribute the value of share-based compensation,
determined under SFAS 123R, to expense using the accelerated multiple-option
approach.  Share-based compensation expense included in fiscal 2007,
2008 and 2009 includes the impact of estimated forfeitures.  SFAS 123R
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates.  For the periods prior to fiscal 2007, we accounted for
forfeitures as they occurred.  The adoption of SFAS 123R requires us
to reflect the net cumulative impact of estimating forfeitures in the
determination of period expense by reversing the previously recognized
cumulative compensation expense related to those forfeitures, rather than
recording forfeitures when they occur as previously permitted.  We did
not record this cumulative impact upon adoption, as the amount was
insignificant.  Stock options granted in periods prior to January 29,
2006 were measured based on SFAS 123 requirements, whereas stock options
granted subsequent to January 29, 2006 were measured based on SFAS 123R
requirements.
 
 30
 Table of Contents
 Valuation of
marketable securities:  Our marketable
securities include auction rate securities, or ARS, corporate commercial paper
and bonds and US agency notes.  We classify our marketable securities
as available-for-sale and report them at fair value with the related unrealized
gains and losses included in accumulated other comprehensive
income.  We monitor all our marketable securities for impairment and
if these securities are reported to have a decline in fair value, use
significant judgment to identify events or circumstances that would likely have
a significant adverse effect on the future value of each investment including:
(i) the nature of the investment; (ii) the cause and duration of any
impairment; (iii) the financial condition and future prospects of the
issuer; (iv) for securities with a reported decline in fair value, our ability
to hold the security for a period of time sufficient to allow for any
anticipated recovery of fair value; (v) the extent to which fair value may
differ from cost; and  (vi) a comparison of the income generated by
the securities compared to alternative investments.  We recognize an
impairment charge if a decline in the fair value of our marketable securities is
judged to be other-than-temporary.
 
 At
January 31, 2009, we held nine auction rate securities with a cost and par value
of $43.0 million.  Auction rate securities are bought and sold in the
marketplace through a bidding process sometimes referred to as a “Dutch
auction.”  Historically, the fair value of our ARS has been determined
by the frequent auction periods, generally every 28 days, which provided
liquidity at par value for these investments.  However, subsequent to
February 2008, all auctions involving such securities held by us have
failed.  The result of a failed auction is that these ARS continue to
pay interest in accordance with their terms at each respective auction date;
however, liquidity of the securities will continue to be limited until there is
a successful auction, the issuer redeems the securities, the securities mature
or until such time as other markets for these ARS develop.  We cannot
be certain regarding the amount of time it will take for an auction market or
other markets to develop for these securities.  In October 2008, our
cash investment advisor, UBS, acknowledged our acceptance of its proposal of a
comprehensive settlement agreement, in which all the ARS currently in our
portfolio could be redeemed at par value.  The offer to redeem will be
at our option during a two year period beginning in June 2010.  The
offer also gives UBS the discretion to buy any or all of these securities from
us at par value at any time.  Additionally, the proposed solution by
UBS to the lack of liquidity of our ARS included a commitment effective October
2008 through June 2010 to loan an amount up to 75% of the par value of the
ARS.  The interest charged on such loan would be equal to the
proportional amount of interest being paid by the issuers of the ARS borrowed
against.  At January 31, 2009, UBS provided an estimated value for the
nine ARS of approximately $37.6 million, which reflects an unrealized loss of
$5.4 million from our original purchase price.  Our management has not
adopted UBS’ estimated value of our ARS for the reasons described
below.
 
 We have
reviewed the prospectuses for each of the nine ARS in our investment portfolio
as of January 31, 2009 and determined that the unprecedented disruption in the
auction process and resulting pattern of interest payments was in accordance
with their established rules of operation under these
circumstances.  The default mechanism called for in the operating
rules of these instruments is designed to adjust their interest payments to a
limit based on the income generated by their underlying student
loans.  The most significant consequences of this mechanism are the
preservation of their AAA credit rating while adjusting to a continuing stream
of interest payments to the security holders at a rate correlating to
contemporary credit market rates.
 
 As a
result of this review, we reached the conclusion that the securities do have a
strong underlying principle value and that any potential adjustment in their
carrying value would be based upon our ability to endure their lack of
liquidity, the degree of certainty of continuing interest payments and the rate
of return on these securities.  Given that we expect considerable
liquidity from our other assets, foresee continuing positive cash flow and have
accepted our investment advisor’s offer to purchase all of our ARS at par value
in June 2010, we do not consider the remaining possible liquidity risk and UBS
default risk to be significant enough to justify a reduction in the carrying
value.  The remaining valuation factor that we considered was the rate
of return evidenced by the interest received.  We used a discounted
cash flow calculation that reached a valuation that was similar to other of our
recent investments with comparably high credit ratings.
 
 As a
result of this judgment process and in accordance with the various accounting
pronouncements in this area, we reached the conclusion that the carrying value
of our ARS has not been impaired and that we have no expectation of any material
adverse impact on our future results of operations, liquidity, or capital
resources associated with holding these securities.
  At
January 31, 2009, all of our ARS are classified as long-term marketable
securities and as Level 3 assets in accordance with SFAS No. 157, Fair Value Measurements
(“SFAS 157”), as their valuation requires substantial judgment and estimation of
factors that are not currently observable in the market due to the lack of
trading in the securities.  If different assumptions were used for the
various inputs to the valuation approach including, but not limited to,
assumptions involving the estimated lives of the ARS, the estimated cash flows
over those estimated lives, and the estimated discount rates, applied to those
cash flows, the estimated fair value of these investments could be significantly
lower than the fair value we determined as of January 31, 2009.
 
 31
 Table of Contents
 Litigation and
settlement costs:  From time to
time, we are involved in disputes, litigation and other legal
proceedings.  We defend these matters
aggressively.  However, there are many uncertainties associated with
any litigation, and we cannot assure you that these actions or other third party
claims against us will be resolved without costly litigation and/or substantial
settlement charges.  If any of these events were to happen, our
business, financial condition, results of operations and cash flows could be
materially and adversely affected.  We record a charge equal to at
least the minimum estimated liability for litigation costs or loss contingency
only when both of the following conditions are met: (i) information available
prior to issuance of the financial statements indicates that it is probable that
an asset had been impaired or a liability had been incurred at the date of the
financial statements and (ii) the range of loss can be reasonably
estimated.  However, the actual liability in any such litigation may
be materially different from our estimates, which could result in the need to
record additional expenses.
 
 Accounts
receivable:  We defer recognition of revenue and the related
receivable when we cannot estimate whether collectability is reasonably assured
at the time products and services are delivered to our customer.  We
also provide allowances for bad debt and sales returns.  In
establishing our allowance for bad debt we review the customer's payment history
and information regarding their credit worthiness.  In establishing
our allowance for sales returns, we make estimates of potential future returns
of products for which revenue has been recognized in the current period,
including analyzing historical returns, current economic trends and changes in
customer demand and acceptance of our products.  In fiscal 2009, 2008
and 2007, we recorded provisions for sales returns, discounts and bad debt in
the total amounts of $0.9 million, $0.6 million and $30,000,
respectively.  If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments, or
future product returns increased, additional allowances may be
required.
 
 Results
of Operations
 
 The
following table is derived from our selected consolidated financial data and
sets forth our historical operating results as a percentage of net revenue for
each of the fiscal years indicated (in thousands):
 Years
      EndedJanuary
      31,
                                                  
                                                  
                                                  % of
                                                  
                                                  
                                                  February
      2,
                                                  
                                                  
                                                  % of
                                                  
                                                  
                                                  February
      3,
                                                  
                                                  
                                                  % of2009
                                                  
                                                  
                                                  Net
      Revenue
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  Net
      Revenue
                                                  
                                                  
                                                  2007
                                                  
                                                  
                                                  Net
      RevenueNet
      revenue
                                                  
                                                  $
                                                  209,160
                                                  
                                                  
                                                  
                                                  100%
                                                  
                                                  
                                                  $
                                                  221,206
                                                  
                                                  
                                                  
                                                  100%
                                                  
                                                  
                                                  $
                                                  91,218
                                                  
                                                  
                                                  
                                                  100%Cost
      of revenue
                                                  
                                                  
                                                  108,606
                                                  
                                                  
                                                  
                                                  52%
                                                  
                                                  
                                                  
                                                  108,408
                                                  
                                                  
                                                  
                                                  49%
                                                  
                                                  
                                                  
                                                  46,783
                                                  
                                                  
                                                  
                                                  51%Gross
      profit
                                                  
                                                  
                                                  100,554
                                                  
                                                  
                                                  
                                                  48%
                                                  
                                                  
                                                  
                                                  112,798
                                                  
                                                  
                                                  
                                                  51%
                                                  
                                                  
                                                  
                                                  44,435
                                                  
                                                  
                                                  
                                                  49%Operating
      expenses:Research
      and development
                                                  
                                                  
                                                  43,558
                                                  
                                                  
                                                  
                                                  21%
                                                  
                                                  
                                                  
                                                  31,384
                                                  
                                                  
                                                  
                                                  14%
                                                  
                                                  
                                                  
                                                  22,515
                                                  
                                                  
                                                  
                                                  25%Sales
      and marketing
                                                  
                                                  
                                                  12,101
                                                  
                                                  
                                                  
                                                  6%
                                                  
                                                  
                                                  
                                                  10,226
                                                  
                                                  
                                                  
                                                  5%
                                                  
                                                  
                                                  
                                                  7,841
                                                  
                                                  
                                                  
                                                  9%General
      and administrative
                                                  
                                                  
                                                  17,705
                                                  
                                                  
                                                  
                                                  8%
                                                  
                                                  
                                                  
                                                  13,887
                                                  
                                                  
                                                  
                                                  6%
                                                  
                                                  
                                                  
                                                  8,222
                                                  
                                                  
                                                  
                                                  9%Acquired
      in-process research and development
                                                  
                                                  
                                                  1,571
                                                  
                                                  
                                                  
                                                  1%
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Total
      operating expenses
                                                  
                                                  
                                                  74,935
                                                  
                                                  
                                                  
                                                  36%
                                                  
                                                  
                                                  
                                                  55,497
                                                  
                                                  
                                                  
                                                  25%
                                                  
                                                  
                                                  
                                                  38,578
                                                  
                                                  
                                                  
                                                  43%Income
      from operations
                                                  
                                                  
                                                  25,619
                                                  
                                                  
                                                  
                                                  12%
                                                  
                                                  
                                                  
                                                  57,301
                                                  
                                                  
                                                  
                                                  26%
                                                  
                                                  
                                                  
                                                  5,857
                                                  
                                                  
                                                  
                                                  6%Interest
      income and other income, net
                                                  
                                                  
                                                  5,698
                                                  
                                                  
                                                  
                                                  3%
                                                  
                                                  
                                                  
                                                  5,782
                                                  
                                                  
                                                  
                                                  3%
                                                  
                                                  
                                                  
                                                  815
                                                  
                                                  
                                                  
                                                  1%Income
      before income taxes
                                                  
                                                  
                                                  31,317
                                                  
                                                  
                                                  
                                                  15%
                                                  
                                                  
                                                  
                                                  63,083
                                                  
                                                  
                                                  
                                                  29%
                                                  
                                                  
                                                  
                                                  6,672
                                                  
                                                  
                                                  
                                                  7%Provision
      for (benefit from) income taxes
                                                  
                                                  
                                                  4,894
                                                  
                                                  
                                                  
                                                  2%
                                                  
                                                  
                                                  
                                                  (7,126
                                                  )
                                                  
                                                  
                                                  3%
                                                  
                                                  
                                                  
                                                  428
                                                  
                                                  
                                                  
                                                  —Net
      income
                                                  
                                                  $
                                                  26,423
                                                  
                                                  
                                                  
                                                  13%
                                                  
                                                  
                                                  $
                                                  70,209
                                                  
                                                  
                                                  
                                                  32%
                                                  
                                                  
                                                  $
                                                  6,244
                                                  
                                                  
                                                  
                                                  7%
 
 Net
revenue
 
 Our net
revenue for fiscal 2009 decreased approximately $12.0 million, or 5%, compared
to fiscal 2008.  This decrease in revenue for fiscal 2009 was
primarily due to an approximate 10% decline in average selling prices of our
SoCs which was partially offset by an increase in SoC units
shipped.  The decline in average selling prices was primarily the
result of certain customers achieving cumulative volume sales targets during the
year on purchases of our mature SMP8630 series SoC products.  This
decline in average selling prices was not offset by the increase in SoC units
shipped during fiscal 2009 compared to fiscal 2008 due to a reduction in
inventory levels in our customers supply chains.  Our net revenue for
fiscal 2008 increased approximately $130.0 million, or 143%, compared to fiscal
2007.  This increase in revenue for fiscal 2008 was primarily
attributable to increased sales of our SoCs into the IPTV and connected media
player markets.
 
 Net
revenue by target market
 
 We sell
our products into five primary markets, which are the IPTV market, the connected
media player market, the prosumer and industrial audio/video market, the HDTV
market and the wireless market.  We also sell our products, to a
lesser extent, into several other markets, such as the PC-based add-in market,
which we refer to collectively as our other market.  The following
table sets forth our net revenue by target market and the percentage of net
revenue represented by our product sales to each target market (in
thousands):
 
 32
 Table of Contents
 Years
      EndedJanuary
      31,
                                                          
                                                          
                                                          %
      of
                                                          
                                                          
                                                          February
      2,
                                                          
                                                          
                                                          %
      of
                                                          
                                                          
                                                          February
      3,
                                                          
                                                          
                                                          %
      of2009
                                                          
                                                          
                                                          Net
      Revenue
                                                          
                                                          
                                                          2008
                                                          
                                                          
                                                          Net
      Revenue
                                                          
                                                          
                                                          2007
                                                          
                                                          
                                                          Net
      RevenueIPTV
                                                          
                                                          $
                                                          164,334
                                                          
                                                          
                                                          
                                                          79%
                                                          
                                                          
                                                          $
                                                          164,143
                                                          
                                                          
                                                          
                                                          74%
                                                          
                                                          
                                                          $
                                                          61,501
                                                          
                                                          
                                                          
                                                          67%Connected
      media players
                                                          
                                                          
                                                          30,069
                                                          
                                                          
                                                          
                                                          14%
                                                          
                                                          
                                                          
                                                          49,127
                                                          
                                                          
                                                          
                                                          22%
                                                          
                                                          
                                                          
                                                          24,698
                                                          
                                                          
                                                          
                                                          27%Prosumer
      and industrial audio/video
                                                          
                                                          
                                                          8,099
                                                          
                                                          
                                                          
                                                          4%
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —HDTV
                                                          
                                                          
                                                          1,664
                                                          
                                                          
                                                          
                                                          1%
                                                          
                                                          
                                                          
                                                          3,633
                                                          
                                                          
                                                          
                                                          2%
                                                          
                                                          
                                                          
                                                          1,657
                                                          
                                                          
                                                          
                                                          2%Wireless
                                                          
                                                          
                                                          826
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —Other
                                                          
                                                          
                                                          4,168
                                                          
                                                          
                                                          
                                                          2%
                                                          
                                                          
                                                          
                                                          4,303
                                                          
                                                          
                                                          
                                                          2%
                                                          
                                                          
                                                          
                                                          3,362
                                                          
                                                          
                                                          
                                                          4%Net
      revenue
                                                          
                                                          $
                                                          209,160
                                                          
                                                          
                                                          
                                                          100%
                                                          
                                                          
                                                          $
                                                          221,206
                                                          
                                                          
                                                          
                                                          100%
                                                          
                                                          
                                                          $
                                                          91,218
                                                          
                                                          
                                                          
                                                          100%
 IPTV:  For fiscal 2009,
revenue from sales of our SoC solutions, primarily our SMP8630 SoC series, into
the IPTV market increased $0.2 million, or 0.1%, from fiscal
2008.  The relatively flat growth in 2009 was attributable to an
overall slowdown in the IPTV market in the second half of fiscal 2009 as a
result of the current economic downturn and adjustments to inventory levels at
our customers and throughout the supply chain.  Our revenue from the
IPTV market as a percentage of our total revenue for fiscal 2009 as compared to
fiscal 2008 increased by 5%, primarily due to the decrease in SoCs shipped to
our customers in the connected media player market.  For fiscal 2008,
revenue from sales of our SoC solutions into the IPTV market increased $102.6
million, or 167% from fiscal 2007.  This increase was primarily
attributable to the increased volume of SoCs shipped to our customers in the
IPTV market incorporating our SoCs into their products, primarily our SMP8630
SoC series.  Our revenue from the IPTV market as a percentage of our
total revenue for fiscal 2008 as compared to fiscal 2007 increased by 7%
primarily due to expansion of the IPTV market and increased sales to existing
customers as well as sales to new customers.  We expect our revenue
from the IPTV market to fluctuate in future periods as this revenue is based on
IPTV service deployments by telecommunication service providers and the changes
in inventory levels at the contract manufacturers that supply them.
 
 Connected media
player:  For fiscal 2009,
revenue from sales of our products to the connected media playermarket decreased $19.1
million, or 39%, from fiscal 2008.  This decrease was primarily
attributable to a reduction in sales to customers who incorporate our SoCs into
Blu-ray players as a result of increased competition.  For the same
reason, our percentage of net revenue from sales into the connected media player
market decreased 8% as a percentage of our total revenue.  For fiscal
2008, revenue from sales of our products to the connected media playermarket increased $24.4
million, or 99%, from fiscal 2007.  This increase was primarily
attributable to increased sales volume of our customers’ products incorporating
our SoCs, including an increase in Blu-ray and digital media adapter
applications.  However, for this period our percentage of net revenue
from sales into the connected media player market decreased 5% as a percentage
of our total revenue, primarily due to a disproportionate increase in the sales
of our products into the IPTV market.
 
 Prosumer and
industrial audio/video:  For fiscal 2009,
net revenue from sales of our products into the prosumer and industrial
audio/video market was $8.1 million.  We entered into this market
through our acquisition of the VXP Group in February 2008.
 
 HDTV:  For fiscal 2009,
net revenue from sales of our products into the HDTV market decreased by $2.0
million, or 54%, and also decreased by 1% as a percentage of total net revenue
from fiscal 2008.  This decrease was primarily attributable to a
decline in sales of our SoCs to customers who incorporate our product as a
result of increased competition.  For fiscal 2008, net revenue from
sales of our products into the HDTV market increased by $2.0 million, or 119%,
from fiscal 2007.  This increase was primarily attributable to an
overall increase in demand for our HDTV applications.
 
 Wireless:  For fiscal 2009,
net revenue from sales of our products into the wireless market increased by
$0.8 million, or 100%, from fiscal 2008.  This increase was the result
of our entry into the wireless home automation market through our acquisition of
Zensys Holdings Corporation in December 2008.  We expect net revenue
from this market to increase in future periods as we expand sales of the Z-wave
product line.
 
 Other:  Our other markets
consist of PC add-ins, development contracts, services and other ancillary
markets.  For fiscal 2009, net revenue decreased $0.1 million, or 3%,
from fiscal 2008.  The decrease is primarily due to lower engineering
development for customization of our SoCs.  For fiscal 2008, net
revenue increased $0.9 million, or 28% from fiscal 2007.  This
increase was primarily attributable to an increase in engineering development
for customization of our SoCs.
 
 Net
revenue by product group
 
 Our
primary product group consists of our SoC solutions.  To a lesser
extent we derive net revenues from other products and services.  The
following table sets forth net revenue in each of our product groups and the
percentage of net revenue represented by each product group (in
thousands):
 
 33
 Table of Contents
 Years
      EndedJanuary
      31,
                                                            
                                                            
                                                            %
      of
                                                            
                                                            
                                                            February
      2,
                                                            
                                                            
                                                            %
      of
                                                            
                                                            
                                                            February
      3,
                                                            
                                                            
                                                            %
      of2009
                                                            
                                                            
                                                            Net
      Revenue
                                                            
                                                            
                                                            2008
                                                            
                                                            
                                                            Net
      Revenue
                                                            
                                                            
                                                            2007
                                                            
                                                            
                                                            Net
      RevenueSoCs
                                                            
                                                            $
                                                            207,096
                                                            
                                                            
                                                            
                                                            99%
                                                            
                                                            
                                                            $
                                                            216,703
                                                            
                                                            
                                                            
                                                            98%
                                                            
                                                            
                                                            $
                                                            86,984
                                                            
                                                            
                                                            
                                                            95%Other
                                                            
                                                            
                                                            2,064
                                                            
                                                            
                                                            
                                                            1%
                                                            
                                                            
                                                            
                                                            4,503
                                                            
                                                            
                                                            
                                                            2%
                                                            
                                                            
                                                            
                                                            4,234
                                                            
                                                            
                                                            
                                                            5%Net
      revenue
                                                            
                                                            $
                                                            209,160
                                                            
                                                            
                                                            
                                                            100%
                                                            
                                                            
                                                            $
                                                            221,206
                                                            
                                                            
                                                            
                                                            100%
                                                            
                                                            
                                                            $
                                                            91,218
                                                            
                                                            
                                                            
                                                            100%
 
 SoCs:  Our SoCs are
targeted toward manufacturers and large volume designer and manufacturer
customers building products for the IPTV, connected media player, prosumer and
industrial audio/video, HDTV and wireless consumer electronic
markets.  The decrease of $9.6 million, or 4%, in net revenue from
SoCs in fiscal 2009 as compared to fiscal 2008 was due primarily to an
approximate 10% decline in average selling prices of our SoCs which was
partially offset by an increase of SoC units shipped.  The decline in
average selling prices was primarily the result of certain customers achieving
cumulative volume sales targets during the year on purchases of our mature SoC
products.  This decline in average selling prices was not offset by
the increase in SoC units shipped during fiscal 2009 compared to fiscal 2008 due
to a reduction in inventory levels in our customers supply
chains.  The increase of $129.7 million, or 149%, in net revenue from
SoCs in fiscal 2008 as compared to fiscal 2007 was due primarily to an increase
in sales of our SoC solutions into newer generation IPTV products and Blu-ray
players.
 
 Other:We derive net revenue
from other products and services, including engineering support services for
both hardware and software, engineering development for customization of SoCs
and other accessories.  The decrease of $2.4 million, or 54%, in our
net revenue from other products in fiscal 2009 from fiscal 2008 was due to a
reduction in engineering development and service fees and development
kits.  The slight increase in our net revenue from other products in
fiscal 2008 from fiscal 2007 was due primarily to increases in sales of our
engineering development kits related to our SoCs and increases in support
services as a result of our increased SoC sales, partially offset by a decrease
in sales of our board products as a result of decreased demand.  We
anticipate our net revenue from board products will be relatively flat or
decrease in future periods due to our strategic decision to focus on our SoC
solutions.
 
 Net
revenue by geographic region
 
 The
following table sets forth our net revenue by geographic region and the
percentage of net revenue represented by each geographic region based on the
invoicing location of each customer (in thousands):
  Years
      EndedJanuary
      31,
                                                      
                                                      
                                                      %
      of
                                                      
                                                      
                                                      February
      2,
                                                      
                                                      
                                                      %
      of
                                                      
                                                      
                                                      February
      3,
                                                      
                                                      
                                                      %
      of2009
                                                      
                                                      
                                                      Net
      Revenue
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      Net
      Revenue
                                                      
                                                      
                                                      2007
                                                      
                                                      
                                                      Net
      RevenueAsia
                                                      
                                                      $
                                                      116,583
                                                      
                                                      
                                                      
                                                      56%
                                                      
                                                      
                                                      $
                                                      153,146
                                                      
                                                      
                                                      
                                                      69%
                                                      
                                                      
                                                      $
                                                      48,386
                                                      
                                                      
                                                      
                                                      53%Europe
                                                      
                                                      
                                                      80,067
                                                      
                                                      
                                                      
                                                      38%
                                                      
                                                      
                                                      
                                                      56,782
                                                      
                                                      
                                                      
                                                      26%
                                                      
                                                      
                                                      
                                                      33,109
                                                      
                                                      
                                                      
                                                      36%North
      America
                                                      
                                                      
                                                      12,464
                                                      
                                                      
                                                      
                                                      6%
                                                      
                                                      
                                                      
                                                      11,173
                                                      
                                                      
                                                      
                                                      5%
                                                      
                                                      
                                                      
                                                      9,607
                                                      
                                                      
                                                      
                                                      11%Other
      regions
                                                      
                                                      
                                                      46
                                                      
                                                      
                                                      
                                                      *
                                                      
                                                      
                                                      
                                                      105
                                                      
                                                      
                                                      
                                                      *
                                                      
                                                      
                                                      
                                                      116
                                                      
                                                      
                                                      
                                                      *Net
      revenue
                                                      
                                                      $
                                                      209,160
                                                      
                                                      
                                                      
                                                      100%
                                                      
                                                      
                                                      $
                                                      221,206
                                                      
                                                      
                                                      
                                                      100%
                                                      
                                                      
                                                      $
                                                      91,218
                                                      
                                                      
                                                      
                                                      100%
 *      The
percentage of net revenue is less than one percent.
 
 Asia:  Our net revenue
in absolute dollars from Asia decreased $36.6 million, or 24%, in fiscal 2009 as
compared to fiscal 2008.  The decrease in net revenue from Asia in
both absolute dollars and as a percentage of our net revenue was primarily
attributable to the decline in revenues from customers in Japan and Korea due to
unit volume decline in Blu-ray DVD players and in Singapore due to a reduction
in inventory levels in our customers in the supply chain related to IPTV during
fiscal 2009.
 
 Our net
revenue in absolute dollars from Asia increased $104.8 million, or 217%, in
fiscal 2008 as compared to fiscal 2007.  The increase in net revenue
from Asia in both absolute dollars and as a percentage of our net revenue was
primarily attributable to our customers’ continued expansion of their products
incorporating our SoCs.  Also, companies who incorporate our products
into their finished goods and are located in other regions continued to move
their production orders to large designers and manufacturers located in the Asia
region which has led to a further shifting of our net revenue from other regions
into the Asia region as many of our direct customers are large designers and
manufacturers located in Asia.  We also continued to experience large
volume orders from two distributors located in Asia.
 
 The
following table sets forth the percentage of net revenue from countries in the
Asia region that accounted for over 10% of net revenue:
 
 34
 Table of Contents
 Years
      EndedJanuary
      31,
                                            
                                            
                                            February
      2,
                                            
                                            
                                            February
      3,2009
                                            
                                            
                                            2008
                                            
                                            
                                            2007Singapore
                                            
                                            
                                            21%
                                            
                                            
                                            
                                            24%
                                            
                                            
                                            
                                            *China
                                            
                                            
                                            12%
                                            
                                            
                                            
                                            *
                                            
                                            
                                            
                                            11%Taiwan
                                            
                                            
                                            10%
                                            
                                            
                                            
                                            *
                                            
                                            
                                            
                                            *Korea
                                            
                                            
                                            *
                                            
                                            
                                            
                                            19%
                                            
                                            
                                            
                                            17%Japan
                                            
                                            
                                            *
                                            
                                            
                                            
                                            12%
                                            
                                            
                                            
                                            *
 *
                Net
      revenue from this country was less than 10% of our net
      revenue.
 
 Europe:  Our
net revenue in absolute dollars from Europe for fiscal 2009 increased $23.3
million, or 41%, as compared to fiscal 2008.  The increase in our net
revenue from Europe in both absolute dollars and as a percentage of our net
revenue was primarily attributable to major deployments by our European
customers in France using our SoCs in their IPTV set-top boxes.
 
 Our net
revenue in absolute dollars from Europe for fiscal 2008 increased $23.7 million,
or 72%, as compared to fiscal 2007.  The increase in our net revenue
from Europe in both absolute dollars and as a percentage of our net revenue in
fiscal 2008 compared to fiscal 2007 was primarily due to major deployments by
our European customers using our SoCs in their IPTV set-top boxes.
 
 Our net
revenue from Europe in any given period fluctuates depending on whether our
customers place their orders locally or through their overseas manufacturers who
incorporate our SoCs into their final products.
 
 The
following table sets forth the percentage of net revenue from countries in the
Europe region that accounted for over 10% of net revenue:
  Years
      EndedJanuary
      31,
                                          
                                          
                                          February
      2,
                                          
                                          
                                          February
      3,2009
                                          
                                          
                                          2008
                                          
                                          
                                          2007France
                                          
                                          
                                          15%
                                          
                                          
                                          
                                          14%
                                          
                                          
                                          
                                          29%Netherlands
                                          
                                          
                                          12%
                                          
                                          
                                          
                                          *
                                          
                                          
                                          
                                          *
 *
                Net
      revenue from this country was less than 10% of our net
      revenue.
 
 North
America:  Our net revenue in absolute dollars from North
America increased $1.3 million, or 12%, for fiscal 2009 as compared to fiscal
2008.  The increase in our net revenue from North America in absolute
dollars and as a percentage of our net revenue in fiscal 2009 was primarily
attributable to increased demand for our SoC solutions for the prosumer and
industrial audio/video markets as a result of our acquisition of the VXP product
line in February 2008.  However, the overall trend has been for
companies located in North America who incorporate our products into their
finished products to move their production orders to large designers and
manufacturers located in the Asia region.
 
 Our net
revenue in absolute dollars from North America increased $1.6 million, or 16%,
for fiscal 2008 as compared to fiscal 2007.  The increase in absolute
dollars was primarily attributable to increased demand for our SoC solutions for
the IPTV market.  However, our net revenue from North America as a
percentage of our net revenue declined from 11% in fiscal 2007 to 5% in fiscal
2008 as a result of the continuing trend of companies located in North America
who incorporate our products into their finished products moving their
production orders to large designers and manufacturers located in the Asia
region.
 
 Our
revenue from North America in any given period fluctuates depending on whether
our customers place their orders locally or through overseas manufacturers who
incorporate our products into their final products.
 
 In fiscal
2009, our net revenue generated outside North America was 94% of our net revenue
as compared to 95% in fiscal 2008 and 89% in fiscal 2007.  We expect
that net revenue outside of North America will continue to account for a
significant portion of our net revenue.
 
 Major
Customers
 
 The
following table sets forth the major customers that accounted for over 10% of
net revenue:
 
 35
 Table of Contents
 Years
      EndedJanuary
      31,
                                            
                                            
                                            February
      2,
                                            
                                            
                                            February
      3,Customer
                                            
                                            2009
                                            
                                            
                                            2008
                                            
                                            
                                            2007MTC
      Singapore
                                            
                                            
                                            21%
                                            
                                            
                                            
                                            23%
                                            
                                            
                                            
                                            *Cisco
      Systems **
                                            
                                            
                                            22%
                                            
                                            
                                            
                                            *
                                            
                                            
                                            
                                            *Uniquest
      Corp.
                                            
                                            
                                            *
                                            
                                            
                                            
                                            19%
                                            
                                            
                                            
                                            17%Macnica,
      Inc.
                                            
                                            
                                            *
                                            
                                            
                                            
                                            12%
                                            
                                            
                                            
                                            *Freebox
      SA
                                            
                                            
                                            *
                                            
                                            
                                            
                                            *
                                            
                                            
                                            
                                            20%
 *
                Net
      revenue from customer was less than 10% of our net
  revenue.
 **
                Includes
      both direct sales and indirect sales made through
      subcontractors.
 
 Gross
Profit and Gross Margin
 
 The
following table sets forth gross profit and gross margin (in
thousands):
  Years
      EndedJanuary
      31,
                                                  
                                                  
                                                  %
                                                  
                                                  
                                                  February
      2,
                                                  
                                                  
                                                  %
                                                  
                                                  
                                                  February
      3,2009
                                                  
                                                  
                                                  change
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  change
                                                  
                                                  
                                                  2007Gross
      profit
                                                  
                                                  $
                                                  100,554
                                                  
                                                  
                                                  
                                                  -11%
                                                  
                                                  
                                                  $
                                                  112,798
                                                  
                                                  
                                                  
                                                  154%
                                                  
                                                  
                                                  
                                                  44,435Gross
      margin
                                                  
                                                  
                                                  48.1%
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  51.0%
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  48.7%
 The
decrease in gross profit in fiscal 2009 was due primarily to a 5% decrease in
revenues as well as a 9.6% decline in our average selling prices per SoC unit
which was only partially offset by a 1.9% decline in our average costs per SoC
unit.  The significant increase in gross profit in fiscal 2008 was
primarily due to increased sales of our SoCs used in the IPTV and connected
media player markets.  Provisions for excess and obsolete inventory
included in cost of net revenue were $2.1 million in fiscal 2009, $0.7 million
in 2008 and $1.2 million in fiscal 2007.
 
 The 2.9
percentage point decrease in gross margin in fiscal 2009 from fiscal 2008 was
primarily due to a 9.6% decline in our average selling prices per SoC, which was
only partially offset by a 1.9% decline in our average costs per
SoC.  Our average cost per unit did not decline as fast as our average
selling prices due to a buildup of die bank in the second quarter of fiscal 2009
that was not consumed as demand decreased due to a reduction in inventory levels
in our customer’s supply chain.  Additionally, we experienced an
aggregate increase of $1.5 million in amortization of acquired intangibles due
to the VXP and Zensys acquisitions that were completed in fiscal 2009, a $1.4
million increase in write downs for excess and slow moving inventory and a $1.3
million increase in goldwire costs for material used in our SMP8630 series SoC
assembly process.  The increase in gross margin in fiscal 2008 from
fiscal 2007 was primarily related to the reduction of our product costs as we
achieved increased unit production volumes and manufacturing efficiencies with
our manufacturers.
 
 Operating
Expenses
 
 The
following table sets forth operating expenses and percent changes in operating
expenses (in thousands):
  Years
      EndedJanuary
      31,
                                                      
                                                      
                                                      %
                                                      
                                                      
                                                      February
      2,
                                                      
                                                      
                                                      %
                                                      
                                                      
                                                      February
      3,2009
                                                      
                                                      
                                                      change
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      change
                                                      
                                                      
                                                      2007Research
      and development expenses
                                                      
                                                      $
                                                      43,558
                                                      
                                                      
                                                      
                                                      39%
                                                      
                                                      
                                                      $
                                                      31,384
                                                      
                                                      
                                                      
                                                      39%
                                                      
                                                      
                                                      $
                                                      22,515Sales
      and marketing expenses
                                                      
                                                      
                                                      12,101
                                                      
                                                      
                                                      
                                                      18%
                                                      
                                                      
                                                      
                                                      10,226
                                                      
                                                      
                                                      
                                                      30%
                                                      
                                                      
                                                      
                                                      7,841General
      and administrative expenses
                                                      
                                                      
                                                      17,705
                                                      
                                                      
                                                      
                                                      27%
                                                      
                                                      
                                                      
                                                      13,887
                                                      
                                                      
                                                      
                                                      69%
                                                      
                                                      
                                                      
                                                      8,222Acquired
      in-process research and development
                                                      
                                                      
                                                      1,571
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Total
      operating expenses
                                                      
                                                      $
                                                      74,935
                                                      
                                                      
                                                      
                                                      35%
                                                      
                                                      
                                                      $
                                                      55,497
                                                      
                                                      
                                                      
                                                      44%
                                                      
                                                      
                                                      $
                                                      38,578
 Research and
development expense:  Research and
development expense increased by $12.2 million, or 39%, in fiscal 2009
compared to fiscal 2008.  This increase is primarily attributable to
an increase of $9.5 million in compensation and benefit expense due to increased
headcount and salaries, an increase of $1.7 million in share-based compensation
expense, which was partially offset by $1.5 million in fiscal 2008 for
compensation expense associated with research and development personnel as a
result of the employee stock option tender offer, an increase of $0.8 million in
rent and facilities costs as a result of new facilities in France and Canada, an
increase of $0.6 million in travel and tradeshow costs to provide engineering
support to marketing efforts, an increase of $0.6 million in depreciation and
amortization due to purchase of equipment for infrastructure and to support
product development and an increase of $0.3 million in recruiting fees in
support of hiring additional personnel.  Research and development
expense increased by approximately $8.9 million, or 39%, in fiscal 2008
compared to fiscal 2007.  The increase is primarily attributable to an
increase of $3.4 million in license fees, consulting services, supplies and
non-recurring engineering costs to develop our products, an increase of $2.9
million in compensation expense primarily as a result of increased headcount, an
increase of $2.3 million in share-based compensation expense and an increase of
$0.4 million in depreciation and amortization and rent expense.  The
$2.3 million increase in share-based compensation expense includes $1.5 million
in compensation expense associated with research and development personnel as a
result of the employee stock option tender offer we initiated in the second
quarter of fiscal 2008 in addition to an increase in headcount.  We
anticipate research and development expense will continue to increase in
absolute dollars.
 
 36
 Table of Contents
 Sales and
marketing expense:  Sales and
marketing expense increased by $1.9 million, or 18%, in fiscal 2009 compared to
fiscal 2008.  This increase is primarily attributable to an increase
of $0.4 million in compensation and benefit expenses which was primarily due to
higher headcount from acquisitions of the VXP Group and Zensys Holdings
Corporation, an increase of $1.1 million in share-based compensation expense
which was primarily due to $0.7 million in acceleration of certain option grants
and new grants for new hires and partially offset by $0.4 million in fiscal 2008
for  compensation expense associated with sales and marketing
personnel as a result of the employee stock option tender offer, an increase of
$0.5 million in increased tradeshow costs to promote our products and a $0.2
million increase in amortization of acquired intangibles as result of the VXP
Group and Zensys Holdings Corporation acquisitions.  Sales and
marketing expense increased by $2.4 million, or 30%, in fiscal 2008 compared to
fiscal 2007.  The increase is primarily attributable to an increase of
$1.2 million in compensation expense primarily as a result of increased
headcount, variable selling costs, such as commissions, due to increased sales,
an increase of $0.6 million in share-based compensation expense, an increase of
$0.3 million in professional services, an increase of $0.1 million in travel and
entertainment expenses and an increase of $0.1 million in depreciation and
amortization and rent expense.  The $0.6 million increase in
share-based compensation expense includes $0.4 million in compensation expense
associated with sales and marketing personnel as a result of the employee stock
option tender offer we initiated in the second quarter of fiscal
2008.  We anticipate that our sales and marketing expense will
continue to increase in absolute dollars.
 
 General and
administrative expense:General and
administrative expense in fiscal 2009 increased $3.8 million, or 27%, compared
to fiscal 2008.  This increase is primarily attributable to an
increase of $2.8 million in share-based compensation expense, which was
partially offset by $0.3 million in fiscal 2008 for compensation expense
associated with general and administrative personnel as a result of the employee
stock option tender offer, an increase of $0.9 million in compensation and
benefit expenses primarily as result of increased headcount due to the
establishment of operations in Singapore and the acquisitions of the VXP Group
and Zensys Holdings Corporation, an increase of $0.9 million in other
professional fees primarily due to our Oracle implementation, an increase of
$0.9 million in audit and tax fees primarily due to implementation costs of our
international tax strategy, $0.5 million in insurance costs and an increase of
$0.2 million in travel, entertainment and other expenses. These increases were
partially offset by a decrease of $2.1 million in legal fees, which was higher
in fiscal 2008 primarily due to the review of our historical stock option
granting practices.  General and administrative expense in fiscal 2008
increased $5.7 million, or 69%, compared to fiscal 2007.  The increase
is primarily attributable to increases of $1.3 million in compensation expense
primarily as a result of increased headcount, an increase of $1.2 million in
legal fees related to the review of our historical stock option granting
practices of prior years, an increase of $1.2 million in share-based
compensation expense, an increase of $1.4 million in professional fees related
to audit, tax and other services and an increase of $0.4 million in depreciation
and amortization, rent and other miscellaneous expenses.  The $1.2
million increase in share-based compensation expense includes $0.3 million in
compensation expense associated with general and administrative personnel as a
result of the employee stock option tender offer we initiated in the second
quarter of fiscal 2008.  We expect our general and administrative
expense will continue to increase in absolute dollars.
 
 Acquired
in-process research and development:  Acquired in-process
research and development, or IPR&D, totaled $1.6 million in fiscal 2009
as a result of the VXP Group acquisition completed on February 8,
2008.  The amount of the purchase price allocated to IPR&D was
determined through established valuation techniques used in the high technology
industry and was expensed upon acquisition as it was determined that the
underlying projects had not reached technological feasibility and no alternative
future uses existed.
 
 Share-based
compensation expense:The following table
sets forth the total share-based compensation expense, excluding tender offer
payments associated with the adjustments to measurement dates for option grants,
that is included in each functional line item in the consolidated statements of
operations (in thousands):
 Fiscal
      Years EndedJanuary
      31,
                                            
                                            
                                            February
      2,
                                            
                                            
                                            February
      3,
                                            
                                            
                                            January
      28,
                                            
                                            
                                            January
      29,2009
                                            
                                            
                                            2008
                                            
                                            
                                            2007
                                            
                                            
                                            2006
                                            
                                            
                                            2005Supplemental
      Data on Share-based CompensationExpense:Cost
      of revenue
                                            
                                            $
                                            359
                                            
                                            
                                            $
                                            559
                                            
                                            
                                            $
                                            380
                                            
                                            
                                            $
                                            84
                                            
                                            
                                            $
                                            101Research
      and development
                                            
                                            
                                            5,294
                                            
                                            
                                            
                                            3,577
                                            
                                            
                                            
                                            2,815
                                            
                                            
                                            
                                            650
                                            
                                            
                                            
                                            595Selling
      and marketing
                                            
                                            
                                            2,115
                                            
                                            
                                            
                                            1,005
                                            
                                            
                                            
                                            825
                                            
                                            
                                            
                                            353
                                            
                                            
                                            
                                            344General
      and administrative
                                            
                                            
                                            4,905
                                            
                                            
                                            
                                            2,068
                                            
                                            
                                            
                                            1,246
                                            
                                            
                                            
                                            495
                                            
                                            
                                            
                                            436$
                                            12,673
                                            
                                            
                                            $
                                            7,209
                                            
                                            
                                            $
                                            5,266
                                            
                                            
                                            $
                                            1,582
                                            
                                            
                                            $
                                            1,476
 37
 Table of Contents
 Accounting
for employee stock option grants will continue to have an adverse impact on our
results of operations.  The amount of unearned share-based
compensation currently estimated to be expensed in the period fiscal 2010
through 2012 related to unvested share-based payment awards at January 31, 2009
is $40.6 million.  The weighted average period over which the unearned
share-based compensation is expected to be recognized is approximately 3.49
years.  Future share-based compensation expense and unearned
share-based compensation will increase to the extent that we grant additional
equity awards to employees or assume unvested equity awards in connection with
any acquisitions.
 
 Amortization
of intangible assets
 
 Amortization
expense of $2.3 million and $0.8 million for acquired developed technology for
fiscal 2009 and 2008, respectively, is classified as cost of
sales.  Amortization expense of $0.5 million and $0.5 million for
other purchased intangible assets for fiscal 2009 and 2008, respectively, is
classified as research and development expense in our consolidated statements of
operations.  Amortization expense of $0.1 million for other purchased
intangible assets for fiscal 2009 is classified as sales and marketing expense
and no amortization expense for fiscal 2008.  At January 31, 2009, the
unamortized balance from purchased intangible assets was $17.5 million which
will be amortized to future periods based on their respective remaining
estimated useful lives.  If we purchase additional intangible assets
in the future, our cost of revenue or other operating expenses will increase by
the amortization of those assets.
 
 Gains
on sale of long-term investment
 
 During
fiscal 2009, we sold our investment in Envivio, Inc., a privately held company,
for approximately $0.3 million including a gain of approximately
$39,000.  We recognized no gain on sales of long-term investments in
fiscal 2008 or 2007.  We do not expect to sell any of our remaining
long-term investments in the near future.
 
 Interest
and other income, net
 
 The
following table sets forth our net interest and other income and related
percentage increase over the previous fiscal year for fiscal 2009, 2008 and 2007
(in thousands):
  Years
      EndedJanuary
      31,
                                              
                                              
                                              %
                                              
                                              
                                              February
      2,
                                              
                                              
                                              %
                                              
                                              
                                              February
      3,2009
                                              
                                              
                                              change
                                              
                                              
                                              2008
                                              
                                              
                                              change
                                              
                                              
                                              2007Interest
      and other income, net
                                              
                                              $
                                              5,698
                                              
                                              
                                              
                                              -1%
                                              
                                              
                                              $
                                              5,782
                                              
                                              
                                              
                                              609%
                                              
                                              
                                              
                                              815
 
 Our other
income and expense primarily consisted of interest income from marketable
securities, gains or losses on sales of marketable securities and foreign
exchange transactions.  The decrease of $0.1 million, or 1%, in fiscal
2009 as compared to fiscal 2008 was due primarily to a decrease in our average
interest rate achieved on our total cash, cash equivalents and marketable
securities which was partially offset by an increase in our average cash,
cash equivalents and marketable securities balances in fiscal 2009 compared to
fiscal 2008.  The increase of $5.0 million, or 609%, in fiscal 2008 as
compared to fiscal 2007 was due primarily to an increase in interest income
earned on cash, cash equivalents and marketable securities, which increased
significantly during fiscal 2008 as a result of cash generated from operations
and our follow-on public offering of our common stock in October 2007 that
raised $199 million.
 
 Provision
for (Benefit from) income taxes
 
 We
recorded a provision for income taxes of $4.9 million in fiscal 2009, a benefit
from income taxes of $7.1
million in fiscal 2008
and a provision for income taxes of $0.4million in 2006. 
The fiscal 2009,
2008
and 2007
effective tax rate was approximately 16%,
(11)%
and 6%,
respectively.  Our fiscal 2009
effective tax rate differs from the federal statutory rate of 35%
primarily due to our international operations strategy, which resulted in a
foreign tax differential benefit.  Our fiscal 2008
effective tax rate differs from the federal statutory rate of 35%
primarily due to our use of net operating losses and the release of the
valuation allowance, which provided an aggregate tax benefit of $(33.7)
million.  Our fiscal 2007
effective tax rate differs from the federal statutory rate of 35%
primarily due to our use of net operating losses.
 
 Liquidity
and Capital Resources
 
 The
following table sets forth the cash and cash equivalents and short-term
marketable securities (in thousands):
 
 38
 Table of Contents
 January
      31,
                                    
                                    
                                    February
      2,2009
                                    
                                    
                                    2008Cash
      and cash equivalents
                                    
                                    $
                                    90,845
                                    
                                    
                                    $
                                    174,089Short-term
      marketable securities
                                    
                                    
                                    28,862
                                    
                                    
                                    
                                    44,401$
                                    119,707
                                    
                                    
                                    $
                                    218,490
 
 As of
January 31, 2009, our principal sources of liquidity consisted of cash and cash
equivalents and short-term marketable securities of $119.7 million, which
represents a decrease of $98.8 million from $218.5 million at February 2,
2008.  The decrease in cash and cash equivalents and short-term
marketable securities was primarily the result of $85.9 million used for share
repurchases, $28.5 million used for the acquisitions of VXP Group in February
2008 and Zensys Holdings Corporation in December 2008, purchases of $15.7
million for software, equipment and leasehold improvements, $15.3 million in
purchases of long-term marketable securities and long-term investments of $3.0
million.  These uses of cash, cash equivalents and short-term
marketable securities were partially offset by $42.8 million of cash generated
from our operating activities and $4.6 million in net proceeds from the sale of
our common stock through our stock option plans and employee stock purchase
plan.
 
 Our
primary net cash inflows and outflows at the end of each fiscal year were as
follows (in thousands):
  Years
      EndedJanuary
      31,
                                            
                                            
                                            February
      2,
                                            
                                            
                                            February
      3,2009
                                            
                                            
                                            2008
                                            
                                            
                                            2007Net
      cash (used in) provided by:Operating
      activities
                                            
                                            $
                                            42,831
                                            
                                            
                                            $
                                            40,235
                                            
                                            
                                            $
                                            8,492Investing
      activities
                                            
                                            
                                            (46,794
                                            )
                                            
                                            
                                            (100,149
                                            )
                                            
                                            
                                            (2,031
                                            )Financing
      activities
                                            
                                            
                                            (78,900
                                            )
                                            
                                            
                                            209,384
                                            
                                            
                                            
                                            1,013Effect
      of foreign rate changes on cash and cash equivalents
                                            
                                            
                                            (381
                                            )
                                            
                                            
                                            206
                                            
                                            
                                            
                                            112Net
      (decrease) increase in cash and cash equivalents
                                            
                                            $
                                            (83,244
                                            )
                                            
                                            $
                                            149,676
                                            
                                            
                                            $
                                            7,586
 
 Cash
flows from operating activities
 
 Net cash
provided by operating activities was $42.8 million for fiscal
2009.  The cash provided by our operating activities for fiscal 2009
was primarily due to net income of $26.4 million, non-cash operating expenses of
$24.9 million, a $10.1 million decrease in accounts receivable, a $4.6 million
increase in other long-term liabilities and a $0.4 million decrease in other
assets.  These increases were partially offset by an $18.0 million
decrease in accounts payable and accrued liabilities, a $5.5 million increase in
inventories and a $0.1 million increase in prepaid expense.  The
decrease in accounts payable and accrued liabilities was due primarily to lower
inventory purchases and the timing of payments for tax liabilities and software
licenses during the fourth quarter of fiscal 2009 compared to the fourth quarter
of fiscal 2008.  The decrease in accounts receivable was primarily due
to lower product revenues in the fourth quarter of fiscal 2009 compared to the
fourth quarter of fiscal 2008.  The increase in inventories resulted
from an increase in our die bank level at the end of the fiscal 2009 compared to
the end of fiscal 2008.  At the end of fiscal 2008, our die bank level
was low relative to the sales volume we were experiencing at that time due to
rapidly increasing demand during fiscal 2008.  At the end of fiscal
2009 our die bank was somewhat elevated relative to our sales volume due to a
strategic build up of certain wafers for some of our key
customers.  The increase in other long-term liabilities is primarily
due to higher deferred tax obligations which resulted in increased long-term
income taxes payable and deferred tax liabilities  Non-cash charges
included share-based compensation of $12.7 million, depreciation and
amortization of $7.2 million, provision for sales returns, discounts and
doubtful accounts of $0.9 million, provisions for excess and obsolete inventory
of $2.1 million and acquired in-process research and development of $1.6 million
in fiscal 2009.
 
 Net cash
provided by operating activities was $40.2 million for fiscal
2008.  The cash provided by our operating activities for fiscal 2008
was primarily due to net income of $70.2 million, non-cash expenses of $4.2
million and a $10.4 million increase in accounts payable and other accrued
liabilities.  These amounts were partially offset by a $29.6 million
increase in accounts receivable, a $10.9 million increase in inventories and a
$4.5 million increase in prepaid expenses and other assets.  The
increases in accounts receivables and inventories in 2008 were the result of the
increase in our sales in the IPTV, high definition DVD and other media players,
and HDTV markets.  Non-cash charges included share-based compensation
of $7.2 million in fiscal 2008 offset by a reduction of deferred income taxes of
$12.7 million.
 
 39
 Table of Contents
 Cash
flows from our operating activities will continue to fluctuate based upon our
ability to grow net revenues while managing the timing of payments to us from
customers and to vendors from us, the timing of inventory purchases and
subsequent manufacture and sale of our products.
 
 Cash
flow from investing activities
 
 Net cash
used in our investing activities was $46.8 million for fiscal 2009, which was
primarily due to net cash paid of $28.5 million in connection with the
acquisitions of VXP Group and Zensys Holdings Corporation, purchases of
software, equipment and leasehold improvements of $15.7 million and purchases of
private equity investments for $3.0 million, partially offset by net sales and
maturities of marketable securities and long-term investment of $0.4
million.
 
 Net cash
used in our investing activities was $100.1 million for fiscal 2008, primarily
due to net purchases of marketable securities of $92.6 million and purchases of
software, equipment and leasehold improvements of $7.6 million.
 
 Cash
flow from financing activities
 
 Net cash
used in financing activities was $78.9 million in fiscal 2009, which was the
result of $85.9 million for the repurchase of 4.2 million shares of our common
stock, partially offset by $4.6 million of proceeds from the exercise of
employee stock options and stock purchase rights and $2.4 million of excess tax
benefit from share-based compensation.
 
 Net cash
provided by financing activities was $209.4 million in fiscal 2008, which
primarily consisted of $198.9 million of net proceeds from our follow-on
offering, $10.5 million of proceeds from the exercise of employee stock
options and $0.2 million excess tax benefit from share-based
compensation.
 
 Prior to
fiscal 2007, our primary sources of funds were proceeds from the sale of our
common stock.  In certain periods, cash generated from operations has
been a source of funds.  While we generated cash from operations for
fiscal 2009, 2008 and 2007, it is possible that our operations will consume cash
in future periods.  Based on our currently anticipated cash needs, we
believe that our current reserve of cash, cash equivalents and short-term
marketable securities will be sufficient to meet our anticipated working capital
requirements, obligations, capital expenditures, strategic investments and other
cash needs for at least the next twelve months.  However, it is
possible that we may need to raise additional funds to finance our activities
during or beyond the next 12 months, and our future capital requirements may
vary significantly from those currently planned.  Our cash, cash
equivalent and marketable security balances will continue to fluctuate based
upon our ability to grow revenue, the timing of payments to us from customers
and to vendors from us and the timing of inventory purchases and subsequent
manufacture and sale of our products.
 
 At
January 31, 2009, we held nine auction rate securities, or ARS, with a cost and
par value of $43.0 million, which are all classified as long-term marketable
securities.  Our marketable securities consist primarily of auction
rate securities, corporate commercial paper and bonds and US agency
notes.  We monitor all our marketable securities for impairment and if
these securities are reported to have had a decline in fair value, we use
significant judgment to identify events or circumstances that would likely have
a significant adverse effect on the future value of each investment including:
(i) the nature of the investment; (ii) the cause and duration of any
impairment; (iii) the financial condition and near term prospects of the
issuer; (iv) for securities with a reported decline in fair value, our
ability to hold the security for a period of time sufficient to allow for any
anticipated recovery of fair value; (v) the extent to which fair value may
differ from cost; and  (vi) a comparison of the income generated by
the securities compared to alternative investments.  We would
recognize an impairment charge if a decline in the fair value of our marketable
securities is judged to be other-than-temporary.
 
 Auction
rate securities are bought and sold in the marketplace through a bidding process
sometimes referred to as a “Dutch auction.”  Historically, the fair
value of our ARS has been determined by the frequent auction periods, generally
every 28 days, which provided liquidity at par value for these
investments.  However, subsequent to February 2008, all auctions
involving such securities held by us have failed.  The result of a
failed auction is that these ARS will continue to pay interest in accordance
with their terms at each respective auction date; however, liquidity of the
securities will continue to be limited until there is a successful auction, the
issuer redeems the securities, the securities mature or until such time as other
markets for these ARS develop.  We cannot be certain regarding the
amount of time it will take for an auction market or other markets to develop
for these securities.  In October 2008, our cash investment advisor,
UBS, acknowledged our acceptance of its proposal of a comprehensive settlement
agreement, in which all the ARS currently in our portfolio could be redeemed at
par value.  The offer to redeem will be at our option during a two
year period beginning in June 2010.  The offer also gives UBS the
discretion to buy any or all of these securities from us at par value at any
time.  Additionally, the proposed solution by UBS to the lack of
liquidity of our ARS included a commitment effective October 2008 through June
2010 to loan an amount up to 75% of the par value of the ARS.  The
interest charged on such loan would be equal to the proportional amount of
interest being paid by the issuers of the ARS borrowed against.  At
January 31, 2009, UBS provided an estimated value for the nine ARS of
approximately $37.6 million, which reflects an unrealized loss of $5.4 million
from our original cost.  Our management has not adopted UBS’ estimated
value of our ARS for the reasons described below.
 
 40
 Table of Contents
 We have
reviewed the prospectuses for each of the nine ARS in our investment portfolio
as of January 31, 2009 and determined that the unprecedented disruption in the
auction process and resulting pattern of interest payments was in accordance
with their established rules of operation under these
circumstances.  The default mechanism called for in the operating
rules of these instruments is designed to adjust their interest payments to a
limit based on the income generated by their underlying student
loans.  The most significant consequences of this mechanism are the
preservation of their AAA credit rating while adjusting to a continuing stream
of interest payments to the security holders at a rate correlating to
contemporary credit market rates.  As a result of this review, we
reached the conclusion that the securities do have a strong underlying principle
value and that any potential adjustment in their carrying value would be based
upon our ability to endure their lack of liquidity, the degree of certainty of
continuing interest payments and the rate of return on these
securities.
 
 Given
that we expect considerable liquidity from our other assets, foresee continuing
positive cash flow and have accepted our investment advisor’s offer to purchase
all of our ARS at par value in June 2010, we do not consider the remaining
possible liquidity risk and UBS default risk to be significant enough to justify
a reduction in their carrying value.  The remaining valuation factor
that we considered was the rate of return evidenced by the interest
received.  We used a discounted cash flow calculation that reached a
valuation that was similar to other of our recent investments with comparably
high credit ratings.
 
 As a
result of this judgment process and in accordance with the various accounting
pronouncements in this area, we reached the conclusion that the carrying value
of our ARS has not been impaired and that we have no expectation of any material
adverse impact on our future results of operations, liquidity, or capital
resources associated with holding these securities.
 
 Contractual
Obligations and Commitments
 
 We do not
have guaranteed price or quantity commitments from any of our
suppliers.  We generally maintain products for distribution through
corporate markets based on forecasts rather than firm purchase
orders.  Additionally, we generally acquire products for sale to our
OEM customers based on purchase orders received as well as forecasts from such
customers.  Purchase orders with delivery dates greater than 12 weeks
are typically cancelable without penalty from such OEM customers.  We
currently place non-cancelable orders to purchase semiconductor wafers and other
materials from our suppliers on an eight to twelve week lead-time
basis.
 
 The
following table sets forth the amounts of payments due under specified
contractual obligations as of January 31, 2009 (in thousands):
  Payments
      Due by PeriodContractual
      Obligations
                                              
                                              1
      year or less
                                              
                                              1
      - 3 years
                                              
                                              
                                              4
      - 5 years
                                              
                                              
                                              thereafter
                                              
                                              
                                              TotalOperating
      leases
                                              
                                              $
                                              1,629
                                              
                                              
                                              $
                                              3,023
                                              
                                              
                                              $
                                              1,900
                                              
                                              
                                              $
                                              2,482
                                              
                                              
                                              
                                              9,034Non-cancelable
      purchase orders
                                              
                                              
                                              10,863
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              10,863$
                                              12,492
                                              
                                              
                                              $
                                              3,023
                                              
                                              
                                              $
                                              1,900
                                              
                                              
                                              $
                                              2,482
                                              
                                              
                                              $
                                              19,897
 In March
2008, we entered into a new lease agreement for a facility of approximately
5,500 square feet in Paris, France.  The facility is used for our
French research and development operations and the lease will expire in March
2017.  Additionally, in June 2008, we entered into a new lease
agreement for a facility of approximately 15,000 square feet in Ontario,
Canada.  The facility is used for our Canadian research and
development operations and the lease will expire in June 2013.  The
base rent for the facilities in France and Canada will remain flat over the life
of the leases, with free rent for the initial two and three months,
respectively.
 
 Recent
Accounting Pronouncements
 
 In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities(“SFAS 159”).  SFAS 159
provides companies with an option to report selected financial assets and
liabilities at fair value.  The standard’s objective is to reduce both
complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities
differently.  The standard requires companies to provide additional
information that will help investors and other users of financial statements to
more easily understand the effect of our choice to use fair value on its
earnings.  It also requires companies to display the fair value of
those assets and liabilities for which we have chosen to use fair value on the
face of the balance sheet.  The new standard does not eliminate
disclosure requirements included in other accounting standards, including
requirements for disclosures about fair value measurements included in SFAS
157and SFAS No.
107, Disclosures about Fair
Value of Financial Instruments(“SFAS 107”).SFAS 159 is
effective for fiscal years beginning after November 15, 2007, and we did not
elect to adopt the fair value option under SFAS 159.
 
 41
 Table of Contents
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations ("SFAS
141R").  SFAS 141R establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree.  The statement also provides guidance for
recognizing and measuring the goodwill acquired in the business combination,
requires related acquisition costs to be expensed in the period incurred and
determines what information to disclose to enable users of financial statements
to evaluate the nature and financial effects of the business
combination.  SFAS 141R is effective for fiscal years beginning after
December 15, 2008.  Accordingly, any business combinations we engaged
in were recorded and disclosed according to SFAS 141 until January 31,
2009.  We expect SFAS No. 141R will have an impact on our consolidated
financial statements, but the nature and magnitude of the specific effects will
depend upon the nature, terms and size of any acquisitions it consummates after
the effective date of January 31, 2009.
 
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB No. 51 (“SFAS
160”), which establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary, changes in a parent’s ownership
interest in a subsidiary and the deconsolidation of a
subsidiary.  SFAS 160 is effective for fiscal years beginning after
December 15, 2008.  We will adopt this pronouncement in our first
quarter of fiscal 2010 and do not expect the adoption to have a material impact
on our consolidated financial statements.
 
 In
February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, Effective Date of FASB Statement
No.157 (“FSP 157-2”), which delays the effective date of SFAS No. 157,
Fair Value Measurements
(“SFAS 157”), for all non-recurring fair value measurements of non-financial
assets and non-financial liabilities until fiscal years beginning after November
15, 2008.  We are currently evaluating the financial impact of FSP
157-2 on our financial position and results of operations.
 
 In April
2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”), which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under
SFAS 142.  This pronouncement requires enhanced disclosures
concerning a company’s treatment of costs incurred to renew or extend the term
of a recognized intangible asset.  FSP 142-3 is effective for
financial statements issued for fiscal years beginning after December 15,
2008.  We are currently evaluating the impact of FSP 142-3, but
do not expect the adoption to have a material impact on our consolidated
financial statements.
 
 ITEM7A.            QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 The
following discussion about our market risk disclosures involves forward-looking
statements.  Actual results could differ materially from those
projected in the forward-looking statements.  We face exposure to
market risk from adverse movements in interest rates and foreign currency
exchange rates, which could impact our operations and financial
condition.  We do not use derivative financial instruments for
speculative purposes.
  Interest rate
sensitivity:  At January 31, 2009 we held money market funds of
$59.2 million, short-term marketable securities of $28.9 million and long-term
marketable securities of $72.5 million.  If short-term interest rates
were to decrease 10%, the decreased interest income associated with these money
market funds and marketable securities would not have a significant impact on
our net income and cash flows.
 
 At
January 31, 2009, we held nine auction rate securities, or ARS, with a cost and
par value of $43.0 million, which are all classified as long-term
marketable securities.  Historically, the fair value of our ARS has
been determined by the frequent auction periods, generally 28 days, which
provided liquidity at par value for these investments.  However,
subsequent to February 2008, all auctions involving such securities held by us
have failed.  The result of a failed auction is that these ARS will
continue to pay interest in accordance with their terms at each respective
auction date; however, liquidity of the securities will continue to be limited
until there is a successful auction, the issuer redeems the securities, the
securities mature or until such time as other markets for these ARS
develop.  We cannot be certain regarding the amount of time it will
take for an auction market or other markets to develop for these
securities.
 
 As a
result, we have reviewed the prospectuses for each of the nine ARS in the
Company’s investment portfolio as of January 31, 2009 and determined that the
unprecedented disruption in the auction process and resulting pattern of
interest payments was in accordance with their established rules of operation
under these circumstances.  The default mechanism called for in the
operating rules of these instruments is designed to adjust their interest
payments to a limit based on the income generated by their underlying student
loans.  The most significant consequences of this mechanism are the
preservation of their AAA credit rating while adjusting to a continuing stream
of interest payments to the security holders at a rate correlating to
contemporary credit market rates.
 
 42
 Table of Contents
 As a
result of this review, we reached the conclusion that the securities do have a
strong underlying principle value and that any potential adjustment in their
carrying value would be based upon our ability to endure their lack of
liquidity, the degree of certainty of continuing interest payments and the rate
of return on these securities.  Given that we expect considerable
liquidity from our other assets, foresee continuing positive cash flow and have
accepted our investment advisor’s offer to purchase all of our ARS at par value
in June 2010, we do not consider the remaining window of possible lack of
liquidity to be of sufficient risk to justify a reduction in their carrying
value.  The remaining valuation factor that we considered was the rate
of return evidenced by the interest received.  We used a discounted
cash flow calculation that reached a valuation that was similar to other of our
recent investments with comparably high credit ratings.
 
 As a
result of this judgment process and in accordance with the various accounting
pronouncements in this area, we reached the conclusion that the carrying value
of our ARS has not been impaired and that we have no expectation of any material
adverse impact on our future results of operations, liquidity, or capital
resources associated with holding these securities.
 
 Foreign currency
exchange rate sensitivity:  The Canadian dollar, Danish kroner
and Euro are the primary financial currencies of our subsidiaries in Canada,
Denmark and France, respectively.  We do not currently enter into
foreign exchange forward contracts to hedge certain balance sheet exposures and
inter-company balances against future movements in foreign exchange
rates.  However, we do maintain certain cash balances denominated in
the Hong Kong dollar, Canadian dollar, Euro, Danish kroner and Singapore
dollar.  If foreign exchange rates were to weaken against the U.S.
dollar immediately and uniformly by 10% from the exchange rate at January 31,
2009, the fair value of these foreign currency amounts would decline by an
insignificant amount.
 
 43
 Table of Contents
 ITEM8.                FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
 
 
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
  PageReport
      of Independent Registered Public Accounting Firm
                    45Consolidated
      Balance Sheets
                    46Consolidated
      Statements of Operations
                    47Consolidated
      Statements of Shareholders’ Equity and Comprehensive
Income
                    48Consolidated
      Statements of Cash Flows
                    49Notes
      to Consolidated Financial Statements
                    50
 
 
 
 44
 Table of Contents
  REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 The Board
of Directors and Shareholders
 Sigma
Designs, Inc.
 Milpitas,
CA
 
 We have
audited the accompanying consolidated balance sheets of Sigma Designs, Inc. and
subsidiaries ("the Company") as of January 31, 2009 and February 2, 2008, and
the related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for each of the fiscal years in the
three-year period ended January 31, 2009.  We have also audited the
Company's internal control over financial reporting as of January 31, 2009,
based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  Our audits also included the financial
statement schedule listed in the Index at Part IV, Item 15.  The
Company's management is responsible for these financial statements and schedule,
for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management Report on Internal Control over
Financial Reporting, appearing under Item 9A.  Our responsibility is
to express an opinion on these financial statements and schedule and an opinion
on the Company's internal control over financial reporting 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 audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects.  Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audits also included performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audits provide a reasonable basis for our
opinions.
 
 A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company's internal
control over financial reporting includes those policies and procedures that (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.
 
 In our
opinion, the consolidated financial statements and schedule referred to above
present fairly, in all material respects, the financial position of the Company
as of January 31, 2009 and February 2, 2008, and the results of its operations
and its cash flows for each of the years in the three-year period ended January
31, 2009 in conformity with accounting principles generally accepted in the
United States of America.  Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of January 31, 2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
 
 As
discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of FASB Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109,effective February 4,
2007.
 
 
 ARMANINO
McKENNA LLP
 San
Ramon, California
 April 1,
2009
  45
 Table of Contents
 SIGMA
DESIGNS, INC.
 CONSOLIDATED
BALANCE SHEETS
 (In
thousands, except share amounts)
  January
      31,
                            
                            
                            February
      2,2009
                            
                            
                            2008AssetsCurrent
      assets:Cash
      and cash equivalents
                            
                            $
                            90,845
                            
                            
                            $
                            174,089Short-term
      marketable securities
                            
                            
                            28,862
                            
                            
                            
                            44,401Accounts
      receivable, net of allowances of $534 in 2009 and $252 in
    2008
                            
                            
                            30,719
                            
                            
                            
                            40,205Inventories
                            
                            
                            36,058
                            
                            
                            
                            26,283Deferred
      tax assets
                            
                            
                            1,417
                            
                            
                            
                            5,155Prepaid
      expenses and other current assets
                            
                            
                            5,909
                            
                            
                            
                            5,547Total
      current assets
                            
                            
                            193,810
                            
                            
                            
                            295,680Long-term
      marketable securities
                            
                            
                            72,523
                            
                            
                            
                            57,242Software,
      equipment and leasehold improvements, net
                            
                            
                            21,124
                            
                            
                            
                            8,783Goodwill
                            
                            
                            9,928
                            
                            
                            
                            5,020Intangible
      assets, net
                            
                            
                            17,520
                            
                            
                            
                            4,303Deferred
      tax assets, net of current portion
                            
                            
                            12,824
                            
                            
                            
                            7,513Long-term
      investments
                            
                            
                            3,000
                            
                            
                            
                            263Other
      non-current assets
                            
                            
                            218
                            
                            
                            
                            662Total
      assets
                            
                            $
                            330,947
                            
                            
                            $
                            379,466Liabilities
      and Shareholders' EquityCurrent
      liabilities:Accounts
      payable
                            
                            $
                            5,655
                            
                            
                            $
                            18,484Accrued
      liabilities
                            
                            
                            12,826
                            
                            
                            
                            14,018Total
      current liabilities
                            
                            
                            18,481
                            
                            
                            
                            32,502Other
      long-term liabilities
                            
                            
                            5,801
                            
                            
                            
                            1,372Long
      term deferred tax liabilities
                            
                            
                            1,415
                            
                            
                            
                            —Total
      liabilities
                            
                            
                            25,697
                            
                            
                            
                            33,874Commitments
      and contingencies (Note 12)Shareholders'
      equity:Preferred
      stock - no par value, 2,000,000 shares authorized; no shares issued or
      outstanding
                            
                            
                            —
                            
                            
                            
                            —Common
      stock and additional paid-in capital; no par value; 100,000,000 shares
      authorized;30,756,848
      issued and 26,564,536 outstanding at January 31, 2009 and 30,031,060
      shares issued and outstanding at February 2, 2008
                            
                            
                            360,908
                            
                            
                            
                            341,194Treasury
      stock, at cost, 4,192,312 shares at January 31, 2009 and no shares at
      February 2, 2008
                            
                            
                            (85,941
                            )
                            
                            
                            —Accumulated
      other comprehensive income
                            
                            
                            273
                            
                            
                            
                            811Retained
      earnings
                            
                            
                            30,010
                            
                            
                            
                            3,587Total
      shareholders' equity
                            
                            
                            305,250
                            
                            
                            
                            345,592Total
      liabilities and shareholders' equity
                            
                            $
                            330,947
                            
                            
                            $
                            379,466
 
 See
      the accompanying Notes to Consolidated Financial
  Statements
  46
 Table of Contents
  SIGMA
DESIGNS, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (In
thousands, except per share amounts)
 
 Years
      EndedJanuary
      31,
                                          
                                          
                                          February
      2,
                                          
                                          
                                          February
      3,2009
                                          
                                          
                                          2008
                                          
                                          
                                          2007Net
      revenue
                                          
                                          $
                                          209,160
                                          
                                          
                                          $
                                          221,206
                                          
                                          
                                          $
                                          91,218Cost
      of revenue
                                          
                                          
                                          108,606
                                          
                                          
                                          
                                          108,408
                                          
                                          
                                          
                                          46,783Gross
      profit
                                          
                                          
                                          100,554
                                          
                                          
                                          
                                          112,798
                                          
                                          
                                          
                                          44,435Operating
      expenses:Research
      and development
                                          
                                          
                                          43,558
                                          
                                          
                                          
                                          31,384
                                          
                                          
                                          
                                          22,515Sales
      and marketing
                                          
                                          
                                          12,101
                                          
                                          
                                          
                                          10,226
                                          
                                          
                                          
                                          7,841General
      and administrative
                                          
                                          
                                          17,705
                                          
                                          
                                          
                                          13,887
                                          
                                          
                                          
                                          8,222Acquired
      in-process research and development
                                          
                                          
                                          1,571
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Total
      operating expenses
                                          
                                          
                                          74,935
                                          
                                          
                                          
                                          55,497
                                          
                                          
                                          
                                          38,578Income
      from operations
                                          
                                          
                                          25,619
                                          
                                          
                                          
                                          57,301
                                          
                                          
                                          
                                          5,857Interest
      and other income, net
                                          
                                          
                                          5,698
                                          
                                          
                                          
                                          5,782
                                          
                                          
                                          
                                          815Income
      before income taxes
                                          
                                          
                                          31,317
                                          
                                          
                                          
                                          63,083
                                          
                                          
                                          
                                          6,672Provision
      for (benefit from) income taxes
                                          
                                          
                                          4,894
                                          
                                          
                                          
                                          (7,126
                                          )
                                          
                                          
                                          428Net
      income
                                          
                                          $
                                          26,423
                                          
                                          
                                          $
                                          70,209
                                          
                                          
                                          $
                                          6,244Net
      income per share:Basic
                                          
                                          $
                                          0.98
                                          
                                          
                                          $
                                          2.73
                                          
                                          
                                          $
                                          0.28Diluted
                                          
                                          $
                                          0.95
                                          
                                          
                                          $
                                          2.46
                                          
                                          
                                          $
                                          0.24Shares
      used in computing net income per share:Basic
                                          
                                          
                                          26,892
                                          
                                          
                                          
                                          25,683
                                          
                                          
                                          
                                          22,683Diluted
                                          
                                          
                                          27,705
                                          
                                          
                                          
                                          28,550
                                          
                                          
                                          
                                          25,670
 
 See
      the accompanying Notes to Consolidated Financial
  Statements
  47
 Table of Contents
 SIGMA
DESIGNS, INC.
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
 AND
COMPREHENSIVE INCOME
 (In
thousands, except shares)
  Accumulated
      OtherCommon
      Stock
                                                  
                                                  
                                                  Treasury
      Stock
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  Comprehensive
      Income
                                                  
                                                  
                                                  RetainedShareholder
                                                  
                                                  
                                                  Unrealized
                                                  
                                                  
                                                  Accumulated
                                                  
                                                  
                                                  Earnings
                                                  
                                                  
                                                  Total
                                                  
                                                  
                                                  TotalDeferred
                                                  
                                                  
                                                  Notes
                                                  
                                                  
                                                  Gain/
                                                  
                                                  
                                                  Translation
                                                  
                                                  
                                                  (Accumulated
                                                  
                                                  
                                                  Shareholders'
                                                  
                                                  
                                                  ComprehensiveShares
                                                  
                                                  
                                                  Amount
                                                  
                                                  
                                                  Shares
                                                  
                                                  
                                                  Amount
                                                  
                                                  
                                                  Compensation
                                                  
                                                  
                                                  Receivable
                                                  
                                                  
                                                  (Loss)
                                                  
                                                  
                                                  Adjustment
                                                  
                                                  
                                                  Deficit)
                                                  
                                                  
                                                  Equity
                                                  
                                                  
                                                  IncomeBalance,
      January 28, 2006
                                                  
                                                  
                                                  21,945,874
                                                  
                                                  
                                                  $
                                                  107,700
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  —
                                                  
                                                  
                                                  $
                                                  (4,303
                                                  )
                                                  
                                                  $
                                                  (58
                                                  )
                                                  
                                                  $
                                                  (19
                                                  )
                                                  
                                                  $
                                                  223
                                                  
                                                  
                                                  $
                                                  (72,866
                                                  )
                                                  
                                                  $
                                                  30,677Net
      income
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  6,244
                                                  
                                                  
                                                  
                                                  6,244
                                                  
                                                  
                                                  $
                                                  6,244Unrealized
      gains on marketable securities
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  35
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  35
                                                  
                                                  
                                                  
                                                  35Currency
      translation adjustment
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  112
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  112
                                                  
                                                  
                                                  
                                                  112Total
      comprehensive income
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  6,391Reversal
      of APB 25 deferred share-basedcompensation
      upon the adoption of FAS 123R
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (4,303
                                                  )
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  4,303
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Share-based
      compensation expense
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  6,059
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  6,059Issuance
      of common stock for Blue7 acquisition
                                                  
                                                  
                                                  583,870
                                                  
                                                  
                                                  
                                                  8,189
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  8,189Non-employee
      share-based compensation
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  317
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  317Tax
      benefit from stock options
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  123
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  123Net
      proceeds from common stock issued under share plans
                                                  
                                                  
                                                  374,186
                                                  
                                                  
                                                  
                                                  1,216
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  1,216Balance, February 3, 2007
                                                  
                                                  
                                                  22,903,930
                                                  
                                                  
                                                  
                                                  119,301
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (58
                                                  )
                                                  
                                                  
                                                  16
                                                  
                                                  
                                                  
                                                  335
                                                  
                                                  
                                                  
                                                  (66,622
                                                  )
                                                  
                                                  
                                                  52,972Net
      income
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  70,209
                                                  
                                                  
                                                  
                                                  70,209
                                                  
                                                  
                                                  
                                                  70,209Unrealized
      gains on marketable securities
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  254
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  254
                                                  
                                                  
                                                  
                                                  254Currency
      translation adjustment
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  206
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  206
                                                  
                                                  
                                                  
                                                  206Total
      comprehensive income
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  70,669Shareholder
      receivable written off
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  29
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  29Repayment
      of shareholder note receivable
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  29
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  29Share-based
      compensation expense
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  6,777
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  6,777Non-employee
      share-based compensation
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  432
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  432Tax
      benefit from stock options
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  5,266
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  5,266Net
      proceeds from common stock issued under share plans
                                                  
                                                  
                                                  2,527,130
                                                  
                                                  
                                                  
                                                  10,524
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  10,524Net
      proceeds from common stock issued in follow-onoffering,
      net of offering costs
                                                  
                                                  
                                                  4,600,000
                                                  
                                                  
                                                  
                                                  198,894
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  198,894Balance, February 2, 2008
                                                  
                                                  
                                                  30,031,060
                                                  
                                                  
                                                  
                                                  341,194
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  270
                                                  
                                                  
                                                  
                                                  541
                                                  
                                                  
                                                  
                                                  3,587
                                                  
                                                  
                                                  
                                                  345,592Net
      income
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  26,423
                                                  
                                                  
                                                  
                                                  26,423
                                                  
                                                  
                                                  
                                                  26,423Unrealized
      loss on marketable securities
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (157
                                                  )
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (157
                                                  )
                                                  
                                                  
                                                  (157
                                                  )Currency
      translation adjustment
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (381
                                                  )
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (381
                                                  )
                                                  
                                                  
                                                  (381
                                                  )Total
      comprehensive income
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  25,885Share-based
      compensation expense
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  12,617
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  12,617Non-employee
      share-based compensation
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  56
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  56Tax
      benefit from stock options
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  2,440
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  2,440Net
      proceeds from common stock issued under share plans
                                                  
                                                  
                                                  725,788
                                                  
                                                  
                                                  
                                                  4,601
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  4,601Repurchase
      of common stock shares
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (4,192,312
                                                  )
                                                  
                                                  
                                                  (85,941
                                                  )
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (85,941
                                                  )Balance,
      January 31, 2009
                                                  
                                                  
                                                  30,756,848
                                                  
                                                  
                                                  $
                                                  360,908
                                                  
                                                  
                                                  
                                                  (4,192,312
                                                  )
                                                  
                                                  $
                                                  (85,941
                                                  )
                                                  
                                                  $
                                                  —
                                                  
                                                  
                                                  $
                                                  —
                                                  
                                                  
                                                  $
                                                  113
                                                  
                                                  
                                                  $
                                                  160
                                                  
                                                  
                                                  $
                                                  30,010
                                                  
                                                  
                                                  $
                                                  305,250
  See
      the accompanying Notes to Consolidated Financial
  Statements
 48
 Table of Contents
 SIGMA
DESIGNS, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (In
thousands)
 
 Years
      EndedJanuary
      31,
                                        
                                        
                                        February
      2,
                                        
                                        
                                        February
      3,2009
                                        
                                        
                                        2008
                                        
                                        
                                        2007Cash
      flows from operating activities:Net
      income
                                        
                                        $
                                        26,423
                                        
                                        
                                        $
                                        70,209
                                        
                                        
                                        $
                                        6,244Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                                        
                                        
                                        7,214
                                        
                                        
                                        
                                        3,375
                                        
                                        
                                        
                                        2,352Acquired
      in-process research and development
                                        
                                        
                                        1,571
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Share-based
      compensation
                                        
                                        
                                        12,673
                                        
                                        
                                        
                                        7,209
                                        
                                        
                                        
                                        5,266Shareholder
      note receivable written off
                                        
                                        
                                        —
                                        
                                        
                                        
                                        29
                                        
                                        
                                        
                                        —Provision
      for excess and obsolete inventory
                                        
                                        
                                        2,055
                                        
                                        
                                        
                                        669
                                        
                                        
                                        
                                        1,224Provision
      for sales returns, discounts and doubtful accounts
                                        
                                        
                                        948
                                        
                                        
                                        
                                        619
                                        
                                        
                                        
                                        30Deferred
      income taxes
                                        
                                        
                                        610
                                        
                                        
                                        
                                        (12,668
                                        )
                                        
                                        
                                        —Losses
      on disposal of software, equipment and leasehold
    improvements
                                        
                                        
                                        2
                                        
                                        
                                        
                                        12
                                        
                                        
                                        
                                        10Gains
      on sale of long-term investments
                                        
                                        
                                        (39
                                        )
                                        
                                        
                                        (31
                                        )
                                        
                                        
                                        —Investment
      impairment charges
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        19Tax
      benefit from employee stock option plan
                                        
                                        
                                        2,440
                                        
                                        
                                        
                                        5,264
                                        
                                        
                                        
                                        123Excess
      tax benefit from share-based compensation
                                        
                                        
                                        (2,440
                                        )
                                        
                                        
                                        (179
                                        )
                                        
                                        
                                        —Accretion
      of contributed leasehold improvements
                                        
                                        
                                        (150
                                        )
                                        
                                        
                                        (130
                                        )
                                        
                                        
                                        (81
                                        )Changes
      in operating assets and liabilities:Accounts
      receivable
                                        
                                        
                                        10,079
                                        
                                        
                                        
                                        (29,593
                                        )
                                        
                                        
                                        (6,310
                                        )Inventories
                                        
                                        
                                        (5,513
                                        )
                                        
                                        
                                        (10,949
                                        )
                                        
                                        
                                        (13,397
                                        )Prepaid
      expenses and other current assets
                                        
                                        
                                        (108
                                        )
                                        
                                        
                                        (4,194
                                        )
                                        
                                        
                                        45Other
      non-current assets
                                        
                                        
                                        443
                                        
                                        
                                        
                                        (284
                                        )
                                        
                                        
                                        —Accounts
      payable
                                        
                                        
                                        (13,535
                                        )
                                        
                                        
                                        4,762
                                        
                                        
                                        
                                        9,517Accrued
      liabilities
                                        
                                        
                                        (4,421
                                        )
                                        
                                        
                                        5,626
                                        
                                        
                                        
                                        3,450Other
      long-term liabilities
                                        
                                        
                                        4,579
                                        
                                        
                                        
                                        489
                                        
                                        
                                        
                                        —Net
      cash provided by operating activities
                                        
                                        
                                        42,831
                                        
                                        
                                        
                                        40,235
                                        
                                        
                                        
                                        8,492Cash
      flows from investing activities:Purchase
      of marketable securities
                                        
                                        
                                        (108,318
                                        )
                                        
                                        
                                        (194,254
                                        )
                                        
                                        
                                        (22,234
                                        )Sales
      and maturities of marketable securities
                                        
                                        
                                        108,421
                                        
                                        
                                        
                                        101,656
                                        
                                        
                                        
                                        23,003Purchases
      of software, equipment and leasehold improvements
                                        
                                        
                                        (15,691
                                        )
                                        
                                        
                                        (7,582
                                        )
                                        
                                        
                                        (3,014
                                        )Net
      cash received (paid) in connection with acquisitions
                                        
                                        
                                        (28,508
                                        )
                                        
                                        
                                        —
                                        
                                        
                                        
                                        147Purchase
      of long-term investments
                                        
                                        
                                        (3,000
                                        )
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Recovery
      of long-term investment loss
                                        
                                        
                                        —
                                        
                                        
                                        
                                        31
                                        
                                        
                                        
                                        —Net
      proceeds from liquidation of long-term investment
                                        
                                        
                                        302
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Other
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        67Net
      cash used in investing activities
                                        
                                        
                                        (46,794
                                        )
                                        
                                        
                                        (100,149
                                        )
                                        
                                        
                                        (2,031
                                        )Cash
      flows from financing activities:Repurchase
      of common stock shares
                                        
                                        
                                        (85,941
                                        )
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Repayment
      of bank borrowings
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (242
                                        )
                                        
                                        
                                        (203
                                        )Net
      proceeds from exercise of employee stock options and stock purchase
      rights
                                        
                                        
                                        4,601
                                        
                                        
                                        
                                        10,524
                                        
                                        
                                        
                                        1,216Excess
      tax benefit on share-based compensation
                                        
                                        
                                        2,440
                                        
                                        
                                        
                                        179
                                        
                                        
                                        
                                        —Repayment
      of shareholder note receivable
                                        
                                        
                                        —
                                        
                                        
                                        
                                        29
                                        
                                        
                                        
                                        —Proceeds
      from issuance of common stock, net of offering costs
                                        
                                        
                                        —
                                        
                                        
                                        
                                        198,894
                                        
                                        
                                        
                                        —Net
      cash provided by (used in) financing activities
                                        
                                        
                                        (78,900
                                        )
                                        
                                        
                                        209,384
                                        
                                        
                                        
                                        1,013Effect
      of foreign exchange rate changes on cash and cash
    equivalents
                                        
                                        
                                        (381
                                        )
                                        
                                        
                                        206
                                        
                                        
                                        
                                        112Increase
      (decrease) in cash and cash equivalents
                                        
                                        
                                        (83,244
                                        )
                                        
                                        
                                        149,676
                                        
                                        
                                        
                                        7,586Cash
      and cash equivalents at beginning of period
                                        
                                        
                                        174,089
                                        
                                        
                                        
                                        24,413
                                        
                                        
                                        
                                        16,827Cash
      and cash equivalents at end of period
                                        
                                        $
                                        90,845
                                        
                                        
                                        $
                                        174,089
                                        
                                        
                                        $
                                        24,413Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        10
                                        
                                        
                                        $
                                        30Cash
      paid for income taxes
                                        
                                        $
                                        200
                                        
                                        
                                        $
                                        388
                                        
                                        
                                        $
                                        171Issuance
      of common stock and assumption of stock options related to business
      acquisition
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        11,414
 
 See
      the accompanying Notes to Consolidated Financial
  Statements
 49
 Table of Contents
 SIGMA
DESIGNS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 1.
                Organization
      and Summary of Significant Accounting
Policies
 
 Organization and nature of
operations:Sigma Designs, Inc. (the “Company”)
specializes in integrated system-on-chip solutions (“SoC”) for the IPTV,
connected media player, prosumer and industrial audio/video, HDTV, wireless and
other markets.  The Company sells its products to manufacturers,
designers and to a lesser extent, to distributors who, in turn, sell to
manufacturers.
 
 Basis of
presentation:The consolidated financial statements include
Sigma Designs, Inc. and its wholly-owned subsidiaries.  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 follows a 52 or 53 week fiscal reporting
calendar ending on the Saturday closest to January 31 each year.  The
Company’s most recent fiscal year ended on January 31, 2009 and included 52
weeks.  The fiscal years ended February 2, 2008 and February 3, 2007
included 52 weeks and 53 weeks, respectively.  The Company’s next
fiscal year, ending on January 30, 2010, will include 52 weeks.
 
 Use of
estimates:The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America (“US GAAP”) requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying
notes.  On an ongoing basis, the Company evaluates its estimates,
including, but not limited to, those related to income taxes, warranty
obligations and litigation and settlement costs, the collectability of accounts
receivable, the valuation of inventory on a lower of cost or market basis, the
valuation of share-based compensation, expected future cash flows and useful
lives of investments, goodwill, intangible assets and other long-lived
assets.  The Company bases its estimates on historical experience and
on other assumptions that its management believes are reasonable under the
circumstances.  These estimates form the basis for making judgments
about the carrying values of assets and liabilities when those values are not
readily apparent from other sources.  Actual results may differ
materially from management’s estimates.
 
 Fair value of financial
instruments:For certain of the Company’s financial
instruments, including cash and cash equivalents, accounts receivable, short-
and long-term marketable securities, accounts payable and other current
liabilities, the carrying amounts approximate their fair value due to the
relatively short maturity of these items.Marketable
securities consist of available-for-sale securities that are reported at fair
value with the related unrealized gains and losses included in accumulated other
comprehensive income, a component of shareholders’ equity.  Pursuant
to Statement of Financial Accounting Standard (“SFAS”), SFAS No. 157,
Fair Value Measurements
(“SFAS 157”), the fair value of cash equivalents and certain marketable
securities is determined based on “Level 1” inputs, which consist of quoted
prices in active markets for identical assets.  The Company holds nine
auction rate securities (“ARS”) and the fair value of ARS is determined based on
“Level 3” inputs, which is valued through a discounted cash flow using
significant assumptions as to the expected future interest income from those
securities which is not observable in the market.
 
 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- and long-term marketable
securities:Short-term marketable securities represent highly
liquid debt instruments with a remaining maturity date at acquisition date of
greater than 90 days but less than one year and are stated at fair
value.  Long-term marketable securities represent securities with
contractual maturities greater than one year from the date of
acquisition.  The Company’s marketable securities are classified as
available-for-sale because the sale of such securities may be required prior to
maturity.  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 within shareholders’ equity.  Any gains and
losses on the sale of marketable securities are determined on a specific
identification basis.
 
 Accounts
receivable:  The Company defers recognition of revenue and the
related receivable when it cannot estimate whether collectability is reasonably
assured at the time products and services are delivered to its
customer.  The Company also provides allowances for bad debt and sales
returns.  In establishing the allowance for bad debt management
reviews the customer's payment history and information regarding their credit
worthiness.  In establishing the allowance for sales returns,
management makes estimates of potential future returns of products for which
revenue has been recognized in the current period, including analyzing
historical returns, current economic trends, and changes in customer demand and
acceptance of its products.  In fiscal 2009, 2008 and 2007, the
Company recorded provisions for sales returns, discounts and bad debt in the
total amounts of $0.9 million, $0.6 million and $30,000,
respectively.  If the financial condition of the Company’s customers
were to deteriorate, resulting in an impairment of their ability to make
payments, or future product returns increased, additional allowances may be
required.
 
 50
 Table of Contents
 Inventories:Inventories
are stated at the lower of standard cost (approximating a first-in, first-out
basis) or market value.  The Company evaluates its ending inventories
for excess quantities and obsolescence on a quarterly basis.  This
evaluation includes analysis of historical and forecasted sales levels by
product.  A provision is recorded for inventories on hand in excess of
forecasted demand.  In addition, the Company writes off inventories
that are considered obsolete.  Obsolescence is determined from several
factors, including competitiveness of product offerings, market conditions and
product life cycles.  Increases to the allowance for excess and
obsolete inventory are charged to cost of revenue.  At the point of
the loss recognition, a new, lower-cost basis for that inventory is established,
and subsequent changes in facts and circumstances do not result in the
restoration or increase in that newly established cost basis.  If this
lower-costed inventory is subsequently sold, the related allowance is matched to
the movement of related product inventory, resulting in lower costs and higher
gross margins for those products.
 
 As a
result of this inventory valuation review, the Company charged approximately
$2.1 million, $0.7 million and $1.2 million to cost of revenue for fiscal 2009,
2008 and 2007, respectively.
 
 Software, equipment and leasehold
improvements:Software, equipment and leasehold improvements
are stated at cost.  Depreciation and amortization are computed using
the straight-line method based on the useful lives of the assets (one to five
years) or the lease term if shorter.  The allowance for leasehold
improvements received from the landlord for improvements to the Company’s
current facility is amortized using the straight-line method over the lesser of
the remaining lease term or the useful life of the leasehold
improvements.  Repairs and maintenance costs are expensed as
incurred.
 
 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 its long-term investments for impairment
annually according to Emerging Issues Task Force Issue No. 03-01, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments(“EITF
03-01”).  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 includes
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.
 
 Goodwill and 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.
 
 The
Company reviews goodwill and intangible assets with indefinite lives annually
for impairment and whether events or changes in circumstances indicate the
carrying value may not be recoverable in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible
Assets (“SFAS 142”).  An impairment charge is recorded if the
carrying value exceeds the assets’ fair value.  Purchased intangible
assets with finite useful lives are amortized using the straight-line method
over their estimated useful lives and are reviewed for impairment under SFAS No.
144, Accounting for the
Impairment or Disposal of Long-Lived Assets (“SFAS
144”).  Determining the fair value of a reporting unit is judgmental
in nature and involves the use of significant estimates and
assumptions.  These estimates and assumptions include revenue growth
rates and forecasted operating margins used to calculate projected future cash
flows, risk-adjusted discount rates, future economic and market conditions and
determination of appropriate market comparables.  The Company bases
its fair value estimates on assumptions it believes to be
reasonable.  Actual future results may differ from those
estimates.
 
 Revenue recognition:The
Company derives its revenue primarily from three principal sources: product
sales, product development contracts and service contracts.  The
Company recognizes revenue 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 collectability is reasonably assured.
 
 Revenue
from product sales to original equipment manufacturers (“OEM”), distributors and
end users is generally recognized upon shipment, as shipping terms are
predominantly FOB shipping point, except that revenue is deferred when
management cannot reasonably estimate the amount of returns or where
collectability is not assured.  In those situations, revenue is
recognized when collection subsequently becomes probable and returns are
estimable.  Allowances for sales returns, discounts and warranty costs
are recorded at the time that the associated revenue is recognized.
 
 51
 Table of Contents
 Product
development agreements typically require that the Company provide customized
software to support customer-specific designs; accordingly, this revenue is
accounted for under the AICPA Statement of Position (“SOP”) 97-2, Software Revenue
Recognition.  The Company offers post-contract customer support
(“PCS”) on a contractual basis for additional fees, typically with 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.  The Company classifies development
costs related to product development agreements as cost of
revenue.  Product development revenue was approximately $0.3 million,
$1.0 million and $0.6 million for fiscal 2009, 2008 and 2007,
respectively.
 
 Revenue
from service contracts consist of fees for providing engineering support
services and are recognized ratably over the contract term as services are
provided.  Expenses related to support service revenue are included in
cost of revenue.  Support service revenue was $18,000, $0.9 million
and $0.3 million for fiscal 2009, 2008 and 2007, respectively.
 
 Foreign
currency:The functional currency of the Company’s foreign
subsidiaries is either the U.S. dollar or the local currency of each
country.  Where the local currency is the functional currency, 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 interest and other income, net, in the
accompanying consolidated statements of operations have not been significant for
all years presented.
 
 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 and long-term marketable securities, long-term
investments and accounts receivable.  The majority of the Company’s
cash, cash equivalents and short-term and long-term marketable securities are on
deposit with eleven financial institutions.  The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral for sales on credit.  The Company reviews its accounts
receivable balances to determine if any receivables will potentially be
uncollectible and includes any amounts that are determined to be uncollectible
in its allowance for doubtful accounts
 
 Income
taxes:Deferred income taxes reflect the net tax effects of
any temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts reported for income tax
purposes, and any operating losses and tax credit carryforwards.  Income
taxes are accounted for under an asset and liability approach in accordance with
SFAS No. 109, Accounting
for Income Taxes(“SFAS 109”).  Deferred tax liabilities are
recognized for future taxable amounts and deferred tax assets are recognized for
future deductions, net of any valuation allowance, to reduce deferred tax assets
to amounts that are considered more likely than not to be
realized.  The income tax provision (benefit) for fiscal 2009, 2008
and 2007 was $4.9 million, $(7.1) million and $0.4 million,
respectively.
 
 In July
2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in
Income Taxes –
An Interpretation of FASB Statement No. 109 (“FIN 48”).  FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with SFAS 109 and prescribes a
recognition threshold and measurement attributes for financial statement
disclosure of tax positions taken or expected to be taken on a tax return. 
Under FIN 48, the impact of an uncertain income tax position on the income tax
return must be recognized as the largest amount that is more-likely-than-not to
be sustained upon audit by the relevant taxing authority.  An uncertain
income tax position will not be recognized if it has less than a 50% likelihood
of being sustained.  Additionally, FIN 48 provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.  The Company adopted the provisions of
FIN 48 on February 4, 2007, the beginning of its fiscal 2008.  The
total amount of unrecognized tax benefits as of January
31, 2009 was $10.9
million.
 
 Share-based
compensation:The Company applies SFAS No.123R, Share-Based Payment (“SFAS
123R”), to measure and recognize compensation expense for all share-based
payment awards made to employees and directors based on estimated fair
values.
 
 52
 Table of Contents
 SFAS 123R
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 the Company’s consolidated
statements of operations.
 
 Share-based
compensation expense recognized in periods after January 28, 2006 is based on
the value of the portion of share-based payment awards that is ultimately
expected to vest during the period.  Share-based compensation expense
recognized in the Company’s consolidated statements of operations for periods
after the adoption of SFAS 123R 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 123R.  As
share-based compensation expense recognized in the consolidated statements of
operations for fiscal 2009 is based on awards ultimately expected to vest, it
has been adjusted for estimated forfeitures.  SFAS 123R requires
forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates.
 
 The
effect of recording employee share-based compensation expense on the
consolidated statements of operations for fiscal 2009, 2008 and 2007 was as
follows (in thousands, except per share amounts):
 Years
      EndedJanuary
      31, 2009
                                        
                                        
                                        February
      2, 2008
                                        
                                        
                                        February
      3, 2007Share-based
      compensation expense by type of award:Stock
      options
                                        
                                        $
                                        11,954
                                        
                                        
                                        $
                                        6,358
                                        
                                        
                                        $
                                        4,842Employee
      stock purchase plan
                                        
                                        
                                        663
                                        
                                        
                                        
                                        419
                                        
                                        
                                        
                                        107Total
      share-based compensation expense
                                        
                                        
                                        12,617
                                        
                                        
                                        
                                        6,777
                                        
                                        
                                        
                                        4,949Tax
      effect of share-based compensation expense
                                        
                                        
                                        (3,754
                                        )
                                        
                                        
                                        (1,597
                                        )
                                        
                                        
                                        (317
                                        )Net
      effect on net income
                                        
                                        $
                                        8,863
                                        
                                        
                                        $
                                        5,180
                                        
                                        
                                        $
                                        4,632Effect
      on net income per share:Basic
                                        
                                        $
                                        0.33
                                        
                                        
                                        $
                                        0.20
                                        
                                        
                                        $
                                        0.20Diluted
                                        
                                        $
                                        0.32
                                        
                                        
                                        $
                                        0.18
                                        
                                        
                                        $
                                        0.18
 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.
 
 Research and development costs:Costs incurred in the research and development of the Company’s products
are expensed as incurred.  Costs associated with the development of
computer software are expensed prior to the establishment of technological
feasibility and capitalized in certain cases thereafter until the product is
available for general release to customers.
 
 Recent accounting
pronouncements:In February 2007, the FASB issued SFAS No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities(“SFAS 159”).  SFAS
159 provides companies with an option to report selected financial assets and
liabilities at fair value.  The standard’s objective is to reduce both
complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities
differently.  The standard requires companies to provide additional
information that will help investors and other users of financial statements to
more easily understand the effect of the Company’s choice to use fair value on
its earnings.  It also requires companies to display the fair value of
those assets and liabilities for which the Company has chosen to use fair value
on the face of the balance sheet.  The new standard does not eliminate
disclosure requirements included in other accounting standards, including
requirements for disclosures about fair value measurements included in SFAS
157and SFAS No.
107, Disclosures about Fair
Value of Financial Instruments(“SFAS 107”).SFAS 159 is
effective for fiscal years beginning after November 15, 2007, and the Company
did not elect to adopt the fair value option under SFAS 159.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
("SFAS 141R").  SFAS 141R establishes principles and requirements
for how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree.  The statement also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination, requires related acquisition costs to be expensed in the period
incurred and determines what information to disclose to enable users of
financial statements to evaluate the nature and financial effects of the
business combination.  SFAS 141R is effective for fiscal years
beginning after December 15, 2008.  Accordingly, any business
combinations that the Company engaged in were recorded and disclosed according
to SFAS 141 until January 31, 2009.  The Company expects
SFAS No. 141R will have an impact on its consolidated financial
statements, but the nature and magnitude of the specific effects will depend
upon the nature, terms and size of any acquisitions it consummates after the
effective date of January 31, 2009.
 
 53
 Table of Contents
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB No. 51 (“SFAS
160”), which establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary, changes in a parent’s ownership
interest in a subsidiary and the deconsolidation of a
subsidiary.  SFAS 160 is effective for fiscal years beginning after
December 15, 2008.  The Company will adopt this pronouncement in its
first quarter of fiscal 2010 and does not expect the adoption to have a material
impact on its consolidated financial statements.
 
 In
February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2,
Effective Date of FASB
Statement No.157 (“FSP 157-2”), which delays the effective date of SFAS
No. 157, Fair Value
Measurements (“SFAS 157”), for all non-recurring fair value measurements
of non-financial assets and non-financial liabilities until fiscal years
beginning after November 15, 2008.  The Company is currently
evaluating the financial impact of FSP 157-2 on its financial position and
results of operations.
 
 In April
2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”), which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under
SFAS 142.  This pronouncement requires enhanced disclosures
concerning a company’s treatment of costs incurred to renew or extend the term
of a recognized intangible asset.  FSP 142-3 is effective for
financial statements issued for fiscal years beginning after December 15,
2008.  The Company is currently evaluating the impact of
FSP 142-3, but do not expect the adoption to have a material impact on its
consolidated financial statements.
 
 2.
                  Change
      in accounting policy
 
 Effective
for the second quarter of fiscal 2009, the Company changed its method of
accounting for valuing the portion of its inventory known as tested wafers or
die bank.  Previously, the expense associated with yield loss from the
initial testing of wafers was expensed to cost of revenue until the wafers were
moved into the next stage of production.  Historically, the Company
had absorbed the value of rejected die only when the wafers were moved into work
in process (“WIP”).  Now, the Company accounts for the yield loss from
the initial testing by immediately absorbing the cost of the rejected die as
they are tested.
 
 In the
second quarter of fiscal 2009, the Company significantly upgraded its enterprise
resource planning (ERP) system, which provided better tools to more accurately
track and value its die bank.  In addition, in light of the Company’s
rapid growth in fiscal 2008, its die bank segment of inventory had not been
significant in any single period until the first quarter of fiscal
2009.  As a result of increased significance of the die bank
inventory, which the Company currently anticipates will continue, combined with
an improved ERP system, the Company believes that absorbing the yield loss into
its inventory consistently throughout the manufacturing process is preferable to
the prior accounting method.  In making this determination, the
Company also considered the accounting practices of other fabless semiconductor
companies and the added clarity and ease of understanding that such a change
would have on its reported results for investors provided by the additional cost
component.
 
 The
Company has accounted for this change in method of accounting in accordance with
Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error
Corrections (“SFAS 154”).  This statement requires that all
elective accounting changes be made on a retrospective
basis.  Accordingly, the Company retrospectively adjusted its
unaudited condensed statement of operations for the three months ended May 3,
2008 and the unaudited consolidated balance sheet as of May 3, 2008 to reflect
the results of absorbing the yield loss associated with the sorted wafers in
inventory and the direct tax effect of this adjustment.  Prior to the
first quarter of fiscal 2009, the Company did not maintain a material level of
die bank within its inventory.  Therefore, the Company has determined
that no material retrospective adjustments were necessary for periods before
fiscal 2009.
 
 The
following table sets forth the retrospective adjustments to the results as of
and for the quarter ended May 3, 2008:
 
 54
 Table of Contents
 Unaudited
      Condensed Consolidated Balance Sheet(in
      thousands)
  May
      3, 2008As
      Previously
                                      Reported
                                    
                                    
                                    Adjustment
                                    
                                    
                                    AdjustedInventories
                                    
                                    $
                                    34,541
                                    
                                    
                                    $
                                    2,387
                                    
                                    
                                    $
                                    36,928Total
      current assets
                                    
                                    
                                    217,012
                                    
                                    
                                    
                                    2,387
                                    
                                    
                                    
                                    219,399Total
      assets
                                    
                                    
                                    309,836
                                    
                                    
                                    
                                    2,387
                                    
                                    
                                    
                                    312,223Accrued
      liabilities and other
                                    
                                    
                                    13,369
                                    
                                    
                                    
                                    472
                                    
                                    
                                    
                                    13,841Total
      current liabilities
                                    
                                    
                                    30,873
                                    
                                    
                                    
                                    472
                                    
                                    
                                    
                                    31,345Total
      liabilities
                                    
                                    
                                    32,631
                                    
                                    
                                    
                                    472
                                    
                                    
                                    
                                    33,103Total
      shareholders’ equity
                                    
                                    
                                    277,205
                                    
                                    
                                    
                                    1,915
                                    
                                    
                                    
                                    279,120Total
      liabilities and shareholders’ equity
                                    
                                    $
                                    309,836
                                    
                                    
                                    $
                                    2,387
                                    
                                    
                                    $
                                    312,223
  Unaudited
      Condensed Consolidated Statement of Income(in
      thousands, except per share
data)
  Three
      Months EndedMay
      3, 2008As
      Previously
                                                    Reported
                                                  
                                                  
                                                  Adjustment
                                                  
                                                  
                                                  AdjustedCost
      of revenue
                                                  
                                                  $
                                                  31,249
                                                  
                                                  
                                                  $
                                                  (2,387
                                                  )
                                                  
                                                  $
                                                  28,862Gross
      profit
                                                  
                                                  
                                                  25,633
                                                  
                                                  
                                                  
                                                  2,387
                                                  
                                                  
                                                  
                                                  28,020Net
      income from operations
                                                  
                                                  
                                                  4,097
                                                  
                                                  
                                                  
                                                  2,387
                                                  
                                                  
                                                  
                                                  6,484Net
      income before income taxes
                                                  
                                                  
                                                  6,265
                                                  
                                                  
                                                  
                                                  2,387
                                                  
                                                  
                                                  
                                                  8,652Provision
      for income taxes
                                                  
                                                  
                                                  1,598
                                                  
                                                  
                                                  
                                                  472
                                                  
                                                  
                                                  
                                                  2,070Net
      income
                                                  
                                                  $
                                                  4,667
                                                  
                                                  
                                                  $
                                                  1,915
                                                  
                                                  
                                                  $
                                                  6,582Basic
      net income per share
                                                  
                                                  $
                                                  0.16
                                                  
                                                  
                                                  $
                                                  0.07
                                                  
                                                  
                                                  $
                                                  0.23Diluted
      net income per share
                                                  
                                                  $
                                                  0.16
                                                  
                                                  
                                                  $
                                                  0.06
                                                  
                                                  
                                                  $
                                                  0.22
 
 3.
                Share
      Repurchase Program
 
 On
February 27, 2008, the Company announced that its Board of Directors had
approved a share repurchase program that authorized the Company to repurchase up
to 2.0 million shares of its common stock.  On March 18, 2008, the
Company announced that its Board of Directors had approved an increase of 3.0
million additional shares to the program, resulting in a total amount authorized
to be repurchased under the share repurchase program of 5.0 million
shares.  The share repurchase program had a one-year term, and thus,
terminated on March 17, 2009.  Share repurchases under the
authorizations were as follows (in thousands, except share and per share
data):
 Period
                                
                                Total
      Number of Shares Purchased
                                
                                
                                Total
      Cost of Repurchase
                                
                                
                                Average
      Price Paid per Share
                                
                                
                                Maximum
      Number of Share that Could Be Purchased under the PlanAuthorization
      of 2 million shares - February 26, 2008
                                
                                
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                
                                2,000,000Additional
      authorization of 3 million shares - March 18, 2008
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                5,000,000Quarter
      Ending May 3, 2008
                                
                                
                                3,836,025
                                
                                
                                
                                80,593
                                
                                
                                
                                21.01
                                
                                
                                
                                1,163,975Quarter
      Ending August 2, 2008
                                
                                
                                356,287
                                
                                
                                
                                5,348
                                
                                
                                
                                15.01
                                
                                
                                
                                807,688Quarter
      Ending November 1, 2008
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                807,688Quarter
      Ending January 31, 2009
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                807,688Total
                                
                                
                                4,192,312
                                
                                
                                $
                                85,941
                                
                                
                                $
                                20.50
 55
 Table of Contents
 4.
                Cash, cash equivalents and marketable
      securities
 
 Cash,
cash equivalents and marketable securities consist of the following (in
thousands):
 January
      31, 2009
                                                
                                                
                                                February
      2, 2008Book
                                                
                                                
                                                Net
      unrealized
                                                
                                                
                                                Fair
                                                
                                                
                                                Book
                                                
                                                
                                                Net
      unrealized
                                                
                                                
                                                FairValue
                                                
                                                
                                                Gain
                                                
                                                
                                                Value
                                                
                                                
                                                Value
                                                
                                                
                                                Gain
                                                
                                                
                                                ValueMoney
      market funds
                                                
                                                $
                                                59,213
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                59,213
                                                
                                                
                                                $
                                                165,719
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                165,719Corporate
      commercial paper
                                                
                                                
                                                15,728
                                                
                                                
                                                
                                                33
                                                
                                                
                                                
                                                15,761
                                                
                                                
                                                
                                                33,354
                                                
                                                
                                                
                                                35
                                                
                                                
                                                
                                                33,389Corporate
      bonds
                                                
                                                
                                                26,529
                                                
                                                
                                                
                                                52
                                                
                                                
                                                
                                                26,581
                                                
                                                
                                                
                                                17,177
                                                
                                                
                                                
                                                180
                                                
                                                
                                                
                                                17,357US
      agency discount notes
                                                
                                                
                                                16,015
                                                
                                                
                                                
                                                28
                                                
                                                
                                                
                                                16,043
                                                
                                                
                                                
                                                4,926
                                                
                                                
                                                
                                                25
                                                
                                                
                                                
                                                4,951US
      agency non-callable
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                7,000
                                                
                                                
                                                
                                                30
                                                
                                                
                                                
                                                7,030Auction
      rate securities
                                                
                                                
                                                43,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                43,000
                                                
                                                
                                                
                                                43,900
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                43,900Total
      cash equivalents and marketable securities
                                                
                                                $
                                                160,485
                                                
                                                
                                                $
                                                113
                                                
                                                
                                                $
                                                160,598
                                                
                                                
                                                $
                                                272,076
                                                
                                                
                                                $
                                                270
                                                
                                                
                                                $
                                                272,346Cash
      on hand held in the United States
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                1,650
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                2,257Cash
      on hand held overseas
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                29,982
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                1,129Total
      cash on hand
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                31,632
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,386Total
      cash, cash equivalents and marketable securities
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                192,230
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                275,732Reported
      as:Cash
      and cash equivalents
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                90,845
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                174,089Short-term
      marketable securities
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                28,862
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                44,401Long-term
      marketable securities
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                72,523
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                57,242$
                                                192,230
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                275,732
 
 The
amortized cost and estimated fair value of cash equivalents and marketable
securities, by contractual maturity, are shown below (in
thousands).  Actual maturities may differ from contractual
maturities.
  January
      31, 2009
                              
                              
                              February
      2, 2008Book
                              
                              
                              Fair
                              
                              
                              Book
                              
                              
                              Fair(In
      thousands)
                              
                              Value
                              
                              
                              Value
                              
                              
                              Value
                              
                              
                              ValueDue
      in 1 year or less
                              
                              $
                              88,046
                              
                              
                              $
                              88,075
                              
                              
                              $
                              214,959
                              
                              
                              $
                              215,104Due
      in greater than 1 year
                              
                              
                              72,439
                              
                              
                              
                              72,523
                              
                              
                              
                              57,117
                              
                              
                              
                              57,242Total
                              
                              $
                              160,485
                              
                              
                              $
                              160,598
                              
                              
                              $
                              272,076
                              
                              
                              $
                              272,346
 The
Company’s marketable securities include primarily auction rate securities
(“ARS”), corporate commercial paper and bonds and US agency
notes.  The Company classifies its marketable securities as
available-for-sale and reports them at fair market value with the related
unrealized gains and losses included in accumulated other comprehensive
income.  The Company monitors all of its marketable securities for
impairment and if these securities are reported to have had a decline in fair
value, uses significant judgment to identify events or circumstances that would
likely have a significant adverse effect on the future value of each investment
including: (i) the nature of the investment; (ii) the cause and duration of any
impairment; (iii) the financial condition and near term prospects of the issuer;
(iv) for securities with a reported decline in fair value, its ability to hold
the security for a period of time sufficient to allow for any anticipated
recovery of fair value; (v) the extent to which fair value may differ from cost;
and (vi) a comparison of the income generated by the securities compared to
alternative investments.  The Company would recognize an impairment
charge if a decline in the fair value of its marketable securities is judged to
be other-than-temporary.
 
 At
January 31, 2009, the Company held nine auction rate securities with a cost and
par value of $43.0 million.  Auction rate securities are bought and
sold in the marketplace through a bidding process sometimes referred to as a
“Dutch auction.”  Historically, the fair value of the Compnay's ARS
has been determined by the frequent auction periods, generally every 7 to
28 days, which provided liquidity at par value for these
investments.  However, subsequent to February 2008, all auctions
involving such securities held by the Company have failed.  The result
of a failed auction is that these ARS will continue to pay interest in
accordance with their terms at each respective auction date; however, liquidity
of the securities will continue to be limited until there is a successful
auction, the issuer redeems the securities, the securities mature or until such
time as other markets for these ARS develop.  Management cannot be
certain regarding the amount of time it will take for an auction market or other
markets to develop for these securities.  In October 2008, the
Company’s cash investment advisor, UBS, acknowledged the Company’s acceptance of
its proposal of a comprehensive settlement agreement, in which all the ARS
currently in the Company’s portfolio could be redeemed at par
value.  The offer to redeem will be at the Company’s option during a
two year period beginning in June 2010.  The offer also gives UBS the
discretion to buy any or all of these securities from the Company at par value
at any time.  Additionally, the proposed solution by UBS to the lack
of liquidity of the Company’s ARS included a commitment effective October 2008
through June 2010 to loan an amount up to 75% of the par value of the
ARS.  The interest charged on such loan would be equal to the
proportional amount of interest being paid by the issuers of the ARS borrowed
against.  At January 31, 2009, UBS provided an estimated value for the
nine ARS of approximately $37.6 million, which reflects an unrealized loss of
$5.4 million from the Company’s original cost.  Management has not
adopted UBS’ estimated value of the Company’s ARS for the reasons described
below.
 
 56
 Table of Contents
 Management
has reviewed the prospectuses for each of the nine ARS in the Company’s
investment portfolio as of January 31, 2009 and determined that the
unprecedented disruption in the auction process and resulting pattern of
interest payments was in accordance with their established rules of operation
under these circumstances.  The default mechanism called for in the
operating rules of these instruments is designed to adjust their interest
payments to a limit based on the income generated by their underlying student
loans.  The most significant consequences of this mechanism are the
preservation of their AAA credit rating while adjusting to a continuing stream
of interest payments to the security holders at a rate correlating to
contemporary credit market rates.
 
 As a
result of this review, management reached the conclusion that the securities do
have a strong underlying principle value and that any potential adjustment in
their carrying value would be based upon its ability to endure their lack of
liquidity, the degree of certainty of continuing interest payments and the rate
of return on these securities.  Given that management expects
considerable liquidity from the Company’s other assets, foresees continuing
positive cash flow and has accepted the Company’s investment advisor’s offer to
purchase all of the Company’s ARS at par value in June 2010, it does not
consider the remaining possible liquidity risk and UBS’ default risk to be
significant enough to justify a reduction in the carrying value.  The
remaining valuation factor that management considered was the rate of return
evidenced by the interest received.  Management used a discounted cash
flow calculation that reached a valuation that was similar to other of its
recent investments with comparably high credit ratings.
 
 As a
result of this judgment process and in accordance with the various accounting
pronouncements in this area, management reached the conclusion that the $43.0
million carrying value of the Company’s nine ARS has not been impaired and that
it has no expectation of any material adverse impact on the Company’s future
results of operations, liquidity or capital resources associated with holding
these securities.
 
 5.
                Fair
      values of assets and liabilities
 
 On
February 3, 2008, the Company adopted SFAS 157.  The standard defines
fair value as “the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date (exit price).”  The standard establishes a
consistent framework for measuring fair value and expands disclosure
requirements about fair value measurements.  SFAS 157, among other
things, requires the Company to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
 
 In
February 2008, the FASB issued FSP No. 157-1, Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13,which amends SFAS 157 to remove
certain leasing transactions from its scope.  In February 2008 the
FASB issued FSP No. 157-2, Effective Date of FASB Statement
No. 157,which delays the effective date of SFAS 157 for
non-financial assets and liabilities to fiscal years beginning after
November 15, 2008.  In October 2008, the FASB issued FSP
No. 157-3, Determining
the Fair Value of a Financial Asset When the Market for That Asset is Not
Active, which clarifies how management’s internal assumptions should be
considered in measuring fair value when (i) observable data are not
present, (ii) observable market information from an inactive market should
be taken into account, and (iii) the use of broker quotes or pricing
services should be considered in assessing the relevance of observable and
unobservable data to measure fair value.
 
 Fair
Value Hierarchy
 
 SFAS 157
discusses valuation techniques, such as the market approach (comparable market
prices), the income approach (present value of future income or cash flow), and
the cost approach (cost to replace the service capacity of an asset or
replacement cost).  The statement utilizes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels.  The following is a brief description of those
three levels:
 
 ·
                Level 1- Valuation is
      based upon quoted prices for identical instruments traded in active
      markets.
 
 ·
                Level 2- Valuation is
      based upon quoted prices for similar instruments in active markets, quoted
      prices for identical or similar instruments in markets that are not
      active, and model-based valuation techniques for which all significant
      assumptions are observable in the
market.
 
 ·
                Level 3- Valuation is
      generated from model-based techniques that use significant assumptions not
      observable in the market.  These unobservable assumptions
      reflect management’s estimates of assumptions that market participants
      would use in pricing the asset or liability.  Valuation
      techniques include use of option pricing models, discounted cash flows
      models and similar techniques.
 
 57
 Table of Contents
 Determination
of Fair Value
 
 The
Company’s cash equivalents and marketable securities, with the exception of ARS,
are classified within Level 1 of the fair value hierarchy because they are
valued using quoted market prices, broker or dealer quotations or alternative
pricing sources with reasonable levels of price transparency.  The
types of marketable securities valued based on quoted market prices in active
markets include most U.S. government and agency securities, sovereign government
obligations, money market securities and certain corporate obligations with a
high credit ratings and an ongoing trading market.  These ARS holdings
are classified within Level 3 as the Company valued the ARS through a discounted
cash flow model which requires making a significant assumption as to the
expected future interest income from those securities which is not observable in
the market.  During fiscal 2009 and 2008, the Company recorded no
impairment loss relating to the value of ARS, nor any realized gains or
losses.
 
 The table
below presents the balances of the Company’s assets measured at fair value on a
recurring basis (in thousands):
 Fair
      Value Measurement at Reporting DateQuoted
      Prices In Active Markets for Identical Assets
                                              
                                              
                                              Significant
      Observable Inputs
                                              
                                              
                                              Significant
      Unobservable InputsFair Value
                                              
                                              
                                              (Level 1)
                                              
                                              
                                              (Level 2)
                                              
                                              
                                              (Level 3)Money
      market funds
                                              
                                              $
                                              59,213
                                              
                                              
                                              $
                                              59,213
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —Corporate
      commercial paper
                                              
                                              
                                              15,761
                                              
                                              
                                              
                                              15,761
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Corporate
      bonds
                                              
                                              
                                              26,581
                                              
                                              
                                              
                                              26,581
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —US
      agency discount notes
                                              
                                              
                                              16,043
                                              
                                              
                                              
                                              16,043
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Auction
      rate securities
                                              
                                              
                                              43,000
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              43,000Total
      cash equivalents and marketable securities
                                              
                                              $
                                              160,598
                                              
                                              
                                              $
                                              117,598
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              43,000
 The
Company’s ARS, which are measured at fair value on a reoccurring basis using
significant unobservable inputs (Level 3), had no activity in fiscal
2009.
 
 6.
                Inventories
 
 Inventories
consist of the following (in thousands):
 January
      31,
                              
                              
                              February
      2,2009
                              
                              
                              2008Wafers
      and other purchased materials
                              
                              $
                              22,325
                              
                              
                              $
                              12,838Work-in-process
                              
                              
                              2,869
                              
                              
                              
                              2,735Finished
      goods
                              
                              
                              10,864
                              
                              
                              
                              10,710Total
                              
                              $
                              36,058
                              
                              
                              $
                              26,283
 
 7.
                Software,
      equipment and leasehold
improvements
 
 Software,
equipment and leasehold improvements consist of the following (in
thousands):
 
 58
 Table of Contents
 January
      31,
                                
                                
                                February
      2,2009
                                
                                
                                2008Software
                                
                                $
                                17,831
                                
                                
                                $
                                5,688Equipment
                                
                                
                                7,688
                                
                                
                                
                                5,531Office
      equipment and furniture
                                
                                
                                3,034
                                
                                
                                
                                1,981Leasehold
      improvements
                                
                                
                                2,241
                                
                                
                                
                                1,036Total
                                
                                $
                                30,794
                                
                                
                                $
                                14,236Accumulated
      depreciation and amortization
                                
                                
                                (9,670
                                )
                                
                                
                                (5,453
                                )Total
                                
                                $
                                21,124
                                
                                
                                $
                                8,783
 Software
equipment and leasehold improvement depreciation and amortization expense for
fiscal 2009, 2008 and 2007 was $4.2 million, $2.2 million and $1.1 million,
respectively.
 
 8.
                Acquisition
 
 Fiscal
2009 Acquisitions
 
 On
December 19, 2008, the Company acquired Zensys Holdings Corporation (“Zensys”),
a wireless start-up company for $13.2 million in cash including transaction
costs.  Zensys Holdings Corporation, based in Fremont, California, is
a developer of single-chip RF solutions called Z-Wave®  As part of the
acquisition, twenty eight employees joined the Company and Zensys has a research
and development office in Denmark.
 
 In
connection with the Zensys acquisition, the Company obtained a valuation of the
intangible assets acquired in order to allocate the purchase price in accordance
with SFAS No. 141, Business Combinations
(“SFAS 141”).  In accordance with SFAS 141, the total
purchase price was allocated to Zensys’ net tangible and intangible assets based
upon fair values as of December 19, 2008.  The excess purchase price
over the value of the net tangible and identifiable intangible assets was
recorded as goodwill.  The purchase price in the transaction was
allocated as follows (in thousands):
  EstimatedAmount
                                  
                                  Useful
      LifeCash
      consideration
                                  
                                  $
                                  13,017Transaction
      costs
                                  
                                  
                                  213Total
      consideration
                                  
                                  $
                                  13,230Net
      tangible assets
                                  
                                  $
                                  4,266Identifiable
      intangible assets:Developed
      technology
                                  
                                  
                                  5,110
                                  
                                  9
      yearsTrademarks
                                  
                                  
                                  1,180
                                  
                                  10
      yearsGoodwill
                                  
                                  
                                  2,674Total
      consideration
                                  
                                  $
                                  13,230
  On
February 8, 2008, the Company acquired certain assets and assumed certain
liability obligations of the VXP Image Processing business (“VXP”), which
specializes in video processing technology that the Company intends to use to
bring studio quality video to consumer television, from Gennum Corporation for
$18.6 million in cash including transaction costs.  Forty-four employees
joined the Company as part of the acquisition.
 
 In
connection with the VXP acquisition, the Company obtained a valuation of the
intangible assets acquired in order to allocate the purchase price in accordance
with SFAS 141.  In accordance with SFAS 141, the total
purchase price was allocated to VXP’s net tangible and intangible assets based
upon fair values as of February 8, 2008.  The excess purchase price
over the value of the net tangible and identifiable intangible assets was
recorded as goodwill.  Approximately $0.1 million of the goodwill is
deductible for tax purposes.  The purchase price in the transaction
was allocated as follows (in thousands):
 59
 Table of Contents
 EstimatedAmount
                                  
                                  
                                  Useful
      LifeCash
      consideration
                                  
                                  $
                                  18,200Transaction
      costs
                                  
                                  
                                  376Total
      consideration
                                  
                                  $
                                  18,576Net
      tangible assets
                                  
                                  $
                                  4,555Identifiable
      intangible assets:Developed
      technology
                                  
                                  
                                  8,504
                                  
                                  
                                  2
      to 7 yearsIn
      process research and development
                                  
                                  
                                  1,571
                                  
                                  
                                  
                                  N/ACustomer
      relationships
                                  
                                  
                                  1,123
                                  
                                  
                                  7
      yearsTrademarks
                                  
                                  
                                  298
                                  
                                  
                                  5
      yearsSoftware
      license
                                  
                                  
                                  291
                                  
                                  
                                  8
      yearsGoodwill
                                  
                                  
                                  2,234Total
      consideration
                                  
                                  $
                                  18,576
 Fiscal
2007 Acquisition
 
 On
February 16, 2006, the Company completed the acquisition of Blue7 for $11.9
million.  Blue7's results of operations are included in the Company’s
statement of operations from the acquisition date.  Prior to the
acquisition, the Company held 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.  In connection with the Blue7 acquisition, the
Company obtained a valuation of the intangible assets acquired in order to
allocate the purchase price in accordance with SFAS 141.  In
accordance with SFAS 141, the total purchase price was allocated to Blue7’s
net tangible and intangible assets based upon 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
purchase price in the transaction was allocated as follows (in
thousands)
  EstimatedAmount
                              
                              Useful
      LifeValue
      of Sigma stock issued
                              
                              $
                              8,190Fair
      value of vested stock options assumed
                              
                              
                              1,091Retirement
      of notes receivable
                              
                              
                              400Retirement
      of interest receivable
                              
                              
                              25Investment
      in Blue7 prior to the acquisition
                              
                              
                              1,000Notes
      receivable converted to Blue7 preferred shares prior to the
      acquisition
                              
                              
                              500Cash
      acquired from acquisition
                              
                              
                              (147
                              )Transaction
      costs
                              
                              
                              804Total
      consideration
                              
                              $
                              11,863Net
      tangible assets
                              
                              $
                              104Identifiable
      intangible assets:Developed
      technology
                              
                              
                              5,300
                              
                              7
      yearsNoncompete
      agreements
                              
                              
                              1,400
                              
                              3
      yearsLicensing
      agreements
                              
                              
                              39
                              
                              6
      to 15 monthsGoodwill
                              
                              
                              5,020Total
      consideration
                              
                              $
                              11,863
  60
 Table of Contents
 9.
                Goodwill
      and Intangible assets
 
 Goodwill
 
 Goodwill
as of January 31, 2009 totaled $9.9 million.  Goodwill attributable to
the Zensys Holdings Corporation acquisition on December 19, 2008 was
approximately $2.7 million, goodwill attributable to the VXP Group acquisition
on February 8, 2008 was approximately $2.2 million, and the remaining goodwill
balance of approximately $5.0 million was attributable to the fiscal 2007 Blue7
acquisition.
 
 Intangible
assets
 
 Acquired
intangible assets, subject to amortization, were as follows as of January 31,
2009 (in thousands, except for years):
 Accumulated
                                          
                                          
                                          
                                          
                                          EstimatedCost
                                          
                                          
                                          Amortization
                                          
                                          
                                          Net
                                          
                                          Useful
      LifeDeveloped
      technology
                                          
                                          $
                                          18,914
                                          
                                          
                                          $
                                          (3,788
                                          )
                                          
                                          $
                                          15,126
                                          
                                          2
      to 9 yearsTrademarks
                                          
                                          
                                          1,478
                                          
                                          
                                          
                                          (69
                                          )
                                          
                                          
                                          1,409
                                          
                                          5
      to 10 yearsNoncompete
      agreements
                                          
                                          
                                          1,400
                                          
                                          
                                          
                                          (1,381
                                          )
                                          
                                          
                                          19
                                          
                                          3
      yearsCustomer
      relationships
                                          
                                          
                                          1,123
                                          
                                          
                                          
                                          (157
                                          )
                                          
                                          
                                          966
                                          
                                          7
      years$
                                          22,915
                                          
                                          
                                          $
                                          (5,395
                                          )
                                          
                                          $
                                          17,520
 Amortization
expense related to acquired intangible assets was $3.0 million, $1.2 million and
$1.2 million for the years ended January 31, 2009, February 2, 2008 and February
3, 2007, respectively.  As of January 31, 2009, the Company expects
the amortization expense in future periods to be as shown below (in
thousands):
 Developed
                              
                              
                              Noncompete
                              
                              
                              CustomerFiscal
      year
                              
                              Technology
                              
                              
                              Agreements
                              
                              
                              Relationships
                              
                              
                              Trademarks
                              
                              
                              Total2010
                              
                              
                              2,848
                              
                              
                              $
                              19
                              
                              
                              $
                              160
                              
                              
                              
                              178
                              
                              
                              $
                              3,2052011
                              
                              
                              2,693
                              
                              
                              
                              —
                              
                              
                              
                              160
                              
                              
                              
                              178
                              
                              
                              
                              3,0312012
                              
                              
                              2,689
                              
                              
                              
                              —
                              
                              
                              
                              160
                              
                              
                              
                              178
                              
                              
                              
                              3,0272013
                              
                              
                              2,689
                              
                              
                              
                              —
                              
                              
                              
                              160
                              
                              
                              
                              178
                              
                              
                              
                              3,0272014
                              
                              
                              1,964
                              
                              
                              
                              —
                              
                              
                              
                              160
                              
                              
                              
                              119
                              
                              
                              
                              2,243Thereafter
                              
                              
                              2,243
                              
                              
                              
                              —
                              
                              
                              
                              166
                              
                              
                              
                              578
                              
                              
                              
                              2,987$
                              15,126
                              
                              
                              $
                              19
                              
                              
                              $
                              966
                              
                              
                              $
                              1,409
                              
                              
                              $
                              17,520
 
 10.
                Accrued
      liabilities
 
 Accrued
liabilities consist of the following (in thousands):
 January
      31,
                            
                            
                            February
      2,2009
                            
                            
                            2008Accrued
      salaries, commissions and benefits
                            
                            $
                            3,584
                            
                            
                            $
                            2,223Accrued
      rebates
                            
                            
                            3,230
                            
                            
                            
                            483Accrued
      warranty
                            
                            
                            1,330
                            
                            
                            
                            1,564Accrued
      license fees
                            
                            
                            1,193
                            
                            
                            
                            2,629Customer
      deposits
                            
                            
                            1,033
                            
                            
                            
                            214Accrued
      payroll taxes
                            
                            
                            840
                            
                            
                            
                            2,823Accrued
      royalties
                            
                            
                            473
                            
                            
                            
                            690Deferred
      revenues
                            
                            
                            251
                            
                            
                            
                            215Income
      taxes payable
                            
                            
                            248
                            
                            
                            
                            —Accrued
      attorney's fees
                            
                            
                            —
                            
                            
                            
                            2,250Other
      accrued liabilities
                            
                            
                            644
                            
                            
                            
                            927Total
                            
                            $
                            12,826
                            
                            
                            $
                            14,018
 11.
                Product
      warranty
 
 In
general, the Company sells products with a one-year limited warranty that its
products will be free from defects in materials and
workmanship.  Warranty cost is estimated at the time revenue is
recognized, based on historical activity and additionally for any specific known
product warranty issues.  Accrued warranty cost includes hardware
repair and/or replacement and software support costs and is included in accrued
liabilities on the consolidated balance sheets.
 
 61
 Table of Contents
 Details
of the change in accrued warranty for fiscal 2009, 2008 and 2007 are as follows
(in thousands):
 Balance
                          
                          
                          
                          
                          
                          
                          
                          
                          BalanceFiscal
      years
                          
                          Beginning
      of Period
                          
                          
                          Additions
                          
                          
                          Deductions
                          
                          
                          End
      of Period2009
                          
                          $
                          1,564
                          
                          
                          $
                          1,293
                          
                          
                          $
                          (1,527
                          )
                          
                          $
                          1,3302008
                          
                          
                          556
                          
                          
                          
                          1,828
                          
                          
                          
                          (820
                          )
                          
                          
                          1,5642007
                          
                          
                          289
                          
                          
                          
                          599
                          
                          
                          
                          (332
                          )
                          
                          
                          556
 12.
                Commitments
      and Contingencies
 
 Commitments
 
 Leases
 
 The
Company’s primary facility in Milpitas, California is leased under a
non-cancelable lease which expires in September 2012.  The Company
also leases facilities in Canada, Denmark, France, Hong Kong and Singapore under
non-cancelable leases.  Future minimum annual payments under operating
leases are as follows (in thousands):
 OperatingFiscal
      years
                                
                                Leases2010
                                
                                $
                                1,6292011
                                
                                
                                1,4882012
                                
                                
                                1,5352013
                                
                                
                                1,2482014
                                
                                
                                652Thereafter
                                
                                
                                2,482Total
      minimum lease payments
                                
                                $
                                9,034
 Rent
expense, recorded on a straight line base, was $1.5 million, $1.1 million and
$0.7 million for fiscal 2009, 2008 and 2007, respectively.  In prior
years, the Company had sublease income, which was not significant.
 
 Purchase
commitments
 
 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 January 31, 2009, the total amount of outstanding
non-cancelable purchase orders was approximately $10.9 million.
 
 Indemnifications
 
 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
(“SFAS 5”).  To date, the Company has not incurred or accrued any
costs related to any claims under such indemnification provisions.
 
 Royalties
 
 The
Company pays royalties for the right to sell certain products under various
license agreements.  During fiscal 2009, 2008 and 2007, the Company
recorded royalty expense of $2.0 million, $2.3 million and $1.3 million,
respectively, which was recorded to cost of revenue.
 
 62
 Table of Contents
 401(k)
tax deferred savings plan
 
 The
Company maintains a 401(k) tax deferred savings plan for the benefit of
qualified employees who are U.S. based.  Under the 401(k) tax deferred
savings plan, U.S. based employees may elect to reduce their current annual
taxable compensation up to the statutorily prescribed limit, which was $15,500
in calendar year 2008.  Employees age 50 or over may elect to
contribute an additional $5,000.  In January 2008, the Company
implemented a matching contribution program whereby it matches employee
contributions made by each employee at a rate of $0.25 per $1.00
contributed.  The matching contributions to the 401(k) Plan totaled
$0.5 million and $46,000 for fiscal 2009 and 2008, respectively.
 
 Group
Registered Retirement Savings Plan
 
 The
Company maintains a Group Registered Retirement Savings Plan (“GRRSP”) for the
benefit of qualified employees who are based in Canada.  Under the
Registered Retirement Savings Plan (“RRSP”), Canadian based employees may elect
to reduce their annual taxable compensation up to the statutorily prescribed
limit which was $20,000
Canadian in calendar year 2008.  In April 2008, the Company
implemented a matching contribution program under the GRRSP whereby it matches
employee contributions made by each employee up to 2.5% of their annual
salary.  The matching contributions to the GRRSP totaled $69,000 for
fiscal 2009.
 
 Retirement
Pension Plan
 
 The
Company maintains a Retirement Pension Plan for the benefit of qualified
employees who are based in Denmark.  Under the Retirement Pension
Plan, Denmark based employees may elect to reduce their annual taxable
compensation up to their annual salary.  In December 2008, the Company
implemented a contribution program whereby it will contribute 3.0% of its
employee’s annual salary and my elect to terminate future contributions at its
option at any time.  The Company’s matching contribution to the
Retirement Pension Plan totaled $11,000 for fiscal 2009.
 
 Contingencies
 
 Litigation
 
 Certain
current and former directors and officers of the Company were named as
defendants in several shareholder derivative actions filed in the United States
District Court for the Northern District of California, which were 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 alleged 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
asserted 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
alleged that the individual defendants aided and abetted one another’s alleged
breaches of fiduciary duty and violated California Corporations Code section
25402 and brought claims for an accounting and rescission.  In the
State Action, plaintiffs also alleged that the individual defendants wasted
corporate assets.  Both Actions sought to recover unspecified money
damages, disgorgement of profits and benefits and equitable
relief.  The Federal Action also sought treble damages, rescission of
certain defendants’ option contracts, imposition of a constructive trust over
executory option contracts and attorney’s fees.  The Company was named
as a nominal defendant in both the Federal and State Actions; thus, no recovery
against the Company was sought.
 
 On May
28, 2008, the parties to both the Federal Action and the State Action executed a
definitive settlement agreement which, when approved, resulted in the dismissal
of both the Federal Action and the State Action.  On September 15,
2008, the Court entered an Order and Final Judgment approving the settlement and
dismissing the Federal Action with prejudice.  Pursuant to the
settlement agreement, after the Order and Final Judgment approving the
settlement was entered in the Federal Action, Plaintiff requested that the State
Action be dismissed with prejudice.  The Court granted this request on
September 22, 2008.  All amounts due under the settlement were accrued
as of February 2, 2008 and paid during the third quarter of fiscal
2009.
 
 In
January 2007, the Company 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.  Thereafter, as stated above, the
parties to the Federal Action reached an agreement to settle that
action.  On May 28, 2008, the parties to both the Federal Action and
the State Action executed a definitive settlement agreement.  Pursuant
to the settlement agreement, after the Order and Final Judgment approving the
settlement was entered in the Federal Action, Plaintiff requested that the State
Action be dismissed with prejudice.  The Court granted this request on
September 22, 2008.  All amounts due under the settlement were accrued
as of February 2, 2008 and paid during the third quarter of fiscal
2009.
 
 63
 Table of Contents
 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 requested that the Company
voluntarily produce documents relating to, among other things, its stock option
practices.  The Company responded to the SEC's requests in July and
August of 2006 and has received no further requests since that
time.  While the Company has no reason to believe that the SEC inquiry
is still active, the Company intends to continue cooperating with the SEC should
the Company receive any additional requests.
 
 In May
2007, the IRS began an employment tax audit for calendar years 2004 and
2005.  The Company requested that calendar year 2006 also be
included in this audit cycle, and the IRS agreed.  The focus of the
IRS employment tax audit related to tax issues connected to the Company’s
granting stock options with exercise prices per share that were less than the
fair market value per share of the common stock underlying the option on the
option's measurement date for financial reporting purposes.  The
Company recently settled this IRS employment tax audit.  The Company
paid the amounts due to the IRS pursuant to that settlement in fiscal
2009.  The Company has also reported these IRS adjustments to the
California Employment Development Department and has recently reached a
settlement of the corresponding state tax and interest
adjustments.  The Company paid the State tax amounts due under the
settlement in March 2009, which were previously accrued.  The Company
does not expect that any further tax amounts will be due under either
settlement.
 
 In August
2007, the IRS began an income tax audit of the Company’s fiscal
2005.  This audit was concluded in fiscal 2009 and did not
result in a material financial impact to the Company’s operations or
financial condition.
 
 13.
                Net
      income per share
 
 Basic net
income per share for the periods presented is computed by dividing net income by
the weighted average number of common shares outstanding (excluding shares
subject to repurchase).  Diluted net income per share is computed by
including shares subject to repurchase as well as dilutive options.
 
 The
following table sets forth the basic and diluted net income per share computed
for fiscal 2009, 2008 and 2007 (in thousands, except per share
amounts):
 Years
      EndedJanuary
      31,
                                      
                                      
                                      February
      2,
                                      
                                      
                                      February
      3,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2007Numerator:Net
      income, as reported
                                      
                                      $
                                      26,423
                                      
                                      
                                      $
                                      70,209
                                      
                                      
                                      $
                                      6,244Denominator:Weighted
      average common shares outstanding - basic
                                      
                                      
                                      26,892
                                      
                                      
                                      
                                      25,683
                                      
                                      
                                      
                                      22,683Effect
      of dilutive securities:Escrowed
      shares related to Blue7 acquisition
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      94Stock
      options
                                      
                                      
                                      813
                                      
                                      
                                      
                                      2,867
                                      
                                      
                                      
                                      2,893Shares
      used in computation - diluted
                                      
                                      
                                      27,705
                                      
                                      
                                      
                                      28,550
                                      
                                      
                                      
                                      25,670Net
      income per share:Basic
                                      
                                      $
                                      0.98
                                      
                                      
                                      $
                                      2.73
                                      
                                      
                                      $
                                      0.28Diluted
                                      
                                      $
                                      0.95
                                      
                                      
                                      $
                                      2.46
                                      
                                      
                                      $
                                      0.24
 A summary
of the excluded potentially dilutive securities as of the end of each fiscal
year follows (in thousands):
  Years
      EndedJanuary
      31,
                                    
                                    
                                    February
      2,
                                    
                                    
                                    February
      3,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2007Stock
      options excluded because exercise price in excess of average stock
      price
                                    
                                    
                                    2,079
                                    
                                    
                                    
                                    362
                                    
                                    
                                    
                                    489
 14.
                Stock
      option plans
 
 2003
Director stock option plan
 
 During
fiscal 2004, the Company adopted the 2003 Director Stock Option Plan (the “2003
Director 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 97,500
have been granted as of January 31, 2009.
 
 64
 Table of Contents
 2001
Employee stock 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.  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 generally
become exercisable over a five-year period and expire no more than ten years
from the date of grant (all options outstanding at January 31, 2009 expire ten
years from date of grant).  The 2001 plan replaced the predecessor
1994 Option Plan which expired in fiscal 2005.  As of January 31,
2009, the Company had reserved a total of 6.3 million shares of common stock for
issuance under this plan of which 6.3 million had been
granted.  Effective February 1, 2009, the shares reserved for future
issuance under the 2001 Option Plan were automatically increased by 1.0 million
shares in accordance with the term of the Plan.
 
 The total
stock option activities and balances of the Company’s stock option plans are
summarized as follows:
 Weighted
      Average
                        
                        
                        AggregateNumber
      of
                        
                        
                        Weighted
      Average
                        
                        
                        Remaining
                        
                        
                        IntrinsicShares
                        
                        
                        Exercise
      Price
                        
                        
                        Contractual
      Term
                        
                        
                        ValueOutstanding
                        
                        
                        Per
      Share
                        
                        
                        (Years)
                        
                        
                        (in
      thousands)Balance,
      January 28, 2006
                        
                        
                        4,885,217
                        
                        
                        $
                        4.75Granted
      (Weighted average fair value of $9.58)
                        
                        
                        1,092,837
                        
                        
                        
                        10.51Cancelled
                        
                        
                        (173,783
                        )
                        
                        
                        8.14Exercised
                        
                        
                        (337,909
                        )
                        
                        
                        2.74Balance,
      February 3, 2007
                        
                        
                        5,466,362
                        
                        
                        $
                        5.92Granted
      (Weighted average fair value of $29.23)
                        
                        
                        1,204,900
                        
                        
                        
                        45.44Cancelled
                        
                        
                        (249,177
                        )
                        
                        
                        20.47Exercised
                        
                        
                        (2,480,266
                        )
                        
                        
                        3.82Balance,
      February 2, 2008
                        
                        
                        3,941,819
                        
                        
                        $
                        16.78
                        
                        
                        $
                        7.34
                        
                        
                        $
                        125Granted
      (Weighted average fair value of $10.08)
                        
                        
                        1,290,960
                        
                        
                        
                        15.52Cancelled
                        
                        
                        (203,030
                        )
                        
                        
                        25.01Exercised
                        
                        
                        (571,992
                        )
                        
                        
                        5.50Balance,
      January 31, 2009
                        
                        
                        4,457,757
                        
                        
                        $
                        17.50
                        
                        
                        $
                        7.46
                        
                        
                        $
                        5,479Ending
      Vested and Expected to Vest
                        
                        
                        4,253,850
                        
                        
                        $
                        17.40
                        
                        
                        $
                        7.41
                        
                        
                        $
                        5,444Ending
      Exercisable
                        
                        
                        1,858,501
                        
                        
                        $
                        14.02
                        
                        
                        $
                        5.95
                        
                        
                        $
                        4,859
 
 The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value, based on the Company’s closing stock price of $10.22 as of
January 31, 2009, 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 2009, 2008 and 2007 equaled $12.5 million, $85.9 million and $3.7
million, respectively.  The total fair value of options, which vested
during fiscal 2009, 2008 and 2007 equaled $14.0 million, $5.2 million and $5.5
million, respectively.  At January 31, 2009, 64,178 shares were
available under these plans for future grants.
 Options
      Outstanding
                                                    
                                                    
                                                    Options
      ExercisableRange
      of Exercise Prices
                                                    
                                                    
                                                    Number
      of Shares Outstanding at January 31, 2009
                                                    
                                                    
                                                    Weighted
      Average Remaining Life (Years)
                                                    
                                                    
                                                    Weighted
                                                      Average
                                                      Exercise
      Price Per Share
                                                    
                                                    
                                                    Number
      of Shares Exercisable at January 31, 2009
                                                    
                                                    
                                                    Weighted
      Average Exercise Price Per Share$
                                                    0.95
                                                    
                                                    $
                                                    3.50
                                                    
                                                    
                                                    
                                                    478,060
                                                    
                                                    
                                                    
                                                    3.37
                                                    
                                                    
                                                    $
                                                    2.58
                                                    
                                                    
                                                    
                                                    458,540
                                                    
                                                    
                                                    $
                                                    2.56$
                                                    4.25
                                                    
                                                    $
                                                    7.89
                                                    
                                                    
                                                    
                                                    510,267
                                                    
                                                    
                                                    
                                                    5.05
                                                    
                                                    
                                                    $
                                                    7.01
                                                    
                                                    
                                                    
                                                    412,416
                                                    
                                                    
                                                    $
                                                    7.05$
                                                    7.99
                                                    
                                                    $
                                                    9.89
                                                    
                                                    
                                                    
                                                    292,931
                                                    
                                                    
                                                    
                                                    7.63
                                                    
                                                    
                                                    $
                                                    9.57
                                                    
                                                    
                                                    
                                                    47,498
                                                    
                                                    
                                                    $
                                                    9.40$
                                                    10.87
                                                    
                                                    $
                                                    10.87
                                                    
                                                    
                                                    
                                                    794,000
                                                    
                                                    
                                                    
                                                    9.76
                                                    
                                                    
                                                    $
                                                    10.87
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    $
                                                    —$
                                                    11.06
                                                    
                                                    $
                                                    11.06
                                                    
                                                    
                                                    
                                                    536,582
                                                    
                                                    
                                                    
                                                    7.57
                                                    
                                                    
                                                    $
                                                    11.06
                                                    
                                                    
                                                    
                                                    245,759
                                                    
                                                    
                                                    $
                                                    11.06$
                                                    11.40
                                                    
                                                    $
                                                    15.91
                                                    
                                                    
                                                    
                                                    478,035
                                                    
                                                    
                                                    
                                                    6.71
                                                    
                                                    
                                                    $
                                                    12.39
                                                    
                                                    
                                                    
                                                    285,112
                                                    
                                                    
                                                    $
                                                    12.30$
                                                    18.26
                                                    
                                                    $
                                                    28.63
                                                    
                                                    
                                                    
                                                    461,982
                                                    
                                                    
                                                    
                                                    8.48
                                                    
                                                    
                                                    $
                                                    24.09
                                                    
                                                    
                                                    
                                                    115,300
                                                    
                                                    
                                                    $
                                                    25.34$
                                                    31.57
                                                    
                                                    $
                                                    31.57
                                                    
                                                    
                                                    
                                                    161,500
                                                    
                                                    
                                                    
                                                    8.50
                                                    
                                                    
                                                    $
                                                    31.57
                                                    
                                                    
                                                    
                                                    46,589
                                                    
                                                    
                                                    $
                                                    31.57$
                                                    41.58
                                                    
                                                    $
                                                    41.58
                                                    
                                                    
                                                    
                                                    100,000
                                                    
                                                    
                                                    
                                                    9.03
                                                    
                                                    
                                                    $
                                                    41.58
                                                    
                                                    
                                                    
                                                    100,000
                                                    
                                                    
                                                    $
                                                    41.58$
                                                    45.83
                                                    
                                                    $
                                                    45.83
                                                    
                                                    
                                                    
                                                    644,400
                                                    
                                                    
                                                    
                                                    8.76
                                                    
                                                    
                                                    $
                                                    45.83
                                                    
                                                    
                                                    
                                                    147,287
                                                    
                                                    
                                                    $
                                                    45.83$
                                                    0.95
                                                    
                                                    $
                                                    45.83
                                                    
                                                    
                                                    
                                                    4,457,757
                                                    
                                                    
                                                    
                                                    7.46
                                                    
                                                    
                                                    $
                                                    17.50
                                                    
                                                    
                                                    
                                                    1,858,501
                                                    
                                                    
                                                    $
                                                    14.02
 65
 Table of Contents
 As of
January 31, 2009, the unrecorded share-based compensation balance related to
stock options outstanding excluding estimated forfeitures was $40.6 million and
will be recognized over an estimated weighted average amortization period of
3.49 years.  The amortization period is based on the expected vesting
term of the options.
 
 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 shareholders of record as of the close of business on June 18,
2004.  Each Right initially entitles shareholders 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 shareholder 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 right 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 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.  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 2009, 2008 and 2007, 153,796, 46,864
and 36,277 shares of the Company’s common stock were purchased at an average
price of $9.48, $22.28 and $8.02 per share, respectively.  As of
January 31, 2009, the Company had reserved a total of 0.8 million shares of
common stock for issuance under this plan of which 0.7 million had been
granted.  Effective February 1, 2009, an additional 300,000 shares
were available for issuance under the 2001 Purchase Plan pursuant to the
automatic annual increase provision in the Plan.
 
 Valuation
of share-based compensation
 
 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 the Company’s stock price as well as
assumptions regarding a number of highly complex and subjective
variables.  These variables include, but are not limited to, the
Company’s expected stock price volatility over the term of the awards and actual
employee stock option exercise behavior.
 
 The
Company estimates the fair value of stock options using a Black-Scholes
valuation model, consistent with the provisions of SFAS 123R, SAB No. 107, Share-Based Payment (“SAB
107”) and its prior period pro-forma disclosures of net earnings, including
share-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 2009, 2008 and 2007 were $10.08,
$29.23 and $9.58 per share, respectively.  The weighted-average
estimated fair value of employee stock purchase plan shares issued during fiscal
2009, 2008 and 2007 were $4.69, $11.52 and $5.93, per share,
respectively.  The fair value of each option granted and employee
stock purchase plan share issued was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
 
 66
 Table of Contents
 Years
      EndedJanuary
      31,
                                              
                                              February
      2,
                                              
                                              February
      3,Stock
      options
                                              2009
                                              
                                              2008
                                              
                                              2007Expected
      volatility
                                              68.11%
                                              
                                              68.39%
                                              
                                              69.98%Risk-free
      interest rate
                                              2.46%
                                              
                                              3.79%
                                              
                                              4.77%Expected
      term (in years)
                                              5.95
                                              
                                              6.04
                                              
                                              5.90Dividend
      yield
                                              None
                                              
                                              None
                                              
                                              NoneYears
      EndedJanuary
      31,
                                              
                                              February
      2,
                                              
                                              February
      3,Employee
      stock purchase plan
                                              2009
                                              
                                              2008
                                              
                                              2007Expected
      volatility
                                              89.90%
                                              
                                              60.10%
                                              
                                              54.55%Risk-free
      interest rate
                                              1.05%
                                              
                                              4.44%
                                              
                                              4.66%Expected
      term (in years)
                                              0.50
                                              
                                              0.50
                                              
                                              0.50Dividend
      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 its stock price, measured over a period equal to the expected term
of the grants or purchase rights.  The risk-free interest rate is
based on the yield available on U.S. Treasury Strips with an equivalent
remaining term.  The expected term 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 share-based awards
and vesting schedules.  The expected term life of purchase rights is
the period of time remaining in the current offering period.  The
dividend yield assumption is based on the Company’s history of not paying
dividends and assumption of not paying dividends in the future.
 
 Non-employee
related share-based compensation expenses
 
 In
accordance with the provisions of SFAS 123(R) and Emerging Issues Task
Force, Issue 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees For Acquiring, or
in Conjunction With Selling, Goods or Services (“EITF 96-18”), the
Company recorded share-based compensation expense for options issued to
non-employees based on the fair value of the options as estimated on the
measurement date which is typically the grant date, using the Black-Scholes
option pricing model.  The Black-Scholes option pricing model for
fiscal 2009 includes the following weighted average assumptions; expected stock
price volatility of 69%, expected term of 6.39 years, dividend yield of zero
percent and risk-free interest rates of 3.14%.  Total non-employee
share-based compensation recorded during fiscal 2009, 2008 and 2007 was $56,000,
$432,000 and $317,000, respectively.
 
 15.
                Income
      taxes
 
 Income
before provision for income taxes consisted of the following (in
thousands):
 Years
      EndedJanuary
      31,
                                  
                                  
                                  February
      2,
                                  
                                  
                                  February
      3,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2007United
      States
                                  
                                  $
                                  9,380
                                  
                                  
                                  $
                                  61,953
                                  
                                  
                                  $
                                  6,135International
                                  
                                  
                                  21,937
                                  
                                  
                                  
                                  1,130
                                  
                                  
                                  
                                  537Total
                                  
                                  $
                                  31,317
                                  
                                  
                                  $
                                  63,083
                                  
                                  
                                  $
                                  6,672
 The
federal, state and foreign income tax provision (benefit) is summarized as
follows (in thousands):
 
 67
 Table of Contents
 Years
      EndedJanuary
      31,
                                    
                                    
                                    February
      2,
                                    
                                    
                                    February
      3,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2007CurrentFederal
                                    
                                    $
                                    3,441
                                    
                                    
                                    $
                                    5,410
                                    
                                    
                                    $
                                    314State
                                    
                                    
                                    478
                                    
                                    
                                    
                                    34
                                    
                                    
                                    
                                    64Foreign
                                    
                                    
                                    365
                                    
                                    
                                    
                                    58
                                    
                                    
                                    
                                    50Total
      current
                                    
                                    $
                                    4,284
                                    
                                    
                                    $
                                    5,502
                                    
                                    
                                    $
                                    428DeferredFederal
                                    
                                    
                                    966
                                    
                                    
                                    
                                    (9,195
                                    )
                                    
                                    
                                    —State
                                    
                                    
                                    (356
                                    )
                                    
                                    
                                    (3,427
                                    )
                                    
                                    
                                    —Foreign
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (6
                                    )
                                    
                                    
                                    —Total
      deferred
                                    
                                    
                                    610
                                    
                                    
                                    
                                    (12,628
                                    )
                                    
                                    
                                    —Total
      provision (benefit)
                                    
                                    $
                                    4,894
                                    
                                    
                                    $
                                    (7,126
                                    )
                                    
                                    $
                                    428
 The tax
effects of significant items comprising the Company’s deferred tax assets and
liabilities are as follows (in thousands):
 Years
      EndedJanuary
      31,
                              
                              
                              February
      2,2009
                              
                              
                              2008Deferred
      tax assets:Net
      operating losses carry forwards
                              
                              $
                              11,165
                              
                              
                              $
                              943Allowance,
      reserve and other
                              
                              
                              1,729
                              
                              
                              
                              4,864Depreciation
                              
                              
                              371
                              
                              
                              
                              515Tax
      credits
                              
                              
                              4,623
                              
                              
                              
                              4,914Share-based
      compensation
                              
                              
                              6,073
                              
                              
                              
                              3,053Total
      gross deferred tax assets
                              
                              
                              23,961
                              
                              
                              
                              14,289Valuation
      allowance
                              
                              
                              (8,429
                              )
                              
                              
                              —Total
      net deferred tax assets
                              
                              
                              15,532
                              
                              
                              
                              14,289Deferred
      tax liabilities:Acquired
      intangibles
                              
                              
                              (2,706
                              )
                              
                              
                              (1,621
                              )Total
      net deferred tax assets
                              
                              $
                              12,826
                              
                              
                              $
                              12,668
 
 SFAS 109
requires that the tax benefit of net operating losses, temporary differences and
credit carry forwards be recorded as an asset to the extent that management
assesses that realization is “more likely than not.”  Deferred income
taxes result principally from differences in the recognition of certain assets
and liabilities for tax and financial reporting purposes and the tax effect of
tax loss carry forwards.  As of January 31, 2009, net operating loss
carry forwards amounted to approximately $63.0 million and $12.0 million for
federal and California tax purpose, which will begin to expire in 2010 through
2013.  The Company also had federal and state research credit
carryovers of $9.8 million and $8.9 million respectively.  If not
utilized, the federal credits begin to expire in 2010.  The state
research credit has no expiration.  Of the total net operating loss
carryover, $54.7 million federal and $8.0 million state losses will be recorded
as a paid-in capital when utilized in the future.  The Company also
has $43.0 million foreign operating loss carryforwards through its recent
acquisition of a foreign operation.  The valuation allowance increased
by $8.4
million in fiscal 2009 due to management’s assessment that the foreign net
operating loss carryforward is not more likely than not to be realized. 
The valuation allowance decreased by $33.7
million in fiscal 2008 due to the recognition of the deferred tax
assets.
 
 Net
operating losses and tax credit carry forwards as of January 31, 2009 are as
follows (in thousands):
 ExpirationAmount
                        
                        YearsNet
      operating losses, federal
                        
                        $
                        54,698
                        
                        Thru
      2028Net
      operating losses, state
                        
                        
                        8,018
                        
                        Thru
      2018Tax
      credits, federal
                        
                        
                        9,791
                        
                        Thru
      2029Tax
      credits, state
                        
                        
                        8,851
                        
                        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 carry forwards may be
limited as a result of such ownership changes.  Such a limitation
could result in the expiration of carry forwards before they are
utilized.
 
 68
 Table of Contents
 The
effective tax rate of the Company’s provision (benefit) for income taxes differs
from the federal statutory rate as follows (in thousands):
 Years
      EndedJanuary
      31,
                                    
                                    
                                    February
      2,
                                    
                                    
                                    February
      3,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2007Computed
      at federal statutory rate of 35%
                                    
                                    $
                                    10,961
                                    
                                    
                                    $
                                    22,091
                                    
                                    
                                    $
                                    2,336State
      taxes provision (benefit), net of federal benefit
                                    
                                    
                                    (72
                                    )
                                    
                                    
                                    (3,405
                                    )
                                    
                                    
                                    42Difference
      between statutory rate and foreign effective tax rate
                                    
                                    
                                    (5,810
                                    )
                                    
                                    
                                    (287
                                    )
                                    
                                    
                                    (109
                                    )Expenses
      not deductible for tax purposes
                                    
                                    
                                    30
                                    
                                    
                                    
                                    673
                                    
                                    
                                    
                                    235Share
      based compensation expense
                                    
                                    
                                    617
                                    
                                    
                                    
                                    637
                                    
                                    
                                    
                                    554Change
      in valuation allowance, federal effect only
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (25,031
                                    )
                                    
                                    
                                    (1,505
                                    )Tax
      credits
                                    
                                    
                                    (876
                                    )
                                    
                                    
                                    (1,804
                                    )
                                    
                                    
                                    (1,125
                                    )Other
                                    
                                    
                                    44
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Total
                                    
                                    $
                                    4,894
                                    
                                    
                                    $
                                    (7,126
                                    )
                                    
                                    $
                                    428
 Included
in the balance of unrecognized tax benefits at January 31, 2009 are $10.9
million of tax benefits that, if recognized, would reduce the Company’s
effective tax rate.  During the twelve months ended January 31, 2009,
the Company added $6.7 million of unrecognized tax benefits.  A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in thousands):
  Balance
      at February 2, 2008
                            
                            $
                            4,229Additions
      based on tax positions related to the current year
                            
                            
                            6,220Additions
      for tax positions of prior years
                            
                            
                            576Reductions
      for tax positions of prior year
                            
                            
                            (76
                            )Balance
      at January  31, 2009
                            
                            $
                            10,949
 
 The
Company has adopted the accounting policy that interest recognized in accordance
with Paragraph 15 of FIN 48 and penalty recognized in accordance with Paragraph
16 of FIN 48 are classified as part of its income taxes.  In fiscal
2009, the Company recorded $0.1 million of such interest and penalty expense and
as of January 31, 2009, the balance of such accrued interest and penalty was
$0.1 million.
 
 The
Company’s operations are subject to income and transaction taxes in the United
States and in multiple foreign jurisdictions.  Significant estimates
and judgments are required in determining its worldwide provision for income
taxes.  Some of these estimates are based on interpretations of existing
tax laws or regulations.  The ultimate amount of tax liability may be
uncertain as a result.
 
 In May
2007, the IRS began an employment tax audit for calendar years 2004 and
2005.  The Company requested that calendar year 2006 also be
included in this audit cycle, and the IRS agreed.  The focus of the
IRS employment tax audit related to tax issues connected to the Company's
granting stock options with exercise prices per share that were less than the
fair market value per share of the common stock underlying the option on the
option's measurement date for financial reporting purposes.  The
Company recently settled this IRS employment tax audit.  The Company
paid the amounts due to the IRS pursuant to that settlement in fiscal
2009.  The Company has also reported these IRS adjustments to the
California Employment Development Department and has recently reached a
settlement of the corresponding state tax and interest
adjustments.  The Company paid the State tax amounts due under the
settlement on or about March 6, 2009.  The Company does not expect
that any further tax amounts will be due under either settlement.
 
 In August
2007, the IRS began an income tax audit of fiscal
2005.  This audit was concluded in fiscal 2009 and did not
result in a material financial impact to the Company's operations or
financial condition.
 
 The
Company’s tax filings for the fiscal years from 1994 to 2009 remain open in
various taxing jurisdictions.  The Company does not anticipate that
its unrecognized tax benefit would change significantly in the coming 12 month
period.
 
 At
January 31, 2009, undistributed earnings of the Company’s foreign operations
totaling $25.7 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.
 
 69
 Table of Contents
 16.
                Significant
      customers
 
 Major
customers that accounted for over 10% of the Company’s net revenue are as
follows:
 Years
      EndedJanuary
      31,
                                
                                
                                February
      2,
                                
                                
                                February
      3,Customer
                                
                                2009
                                
                                
                                2008
                                
                                
                                2007MTC
      Singapore
                                
                                
                                21%
                                
                                
                                
                                23%
                                
                                
                                
                                *Cisco
      Systems **
                                
                                
                                22%
                                
                                
                                
                                *
                                
                                
                                
                                *Uniquest
      Corp.
                                
                                
                                *
                                
                                
                                
                                19%
                                
                                
                                
                                17%Macnica,
      Inc.
                                
                                
                                *
                                
                                
                                
                                12%
                                
                                
                                
                                *Freebox
      SA
                                
                                
                                *
                                
                                
                                
                                *
                                
                                
                                
                                20%
 *
                Net
      revenue from customer was less than 10% of the Company’s net
      revenue.
 **
                Includes
      both direct sales and indirect sales made through
      subcontractors.
 
 No
domestic customers accounted for more than 10% of total accounts receivable at
January 31, 2009, February 2, 2008 and February 3, 2007.  Four
international customers accounted for 28%, 20%, 10% and 10% of total accounts
receivable at January 31, 2009.  Three international customers
accounted for 46%, 15% and 14% of total accounts receivable at February 2,
2008.
 
 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 was a
month-to-month operating lease with base rent of $4,000 plus a proportionate
share of operating costs commencing April 1, 2006.  The Company
vacated the premises in September 2007 and terminated the
agreement.
 
 During
June 2005, the Company loaned $0.5 million to Blue7, a California corporation,
in which the Company had invested $1.0 million for an approximate 17% ownership
interest.  One of the Company’s board members had invested $0.1
million for a 2% ownership interest during fiscal 2005.  In November
2005 and January 2006, the Company loaned an additional $0.3 million and $0.2
million, respectively, to Blue7.  During fiscal 2007, the total loan
balance of $0.9 million was forgiven and accounted for as part of the Blue7
acquisition cost.  Also, related to the Blue7 acquisition in fiscal
2007, 2,645 shares of stock options were granted to a Blue7 consultant who was
one of the Company’s board members.  During fiscal 2008, 1,984 of
these shares were exercised and the remaining 661 shares were
cancelled.
 
 During
the fourth quarter of fiscal 2009, the Company liquidated its investment in
Envivio, Inc., in which the Company had invested capital of $0.3 million for an
ownership fraction of less than 1% ownership interest.  In addition,
three of the Company’s board members have liquidated their investments in this
same firm, which had aggregated to an ownership fraction of less than 1%
ownership interest.  The Company’s Chairman and Chief Executive
Officer, Thinh Tran, resigned as a member of Envivio’s Board of
Directors.
 
 18.
                Segment
      and geographical information
 
 SFAS No.
131, Disclosures about
Segments of an Enterprise and Related Information (“SFAS No. 131”),
provides annual and interim reporting standards for an enterprise’s business
segments and related disclosures about its products, services, geographical
areas and major customers.
 
 Operating
segments are defined as components of an enterprise for which separate financial
information is available and evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance.  The Company is organized as, and operates in, one
reportable segment.  The Company’s operating segment consists of its
geographically based entities in the United States, Hong Kong and
Singapore.  The Company’s chief operating decision-maker reviews
consolidated financial information, accompanied by information about revenue by
product group, target market and geographic region.  The Company does
not assess the performance of its geographic regions on other measures of income
or expense, such as depreciation and amortization, gross margin or net
income.
 
 The
following table sets forth net revenue attributed to each product group (in
thousands):
 
 70
 Table of Contents
 Years
      EndedJanuary
      31,
                                        
                                        
                                        February
      2,
                                        
                                        
                                        February
      3,2009
                                        
                                        
                                        2008
                                        
                                        
                                        2007SoCs
                                        
                                        $
                                        207,096
                                        
                                        
                                        $
                                        216,703
                                        
                                        
                                        $
                                        86,984Other
                                        
                                        
                                        2,064
                                        
                                        
                                        
                                        4,503
                                        
                                        
                                        
                                        4,234Net
      revenue
                                        
                                        $
                                        209,160
                                        
                                        
                                        $
                                        221,206
                                        
                                        
                                        $
                                        91,218
 The
following table sets forth net revenue attributable to each target market (in
thousands):
 Years
      EndedJanuary
      31,
                                      
                                      
                                      February
      2,
                                      
                                      
                                      February
      3,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2007IPTV
                                      
                                      $
                                      164,334
                                      
                                      
                                      $
                                      164,143
                                      
                                      
                                      $
                                      61,501Connected
      media players
                                      
                                      
                                      30,069
                                      
                                      
                                      
                                      49,127
                                      
                                      
                                      
                                      24,698Prosumer
      and industrial audio/video
                                      
                                      
                                      8,099
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —HDTV
                                      
                                      
                                      1,664
                                      
                                      
                                      
                                      3,633
                                      
                                      
                                      
                                      1,657Wireless
                                      
                                      
                                      826
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Other
                                      
                                      
                                      4,168
                                      
                                      
                                      
                                      4,303
                                      
                                      
                                      
                                      3,362Net
      revenue
                                      
                                      $
                                      209,160
                                      
                                      
                                      $
                                      221,206
                                      
                                      
                                      $
                                      91,218
  The
following table sets forth net revenue to each geographic region based on the
invoiced location of customer (in thousands):
 Years
      EndedJanuary
      31,
                                      
                                      
                                      February
      2,
                                      
                                      
                                      February
      3,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2007Asia
                                      
                                      $
                                      116,583
                                      
                                      
                                      $
                                      153,146
                                      
                                      
                                      $
                                      48,386Europe
                                      
                                      
                                      80,067
                                      
                                      
                                      
                                      56,782
                                      
                                      
                                      
                                      33,109North
      America
                                      
                                      
                                      12,464
                                      
                                      
                                      
                                      11,173
                                      
                                      
                                      
                                      9,607Other
      regions
                                      
                                      
                                      46
                                      
                                      
                                      
                                      105
                                      
                                      
                                      
                                      116Net
      revenue
                                      
                                      $
                                      209,160
                                      
                                      
                                      $
                                      221,206
                                      
                                      
                                      $
                                      91,218
 The
following table sets forth net revenue to each significant country based on the
invoiced location of customer (in thousands):
 Years
      EndedJanuary
      31,
                                      
                                      
                                      February
      2,
                                      
                                      
                                      February
      3,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2007Singapore
                                      
                                      $
                                      43,450
                                      
                                      
                                      $
                                      52,529
                                      
                                      
                                      $
                                      7,403France
                                      
                                      
                                      31,004
                                      
                                      
                                      
                                      31,448
                                      
                                      
                                      
                                      26,836Netherlands
                                      
                                      
                                      24,819
                                      
                                      
                                      
                                      4,389
                                      
                                      
                                      
                                      81China
                                      
                                      
                                      24,583
                                      
                                      
                                      
                                      16,597
                                      
                                      
                                      
                                      9,767Taiwan
                                      
                                      
                                      21,736
                                      
                                      
                                      
                                      10,863
                                      
                                      
                                      
                                      4,368Japan
                                      
                                      
                                      11,030
                                      
                                      
                                      
                                      26,754
                                      
                                      
                                      
                                      7,286United
      States
                                      
                                      
                                      10,620
                                      
                                      
                                      
                                      11,163
                                      
                                      
                                      
                                      9,498Korea
                                      
                                      
                                      10,437
                                      
                                      
                                      
                                      42,941
                                      
                                      
                                      
                                      15,616Rest
      of the world
                                      
                                      
                                      31,481
                                      
                                      
                                      
                                      24,522
                                      
                                      
                                      
                                      10,363Net
      revenue
                                      
                                      $
                                      209,160
                                      
                                      
                                      $
                                      221,206
                                      
                                      
                                      $
                                      91,218
 *
                Net
      revenue is attributable to countries based on invoiced location of
      customer.
 
 71
 Table of Contents
 The
following table set forth long-lived assets, which consist primarily of
software, equipment and leasehold improvements and other non-current assets, by
geographic regions based on the location of the asset (in
thousands):
 Years
      EndedJanuary
      31,
                                      
                                      
                                      February
      2,
                                      
                                      
                                      February
      3,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2007United
      States
                                      
                                      $
                                      18,487
                                      
                                      
                                      $
                                      8,827
                                      
                                      
                                      $
                                      1,721All
      other countries
                                      
                                      
                                      2,855
                                      
                                      
                                      
                                      618
                                      
                                      
                                      
                                      461Total
      long-lived assets
                                      
                                      $
                                      21,342
                                      
                                      
                                      $
                                      9,445
                                      
                                      
                                      $
                                      2,182
  The
following tables set forth customers accounting for 10% or more of Company’s net
revenue (in thousands):
 Years
      EndedJanuary
      31,
                                      
                                      
                                      February
      2,
                                      
                                      
                                      February
      3,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2007MTC
      Singapore
                                      
                                      
                                      21%
                                      
                                      
                                      
                                      23%
                                      
                                      
                                      
                                      *Cisco
      Systems **
                                      
                                      
                                      22%
                                      
                                      
                                      
                                      *
                                      
                                      
                                      
                                      *Uniquest
      Corporporation
                                      
                                      
                                      *
                                      
                                      
                                      
                                      19%
                                      
                                      
                                      
                                      17%Macnica,
      Inc.
                                      
                                      
                                      *
                                      
                                      
                                      
                                      12%
                                      
                                      
                                      
                                      *Freebox
      SA
                                      
                                      
                                      *
                                      
                                      
                                      
                                      *
                                      
                                      
                                      
                                      20%
 *
                Net
      revenue from customer was less than 10% of net
    revenue.
 **
                Includes
      both direct sales and indirect sales made through
      subcontractors.
 
 19.
                Quarterly
      financial information (unaudited)
 
 The
following table presents unaudited quarterly financial information for each of
the Company’s most recent eight fiscal quarters (in thousands, except per share
amounts):
  Quarters
      EndedJanuary
      31,
                                                                  
                                                                  
                                                                  November
      1,
                                                                  
                                                                  
                                                                  August,
      2,
                                                                  
                                                                  
                                                                  May
      3,
                                                                  
                                                                  
                                                                  February
      2,
                                                                  
                                                                  
                                                                  November
      3,
                                                                  
                                                                  
                                                                  August
      4,
                                                                  
                                                                  
                                                                  May
      5,2009
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  2007
                                                                  
                                                                  
                                                                  2007
                                                                  
                                                                  
                                                                  2007Net
      revenue
                                                                  
                                                                  $
                                                                  47,306
                                                                  
                                                                  
                                                                  $
                                                                  46,760
                                                                  
                                                                  
                                                                  $
                                                                  58,212
                                                                  
                                                                  
                                                                  $
                                                                  56,882
                                                                  
                                                                  
                                                                  $
                                                                  76,398
                                                                  
                                                                  
                                                                  $
                                                                  66,244
                                                                  
                                                                  
                                                                  $
                                                                  42,548
                                                                  
                                                                  
                                                                  $
                                                                  36,016Gross
      profit
                                                                  
                                                                  
                                                                  21,354
                                                                  
                                                                  
                                                                  
                                                                  21,659
                                                                  
                                                                  
                                                                  
                                                                  29,521
                                                                  
                                                                  
                                                                  
                                                                  28,020
                                                                  (1)
                                                                  
                                                                  
                                                                  37,453
                                                                  
                                                                  
                                                                  
                                                                  35,227
                                                                  
                                                                  
                                                                  
                                                                  22,308
                                                                  
                                                                  
                                                                  
                                                                  17,810Income
      from operations
                                                                  
                                                                  
                                                                  2,819
                                                                  
                                                                  
                                                                  
                                                                  3,589
                                                                  
                                                                  
                                                                  
                                                                  12,727
                                                                  
                                                                  
                                                                  
                                                                  6,484
                                                                  (1)
                                                                  
                                                                  
                                                                  20,852
                                                                  
                                                                  
                                                                  
                                                                  22,413
                                                                  
                                                                  
                                                                  
                                                                  8,796
                                                                  
                                                                  
                                                                  
                                                                  5,240Net
      income
                                                                  
                                                                  
                                                                  6,579
                                                                  
                                                                  
                                                                  
                                                                  3,671
                                                                  
                                                                  
                                                                  
                                                                  9,591
                                                                  
                                                                  
                                                                  
                                                                  6,582
                                                                  (1)
                                                                  
                                                                  
                                                                  35,302
                                                                  
                                                                  
                                                                  
                                                                  20,950
                                                                  
                                                                  
                                                                  
                                                                  8,588
                                                                  
                                                                  
                                                                  
                                                                  5,369Net
      income per share:Basic
                                                                  
                                                                  $
                                                                  0.25
                                                                  
                                                                  
                                                                  $
                                                                  0.14
                                                                  
                                                                  
                                                                  $
                                                                  0.36
                                                                  
                                                                  
                                                                  $
                                                                  0.23
                                                                  (1)
                                                                  
                                                                  $
                                                                  1.19
                                                                  
                                                                  
                                                                  $
                                                                  0.80
                                                                  
                                                                  
                                                                  $
                                                                  0.36
                                                                  
                                                                  
                                                                  $
                                                                  0.23Diluted
                                                                  
                                                                  $
                                                                  0.24
                                                                  
                                                                  
                                                                  $
                                                                  0.14
                                                                  
                                                                  
                                                                  $
                                                                  0.35
                                                                  
                                                                  
                                                                  $
                                                                  0.22
                                                                  (1)
                                                                  
                                                                  $
                                                                  1.12
                                                                  
                                                                  
                                                                  $
                                                                  0.72
                                                                  
                                                                  
                                                                  $
                                                                  0.32
                                                                  
                                                                  
                                                                  $
                                                                  0.20
 (1)
                The
      amounts included in the first quarter of fiscal 2009 reflect the Company’s
      change in method of accounting for valuing the portion of its inventory
      known as tested wafers or die bank.  The Company has accounted
      for this change in method of accounting in accordance with Statement of
      Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and
      Error Corrections.”  SFAS 154 requires that all elective
      accounting changes be made on a retrospective basis.  Prior to
      the first quarter of fiscal 2009, the Company did not maintain a material
      level of die bank within its inventory.  Therefore, the Company
      has determined that no material retrospective adjustments were necessary
      for periods before fiscal 2009.
 
 ITEM9.
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
 
 None
 
 ITEM9A.
                CONTROLS
      AND PROCEDURES
 
 Evaluation
of Disclosure Controls and Procedures
 
 We are
committed to maintaining disclosure controls and procedures designed to ensure
that information required to be disclosed in our periodic reports filed under
the Exchange Act, is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures and implementing controls and
procedures.
 72
 Table of Contents
 As of
January 31, 2009, the end of the period covered by this Annual Report on
Form 10-K, we have, with the participation of our Chief Executive Officer
and our Chief Financial Officer, evaluated the effectiveness of the design and
effectiveness of our disclosure controls and procedures, as such terms are
defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities and
Exchange Act of 1934 as amended (the “Exchange Act”).  Based on this
evaluation, we have concluded that the Company’s disclosure controls and
procedures were effective as of January 31, 2009.
 
 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 Exchange Act.  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.  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 January 31, 2009.  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).  Based on this assessment, our management
concluded that our internal control over financial reporting was effective as of
January 31, 2009.
 
 Armanino
McKenna LLP, the independent registered public accounting firm that audited our
consolidated financial statements included in this Annual Report on Form 10-K,
has also assessed the effectiveness of internal control over financial reporting
as of January 31, 2009.  Armanino McKenna LLP has issued an
attestation report with an unqualified opinion.  This attestation
report is included herein under Part II, Item 8.
 
 Changes
in Internal Control over Financial Reporting
 
 During
the fourth quarter ended January 31, 2009, there were no changes in our internal
control over financial reporting (as defined in Rule 13(a) – 15(f) under the
Exchange Act) that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.  We
are continuously seeking to improve the efficiency and effectiveness of our
operations and of our internal controls.  This results in refinements
to processes throughout our organization.
 
 ITEM9B.
                OTHER
      MATTERS
 
 None.
 
 PART
III
 
 ITEM10.
                DIRECTORS,
      EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE
    GOVERNANCE
 
 You will
find this information in the sections captioned “Compensation Discussion and
Analysis,” “Report of the Compensation Committee,” “Executive Compensation,” and
“Director Compensation,” which will appear in the 2009 Proxy Statement we will
deliver to our shareholders in connection with our Annual Meeting of
Shareholders to be held on July 9, 2009.  We are incorporating the
information contained in those sections here by reference.
 
 ITEM11.
                EXECUTIVE
      COMPENSATION
 
 You will
find this information in the sections captioned “Compensation Discussion and
Analysis,” “Report of the Compensation Committee,” “Executive Compensation,” and
“Director Compensation,” which will appear in the 2009 Proxy Statement we will
deliver to our shareholders in connection with our Annual Meeting of
Shareholders to be held on July 9,,
2009.  We are incorporating the information contained in those
sections here by reference.
 
 73
 Table of Contents
 ITEM12.
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      SHAREHOLDER MATTERS
 
 You will
find this information in the section captioned “Security Ownership of Certain
Beneficial Owners and Management,” and “Equity Compensation Plan Information,”
which will appear in the 2009 Proxy Statement we will deliver to our
shareholders in connection with our Annual Meeting of Shareholders to be held on
July 9, 2009.  We are incorporating the information contained in that
section here by reference.
 
 ITEM13.
                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDANCE
 
 You will
find this information in the sections captioned “Certain Relationships and
Related Transactions,” and “Corporate Governance and Other Matters,” which will
appear in the 2009 Proxy Statement we will deliver to our shareholders in
connection with our Annual Meeting of Shareholders to be held on July 9,
2009.  We are incorporating the information contained in those
sections here by reference.
 
 ITEM14.
                PRINCIPAL
      ACCOUNTING FEES AND SERVICES
 
 You will
find this information in the sections captioned “Report of the Audit Committee”
and Proposal for Ratification of Selection of Independent Auditors,” which will
appear in the 2009 Proxy Statement we will deliver to our shareholders in
connection with our Annual Meeting of Shareholders to be held on July 9,
2009.  We are incorporating the information contained in those
sections here by reference.
 
 74
 Table of Contents
 PART
IV
 ITEM15.
                  EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
 
 (a) The
following documents are filed as part of this Annual Report on Form
10-K:
 
 1.
                  Consolidated
      Financial Statements
  Financial
      Statements
                            
                            PageReport
      of Independent Registered Public Accounting Firm
                            
                            45Consolidated
      Balance Sheets
                            
                            46Consolidated
      Statements of Operations
                            
                            47Consolidated
      Statements of Shareholders’ Equity and Comprehensive
Income
                            
                            48Consolidated
      Statements of Cash Flows
                            
                            49Notes
      to Consolidated Financial Statements
                            
                            50
 
 2.
                  Consolidated
      Financial Statements Schedules
  Schedule
      II—Valuation and Qualifying Accounts and Reserves
                                
                                77
 
 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.
 
 75
 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 report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Milpitas, State of
California, on the 2nd day of April 2009.
 SIGMA
      DESIGNS, INC.By:
                      /s/ Thinh
      Q. TranThinh
      Q. TranChairman
      of the Board,President
      and Chief Executive Officer
  POWER
OF ATTORNEY
 
 KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Thinh Q. Tran and Thomas E. Gay III, and each of them,
jointly and severally, his true and lawful attorneys-in-fact, each with full
power of substitution and resubstitution, for him in any and all capacities, to
sign any or all amendments to this Annual Report on Form 10-K, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do if personally present,
hereby ratifying and confirming all that each said attorney-in-fact and agent,
or his or her substitute or substitutes or any of them, may lawfully do or cause
to be done by virtue hereof.
 
 PURSUANT
TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS ANNUAL REPORT ON FORM
10-K HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE OF THE REGISTRANT
AND 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)
                              
                              April
      2, 2009/s/
      Thomas E. Gay III
                                Thomas
      E. Gay III
                              
                              Chief
      Financial Officer and Secretary
                                (Principal
      Financial and Accounting Officer)
                              
                              April
      2, 2009/s/
      William J. Almon
                                William
      J. Almon
                              
                              Director
                              
                              April
      2, 2009/s/
      Julien Nguyen
                                Julien
      Nguyen
                              
                              Director
                              
                              April
      2, 2009/s/
      Lung C. Tsai
                                Lung
      C. Tsai
                              
                              Director
                              
                              April
      2,
2009
 76
 Table of Contents
  SCHEDULE
II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
  Additions:Balance
      at
                                          
                                          
                                          Charged
      to
                                          
                                          
                                          
                                          
                                          
                                          Balance
      atBeginning
      of
                                          
                                          
                                          Costs
      and
                                          
                                          
                                          
                                          
                                          
                                          End
      ofClassification
                                          
                                          Year
                                          
                                          
                                          Expenses
                                          
                                          
                                          Deductions:
                                          
                                          
                                          YearAllowance
      for returns, doubtful accounts and discounts:
                                          
                                          (in
      thousands)Fiscal
      year2009
                                          
                                          $
                                          252
                                          
                                          
                                          $
                                          948
                                          
                                          
                                          $
                                          666
                                          
                                          
                                          $
                                          5342008
                                          
                                          
                                          601
                                          
                                          
                                          
                                          619
                                          
                                          
                                          
                                          968
                                          
                                          
                                          
                                          2522007
                                          
                                          
                                          1,491
                                          
                                          
                                          
                                          30
                                          
                                          
                                          
                                          920
                                          
                                          
                                          
                                          601
 
 77
 Table of Contents
 INDEX
TO EXHIBITS
  Exhibit
                              Number
                            
                            Description
                            
                            Filed
      Herewith or Incorporated Herein by Reference
to  3.1
                              
                              Second
      Restated Articles of Incorporation.
                              
                              Incorporated
      by reference to exhibit filed with the Registration Statement on Form S-1
      (No. 33-17789) filed October 8, 1987, Amendment No. 1 thereto filed June
      9, 1988 and Amendment No. 2 thereto filed June 14, 1988, which
      Registration Statement became effective June 14, 1988.3.2
                              
                              Certificate
      of Amendment to the Second Restated Articles of Incorporation dated June
      22, 2001.
                              
                              Incorporated
      by reference to exhibit 3.1 filed with the Registration Statement on Form
      S-8 (No. 333-64234) filed on June 29, 2001.3.3
                              
                              Bylaws
      of the Company, as amended.
                              
                              Incorporated
      by reference to exhibit 3.6 filed with the Annual Report on Form 10-K for
      the fiscal year ended February 1, 2003.3.4
                              
                              Certificate
      of Determination of Preferences of Series A Preferred Stock dated
      June 13, 1997.
                              
                              Incorporated
      by reference to exhibit 3.3 filed with the Registrant’s Form S-1 filed on
      September 14, 2007.3.5
                              
                              Certificate
      of Determination of Preferences of Series B Preferred Stock dated
      January 30, 1998.
                              
                              Incorporated
      by reference to exhibit 3.4 filed with the Registrant’s Form S-1 filed on
      September 14, 2007.3.6
                              
                              Certificate
      of Determination of Preferences of Series C Preferred Stock dated
      January 20, 1999.
                              
                              Incorporated
      by reference to exhibit 3.5 filed with the Registrant’s Form S-1 filed on
      September 14, 2007.3.7
                              
                              Certificate
      of Determination of Rights, Preferences and Privileges of Series D
      Participating Preferred Stock dated June 4, 2004.
                              
                              Incorporated
      by reference to exhibit 3.6 filed with the Registrant’s Form S-1 filed on
      September 14, 2007.3.8
                              
                              Certificate
      of Amendment to the Second Restated Articles of Incorporation dated
      January 28, 2008.
                              
                              Incorporated
      by reference to exhibit 3.7 filed with the Annual Report on Form 10-K
      filed on April 2, 2008.4.1
                              
                              Preferred
      Stock Rights Agreement, dated as of June 7, 2004, between the Company and
      Mellon Investor Services LLC, as Rights Agent, including the Certificate
      of Designation, the form of Rights Certificate and the Summary of Rights
      attached thereto as Exhibit A, B and C, respectively.
                              
                              Incorporated
      by reference to exhibit 4.1 filed with the Current Report on Form 8-K
      filed on June 8, 2004.10.1*
                              
                              Amended
      and Restated 1994 Stock Plan and form of Stock Option
      Agreement.
                              
                              Incorporated
      by reference to exhibit 4.1 filed with the Registration Statement on Form
      S-8 (No. 333-86875) filed on September 10, 1999.10.2*
                              
                              1994
      Director Stock Option Plan and form of Director Option
      Agreement.
                              
                              Incorporated
      by reference to exhibit filed with the Registration Statement on Form S-3
      (No. 33-74308) filed on January 28, 1994, Amendment No. 1 thereto filed
      February 24, 1994, Amendment No. 2 thereto filed March 3, 1994, Amendment
      No. 3 thereto filed March 4, 1994 and Amendment No. 4 thereto filed March
      8, 1994.10.3*
                              
                              2001
      Employee Stock Option Plan.
                              
                              Incorporated
      by reference to exhibit 4.1 filed with the Registration Statement on Form
      S-8 (333-64234) filed on June 29, 2001.10.4*
                              
                              2001
      Employee Stock Purchase Plan and Form of Subscription
      Agreement.
                              
                              Incorporated
      by reference to exhibit 4.2 filed with the Registration Statement on Form
      S-8 (333-64234) filed on June 29,
2001.
  78
 Table of Contents
 Exhibit
                                                Number
                                              
                                              Description
                                              
                                              Filed
      Herewith or Incorporated Herein by Reference
to
 10.5
                              
                              Industrial
      Lease by and between AMB Property, L.P. and the Company dated February 22,
      2007
                              
                              Incorporated
      by reference to exhibit 10.15 filed with the Annual Report on
      Form 10-K for the fiscal year ended February 3,
      2007.10.6*
                              
                              2003
      Director Stock Option Plan.
                              
                              Incorporated
      by reference to exhibit 99.1 filed with the Form S-8 filed on
      July 11, 2003.10.7
                              
                              Loan
      and Security Agreement, dated as of August 12, 2005, by and between
      the Registrant and United Commercial Bank.
                              
                              Incorporated
      by reference to exhibit 10.1 filed with the Quarterly Report on
      Form 10-Q filed on September 8, 2005.21.1
                              
                              Subsidiaries
      of the Registrant.
                              
                              Filed
      herewith.23.1
                              
                              Consent
      of Independent Registered Public Accounting Firm (Armanino McKenna
      LLP)
                              
                              Filed
      herewith as page E-1.24.1
                              
                              Power
      of Attorney (contained in the signature page to this Annual Report on Form
      10-K).
                              
                              Filed
      herewith as page 74.31.1
                              
                              Certification
      of the President and Chief Executive Officer pursuant to Securities
      Exchange Act Rules 13a-14(a) and 15d-14(a).
                              
                              Filed
      herewith as page E-2.31.2
                              
                              Certification
      of the Chief Financial Officer and Secretary pursuant to Securities
      Exchange Act Rules 13a-14(a) and 15d-14(a).
                              
                              Filed
      herewith as page E-3.32.1
                              
                              Certificate
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
                              
                              Filed
      herewith as page E-4.32.2
                              
                              Certificate
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
                              
                              Filed
      herewith as page
E-5.
  *
                Indicates
      management contract or compensatory plan or
  arrangement.
 
 79