##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2007

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the Transition Period from  to

Commission File Number: 000-50391



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SIGMATEL, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 74-2691412                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

1601 S. MoPac Expressway

Suite 100

Austin, Texas 78746

(512) 381-3700

(Address
and telephone number of principal executive offices)



---

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

Large accelerated filer ̈Accelerated filer  x            Non-accelerated filer ̈

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

The number of shares outstanding of the issuers Common Stock, $0.0001 par value, was 35,834,017 as of July 31, 2007.



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##### Table of Contents

SIGMATEL, INC.

FORM 10-Q

TABLE OF CONTENTS



|          |  |                                                                                                                    |  |         
|--------- |  | ------------------------------------------------------------------------------------------------------------------ |  | --------
|          |  |                                                                                                                    |  | Page No.
|          |  |                                                                                                                   
|PART I:   |  | FINANCIAL INFORMATION                                                                                              |  | 3       
|          |  |                                                                                                                   
|Item 1.   |  | Financial Statements                                                                                               |  | 3       
|          |  |                                                                                                                   
|          |  | Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006                                    |  | 3       
|          |  |                                                                                                                   
|          |  | Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and June 30, 2006 |  | 4       
|          |  |                                                                                                                   
|          |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and June 30, 2006           |  | 5       
|          |  |                                                                                                                   
|          |  | Notes to Condensed Consolidated Financial Statements                                                               |  | 6       
|          |  |                                                                                                                   
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                              |  | 14      
|          |  |                                                                                                                   
|Item 3.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                         |  | 26      
|          |  |                                                                                                                   
|Item 4.   |  | Controls and Procedures                                                                                            |  | 26      
|          |  |                                                                                                                   
|PART II:  |  | OTHER INFORMATION                                                                                                  |  | 27      
|          |  |                                                                                                                   
|Item 1.   |  | Legal Proceedings                                                                                                  |  | 27      
|          |  |                                                                                                                   
|Item 1A.  |  | Risk Factors                                                                                                       |  | 28      
|          |  |                                                                                                                   
|Item 2.   |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                        |  | 42      
|          |  |                                                                                                                   
|Item 3.   |  | Defaults Upon Senior Securities                                                                                    |  | 42      
|          |  |                                                                                                                   
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                                |  | 42      
|          |  |                                                                                                                   
|Item 5.   |  | Other Information                                                                                                  |  | 42      
|          |  |                                                                                                                   
|Item 6.   |  | Exhibits                                                                                                           |  | 42      
|          |  |                                                                                                                   
|Signature |  |                                                                                                                    |  | 43      



2



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##### Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

SIGMATEL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)



|                                                                                                                                                                                       |  |              |         |   |                  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                       |  | June 30,2007 |         |   | December 31,2006 |  
|ASSETS                                                                                                                                                                                 |  |              |         |   |                  |   |         |  
|Current assets:                                                                                                                                                                        |  |              |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                              |  | $            | 31,569  |   |                  | $ | 30,686  |  
|Restricted cash                                                                                                                                                                        |  |              | 7,682   |   |                  |   | 7,354   |  
|Short-term investments                                                                                                                                                                 |  |              | 42,800  |   |                  |   | 62,800  |  
|Accounts receivable, net                                                                                                                                                               |  |              | 15,792  |   |                  |   | 12,556  |  
|Inventories, net                                                                                                                                                                       |  |              | 12,909  |   |                  |   | 20,794  |  
|Income tax receivable                                                                                                                                                                  |  |              | 2,485   |   |                  |   | 3,365   |  
|Prepaid expenses and other assets                                                                                                                                                      |  |              | 4,008   |   |                  |   | 5,591   |  
|                                                                                                                                                                                       |  |              |         |   |                  |   |         |  
|Total current assets                                                                                                                                                                   |  |              | 117,245 |   |                  |   | 143,146 |  
|Property, equipment and software, net                                                                                                                                                  |  |              | 10,803  |   |                  |   | 13,301  |  
|Intangible assets, net                                                                                                                                                                 |  |              | 14,492  |   |                  |   | 15,370  |  
|Non-current income tax receivable                                                                                                                                                      |  |              | 4,629   |   |                  |   |        |  
|Other assets                                                                                                                                                                           |  |              | 997     |   |                  |   | 1,574   |  
|                                                                                                                                                                                       |  |              |         |   |                  |   |         |  
|Total assets                                                                                                                                                                           |  | $            | 148,166 |   |                  | $ | 173,391 |  
|                                                                                                                                                                                       |  |              |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                   |  |              |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                                   |  |              |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                                       |  | $            | 15,683  |   |                  | $ | 16,338  |  
|Accrued compensation                                                                                                                                                                   |  |              | 7,814   |   |                  |   | 8,712   |  
|Other accrued expenses                                                                                                                                                                 |  |              | 5,245   |   |                  |   | 5,328   |  
|Deferred revenue                                                                                                                                                                       |  |              | 3,427   |   |                  |   | 1,242   |  
|Income tax payable                                                                                                                                                                     |  |              | 1,963   |   |                  |   | 2,728   |  
|Current portion of long-term obligations                                                                                                                                               |  |              | 386     |   |                  |   | 229     |  
|                                                                                                                                                                                       |  |              |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                              |  |              | 34,518  |   |                  |   | 34,577  |  
|Non-current income taxes payable                                                                                                                                                       |  |              | 5,582   |   |                  |   | 4,453   |  
|Other liabilities                                                                                                                                                                      |  |              | 2,365   |   |                  |   | 809     |  
|                                                                                                                                                                                       |  |              |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                      |  |              | 42,465  |   |                  |   | 39,839  |  
|                                                                                                                                                                                       |  |              |         |   |                  |   |         |  
|Stockholders equity:                                                                                                                                                                  |  |              |         |   |                  |   |         |  
|Common stock, $0.0001 par value; 170,000 shares authorized; shares issued and outstanding: 35,915 and 35,823 at June 30, 2007 and 35,603
and 35,513 at December 31, 2006, respectively |  |              | 4       |   |                  |   | 4       |  
|Additional paid-in capital                                                                                                                                                             |  |              | 201,745 |   |                  |   | 197,711 |  
|Notes receivable from stockholders                                                                                                                                                     |  |              |        |   |                  |   | (5      | )
|Treasury stock, 90 common shares at cost                                                                                                                                               |  |              | (741    | ) |                  |   | (741    | )
|Accumulated deficit                                                                                                                                                                    |  |              | (95,661 | ) |                  |   | (63,687 | )
|Accumulated other comprehensive income                                                                                                                                                 |  |              | 354     |   |                  |   | 270     |  
|                                                                                                                                                                                       |  |              |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                             |  |              | 105,701 |   |                  |   | 133,552 |  
|                                                                                                                                                                                       |  |              |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                             |  | $            | 148,166 |   |                  | $ | 173,391 |  
|                                                                                                                                                                                       |  |              |         |   |                  |   |         |  

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



3



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SIGMATEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                         |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                         |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                                         |  | 2007                       |         |   | 2006                     |   |         | 2007 |  |   | 2006    |  
|Revenues, net                            |  | $                          | 30,734  |   |                          | $ | 43,812  |      |  | $ | 52,753  |   |  | $ | 76,833  |  
|Cost of goods sold                       |  |                            | 19,059  |   |                          |   | 24,890  |      |  |   | 33,350  |   |  |   | 43,182  |  
|                                         |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Gross profit                             |  |                            | 11,675  |   |                          |   | 18,922  |      |  |   | 19,403  |   |  |   | 33,651  |  
|                                         |  |                            |         |  
|Operating expenses:                      |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Research and development                 |  |                            | 17,282  |   |                          |   | 23,061  |      |  |   | 35,603  |   |  |   | 45,253  |  
|Selling, general and administrative      |  |                            | 8,271   |   |                          |   | 12,639  |      |  |   | 18,109  |   |  |   | 26,632  |  
|Loss on asset disposition                |  |                            |        |   |                          |   |        |      |  |   | 594     |   |  |   |        |  
|                                         |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total operating expenses                 |  |                            | 25,553  |   |                          |   | 35,700  |      |  |   | 54,306  |   |  |   | 71,885  |  
|                                         |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Operating loss                           |  |                            | (13,878 | ) |                          |   | (16,778 | )    |  |   | (34,903 | ) |  |   | (38,234 | )
|                                         |  |                            |         |  
|Interest income, net                     |  |                            | 1,037   |   |                          |   | 422     |      |  |   | 2,036   |   |  |   | 1,205   |  
|Foreign exchange loss                    |  |                            | (59     | ) |                          |   | (52     | )    |  |   | (133    | ) |  |   | (104    | )
|                                         |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total other income                       |  |                            | 978     |   |                          |   | 370     |      |  |   | 1,903   |   |  |   | 1,101   |  
|                                         |  |                            |         |  
|Loss before income taxes                 |  |                            | (12,900 | ) |                          |   | (16,408 | )    |  |   | (33,000 | ) |  |   | (37,133 | )
|                                         |  |                            |         |  
|Income tax benefit                       |  |                            | (1,271  | ) |                          |   | (19,335 | )    |  |   | (3,235  | ) |  |   | (15,334 | )
|                                         |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                                         |  |                            |         |  
|Net (loss) income                        |  | $                          | (11,629 | ) |                          | $ | 2,927   |      |  | $ | (29,765 | ) |  | $ | (21,799 | )
|                                         |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|BASIC NET (LOSS) INCOME PER SHARE        |  | $                          | (0.32   | ) |                          | $ | 0.08    |      |  | $ | (0.83   | ) |  | $ | (0.62   | )
|                                         |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|DILUTED NET (LOSS) INCOME PER SHARE      |  | $                          | (0.32   | ) |                          | $ | 0.08    |      |  | $ | (0.83   | ) |  | $ | (0.62   | )
|                                         |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|WEIGHTED AVERAGE SHARES USED TO COMPUTE: |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic net (loss) income per share        |  |                            | 35,818  |   |                          |   | 34,881  |      |  |   | 35,679  |   |  |   | 35,343  |  
|Diluted net (loss) income per share      |  |                            | 35,818  |   |                          |   | 35,695  |      |  |   | 35,679  |   |  |   | 35,343  |  

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



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SIGMATEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                            |  |                          |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                            |  | Six Months EndedJune 30, |        
|                                                                            |  | 2007                     |         |   | 2006 |  
|Cash flows from operating activities:                                       |  |                          |         |   |      |   |         |  
|Net loss                                                                    |  | $                        | (29,765 | ) |      | $ | (21,799 | )
|Adjustments to reconcile net loss to net cash used by operating activities: |  |                          |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                          | 5,681   |   |      |   | 7,295   |  
|Stock-based compensation expense                                            |  |                          | 3,790   |   |      |   | 5,064   |  
|Sabbatical leave benefit                                                    |  |                          | (120    | ) |      |   |        |  
|Lease abandonment charges                                                   |  |                          | 619     |   |      |   |        |  
|Excess tax benefit from employee stock plans                                |  |                          |        |   |      |   | (299    | )
|Other non-cash expense                                                      |  |                          | 93      |   |      |   | 120     |  
|Loss on asset disposition                                                   |  |                          | 594     |   |      |   |        |  
|Changes in assets and liabilities:                                          |  |                          |         |   |      |   |         |  
|Accounts receivable, net                                                    |  |                          | (3,236  | ) |      |   | 22,536  |  
|Inventories, net                                                            |  |                          | 7,885   |   |      |   | (18,449 | )
|Prepaid expenses and other assets                                           |  |                          | 1,584   |   |      |   | (559    | )
|Other non-current assets                                                    |  |                          | 579     |   |      |   | (1,389  | )
|Deferred tax assets & liabilities                                           |  |                          | (3      | ) |      |   | (15,240 | )
|Accounts payable                                                            |  |                          | (1,150  | ) |      |   | (21,037 | )
|Accrued expenses                                                            |  |                          | (1,076  | ) |      |   | 766     |  
|Current portion of long-term obligations                                    |  |                          | (258    | ) |      |   | (359    | )
|Income taxes receivable and payable                                         |  |                          | (4,502  | ) |      |   | 3,373   |  
|Deferred revenue                                                            |  |                          | 2,186   |   |      |   | (4,206  | )
|Other liabilities                                                           |  |                          | 489     |   |      |   | 252     |  
|                                                                            |  |                          |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                          | (16,610 | ) |      |   | (43,931 | )
|                                                                            |  |                          |         |   |      |   |         |  
|Cash flows from investing activities:                                       |  |                          |         |   |      |   |         |  
|Proceeds from maturities of short-term investments                          |  |                          | 114,419 |   |      |   | 32,157  |  
|Purchases of short-term investments                                         |  |                          | (94,409 | ) |      |   |        |  
|Purchases of property, equipment, software and intangible assets            |  |                          | (2,787  | ) |      |   | (6,057  | )
|Proceeds from the sale of fixed assets                                      |  |                          | 68      |   |      |   |        |  
|Increase in restricted cash                                                 |  |                          | (328    | ) |      |   |        |  
|                                                                            |  |                          |         |   |      |   |         |  
|Net cash provided by investing activities                                   |  |                          | 16,963  |   |      |   | 26,100  |  
|                                                                            |  |                          |         |   |      |   |         |  
|Cash flows from financing activities:                                       |  |                          |         |   |      |   |         |  
|Payments on capital lease obligations                                       |  |                          | (135    | ) |      |   | (7      | )
|Common stock repurchases                                                    |  |                          |        |   |      |   | (29,999 | )
|Excess tax benefit from employee stock plans                                |  |                          |        |   |      |   | 299     |  
|Proceeds from issuance of common stock, net of issuance costs               |  |                          | 620     |   |      |   | 1,251   |  
|                                                                            |  |                          |         |   |      |   |         |  
|Net cash provided (used in) by financing activities                         |  |                          | 485     |   |      |   | (28,456 | )
|                                                                            |  |                          |         |   |      |   |         |  
|Effect of exchange rate changes on cash and cash equivalents                |  |                          | 45      |   |      |   | 58      |  
|Net increase (decrease) in cash and cash equivalents                        |  |                          | 883     |   |      |   | (46,229 | )
|Cash and cash equivalents, beginning of period                              |  |                          | 30,686  |   |      |   | 65,712  |  
|                                                                            |  |                          |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                    |  | $                        | 31,569  |   |      | $ | 19,483  |  
|                                                                            |  |                          |         |   |      |   |         |  

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



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Sigmatel, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of SigmaTel, Inc. and its wholly owned subsidiaries (the
Company). All material intercompany balances and transactions have been eliminated. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America (GAAP). The statements have been prepared in accordance with GAAP applicable to interim financial statements. Accordingly, they do not include all of the
information and notes required for complete financial statements.

In the opinion of management, all adjustments considered necessary for a
fair and comparable statement of the Companys financial position, results of operations and cash flows for the periods presented have been included and are of a normal recurring nature. Operating results for the three and six months ended
June 30, 2007, are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

2. Significant
Accounting Policies

For a description of what the Company believes to be the critical accounting policies that affect its more
significant judgments and estimates used in the preparation of its financial statements, refer to its most recent Form 10-K filed with the SEC.

Net
(Loss) Income per Share

Basic net (loss) income per share is computed by dividing net (loss) income by the weighted-average number of
shares of common stock outstanding for the period. Diluted net (loss) income per share is computed giving effect to all potential dilutive common stock, including options, restricted stock units, and common stock subject to repurchase. Such
outstanding common stock options and restricted stock units have been excluded from the calculation of diluted net loss per share for the three and six months ended June 30, 2006 and 2007, as the effect of their exercise would be anti-dilutive.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net (loss) income per share is as follows
(in thousands):



|                                                                                              |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                              |  | Three Months Ended June 30, |         |   | Six Months Ended June 30, |  
|                                                                                              |  | 2007                        |         |   | 2006                      |   |        | 2007 |  |   | 2006    |  
|Numerator:                                                                                    |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Net (loss) income                                                                             |  | $                           | (11,629 | ) |                           | $ | 2,927  |      |  | $ | (29,765 | ) |  | $ | (21,799 | )
|Denominator:                                                                                  |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Weighted-average common stock outstanding                                                     |  |                             | 35,818  |   |                           |   | 35,157 |      |  |   | 35,679  |   |  |   | 35,611  |  
|Less: weighted-average shares subject to repurchase                                           |  |                             |        |   |                           |   | (36    | )    |  |   |        |   |  |   | (28     | )
|Less: shares held in escrow                                                                   |  |                             |        |   |                           |   | (240   | )    |  |   |        |   |  |   | (240    | )
|                                                                                              |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Weighted-average shares used in computing basic net (loss) income per share                   |  |                             | 35,818  |   |                           |   | 34,881 |      |  |   | 35,679  |   |  |   | 35,343  |  
|Dilutive potential common shares used in computing diluted net (loss) income per share        |  |                             |        |   |                           |   | 814    |      |  |   |        |   |  |   |        |  
|                                                                                              |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Total weighted-average number of shares used in computing diluted net (loss) income per share |  |                             | 35,818  |   |                           |   | 35,695 |      |  |   | 35,679  |   |  |   | 35,343  |  
|                                                                                              |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |         |  



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SigmaTel, Inc.

Notes to Condensed Consolidated Financial Statements  continued

(unaudited)



The following outstanding options and restricted stock units were excluded from the computation of
diluted net (loss) income per share as they had an anti-dilutive effect:



|                                 |  |                             |  |                           |  |       |  |      
|-------------------------------- |  | --------------------------- |  | ------------------------- |  | ----- |  | -----
|                                 |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|                                 |  | 2007                        |  | 2006                      |  | 2007  |  | 2006 
|Options to purchase common stock |  | 5,294                       |  | 4,919                     |  | 4,870 |  | 5,894
|Restricted stock units           |  | 420                         |  | 205                       |  | 344   |  | 216  
|                                 |  |                             |  |                           |  |       |  |      
|                                 |  | 5,714                       |  | 5,124                     |  | 5,214 |  | 6,110
|                                 |  |                             |  |                           |  |       |  |      

3. Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) ratified EITF Issue No. 06-2, Accounting for Sabbatical Leave and Other
Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences (Issue 06-2). Issue 06-2 provides guidelines under which sabbatical leave or other similar benefits provided to an employee are considered
to accumulate, as defined in Statement 43. If such benefits are deemed to accumulate, then the compensation cost associated with a sabbatical or other similar benefit arrangement should be accrued over the requisite service period. Upon adoption,
the standard provides guidance for the Company to either record a change in accounting principle through a cumulative adjustment to accumulated deficit or through a retrospective application to all periods. The company adopted Issue 06-2 effective
January 1, 2007, and elected to record as a cumulative effect to accumulated deficit. The election to record as a cumulative effect to accumulated deficit was due to the unreasonable efforts required to apportion the benefit appropriately to
all prior periods. See Note 11 for additional details.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Income
Tax Uncertainties (FIN 48). FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as more-likely-than-not to be sustained by the taxing authority. The recently
issued literature also provides guidance on the de-recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, as FIN 48 also includes guidance concerning accounting for income tax
uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties. The Company adopted FIN 48 effective January 1, 2007. The differences between the amounts recognized in the
statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption were accounted for as a cumulative-effect adjustment recorded to the accumulated deficit. The impact upon the adoption of FIN 48 was significant
to the condensed consolidated financial statements and included recording increases to the liability for unrecognized tax benefits, to the income tax receivable, and the deferred tax assets. In addition, the Company recorded an increase to its
accumulated deficit and a reduction in its additional paid-in capital. See Note 10 for additional details.

In September 2006, the FASB
issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157). SFAS 157 is definitional and disclosure-oriented and addresses how companies should approach measuring fair
value when required by GAAP, it does not create or modify any current GAAP requirements to apply fair value accounting. SFAS 157 provides a single definition for fair value that is to be applied consistently for all accounting applications, and also
generally describes and prioritizes according to reliability the methods and inputs used in valuations. SFAS 157 prescribes various disclosures about financial statement categories and amounts which are measured at fair value, if such disclosures
are not already specified elsewhere in GAAP. The new measurement and disclosure requirements of SFAS 157 are effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently
evaluating the effect that the adoption of SFAS 157 will have on its financial position and results of operations.

In February 2007, the
FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits an entity to elect fair value as the
initial and subsequent measurement attribute for many financial assets and liabilities. Entities electing the fair value option would be required to recognize changes in fair value in earnings. Entities electing the fair value option are required to
distinguish, on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The adjustment to reflect the difference between the fair value and the carrying amount would be accounted for as a cumulative-effect adjustment to accumulated deficit as of the date
of initial adoption. The Company is currently evaluating the impact, if any, of SFAS 159 on the Companys financial position and results of operations.



7



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##### Table of Contents

SigmaTel, Inc.

Notes to Condensed Consolidated Financial Statements  continued

(unaudited)



4. Stock-based Compensation

Stock-based compensation costs are based on the fair value calculated with the Black-Scholes option-pricing model on the date of grant for stock options and on the date of enrollment for the Employee Stock Purchase
Plan (ESPP). Restricted Stock Unit (RSU) fair values equal quoted market price on the date of grant.

The fair
values of stock awards are amortized as compensation expense on a straight-line basis over their requisite service period. Compensation expense recognized is shown in the operating activities section of the condensed consolidated statements of cash
flows.

The Company recognized $1.9 million and $3.8 million in the three and six months ended June 30, 2007 for stock based
compensation. This expense includes $1.7 million for stock options, $0.1 million for RSUs, and $0.1 million for the ESPP in the three months ended June 30, 2007. The table below presents the costs recorded related to stock-based compensation
for the three and six months ended June 30, 2007 and 2006, respectively (amounts shown are in thousands):



|                                  |  |                             |       |                           |   |       |  |      |       |  |   |      
|--------------------------------- |  | --------------------------- | ----- | ------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                                  |  | Three Months Ended June 30, |       | Six Months Ended June 30,
|                                  |  | 2007                        |       | 2006                      |   | 2007  |  | 2006
|Research and development          |  | $                           | 1,441 |                           | $ | 1,709 |  | $    | 2,763 |  | $ | 3,371
|Sales, general and administrative |  |                             | 483   |                           |   | 863   |  |      | 1,027 |  |   | 1,693
|                                  |  |                             |       |                           |   |       |  |      |       |  |   |      
|Total stock-based compensation    |  | $                           | 1,924 |                           | $ | 2,572 |  | $    | 3,790 |  | $ | 5,064
|                                  |  |                             |       |                           |   |       |  |      |       |  |   |      

The Company determined the assumptions in the Black-Scholes model for calculating fair value of
stock-based compensation costs as follows: expected volatility is a combination of the Companys historical and implied volatility; expected term is calculated using the simplified method prescribed in Staff Accounting Bulletin
No.107,Share-Based Payment; the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of valuation; and a dividend yield is not used since the Company has never paid cash dividends and does not currently intend to
pay cash dividends. The Company periodically reviews these assumptions and modifies them as necessary.

Stock Options

The fair value of common stock options granted during the three and six months ended June 30, 2007 and 2006, were estimated using the Black-Scholes option pricing
model with the following assumptions:



|                    |  |                             |  |                           |  |                 |  |           
|------------------- |  | --------------------------- |  | ------------------------- |  | --------------- |  | ----------
|                    |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|                    |  | 2007                        |  | 2006                      |  | 2007            |  | 2006      
|Dividend yield      |  |                            |  |                          |  |                |  |          
|Expected life       |  | 4.4 Years                   |  | 4.5 years                 |  | 4.4 -4.5 years. |  | 4.5 years 
|Expected volatility |  | 64%                         |  | 65%                       |  | 64%             |  | 60  65%  
|Risk-free rate      |  | 4.7%                        |  | 5.0%                      |  | 4.7%            |  | 4.6  5.0%

ESPP

The grant date fair value of the employees purchase rights under the ESPP were calculated using the Black-Scholes model with the following assumptions:



|                    |  |                             |  |                           |  |            |  |           
|------------------- |  | --------------------------- |  | ------------------------- |  | ---------- |  | ----------
|                    |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|                    |  | 2007                        |  | 2006                      |  | 2007       |  | 2006      
|Dividend yield      |  |                            |  |                          |  |           |  |          
|Expected life       |  | 6 months                    |  | 6 months                  |  | 6 months   |  | 6 months  
|Expected volatility |  | 64%                         |  | 60%                       |  | 64 - 66%   |  | 60  67%  
|Risk-free rate      |  | 5.1%                        |  | 5.0%                      |  | 5.0 - 5.1% |  | 4.4  5.0%



8



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##### Table of Contents

SigmaTel, Inc.

Notes to Condensed Consolidated Financial Statements  continued

(unaudited)



A summary of the Companys stock compensation activity with respect to the six months ended
June 30, 2007, follows (share amounts in thousands):



|                                            |  |        |   |  |                                |      
|------------------------------------------- |  | ------ | - |  | ------------------------------ | -----
|Stock Options Under the 1995 and 2003 Plans |  | Shares |   |  | Weighted AverageExercise Price
|Outstanding at December 31, 2006            |  | 5,112  |   |  | $                              | 15.60
|Granted                                     |  | 1,400  |   |  |                                | 3.56 
|Exercised                                   |  | (94    | ) |  |                                | 1.45 
|Cancelled or expired                        |  | (1,094 | ) |  |                                | 20.49
|                                            |  |        |   |  |                                |      
|Outstanding at June 30, 2007                |  | 5,324  |   |  | $                              | 11.68



|                               |  |        |   |  |                                       |     
|------------------------------ |  | ------ | - |  | ------------------------------------- | ----
|Restricted Stock Units         |  | Shares |   |  | Weighted AverageGrant Date Fair Value
|Nonvested at December 31, 2006 |  | 278    |   |  | $                                     | 7.30
|Granted                        |  | 250    |   |  |                                       | 3.56
|Vested                         |  | (36    | ) |  |                                       | 8.83
|Forfeited                      |  | (62    | ) |  |                                       | 6.46
|                               |  |        |   |  |                                       |     
|Nonvested at June 30, 2007     |  | 430    |   |  | $                                     | 5.12

During the six month ended June 30, 2007, 35,689 RSUs vested. The Company had $11.8 million
of total unrecognized compensation cost related to stock options and RSUs at June 30, 2007, that is expected to be recognized over a weighted-average period of 2.2 years. There was no stock compensation cost capitalized into assets as of
June 30, 2007.

For the six months ended June 30, 2007 and 2006, approximately $0.6 million and $1.3 million, respectively, was
received for the exercise of stock options and purchase of shares under the ESPP.

5. Comprehensive (loss) income

The components of comprehensive loss are comprised of net (loss) income, foreign currency translation adjustments and unrealized gains and losses on
securities. Comprehensive loss is as follows (in thousands):



|                                                     |  |                             |         |                           |      |   |       |  |   |         |   |  |   |         |  
|---------------------------------------------------- |  | --------------------------- | ------- | ------------------------- | ---- | - | ----- |  | - | ------- | - |  | - | ------- | -
|                                                     |  | Three Months Ended June 30, |         | Six Months Ended June 30, |     
|                                                     |  | 2007                        |         |                           | 2006 |   | 2007  |  |   | 2006    |  
|Net (loss) income                                    |  | $                           | (11,629 | )                         |      | $ | 2,927 |  | $ | (29,765 | ) |  | $ | (21,799 | )
|Foreign currency translation adjustments, net of tax |  |                             | 36      |                           |      |   | 62    |  |   | 83      |   |  |   | 151     |  
|Unrealized gain on securities                        |  |                             | 3       |                           |      |   | 4     |  |   | 1       |   |  |   | 19      |  
|                                                     |  |                             |         |                           |      |   |       |  |   |         |   |  |   |         |  
|Total comprehensive (loss) income                    |  | $                           | (11,590 | )                         |      | $ | 2,993 |  | $ | (29,681 | ) |  | $ | (21,629 | )
|                                                     |  |                             |         |                           |      |   |       |  |   |         |   |  |   |         |  

6. Restricted Cash and Short-term Investments

The restricted cash includes $7.5 million held in escrow for purposes of settling indemnification claims for the one year period following the closing of
the sale of the PC Audio product line to IDT on July 31, 2006.

Short-term investments at June 30, 2007 and December 31,
2006, consisting of corporate, state and municipal securities, were acquired at an aggregate cost of $42.8 million and $62.8 million, respectively. The fair values of these instruments are based on market interest rates and other market information
available to management as of each balance sheet date.



9



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##### Table of Contents

SigmaTel, Inc.

Notes to Condensed Consolidated Financial Statements  continued

(unaudited)



Short-term investments consisted of the following (in thousands):



|                               |  |               |        |   |                   |   |        |  
|------------------------------ |  | ------------- | ------ | - | ----------------- | - | ------ | -
|                               |  | June 30, 2007 |        |   | December 31, 2006 |  
|Available-for-sale securities: |  |               |        |   |                   |   |        |  
|Auction-rate preferred notes   |  | $             | 42,800 |   |                   | $ | 59,500 |  
|Variable-rate demand notes     |  |               |       |   |                   |   | 3,300  |  
|Commercial paper               |  |               | 6,962  |   |                   |   | 7,718  |  
|                               |  |               |        |   |                   |   |        |  
|Total investments              |  |               | 49,762 |   |                   |   | 70,518 |  
|Less: unrealized gain          |  |               | (1     | ) |                   |   | (1     | )
|Less: cash equivalents         |  |               | (6,961 | ) |                   |   | (7,717 | )
|                               |  |               |        |   |                   |   |        |  
|Total short-term investments   |  | $             | 42,800 |   |                   | $ | 62,800 |  
|                               |  |               |        |   |                   |   |        |  

Management classifies investments in marketable securities at the time of purchase and reevaluates
such classification at each balance sheet date. Securities classified as available-for-sale are stated at fair value. As of June 30, 2007, $7.0 million of liquid investments mature within three months and $42.8 million of liquid investments
mature beyond five years, but have interest rate maturities of less than thirty-five days.

7. Inventories

Inventories, net of reserves, consist of the following (in thousands):



|                       |  |               |        |                   |   |       
|---------------------- |  | ------------- | ------ | ----------------- | - | ------
|                       |  | June 30, 2007 |        | December 31, 2006
|Work in process        |  | $             | 4,308  |                   | $ | 5,567 
|Finished goods         |  |               | 8,601  |                   |   | 15,227
|                       |  |               |        |                   |   |       
|Total inventories, net |  | $             | 12,909 |                   | $ | 20,794
|                       |  |               |        |                   |   |       

At June 30, 2007 and December 31, 2006, the Companys reserve for slow-moving and
obsolete inventory was approximately $2.9 million and $3.4 million, respectively. We monitor and analyze our inventory for obsolescence, adjust this reserve accordingly, and as a part of this analysis, we decreased the reserve by approximately $1.1
million for inventory that was scrapped or sold, and increased the reserve by $0.7 million for slow moving inventory, resulting in a net decrease of $0.4 million during the six months ended June 30, 2007.

8. Intangible Assets

Intangible assets consist
of the following (in thousands):



|                                           |  |                      |        |                         |   |        |     |  |                      |        |                         |   |        |     |   |        |   |  |   |       
|------------------------------------------ |  | -------------------- | ------ | ----------------------- | - | ------ | --- |  | -------------------- | ------ | ----------------------- | - | ------ | --- | - | ------ | - |  | - | ------
|                                           |  | June 30, 2007        |        | December 31, 2006      
|                                           |  | Gross CarryingAmount |        | AccumulatedAmortization |   |        | Net |  | Gross CarryingAmount |        | AccumulatedAmortization |   |        | Net
|Intangible assets subject to amortization: |  |                      |        |                         |   |        |     |  |                      |        |                         |   |        |     |   |        |   |  |   |       
|Developed product technology               |  |                      | 8,212  |                         |   | (2,509 | )   |  |                      | 5,703  |                         |   | 8,212  |     |   | (1,825 | ) |  |   | 6,387 
|Trademarks and trade names                 |  |                      | 500    |                         |   | (175   | )   |  |                      | 325    |                         |   | 500    |     |   | (125   | ) |  |   | 375   
|Patents                                    |  |                      | 4,304  |                         |   | (983   | )   |  |                      | 3,321  |                         |   | 3,703  |     |   | (689   | ) |  |   | 3,014 
|Licenses to manufacture and other          |  |                      | 10,681 |                         |   | (5,538 | )   |  |                      | 5,143  |                         |   | 9,870  |     |   | (4,276 | ) |  |   | 5,594 
|                                           |  |                      |        |                         |   |        |     |  |                      |        |                         |   |        |     |   |        |   |  |   |       
|                                           |  | $                    | 23,697 |                         | $ | (9,205 | )   |  | $                    | 14,492 |                         | $ | 22,285 |     | $ | (6,915 | ) |  | $ | 15,370
|                                           |  |                      |        |                         |   |        |     |  |                      |        |                         |   |        |     |   |        |   |  |   |       



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##### Table of Contents

SigmaTel, Inc.

Notes to Condensed Consolidated Financial Statements  continued

(unaudited)



Intangible asset amortization expense for the three months ended June 30, 2007 and 2006 was $1.2
million and $1.9 million, respectively, and $2.3 million and $3.7 million for the six months ended June 30, 2007 and 2006, respectively.

The remaining estimated annual amortization expense for intangibles is as follows (in thousands):



|                                                  |  |        |       
|------------------------------------------------- |  | ------ | ------
|                                                  |  | Amount
|For the remaining period ending December 31, 2007 |  | $      | 2,193 
|For the year ending December 31, 2008             |  |        | 3,948 
|For the year ending December 31, 2009             |  |        | 3,221 
|For the year ending December 31, 2010             |  |        | 2,818 
|For the year ending December 31, 2011 and beyond  |  |        | 2,312 
|                                                  |  |        |       
|Total remaining estimated amortization expense    |  | $      | 14,492
|                                                  |  |        |       

The Company is amortizing intangible assets on a straight-line basis over their estimated useful
lives. The weighted average useful life is generally 6 years for developed product technology, 5 years for trademarks and trade names, 7 years for patents, and 2 to 5 years for licenses to manufacture.

9. Lease Abandonment and Disposition of Assets

In March 2007, the Company abandoned approximately 25,000 square feet of its office space in Austin, Texas. The total charge incurred in connection with the lease abandonment was approximately $1.2 million, which includes approximately
$0.6 million for leased facilities and approximately $0.6 million for leasehold improvements and furniture. These amounts were recorded in the first quarter of 2007 and are reflected in the selling, general and administrative expense and loss on
asset disposition in the condensed consolidated statements of operations. The related obligations are reserved in the condensed consolidated balance sheet as a short-term liability of approximately $0.2 million and a long-term liability of
approximately $0.2 million. The leasehold improvements and furniture and fixtures had a carrying value of approximately $0.7 million. The Company does not expect any future expenses related to this event.

10. Income Taxes

The Companys effective
tax rate was 10% and 118% for the three months ended June 30, 2007 and 2006, respectively, and 10% and 41% for the six months ended June 30, 2007 and 2006, respectively. The provision for income taxes has been calculated based on the
Companys estimate of its effective tax rate for the full fiscal year. At June 30, 2007, the Companys effective tax rate estimate for the year ended December 31, 2007 was 10%. This estimate differed from the statutory rate
primarily due to the effect of different tax rates in foreign jurisdictions, non-deductible charges related to stock-based compensation, research and development credits and changes in the valuation allowance recorded against the Companys
deferred tax assets. At June 30, 2006, the Companys effective tax rate estimate for the year ended December 31, 2006 was 32%. This estimate differed from the statutory rate primarily due to the effect of different tax rates in
foreign jurisdictions, non-deductible charges related to stock based compensation, and one time benefits related to a change in the Companys international tax strategy.

The Company did not recognize any tax benefits related to equity compensation during the three months ended June 30, 2007 and 2006. Tax benefits of
zero and $0.3 million were recognized during the six months ended June 30, 2007, and 2006, respectively. These benefits were recorded as a reduction of income taxes payable and an increase in additional paid-in capital.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of this adoption, the Company recognized an increase of $2.7 million in
its liability for unrecognized tax benefits offset by a net increase in its income tax receivable and deferred tax assets of $1.6 million, which were recorded as an increase in accumulated deficit of $0.7 million and a reduction in additional
paid-in capital of $0.4 million.

The gross amount of unrecognized tax benefits as of the January 1, 2007 adoption date of FIN 48 was
$8.8 million, of which $6.6 million was included in long term liabilities, $0.5 million was included in current liabilities, and $1.7 million is included in noncurrent deferred tax assets but is offset by valuation allowances. The gross



11



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##### Table of Contents

SigmaTel, Inc.

Notes to Condensed Consolidated Financial Statements  continued

(unaudited)



unrecognized tax benefit was offset by a receivable of $1.6 million, which is classified as a long term receivable. As of June 30, 2007, the gross
amount of unrecognized tax benefits was $9.2 million, of which $5.6 million is included in long term liabilities, $0.4 million is included in current liabilities, and $3.2 million is included in noncurrent deferred tax assets but is offset by
valuation allowances. The gross unrecognized tax benefits are offset by a receivable of $2.2 million, which is classified as a long term receivable. The gross amount of unrecognized tax benefits includes interest and penalties.

If the unrecognized tax benefits were to be realized as of January 1, 2007, $5.6 million would impact the effective tax rate, the remainder would be
offset by changes in the valuation allowance against the deferred tax assets. As of June 30, 2007, $3.8 million of unrecognized tax benefits would impact the effective tax rate. This decrease is primarily related to the expected impact of net
operating loss carrybacks generated in the current period.

The Company files a consolidated U.S. federal income tax return with its U.S.
subsidiaries and the Company and its subsidiaries file in four state and local jurisdictions. The Companys foreign subsidiaries file in seven foreign jurisdictions. With few exceptions, all U.S. federal and state tax years between 1995 and
2007 remain open to examination due to net operating loss carryforwards and credit carryforwards. Foreign tax years from 2005 to 2007 also remain open to examination. The Company does not expect any significant reversals of unrecognized tax benefits
in the next 12 months due to the expiration of statutes of limitation or settlements.

The Company accrues interest and penalties related
to unrecognized tax benefits as a component of the provision for income taxes. As of the January 1, 2007 adoption date of FIN 48, the balance of accrued interest and penalties was $0.5 million.

As of the date of adoption of FIN 48, it was deemed reasonably possible that the total amount of unrecognized benefits would decrease within the next
twelve months by $2.3 million to $2.5 million due to the impact of carrying back projected net operating losses on the total amount of the potential liability.

11. Commitments and Contingencies

In the normal course of its business, the Company enters into contracts that contain
a variety of representations and warranties and which provide general indemnifications. The Companys exposure under these arrangements is unknown as this would involve future claims that might be made against the Company that have not yet
occurred. However based on experience, the Company expects the risk of any loss to be remote.

Severance

During the first quarter of 2007, the Company eliminated approximately 90 positions worldwide. A total charge of approximately $1.9 million incurred in
connection with the employee severance related to these reductions in force was expensed as incurred during the first quarter of 2007. Of the aggregate severance expense, approximately $0.9 million is included in selling, general and administrative
expense and approximately $1.0 million was included in research and development expense in the condensed consolidated statement of operations. The Company does not expect any future charges related to this reduction in force. The accrued severance
associated with the Companys former CEO will be paid over the next 21 months, ending March 27, 2009. As of June 30, 2007, $0.7 million of liabilities related to the severance of the Companys former CEO were included in
condensed consolidated balance sheet. As of June 30, 2007, all of the other liabilities related to the reduction in force were settled and paid.

Sabbatical Leave

Effective January 1, 2007, the Company adopted the provisions of EITF Issue No. 06-2, Accounting
for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences (Issue 06-2). The prior costs associated with sabbatical leave were recognized by recording a liability for the
future benefits to be paid and by recording the cumulative effect of the change in accounting principal to accumulated deficit in the amount of $1.5 million.



12



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##### Table of Contents

SigmaTel, Inc.

Notes to Condensed Consolidated Financial Statements  continued

(unaudited)



Litigation

On January 4, 2005, the Company filed a patent infringement lawsuit against Actions Semiconductor Company (Actions) in the U.S. District Court for the Western District of Texas, Austin Division. The
Company asserted that certain Actions integrated circuits, or ICs, infringed several SigmaTel patents. The Company sought damages and requested a permanent injunction relating to the alleged infringement. On January 3, 2007, the Company
dismissed this lawsuit without prejudice.

On March 14, 2005, the Company filed a complaint requesting that the U.S. International
Trade Commission (the ITC) initiate an investigation of Actions, for violation of Section 337 of the Tariff Act of 1930, in the importation, sale for importation and sale in the U.S. after importation of certain audio processing ICs
and other products containing these audio processing ICs. In the Companys complaint, as amended, the Company asked the ITC to investigate whether certain Actions products infringe one or more of the claims of certain U.S. patents (the
Asserted Patents) owned by the Company. On April 18, 2005, the ITC instituted an investigation into Actions actions based on the Companys allegations. On September 15, 2006, after a hearing on the merits, rulings by
an administrative law judge, and reviews of those rulings by the ITC, the ITC issued a Limited Exclusion Order in favor of SigmaTel (the Order). The Order precluded the importation into the U.S. of MP3 players containing certain chips
manufactured by Actions which contain 2 GB of flash memory or less.

After the ITC issued the Order, Actions requested that the U.S.
Customs and Border Protection arm of the U.S. Government (CBP) examine a redesigned Actions system on chip, or SoC, IC in order to determine whether this redesigned IC falls within the scope of the ITCs Order. On November 22,
2006, Actions requested that the U.S. Patent and Trademark Office (USPTO) reexamine the Asserted Patents in light of certain prior art references which Actions believes render the Asserted Patents. On January 4, 2007, Actions filed
a Notice of Appeal with the U.S. Court of Appeals for the Federal Circuit (CAFC) stating its intention to appeal the Order.

On
September 13, 2006, Actions filed several related patent infringement lawsuits against the Company and its subsidiaries in the Shenzhen Intermediate Peoples Court. In the complaint, Actions asserted that SigmaTels 3500 family of
SoCs infringes a Chinese audio signal processing patent (the Actions Asserted Patent) owned by Actions. Actions sought to halt the infringement of its patent in China by prohibiting the design, manufacture, sale, and use of the
infringing ICs as well as devices containing the allegedly infringing ICs, and payment of damages in the amount of approximately US$12.5 million. Actions also asked the court and other relevant authorities to grant and execute a series of
injunctions and/or border detention orders, enforced by China customs, prohibiting the importation and exportation of the infringing products and MP3 players and devices that contain the infringing products. On March 28, 2007, SigmaTel accepted
service of the complaint through its Chinese attorneys.

On December 12, 2006, the Company filed an invalidation petition with SIPO
(a.k.a. the Chinese Patent Office) to invalidate the Actions Asserted Patent in the PRC.

On June 20, 2007, the Company and Actions
agreed to settle all claims between the parties related to these matters. Pursuant to the settlement agreement, the Company and Actions entered into a general release of all liabilities, a cross-license agreement with respect to all patents owned by
the Company and Actions, including the disputed patents, and an agreement to dismiss all litigation and other legal proceedings pending against each other.

12. Stockholders Equity

Common and Preferred Stock

The Company is authorized to issue 170,000,000 shares of $0.0001 par value common stock and 30,000,000 shares of $0.01 par value Preferred Stock. The
board of directors has the authority to issue the undesignated preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof.



13



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##### Table of Contents

Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations.

Forward-looking
Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact
may be deemed to be forward-looking statements. For example, the words believes, anticipates, plans, expects, intends and similar expressions are intended to identify forward-looking
statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in
Overview, Results of Operations, Liquidity and Capital Resources and Risks Factors below. All forward-looking statements in this document are based on information available to us as of the date hereof
and we assume no obligation to update any such forward-looking statements. The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes contained in this quarterly report.
Unless expressly stated or the context otherwise requires, the terms we, our, us and SigmaTel refer to SigmaTel, Inc.

Overview

General. We are a fabless semiconductor company that designs, develops, and markets
proprietary, analog-intensive, mixed-signal integrated circuits, or ICs, for a variety of digital multimedia products in the consumer electronics markets, including digital media players, printers, and digital televisions. We made our first
commercial shipments of portable multimedia systems on a chip, or SoCs, for the portable multimedia player market in 2001. During 2001, we made our first commercial shipments of audio codecs into the consumer electronics market for products such as
DVD players and set top boxes. We made our first commercial shipments of multi-function printer ICs in the third quarter of 2005 as a result of our acquisition of Oasis Semiconductor, Inc. We made our first commercial shipments of television audio
processors during the third quarter of 2006. We plan to continue to diversify our product offerings by introducing new versions of existing products with additional functionality, and by introducing ICs for markets we do not currently serve, thereby
expanding our total available market opportunity.

Net Loss, Cost Reductions and Refocus.We incurred a net loss of $29.8 million
for the six months ended June 30, 2007, and we will likely incur net losses in the future. We have faced a number of challenges that have affected our operating results during the past two years, including extreme competition in the portable
multimedia SoC market, continuing erosion of average selling prices of our portable multimedia SoCs, delays in delivering new product features to existing and new customers, and price volatility and shortages of other components used to build our
customers devices. Although we have taken and plan to take additional steps to address these challenges and to improve our results of operations, we cannot provide assurance that we will return to profitability on a quarterly or annual basis.

Effective January 1, 2007, Ronald P. Edgerton resigned from his positions as our President, Chief Executive Officer, Chairman, and as
a member of our board of directors. Mr. Edgerton had held these positions since March 2001. Phillip E. Pompa, formerly our Senior Vice President of Portable Systems Group, has been appointed as our President and Chief Executive Officer. In
January 2007, we announced that we are refocusing our business on our three core markets: portable multimedia players; printers; and, digital televisions. We also announced that we are immediately taking steps to reduce our operating costs through
cost control measures and reductions in force. As we implement these cost reductions, we will remain focused on retaining our key technical talent and preserving the integrity of our core product offerings. As part of this plan, we have terminated
future efforts with respect to the digital video camera, USB and infrared peripheral products, our Bluetooth development, and certain consumer audio codec markets. We expect these cost cutting measures to be completed in the third quarter of 2007.
These changes have placed, and any future organizational changes will continue to place, a significant strain on our management, personnel, systems and resources. If we are unable to manage our organizational changes effectively, we may not be able
to take advantage of market opportunities, develop new products, enhance our technological capabilities, satisfy customer requirements, execute on our business plan or respond to competitive pressures.



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New Product Introduction and Acceptance. In June 2007, we introduced our STMP37XX family of
portable multimedia SoCs, our newest SoC for flash-based and hard disk-based digital multimedia players. We introduced our STMP36XX family of portable multimedia SoCs, our previous generation SoC for flash-based and hard disk-based digital
multimedia players, in October 2005. Due to delays in the introduction of our STMP36XX SoC, our historical revenues have continued to be primarily comprised of sales of our STMP35XX family of portable multimedia SoCs, which were introduced in the
fourth quarter of 2003. Despite continued sales of the STMP35XX SoCs, as those products have matured, their average selling prices have declined, which is typical for the semiconductor industry. In order to offset these declining average selling
prices, we intend to increase sales of our STMP37XX and STMP36XX portable multimedia SoCs as a percentage of our overall product mix, and reduce our reliance on the STMP35XX family of portable multimedia SoCs. Our future success depends on our
ability to market and sell our STMP37XX and STMP36XX portable multimedia SoCs, and to develop other new products, including new families of portable multimedia SoCs, in a timely and cost-effective manner. We cannot be assured that we will be able to
develop and introduce, or that potential customers will be able to implement, new or enhanced products in a timely and cost-effective manner or that our new products will generate significant revenues.

Competition; Average Selling Prices. We face competition from a relatively large number of competitors in each of our target markets. The consumer
electronics market, which is a principal end market for our ICs, has historically been subject to intense price competition. Within the portable multimedia player market, the competition is greatest in the low end of the market, where low cost Asian
suppliers are much more likely to achieve product design wins with customers who are primarily focused on the cost of their portable multimedia players. As a result of this competition and erosion of average selling prices, we continue to experience
substantial period-to-period fluctuations in operating results. In the past, we have reduced the average selling price of our products in anticipation of or in response to competitive pricing pressures and new product introductions by us or our
competitors. Due to our delay in introducing the 36XX family of portable multimedia SoCs in 2005, and our resulting extended reliance on our 35XX family of portable multimedia SoCs as our primary source of revenue, our revenues have been
particularly vulnerable to downward pressures on the average selling prices of our portable multimedia SoCs. We were in turn forced to focus more on the low end of the portable multimedia player market, which is intensely competitive due to low cost
Asian suppliers. We believe that as our product lines continue to mature and competitive markets evolve, we are likely to experience further decline in the average selling prices of our products, although we cannot predict the timing and amount of
such future changes with any certainty. If we are unable to offset any such reductions in our average selling prices by timely introducing new products and product enhancements, refocusing on the mid and high level portable multimedia player market,
increasing our sales volumes and reducing our costs, our gross profits and revenues will suffer.

Recent Pressures and Operation
Changes. As a result of acquisitions, the opening of international locations and through hiring, both domestically and internationally, our operations expanded significantly during 2004, 2005, and into 2006. This expansion of our business and
operations placed a significant strain on our management, personnel, systems and resources, and significantly increased our operating expenses. In 2005, we began to face a number of challenges that have negatively affected our operating results,
including extreme competition in the portable multimedia SoC market, continuing erosion of average selling prices of our portable multimedia SoCs, delays in delivering new product features to existing and new customers, and price volatility and
shortages of other components used to build our customers devices. As a result of these challenges and their effects on our operating results, beginning in the fourth quarter of 2006, we implemented a number of organizational changes aimed at
reducing costs and improving our operating results including reductions in force, focusing on core product lines and other cost cutting measures. If we are unable to manage these changes effectively, or if the measures we have implemented are
insufficient, we may not be able to take advantage of market opportunities, develop new products, enhance our technological capabilities, satisfy customer requirements, execute on our business plan, regain profitability or respond to competitive
pressures. Accordingly, you should not rely on the results of any prior quarterly or annual periods as an indication of our future operating performance.

Sales Channels. As a fabless semiconductor company, our business model is less capital intensive because we rely on third parties to manufacture, assemble, and test our ICs. We also utilize distributors to sell
our products. Our sales through distributors result in lower gross margins. However, this decrease in gross margins from sales through distributors is partially offset by lower selling expenses than are associated with direct sales to end customers.
In recent periods, we have begun engaging in more direct sales to customers, which generally results in higher gross margins than indirect sales, but also involves increased selling expenses. As our sales practices continue to evolve towards
increased direct sales to end-customers, there will be continued fluctuations in our gross margins and operating margins.



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Significant Customers. A few customers account for a substantial portion of our sales. The
following table sets forth our customers that represented 10% or more of our revenues for the periods indicated:



|                                    |  |                              |   |  |                           |   |  |      |   |  |      |  
|----------------------------------- |  | ---------------------------- | - |  | ------------------------- | - |  | ---- | - |  | ---- | -
|                                    |  | Three Months Ending June 30, |   |  | Six Months Ended June 30, |  
|                                    |  | 2007                         |   |  | 2006                      |   |  | 2007 |   |  | 2006 |  
|Creative Technology Ltd             |  | 14.5                         | % |  | 18.2                      | % |  | 14.2 | % |  | 15.9 | %
|Samsung Electronics Taiwan Co., Ltd |  | 12.7                         | % |  | *                         |   |  | 15.0 | % |  | *    |  
|Jess Technology Company Ltd         |  | 10.7                         | % |  | *                         |   |  | 12.4 | % |  | *    |  
|ASUSTEK Computer, Inc               |  | *                            |   |  | 12.7                      | % |  | *    |   |  | 12.5 | %
|Holy Stone Enterprise Co., Ltd      |  | *                            |   |  | *                         |   |  | *    |   |  | 10.6 | %
|                                    |  |                              |   |  |                           |   |  |      |   |  |      |  

---

|* | Less than 10%
|- | -------------

We expect that our largest customers will
continue to account for a substantial portion of our sales for the foreseeable future. The identities of our largest customers and their respective contributions to our net revenues have varied and will likely continue to vary from period to period.

Overseas Revenues. The percentage of our revenues from customers located outside the United States was 93.0% and 99.1% for the
three months ended June 30, 2007 and 2006, respectively, and 93.6% and 99.4% for the six months ended June 30, 2007 and 2006, respectively. Most of the products that use our ICs are manufactured outside of the United States. As a result,
we believe that a substantial majority of our revenues will continue to come from customers located outside of the United States. All of our revenues to date have been denominated in United States dollars.

The percentages of our revenues by country are set forth in the following table:



|                |  |                              |   |  |                           |   |  |       |   |  |       |  
|--------------- |  | ---------------------------- | - |  | ------------------------- | - |  | ----- | - |  | ----- | -
|                |  | Three Months Ending June 30, |   |  | Six Months Ended June 30, |  
|                |  | 2007                         |   |  | 2006                      |   |  | 2007  |   |  | 2006  |  
|China/Hong Kong |  | 51.8                         | % |  | 28.8                      | % |  | 49.2  | % |  | 24.7  | %
|Taiwan          |  | 23.7                         |   |  | 43.1                      |   |  | 26.3  |   |  | 47.2  |  
|Singapore       |  | 15.6                         |   |  | 18.5                      |   |  | 15.9  |   |  | 16.7  |  
|United States   |  | 7.0                          |   |  | 0.9                       |   |  | 6.4   |   |  | 0.6   |  
|Other           |  | 1.9                          |   |  | 8.7                       |   |  | 2.2   |   |  | 10.8  |  
|                |  |                              |   |  |                           |   |  |       |   |  |       |  
|Total sales     |  | 100.0                        | % |  | 100.0                     | % |  | 100.0 | % |  | 100.0 | %
|                |  |                              |   |  |                           |   |  |       |   |  |       |  

Sales Cycles.The length of our sales cycle varies depending on the end application for our
products, but our sales cycles are generally lengthy. The cycle can be as short as several months for some portable SoCs and as long as 18 months for our multi-function printer system controller solutions. Volume production of products that use our
ICs can take an additional three to six months to be achieved, if at all. The lengthy sales cycles of our products make forecasting the volume and timing of orders difficult. In addition, the delays inherent in lengthy sales cycles increase the risk
that customers may seek to cancel or modify their orders. Our sales are made by purchase orders, but because industry practice allows customers to reschedule or cancel orders on relatively short notice, and order lead times can vary period to
period, backlog is not a good indicator of our future sales. Cancellations of customer orders or changes in product specifications could result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory and
operating expenses, adversely affecting our results of operations.

Seasonality. Because many of our ICs are designed for use in
consumer electronic products, such as portable multimedia players, multi-function printers, and digital televisions, we expect our business to be subject to seasonality, with increased revenues in the third and fourth quarters of each year, when
customers place orders to meet year-end holiday demand, and lower revenues in the first and second quarters of each year. However, our historic revenue volatility and recent revenue declines make it difficult for us to assess the impact of seasonal
factors on our business.



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Sale of the PC Audio Product Line. During the third quarter of 2006, we completed the sale of our
PC audio codec product line to Integrated Device Technology Inc. (IDT) for total consideration of $81.5 million. Of the purchase price, $7.2 million was deposited into an escrow account upon closing for purposes of settling
indemnification claims for the one-year period following the closing. As of June 30, 2007 the balance of the escrow account is $7.5 million and is reported as restricted cash on the Condensed Consolidated Balance Sheet.

Statement of Operations Overview

The following describes certain
line items in our condensed consolidated statement of operations:

Revenues.Revenues consist primarily of sales of our ICs, net of
sales discounts or incentives. We recognize revenues on direct sales at the time of shipment to our customers or later if required by shipping terms. We defer revenues on sales through distributors which have rights of return or price protection
until products are resold by such distributors to their customers. We also defer revenue from nonrecurring engineering fees (NRE) until the obligations under the NRE agreements have been met. The main factors that impact our revenues are
unit volumes shipped and average selling prices. Overall, we expect average selling prices for our products to decline over time as products mature. Our ability to increase revenues in the future is dependent on increased demand for our established
products and our ability to develop new products and subsequently achieve customer acceptance of newly introduced products.

Cost of
Goods Sold. Cost of goods sold consists primarily of the costs of purchasing silicon wafers, and also includes costs associated with assembly, test and shipping of our ICs, costs of personnel and equipment associated with manufacturing support
and quality assurance, and occupancy costs. Cost of goods sold also consists of amortization of developed product technology and an intellectual property license agreement purchased through our acquisitions, which are amortized over not more than
six years. Because we do not have long-term, fixed-price supply contracts, our wafer costs are subject to the cyclical demand for semiconductors.

Research and Development. Research and development expense consists primarily of salaries and related costs of employees engaged in ongoing research, design and development activities, including stock compensation, contractor fees,
expenses for development testing and evaluation, mask costs, occupancy costs and depreciation of research and development equipment. All research and development costs are expensed as incurred. We believe that continued investment in research and
development is critical to meeting the changing requirements of our customers and to our overall long-term success. We expect, however, that research and development expenses should decrease in absolute dollars as we continue to implement our cost
reduction measures and due to natural attrition, while continuing to invest in research and development activities to develop new products to be competitive in the future, although such expenses as a percentage of revenues may fluctuate.

Selling, General and Administrative. Selling, general and administrative expense consists primarily of salaries and related costs, including
stock compensation, occupancy costs, and sales commissions to independent sales representatives, amortization of acquired intangible assets and related overhead costs for sales, marketing and administrative personnel, legal and accounting services,
as well as marketing activities. We expect, however, that selling, general and administrative expenses should decrease in absolute dollars as we continue to implement our cost reduction measures and due to natural attrition, and other spending in
this area, while continuing to support our future operations. While we expect to continue to incur litigation expenses in the future as we protect and defend our intellectual property and technology, we do not believe those expenses will be as
significant as they have been in the past.

Income Tax Expense. We accrue federal, state, and foreign income taxes at the applicable
statutory rates adjusted for certain items including non-deductible expenses, including stock based compensation, tax credits, interest income from tax advantaged investments, as well as changes in our deferred tax asset valuation allowance.



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Results of Operations

The following table sets forth our condensed consolidated statements of operations as a percentage of revenues for the periods indicated:



|                                    |  |                              |    |  |                           |   |  |       |    |  |       |   
|----------------------------------- |  | ---------------------------- | -- |  | ------------------------- | - |  | ----- | -- |  | ----- | --
|                                    |  | Three Months Ending June 30, |    |  | Six Months Ended June 30, |  
|                                    |  | 2007                         |    |  | 2006                      |   |  | 2007  |    |  | 2006  |   
|Revenues, net                       |  | 100.0                        | %  |  | 100.0                     | % |  | 100.0 | %  |  | 100.0 | % 
|Cost of goods sold                  |  | 62.0                         |    |  | 56.8                      |   |  | 63.2  |    |  | 56.2  |   
|                                    |  |                              |    |  |                           |   |  |       |    |  |       |   
|Gross Profit                        |  | 38.0                         |    |  | 43.2                      |   |  | 36.8  |    |  | 43.8  |   
|                                    |  |                              |    | 
|Operating expenses:                 |  |                              |    |  |                           |   |  |       |    |  |       |   
|Research and development            |  | 56.2                         |    |  | 52.6                      |   |  | 67.5  |    |  | 58.9  |   
|Selling, general and administrative |  | 26.9                         |    |  | 28.9                      |   |  | 34.4  |    |  | 34.7  |   
|Loss on disposition of assets       |  |                             |    |  |                          |   |  | 1.1   |    |  |      |   
|                                    |  |                              |    |  |                           |   |  |       |    |  |       |   
|Total operating expenses            |  | 83.1                         |    |  | 81.5                      |   |  | 102.9 |    |  | 93.6  |   
|                                    |  |                              |    |  |                           |   |  |       |    |  |       |   
|Operating loss                      |  | (45.2                        | )  |  | (38.3                     | ) |  | (66.2 | )  |  | (49.8 | ) 
|                                    |  |                              |    | 
|Other income (expense):             |  |                              |    |  |                           |   |  |       |    |  |       |   
|Interest income, net                |  | 3.4                          |    |  | 1.0                       |   |  | 3.9   |    |  | 1.5   |   
|Foreign exchange loss               |  | (0.2                         | )  |  | (0.1                      | ) |  | (0.3  | )  |  | (0.1  | ) 
|                                    |  |                              |    |  |                           |   |  |       |    |  |       |   
|Total other income                  |  | 3.2                          |    |  | 0.9                       |   |  | 3.6   |    |  | 1.4   |   
|                                    |  |                              |    |  |                           |   |  |       |    |  |       |   
|Loss before income taxes            |  | (42.0                        | )  |  | (37.5                     | ) |  | (62.6 | )  |  | (48.4 | ) 
|Income tax benefit                  |  | (4.1                         | )  |  | (44.1                     | ) |  | (6.1  | )  |  | (20.0 | ) 
|                                    |  |                              |    |  |                           |   |  |       |    |  |       |   
|Net (loss) income                   |  | (37.9                        | )% |  | 6.7                       | % |  | (56.5 | )% |  | (28.4 | )%
|                                    |  |                              |    |  |                           |   |  |       |    |  |       |   

Comparison of Three Months Ended June 30, 2007 to Three Months Ended June 30, 2006

Revenues. Revenues for the three months ended June 30, 2007, were $30.7 million compared to $43.8 million for the three
months ended June 30, 2006, a decrease of 29.8%. This decrease was primarily due to a 26.7% decrease in the sale of our portable multimedia SoCs, due to reduced quantities shipped, and decreased average selling prices, and a 66.4% decrease in
audio codec revenue due to our sale of the PC audio codec product line to IDT on July 31, 2006. Therefore, we had no revenue from the PC audio product line for the three months ended June 30, 2007. Revenue from our TV audio codecs
increased to 9.4% of total revenue in the three months ended June 30, 2007. Revenues from the sale of our portable multimedia SoCs accounted for approximately 72.9% of total revenue for the three months ended June 30, 2007, while our multi
function printer (MFP) revenue comprised approximately 16.9% of total revenue for the period.

Portable Multimedia SoCs.
The decrease of 26.7% in revenues from the sale of our portable multimedia SoCs was primarily due to reduced quantities shipped and decreased average selling prices. We expect the trend of declining average selling prices for existing portable
multimedia SoCs products to continue as these products mature further and as the market becomes more competitive, which may have a negative impact on our future revenues if we cannot sell newer products with enhanced features at relatively higher
prices into the more favorable mid and high range of the market. The 36XX and 37XX families of products are now selling in production quantities and we expect these products to continue to increase as a part of our SoC revenue mix in future
quarters.

Revenues from Multi Function Printer ICs.Revenues from the sale of our multi function printer ICs totaled approximately
$5.2 million and $4.3 million, respectively, for the three months ended June 30, 2007 and 2006, respectively. The increase was due to shipments resulting from design wins with a new key customer.

Audio Codecs and Other Products. The decrease in revenues from the sale of our audio codecs was due to the reduction in shipments to customers in
the personal computer market as a result of the sale of our PC audio codec product line to IDT on July 31, 2006. Therefore, we had no revenue from the PC audio product line for the three months ended June 30, 2007. Revenues from the PC
Audio product line totaled $6.8 million for the three months ended June 30, 2006. Revenues from other products, such as our TV audio products, increased due to a design win with a large customer. Revenues from our TV audio products were $2.9
million for the three months ended June 30, 2007.



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Revenues from Significant Customers. Sales to Creative Technology decreased to 14.5% of total
revenues during the three months ended June 30, 2007, from approximately 18.2% of total revenues during the three months ended June 30, 2006, due to an increase in revenue from other customers as a percentage of total revenues. Sales to
Samsung increased to approximately 12.7% of total revenues during the three months ended June 30 2007, from less than 10% of total revenues, during the three months ended June 30, 2006, due to the adoption of our TV audio product. Sales to
Jess Technology, a distributor based in China, increased to 10.7% of total revenues during the three months ended June 30, 2007, from less than 10% of total revenues, during the three months ended June 30, 2006, due to increased sales to
the distributors end customers across multiple product lines. Revenues from ASUSTEK decreased to less than 10% of total revenues during the three months ended June 30, 2007, from 12.7% of total revenue during the three months ended
June 30, 2006, due to the discontinuation of a product line using our portable audio SoC by one of ASUSTEKs customers.

Gross
Profit. Gross profit as a percentage of revenues, or gross margin, was 38.0% for the three months ended June 30, 2007, compared with 43.2% for the three months ended June 30, 2006. The decrease in gross margin was primarily due to
pressures on average selling prices from competition on our portable multimedia SoCs that target the value and mid-tier segments of the overall portable multimedia player market.

Research and Development. Research and development expenses decreased in total dollars to $17.3 million, or 56.2% of revenues, for the three
months ended June 30, 2007, from $23.1 million, or 52.6% of revenues, for the three months ended June 30, 2006. This dollar decrease of $5.8 million was primarily due to the decrease in headcount resulting from the reductions in force and
natural attrition, the sale of our PC Audio product line and the associated transition of employees in the third quarter of 2006, and other cost-cutting measures recently implemented.

Selling, General and Administrative. Selling, general and administrative expenses decreased to $8.3 million, or 26.9% of revenue, for the three
months ended June 30, 2007, as compared to $12.6 million, or 28.9% of revenues, for the three months ended June 30, 2006. This dollar decrease of $4.3 million was primarily due to the decrease in headcount resulting from the reductions in
force and natural attrition, the sale of our PC Audio product line in the third quarter of 2006, decreased litigation expense and cost-cutting measures recently implemented.

Stock Based Compensation

We
recognized $1.9 million in the three months ended June 30, 2007 for stock based compensation, compared to $2.6 million for the three months ended June 30, 2006. For three months ended June 30, 2007, this expense includes $1.7 million
for stock options, $0.1 million for RSUs, and $0.1 million for the ESPP. For three months ended June 30, 2006, this expense includes $2.3 million for stock options, $0.1 million for RSUs and $0.2 million for the ESPP. The table below presents
the costs recorded related to stock based compensation for the three months ended June 30, 2007 and 2006, respectively (amounts shown are in thousands):



|                                  |  |                             |       |      |   |      
|--------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                  |  | Three Months Ended June 30,
|                                  |  | 2007                        |       | 2006
|Research and development          |  | $                           | 1,441 |      | $ | 1,709
|Sales, general and administrative |  |                             | 483   |      |   | 863  
|                                  |  |                             |       |      |   |      
|Total stock-based compensation    |  | $                           | 1,924 |      | $ | 2,572
|                                  |  |                             |       |      |   |      



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Interest Income. Interest income increased to $1.0 million for the three months ended
June 30, 2007, from $0.4 million for the three months ended June 30, 2006. This was due to an increase in our average cash balances, restricted cash and average investments in short-term marketable securities as of June 30, 2007, and
from a shift in investment strategy that concentrates our investments in taxable securities as a result of our current estimated tax position for the fiscal year 2007.

Income Tax Benefit. We recognized an income tax benefit of $1.3 million for the three months ended June 30, 2007, which represents a decrease from the income tax benefit of $19.3 million we recognized for
the three months ended June 30, 2006. This decrease was primarily due to a change in the estimate of our effective tax rate and the benefits recognized due to changing our international tax strategy. At June 30, 2007, our effective tax
rate estimate for the year ended December 31, 2007, was 10%. This estimate differed from the statutory rate primarily due to the effect of different tax rates in foreign jurisdictions, non-deductible charges related to stock based compensation,
research and development credits and expected changes in the valuation allowance recorded against our deferred tax assets. At June 30, 2006, our effective tax rate estimate for the year ended December 31, 2006 was 32%. This estimate
differed from the statutory rate primarily due to the effect of different tax rates in foreign jurisdictions, non-deductible charges related to stock based compensation, and one time benefits related to unwinding our intellectual property
(IP) or IP migration strategy.

During the three months ended June 30, 2006, we changed our international tax strategy. As
a result, we made a voluntary tax election that changed the tax status of our Cayman subsidiary by causing a deemed liquidation of the subsidiary for U.S. federal income tax purposes. This resulted in a one time benefit of $9.3 million that was
recognized in the three months ended June 30, 2006.

Comparison of Six Months Ended June 30, 2007 to Six Months Ended June 30, 2006

Revenues. Revenues for the six months ended June 30, 2007, were $52.8 million compared to $76.8 million for the six
months ended June 30, 2006, a decrease of 31.3%. This decrease was primarily due to a 26.2% decrease from the sale of our portable multimedia SoCs, due to decreased average selling prices and a 69.6% decrease in revenues from the sale of our
audio codecs, due to the sale of our PC audio codec business in July 2006, therefore we had no revenue from PC Audio product line in the six months ended June 30, 2007. Revenue from our TV audio codecs increased to 8.8% of total revenue in the
six months ended June 30, 2007. Revenues from the sale of our portable multimedia SoCs accounted for approximately 72.9% of total revenue for the six months ended June 30, 2007, while MFP revenue comprised approximately 17.3% of total
revenue for the period.

Portable Multimedia SoCs. The decrease of 26.2% in revenues from the sale of our portable multimedia SoCs
was primarily due to reduced quantities shipped and decreased average selling prices. We expect the trend of declining average selling prices for existing portable multimedia SoCs products to continue as these products mature further and as the
market becomes more competitive, which may have a negative impact on our future revenues if we cannot sell newer products with enhanced features at relatively higher prices into the more favorable mid and high range of the market. The 36XX and 37XX
families of products are now selling in production quantities and we expect these products to continue to increase as a part of our SoC revenue mix in future quarters.

Revenues from Multi Function Printer ICs.Revenues from the sale of our multi function printer ICs totaled approximately $9.1 million and $8.8 million, respectively, for the six months ended June 30, 2007
and 2006, respectively. The increase was due to shipments resulting from design wins with a new key customer.

Audio Codecs and Other
Products. The decrease in revenues from the sale of our audio codecs was due to the reduction in shipments to customers in the personal computer market as a result of the sale of our PC audio codec product line to IDT on July 31, 2006.
Therefore, we had no revenue from the PC audio product line for the six months ended June 30, 2007. Revenues from the PC Audio product line totaled $15.4 million for the six months ended June 30, 2006. Revenues from other products, such as
our TV audio products, increased due to a design win with a large customer. Revenues from our TV audio products were $4.7 million for the six months ended June 30, 2007.

Revenues from Significant Customers. Sales to Samsung increased to approximately 15.0% of total revenues during the six months ended June 30
2007, from less than 10% of total revenues, during the six months



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ended June 30, 2006, due to the adoption of our TV audio product, as well as to a decrease in the revenue of other customers as a percentage of total
revenues. Sales to Creative Technology decreased to 14.2% of total revenues during the six months ended June 30, 2007, from approximately 15.9% of total revenues during the six months ended June 30, 2006, due to an increase in the revenue
of other customers as a percentage of total revenues. Sales to Jess Technology, a distributor based in China, increased to 12.4% of total revenues during the six months ended June 30, 2007, from less than 10% of total revenues, during the six
months ended June 30, 2006, due to the addition of Jess Technology as a new distributor and the resulting increased sales to the distributors end customers across multiple product lines. Revenues from ASUSTEK decreased to less than 10% of
total revenues during the six months ended June 30, 2007, from 12.5% of total revenue during the six months ended June 30, 2006, due to the discontinuation of a product line using our portable audio SoC by one of ASUSTEKs customers.
Revenues from Holystone decreased to less than 10% of total revenues during the six months ended June 30, 2007, from 10.6% of total revenue during the six months ended June 30, 2006, due to the termination of our distributor agreement with
them.

Gross Profit. Gross profit as a percentage of revenues, or gross margin, was 36.8% for the six months ended June 30,
2007, compared with 43.8% for the six months ended June 30, 2006. The decrease in gross margin was primarily due to average selling price pressures from competition on our portable multimedia SoCs that target the value and mid-tier segments of
the overall portable multimedia player market.

Research and Development. Research and development expenses decreased in total
dollars to $35.6 million, or 67.5% of revenues, for the six months ended June 30, 2007, from $45.3 million, or 58.9% of revenues, for the six months ended June 30, 2006. This dollar decrease of $9.7 million was primarily due to the
decrease in headcount resulting from the reductions in force and natural attrition, the sale of our PC Audio product line and the associated transition of employees in the third quarter of 2006, and other cost-cutting measures recently implemented.

Selling, General and Administrative. Selling, general and administrative expenses decreased to $18.1 million, or 34.4% of revenue,
for the six months ended June 30, 2007 as compared to $26.6 million, or 34.7% of revenues, for the six months ended June 30, 2006. This dollar decrease of $8.5 million was primarily due to the decrease in headcount resulting from the
reductions in force and natural attrition, the sale of our PC Audio product line and the associated transition of employees in the third quarter of 2006, decreased litigation expense and cost-cutting measures recently implemented.

Stock Based Compensation.We recognized $3.8 million in the six months ended June 30, 2007 for stock based compensation, compared to $5.1
million for the six months ended June 30, 2006. For the six months ending June 30, 2007, this expense includes $3.2 million for stock options, $0.3 million for RSUs, and $0.3 million for the ESPP. For the six months ended June 30,
2006, this expense includes $4.5 million for stock options, $0.1 million for RSUs, and $0.5 million for the ESPP. The table below presents the costs recorded related to stock based compensation for the six months ended June 30, 2007 and 2006,
respectively (amounts shown are in thousands):



|                                  |  |                           |       |      |   |      
|--------------------------------- |  | ------------------------- | ----- | ---- | - | -----
|                                  |  | Six Months Ended June 30,
|                                  |  | 2007                      |       | 2006
|Research and development          |  | $                         | 2,763 |      | $ | 3,371
|Sales, general and administrative |  |                           | 1,027 |      |   | 1,693
|                                  |  |                           |       |      |   |      
|Total stock-based compensation    |  | $                         | 3,790 |      | $ | 5,064
|                                  |  |                           |       |      |   |      

Interest Income. Interest income increased to $2.0 million for the six months ended
June 30, 2007, from $1.2 million for the six months ended June 30, 2006. This was due to an increase in our average cash balances, restricted cash and average investments in short-term marketable securities from as of June 30, 2007,
and from a shift in investment strategy that concentrates our investments in taxable securities as a result of our current estimated tax position for the fiscal year 2007.

Income Tax Benefit. We recognized an income tax benefit of $3.2 million for the six months ended June 30, 2007, which represents a decrease
from the income tax benefit of $15.3 million we recognized for the six months ended June 30, 2006. This decrease was primarily due to a change in the estimate of our effective tax rate and the benefits recognized due to changing our
international tax strategy. At June 30, 2007, our effective tax rate estimate



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for the year ended December 31, 2007, was 10%. This estimate differed from the statutory rate primarily due to the effect of different tax rates in
foreign jurisdictions, non-deductible charges related to stock based compensation, research and development credits and expected changes in the valuation allowance recorded against our deferred tax assets. At June 30, 2006, our effective tax
rate estimate for the year ended December 31, 2006 was 32%. This estimate differed from the statutory rate primarily due to the effect of different tax rates in foreign jurisdictions, non-deductible charges related to stock based compensation,
and one time benefits related to unwinding our IP migration strategy.

During the three months ended June 30, 2006, we changed our
international tax strategy. As a result, we made a voluntary tax election that changed the tax status of our Cayman subsidiary by causing a deemed liquidation of the subsidiary for U.S. federal income tax purposes. This resulted in a one time
benefit of $9.3 million that was recognized in the three months ended June 30, 2006.

Liquidity and Capital Resources

Working Capital, Cash and Cash Equivalents and Short-term Investments. The following table presents working capital, cash and cash equivalents and
short-term investments (in thousands):



|                             |  |              |        |                  |   |                    |  |   |         |  
|---------------------------- |  | ------------ | ------ | ---------------- | - | ------------------ |  | - | ------- | -
|                             |  | June 30,2007 |        | December 31,2006 |   | Increase(Decrease) | 
|Working capital              |  | $            | 82,727 |                  | $ | 108,569            |  | $ | (25,842 | )
|Cash and cash equivalents(1) |  |              | 31,569 |                  |   | 30,686             |  |   | 883     |  
|Short-term investments(1)    |  |              | 42,800 |                  |   | 62,800             |  |   | (20,000 | )

---

|(1) | Included in working capital.
|--- | ----------------------------

Our working capital as of June 30, 2007, represents a decrease from our working capital as of December 31, 2006 primarily due to the $16.6
million of cash used in our operations and the $2.8 million used for equipment and intangible asset purchases in the six months ended June 30, 2007.

We have historically financed our operations primarily through cash from our financing activities and our operating activities. In recent periods, however, we have financed our operations through the sale of short
term investments and through the sale of our PC audio product line in the third quarter of 2006. Our principal source of liquidity as of June 30, 2007, consisted of $82.1 million in cash, cash equivalents, restricted cash, and short-term
investments. As of June 30, 2007, our short-term investments consisted of state and municipal debt securities, primarily auction-rate preferred notes.

Operating Activities. Net cash used in operating activities was $16.6 million during the six months ended June 30, 2007, compared to $43.9 million for the six months ended June 30, 2006. Operating
cash flows during the six months ended June 30, 2007 reflect our net loss of $29.8 million, depreciation and amortization expense of $5.7 million, stock-based compensation expense of $3.8 million, a lease abandonment charge of $0.6 million, a
loss on disposal of assets of $0.6 million, $0.1 million of other non-cash related expenses, and a net decrease from the changes in assets and liabilities of $2.5 million. Our accounts receivable increased $3.2 million during the six months ended
June 30, 2007, due to increases in revenues and the timing of customer payments, compared to a decrease of $22.5 million, during the six months ended June 30, 2006. Our accounts payable decreased $1.2 million during the six months ended
June 30, 2007, primarily due to decreased inventory purchases, compared to a decrease of $21.0 million, during the six months ended June 30, 2006. Our inventories decreased $7.9 million during the six months ended June 30, 2007, due
to improved inventory management and decreased inventory purchases, compared to an increase of $18.4 million during the six months ended June 30, 2006.

The increase in deferred revenue and other liabilities of approximately $2.7 million during the six months ended June 30, 2007, includes a $2.2 million increase in deferred revenue and a $0.5 million increase in
deferred rent and other liabilities. The increase in deferred revenue is primarily due to distributors building inventories for the peak seasonal demand. Income taxes payable and receivable net, changed by $4.5 million and $3.4 million for the six
months ended June 30, 2007 and 2006, respectively.

Investing Activities. Our investing activities provided cash of $17.0
million and $26.1 million during the six months ended June 30, 2007 and 2006, respectively. Investing activities during the six months ended June 30, 2007 primarily represented net proceeds from short-term investments.



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The fair value of our investments in marketable securities at June 30, 2007, was $42.8 million.
Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. Our investment policy
is to manage our investment portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio through the full investment of available funds. We diversify the marketable securities portfolio by investing in
multiple types of investment-grade securities. Our investment portfolio is primarily invested in short-term securities, with at least an investment grade rating, to minimize interest rate and credit risk as well as to provide for an immediate source
of funds.

Capital expenditures were $2.8 million and $6.1 million during the six months ended June 30, 2007 and 2006, respectively.
These expenditures during the six months ended June 30, 2007, were incurred primarily for the purchase of engineering tools, computer equipment, software, and intangible assets.

Financing Activities. Our financing activities provided $0.5 million and used $28.5 million of cash during the six months ended June 30, 2007
and 2006, respectively. On January 24, 2006, our board of directors authorized a share repurchase plan for up to $30.0 million of our common stock, pursuant to which we purchased approximately 2.6 million shares for $30.0 million. We
received $0.6 million and $1.3 million in proceeds from the exercise of employee stock options and our ESPP during the six months ended June 30, 2007 and 2006, respectively. These proceeds were invested in short-term, investment grade, interest
bearing instruments, pending their use to fund working capital, acquisitions and capital expenditures as required.

Capital
Requirements. Although we expect to reduce our operating expenses in future periods from current levels, we anticipate that operating expenses, changes in working capital, and capital expenditures will continue to constitute a material use of
our cash resources.

Based on current business conditions and our current operating and financial plans, we believe our existing cash,
restricted cash and short-term investments balances, will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our level of revenues, the timing and
extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products, the costs to ensure access to adequate manufacturing capacity, and the continuing market
acceptance of our products. We could be required, or could elect, to seek additional funding through public or private equity or debt financing and additional funds may not be available on terms acceptable to us or at all. If we are unable to obtain
additional financing, if needed, we may be required to reduce the scope of our planned product development and sales and marketing efforts, which could harm our business, financial condition and operating results. We may enter into strategic
arrangements in the future which also could require us to seek additional equity or debt financing. There can be no assurances that we can reduce our net losses and negative cash flow in the foreseeable future. Also, there can be no assurances that
we can raise capital as needed to fund our operations on an ongoing basis.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to uncollectible accounts receivable, inventories, investments, intangible assets, goodwill, stock-based
compensation, income taxes, financing operations, warranty obligations and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from the estimates under different assumptions and conditions.
To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

The following is a discussion of our most critical accounting policies used in the preparation of our financial statements, and the judgments and estimates involved under each. We also have other key accounting policies that do not involve
critical accounting estimates because they do not generally require us to make estimates and judgments that are difficult or subjective (see Note 2 of Notes to Condensed Consolidated Financial Statements).



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Revenue Recognition. We recognize revenues in accordance with Securities and Exchange Commission
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, as amended by SAB 101A and 101B (SAB 101) and SAB 104, Revenue Recognition. SAB 101 requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably
assured. These criteria are usually met at the time of product shipment; however, we do not recognize revenue until all customer acceptance requirements have been met, when applicable. Revenues from product sales to customers other than distributors
are generally recognized upon shipment and reserves are provided for estimated allowances. We defer revenue recognition of nonrecurring engineering fees until all contractual obligations are met. A portion of our sales are made through distributors
under agreements allowing for price protection and/or rights of return. Product revenue on sales made through these distributors is not recognized until the distributors sell the product to their customers. Customer purchase orders and/or contracts
are generally used to determine the existence of an arrangement. Shipping documents and the completion of any customer acceptance requirements, when applicable, are used to verify product delivery. Management assesses whether a price is fixed or
determinable based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Management assesses the collectibility of our accounts receivable based primarily upon the creditworthiness of
the customer, as determined by credit checks and analysis, as well as the customers payment history. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenues recognized for
any reporting period could be adversely impacted.

Inventory Valuation. We value our inventory at the lower of the standard cost of
our inventory or its current estimated market value. We establish inventory reserves at least quarterly for estimated obsolescence or unmarketable inventories on an amount equal to the difference between the cost of the inventory and its estimated
realizable value, based upon assumptions about future demand and market conditions. If actual demand and market conditions are less favorable than those projected, additional inventory reserves may be required that could adversely affect our
operating results.

Stock-Based Compensation. We account for stock-based compensation under the fair value provisions of SFAS 123R.
We adopted SFAS 123R effective January 1, 2006, utilizing the modified-prospective method allowed under the standard. Under the modified prospective method, stock compensation cost recognized for the six months ended June 30, 2007 and 2006
includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and
(b) compensation cost for all share-based payments granted or modified on or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Results of prior periods have not been
restated (see Note 4 of Notes to Condensed Consolidated Financial Statements).

The fair value of our stock-based awards is estimated at
the date of grant using the Black-Scholes option pricing model. The Black-Scholes valuation calculation requires us to estimate key assumptions such as future stock price volatility, expected terms of the awards, risk-free rates and dividend yield.
If our actual experience differs significantly from the assumptions used to compute our stock-based compensation cost, or if different assumptions had been used, we may have recorded too much or too little stock-based compensation cost. In addition,
we are required to estimate the expected forfeiture rate of our stock grants and only recognize the expense for those awards expected to vest. Expected forfeiture rates are based on historical rates and our analysis of potential future forfeiture
rates. If the actual forfeiture rate is materially different from our estimate, our stock-based compensation expense could be materially different. We periodically evaluate the assumptions used in the Black-Scholes model, and calculate expected
volatility based on a combination of our historical and implied volatility. We calculate the expected term using the simplified method prescribed in Staff Accounting Bulletin No. 107, Share-Based Payment, such that the term
is approximated by the mean between the vesting date and the expiration of the award.

We continue to base the estimate of risk-free rate
on the U.S. Treasury yield curve in effect at the time of grant. We have never paid cash dividends and do not currently intend to pay cash dividends, thus we assume a 0% dividend yield.



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Impairment of Long-Lived Assets. We evaluate long-lived assets held and used by us for impairment
annually or whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset
or group of assets over their estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash
flows, of those assets and is recorded in the period in which the determination is made.

Accounting for Income Taxes. We account
for income taxes under SFAS No. 109, Accounting for Income Taxes. This statement requires the use of the asset and liability method whereby deferred tax asset and liability account balances are determined based on differences between
financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. These differences result in deferred tax assets and
liabilities, which are included in our consolidated balance sheets. We then assess the likelihood that the deferred tax assets will be recovered from future taxable income. A valuation allowance is established against deferred tax assets to the
extent we believe that recovery is not likely based on the level of historical taxable income and projections for future taxable income over the periods in which the temporary differences are deductible.

As a multinational corporation, we are subject to taxation in numerous jurisdictions. The determination of the provision for income taxes requires
SigmaTel to take positions on certain issues where there is uncertainty in the application of the tax law. We account for uncertain tax positions under FIN 48, Accounting for Income Tax Uncertainties, which requires that the benefit from
uncertain positions be recognized only when it is more likely than not that the position will be sustained upon examination, based solely on its technical merits.

Recent Accounting Pronouncements

In June 2006, the FASB ratified EITF Issue No. 06-2, Accounting for Sabbatical
Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences (Issue 06-2). Issue 06-2 provides guidelines under which sabbatical leave or other similar benefits provided to an employee
are considered to accumulate, as defined in Statement 43. If such benefits are deemed to accumulate, then the compensation cost associated with a sabbatical or other similar benefit arrangement should be accrued over the requisite service period. We
adopted Issue 06-2 effective January 1, 2007 by recording the cumulative effect of the change in accounting principal to accumulated deficit (see Note 11 of Notes to Condensed Consolidated Financial Statements).

In June 2006, the FASB issued Interpretation No. 48, Accounting for Income Tax Uncertainties (FIN 48). FIN 48 defines the threshold for
recognizing the benefits of tax return positions in the financial statements as more-likely-than-not to be sustained by the taxing authority. The recently issued literature also provides guidance on the de-recognition, measurement and
classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any
recorded income tax uncertainties. We have adopted FIN 48 effective January 1, 2007. FIN 48 is effective for fiscal years beginning after December 15, 2006. The differences between the amounts recognized in the statements of financial
position prior to the adoption of FIN 48 and the amounts reported after adoption were accounted for as a cumulative-effect adjustment recorded to accumulated deficit (see Note 10 of Notes to Condensed Consolidated Financial Statements).

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an
amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits an entity to elect fair value as the initial and subsequent measurement attribute for many financial assets and liabilities. Entities electing the fair value
option would be required to recognize changes in fair value in earnings. Entities electing the fair value option are required to distinguish, on the face of the statement of financial position, the fair value of assets and liabilities for which the
fair value option has been elected and similar assets and liabilities measured using another measurement attribute. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adjustment to reflect the difference between the
fair value and the carrying amount would be accounted for as a cumulative-effect adjustment to accumulated deficit as of the date of initial adoption. We are currently evaluating the impact, if any, of SFAS 159 on our financial position and results
of operations.



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In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
157). SFAS 157 is definitional and disclosure-oriented and addresses how companies should approach measuring fair value when required by GAAP; it does not create or modify any current GAAP requirements to apply fair value accounting. SFAS 157
provides a single definition for fair value that is to be applied consistently for all accounting applications, and also generally describes and prioritizes according to reliability the methods and inputs used in valuations. SFAS 157 prescribes
various disclosures about financial statement categories and amounts which are measured at fair value, if such disclosures are not already specified elsewhere in GAAP. The new measurement and disclosure requirements of SFAS 157 are effective for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the effect that the adoption of SFAS 157 will have on our financial position and results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

The primary objective of our investment activities is to preserve principal while maximizing the income without significantly increasing risk. Some of the
securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk in the future, we intend to maintain our
portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. The risk associated with fluctuating
interest rates is limited to our investment portfolio and we do not believe that a 10% change in interest rates would have a significant impact on the market value of our investments. As of June 30, 2007, all of our investments were in money
market accounts or investment grade securities.

Foreign Currency Risk

We are exposed to foreign currency fluctuations. Sales and inventory purchases made by us and our subsidiaries are denominated in U.S. dollars. A small percentage of our international purchase transactions are in
currencies other than the U.S. dollar. Any currency risk related to these transactions is deemed to be immaterial to us as a whole.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act). Based on that
evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of June 30, 2007, to ensure that information required to be disclosed by us in the reports filed or submitted by us
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, that such information is accumulated and communicated to our management, including our CEO and our CFO, as
appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting.

We have instituted changes in our internal control over financial reporting to remediate the material weakness related to our income tax provision
reported in our Annual Report on Form 10-K for the year ended December 31, 2006 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007. As of December 31, 2006 and March 31, 2007, we did not maintain
effective controls over the completeness and accuracy of the income tax provision and related income taxes payable and deferred income tax accounts. Specifically, we did not maintain effective controls to review and monitor the accuracy of the
components of the income tax provision calculations and related income taxes payable and deferred income tax accounts.



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To remediate the material weakness, we implemented new processes around the analysis of the income tax
provision, primarily related to tax reserves. We also implemented additional procedures around the identification, analysis and recording of the tax effects of significant transactions. And we have added an additional outside expert to review the
provision and key issues.

In April 2007, we implemented a global enterprise resource planning (ERP) system to help us improve
our planning and management processes. The migration of certain legacy systems to the new ERP system required us to make significant changes to our internal control over financial reporting. We believe we have taken the necessary steps to
monitor and maintain appropriate internal control during this implementation.

Other than the changes discussed above, there were no changes
in our internal control over financial reporting during the quarter ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Many participants in the semiconductor industry have a significant number of
patents and have frequently demonstrated a willingness to commence litigation based on allegations of patent and other intellectual property infringement. From time to time, we have received, and expect to continue to receive, notices of claims of
infringement, misappropriation or misuse of other parties proprietary rights. Some of these claims have led to litigation. We cannot assure you that we will prevail in these actions, or that other actions alleging infringement by us of
third-party patents, misappropriation or misuse by us of third-party trade secrets, or invalidity of our patents will not be asserted or prosecuted against us, or that any assertions of infringement, misappropriation or misuse or prosecutions
seeking to establish the invalidity of our patents will not materially and adversely affect our business, financial condition and results of operations. As of June 30, 2007 we were party to the following legal proceedings:

SigmaTel v. Actions Semiconductor

On
January 4, 2005, we filed a patent infringement lawsuit against Actions Semiconductor Company (Actions) in the U.S. District Court for the Western District of Texas, Austin Division. We asserted that certain Actions ICs infringed
several of our patents. We sought damages and requested a permanent injunction relating to the alleged infringement. On January 3, 2007, we dismissed this lawsuit without prejudice.

On March 14, 2005, we filed a complaint requesting that the U.S. International Trade Commission (the ITC) initiate an investigation of
Actions, for violation of Section 337 of the Tariff Act of 1930, in the importation, sale for importation and sale in the U.S. after importation of certain audio processing ICs and other products containing these audio processing ICs. In our
complaint, as amended, we asked the ITC to investigate whether certain Actions products infringe one or more of the claims of certain U.S. patents (the Asserted Patents) owned by us. On April 18, 2005, the ITC instituted an
investigation into Actions actions based on our allegations. On September 15, 2006, after a hearing on the merits, rulings by an administrative law judge, and reviews of those rulings by the ITC, the ITC issued a Limited Exclusion Order
in our favor (the Order). The Order precluded the importation into the U.S. of MP3 players containing certain chips manufactured by Actions which contain 2 GB of flash memory or less.

After the ITC issued the Order, Actions requested that the U.S. Customs and Border Protection arm of the U.S. Government (CBP) examine a
redesigned Actions SoC IC in order to determine whether this redesigned IC falls within the scope of the ITCs Order. On November 22, 2006, Actions requested that the U.S. Patent and Trademark Office (USPTO) reexamine the
Asserted Patents in light of certain prior art references which Actions believes render the Asserted Patents invalid and unenforceable. On January 4, 2007, Actions filed a Notice of Appeal with the U.S. Court of Appeals for the Federal Circuit
(CAFC) stating its intention to appeal the Order.

On June 20, 2007, SigmaTel and Actions agreed to settle all claims
between the parties related to these matters. Pursuant to the settlement agreement, SigmaTel and Actions entered into a general release of all liabilities, a cross-license agreement with respect to all patents owned by SigmaTel and Actions,
including the disputed patents, and an agreement to dismiss all litigation and other legal proceedings pending against each other.



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Actions Semiconductor v. SigmaTel

On September 13, 2006, Actions filed several related patent infringement lawsuits against us and our subsidiaries in the Shenzhen Intermediate
Peoples Court. In the complaint, Actions asserted that our 35XX family of SoCs infringes a Chinese audio signal processing patent (the Actions Asserted Patent) owned by Actions. Actions sought to halt the infringement of its patent
in China by prohibiting the design, manufacture, sale, and use of the infringing ICs as well as devices containing the allegedly infringing ICs, and payment of damages in the amount of approximately US$12.5 million. Actions also asked the court and
other relevant authorities to grant and execute a series of injunctions and/or border detention orders, enforced by China customs, prohibiting the importation and exportation of the infringing products and MP3 players and devices that contain the
infringing products.

On December 12, 2006, we filed an invalidation petition with SIPO (a.k.a. the Chinese Patent Office) to
invalidate the Actions Asserted Patent in the PRC.

On June 20, 2007, SigmaTel and Actions agreed to settle all claims between the
parties related to these matters. Pursuant to the settlement agreement, SigmaTel and Actions entered into a general release of all liabilities, a cross-license agreement with respect to all patents owned by SigmaTel and Actions, including the
disputed patents, and an agreement to dismiss all litigation and other legal proceedings pending against each other.

Item 1A. Risk Factors.

The below description of our risk factors includes any material changes to and
supersedes the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

We do not expect to return to our historic growth rate in the future. We have incurred net losses in prior periods, and we will likely incur losses in the future. If
we cannot return to sustained profitability and positive cash flows from our operations, our liquidity and ability to operate our business effectively could be adversely affected.

We have faced a number of challenges that have affected our operating results, including extreme competition in the portable multimedia SoCs market,
continuing erosion of average selling prices of our portable multimedia SoCs, delays in delivering new product features to existing and new customers, and price volatility and shortages of other components used to build our customers devices.
We have incurred net losses in the past and we will likely continue to incur net losses in the future. We recognized a net loss of $29.8 million for the six months ended June 30, 2007 and a net loss of $109.0 million for the year ended
December 31, 2006. Our operating activities used $16.6 million of cash in the six months ended June 30, 2007 and $49.9 million for the year ended December 31, 2006. Although we have taken and are continuing to take steps to address
these challenges and to improve our cash flows and results of operations, we cannot provide assurance that we will return to profitability or positive cash flows on a quarterly or annual basis. Accordingly, you should not rely on the results of any
prior quarterly or annual periods as an indication of our future operating performance. If we continue to experience negative cash flow from operations over a prolonged period of time, or if we suffer unexpected cash outflows, our liquidity and
ability to operate our business effectively could be adversely affected. Our ability to become profitable again and to maintain profitability depends on the rate of growth of our target markets, the continued market acceptance of our customers
products, the competitive position of our products, and our ability to develop new products.

The average selling prices of our products have in the
past and could continue to decrease rapidly which may negatively impact our revenues and gross profits.

We may experience substantial
period-to-period fluctuations in future operating results due to the erosion of our average selling prices, particularly for portable multimedia SoCs. We have in the past and expect in the future to reduce the average unit price of our products in
anticipation of or in response to competitive pricing pressures, new



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product introductions by us or our competitors and other factors. If we are unable to offset any such reductions in our average selling prices by increasing
our sales volumes, reducing production costs, and developing and introducing new or enhanced products at higher prices, our gross profits and revenues will suffer. To maintain our gross profit percentage, we will need to develop and introduce new
products and product enhancements on a timely basis and continually reduce our costs. Our failure to do so would cause our revenues and gross profit percentage to decline.

The recent changes in our organization, including management resignations, recent acquisitions and dispositions, attrition, reductions in force, and cost cutting measures, have placed a significant strain on our
management, personnel, systems and resources, and the continued success of our business depends on our ability to successfully manage these changes.

Our organization has changed rapidly and further organizational changes may be required to address our strategic objectives. Our organization has changed through acquisitions and dispositions, opening international
locations and through increasing and reducing headcount. We announced the resignation of our former Chief Executive and Chief Financial Officers in January 2007 and December 2006, respectively. We also eliminated approximately 150 positions globally
since the second quarter of 2006, and will be implementing additional cost cutting measures through the third quarter of 2007. In January 2007, we announced the refocus of our business on our core product markets of portable multimedia players,
printers and digital televisions, and our departure from the digital video camera, USB and infrared peripheral, and certain consumer audio codec markets. These changes have placed, and any future changes will continue to place, a significant strain
on our management, personnel, systems and resources. If we are unable to manage these organizational changes effectively, including effectively implementing cost cutting measures, we may not be able to take advantage of market opportunities, develop
new products, enhance our technological capabilities, satisfy customer requirements, execute on our business plan or respond to competitive pressures. We cannot assure you that we will be able to achieve planned cost cutting measures in a timely
manner or at all, or that our cost cutting measures, as planned, will be effective. If cost cutting measures are not effectively implemented, we may experience unanticipated effects from these measures causing harm to our business and customer
relationships. In April 2007, we implemented a global enterprise resource planning (ERP) system to help us improve our planning and management processes. We have experienced, and may continue to experience challenges in implementing the new ERP
system and other related systems that could adversely affect our business by disrupting our ability to timely and accurately process and report key components of our financial position, affecting our ability to complete the evaluation of our
internal control over financial reporting and attestation activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 or disrupting our ability to process certain transactions necessary for our operations.

We depend on a few key customers for a substantial majority of our sales and the loss of, or a significant reduction in orders from, any of them would likely
significantly reduce our revenues.

For the six months ended June 30, 2007, sales to our top five customers accounted for
approximately 54.3% of our revenues. For the year ended December 31, 2006, sales to our top five customers accounted for approximately 49.4% of our revenues. Our operating results in the foreseeable future will likely continue to depend on
sales to a relatively small number of customers, as well as the ability of these customers to sell products that use our ICs. Our revenues would likely decline if one or more of these customers were to significantly reduce, delay or cancel their
orders for any reason. In addition, any difficulty in collecting outstanding amounts due from our customers, particularly customers who place large orders, would harm our financial performance. In the future, these customers may decide not to
purchase our ICs at all, purchase fewer ICs than they did in the past or alter their purchasing patterns, particularly because:



| |  |  | We do not have material long-term purchase contracts with our customers;
| | - |  | ------------------------------------------------------------------------



| |  |  | Substantially all of our sales to date have been made on a purchase order basis, which permits our customers to cancel, change or delay product purchase commitments
with little or no notice to us and without penalty;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Some of our customers may have efforts underway to actively diversify their vendor base which could reduce purchases of our ICs; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Some of our customers have developed or acquired products that compete directly with products these customers purchase from us, which could affect our
customers purchasing decisions in the future.
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While we have been a significant supplier of ICs used in many of our customers products, our customers regularly
evaluate alternative sources of supply in order to diversify their supplier base, which increases their negotiating leverage with us and protects their ability to secure these components. We believe that any expansion of our customers supplier
bases could have an adverse effect on the prices we are able to charge and volume of product that we are able to sell to our customers, which would negatively affect our revenues and operating results.

We depend on our executive officers and other key personnel to manage our business effectively, and if we are unable to retain our current personnel and hire
additional personnel, our ability to develop and successfully market our products could be harmed.

We rely heavily on the services of
our key employees, including our senior management. Our analog designers and other key technical personnel represent a significant asset and serve as an important source of our technological and product innovations. We believe our future success
will depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing personnel, on developing their successors and certain internal processes to reduce our reliance on specific individuals, and
on properly managing the transition of key roles when necessary. Any of our current employees may terminate their employment with us at any time. The competition for such personnel is intense in our industry. In particular, there is a shortage of
engineers who are familiar with the intricacies of the design and manufacturability of analog elements. We may not be successful in attracting and retaining sufficient numbers of technical personnel to support our current or anticipated needs. The
loss of any of our key employees or our inability to attract or retain qualified personnel, including engineers, could delay the development and introduction of our products, or otherwise harm our ability to carry out our business strategy and
compete with other companies.

Failure to manage our distribution relationships could impede our future revenues.

Sales to a small number of distributors generate a significant amount of our revenues. Our sales through distributors accounted for 34.8% of our revenues
for the six months ended June 30, 2007. Our sales through distributors accounted for 35.9% of our revenues for the year ended December 31, 2006. If our distributors were to materially reduce their purchases from us, our business, financial
condition and results of operations would suffer. Our business will depend on our ability to maintain our relationships with distributors, and develop additional channels for the distribution and sale of our products and effectively manage these
relationships. Our distributors decide whether to include our products among those that they sell and may carry and sell product lines that are competitive with ours. Because our distributors are not required to make a specified minimum level of
purchases from us, we cannot be sure that they will prioritize selling our products. As we continue to depend on our indirect sales capabilities, we will need to manage the potential conflicts that may arise within our direct sales force. For
example, conflicts with a distributor may arise when a customer begins purchasing directly from us rather than through the distributor. In addition, relationships with our distributors often involve the use of price protection and inventory return
rights. This often requires a significant amount of sales managements time and system resources to manage properly. We also rely on our distributors to accurately and timely report to us their sales of our products and to provide certain
engineering support services to customers. Our inability to obtain accurate and timely reports and to successfully manage these relationships would adversely affect our business and financial results, and could impact the effectiveness of our
internal controls.

Our business is highly dependent on the consumer electronics market, which is characterized by short product life cycles,
fluctuations in demand and seasonality, and is subject to risks related to product transitions and supply of other components.

We
derive a substantial portion of our revenues from a limited number of products that are used in consumer electronic devices. The consumer electronics market is characterized by intense competition, rapidly evolving technology, and ever-changing
consumer preferences. These factors result in the frequent introduction of new products, short product life cycles and significant price competition. The dynamic nature of this market limits our, as well as our customers, ability to accurately
forecast quarterly and annual sales. If we, or our customers, are unable to manage product transitions, our business and results of operations could be negatively affected. For example, if our customers were to transition from one type of flash
memory to another type of flash memory and our product is not compatible with the new type of flash memory, sales of our ICs would be adversely affected if we were unable to update our product in a timely manner. Further, our customers may choose to
replace our products with products of our competitors if we fail to implement our new products within given time constraints. In addition,



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we are subject to the risk of price volatility and supply problems with other components of the end products of our customers. For example, if our customers
could not obtain sufficient supplies of flash memory, a key component in many portable multimedia players, the sales of our products that are also included in such players would be adversely affected. We believe that any such flash memory supply
constraints and price volatility could cause our customers to purchase fewer portable multimedia SoCs than they might otherwise purchase, thus negatively affecting our business and revenue. Furthermore, continuing technological advancement in
consumer electronic devices, which is a significant driver of customer demand, is largely beyond our control.

Because many of our ICs are
designed for use in consumer electronic products, such as portable multimedia players, printers, and digital televisions, we expect our business to be subject to seasonality, with increased revenue in the third and fourth quarters of each year, when
customers place orders to meet year-end holiday demand, and lower revenue in the first and second quarters of each year. However, our revenues have historically been volatile, which makes it difficult for us to assess the impact of seasonal factors
on our business. If we or our customers are unable to ramp up production of new or existing products to meet any increases in demand due to seasonality or other factors, our revenues from such products would be adversely affected.

Because of the lengthy sales cycles for our products and the fixed nature of a significant portion of our expenses, we may incur substantial expenses before we earn
associated revenues and may not ultimately achieve our forecasted sales for our products.

Our sales cycles can take up to 18 months to
complete and volume production of products that use our ICs can take an additional three to six months to be achieved, if at all. Sales cycles for our products are lengthy for a number of reasons, including the following:



| |  |  | our customers usually complete an in-depth technical evaluation of our products before they place a purchase order;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | the commercial adoption of our products by OEMs and ODMs is typically limited during the initial release of their product to evaluate product performance and
consumer demand;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | new product introductions often center around key trade shows and failure to deliver a product prior to such an event can seriously delay introduction of a product;
and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the development and commercial introduction of products incorporating new technology frequently are delayed.
| | - |  | ------------------------------------------------------------------------------------------------------------

As a result of our lengthy sales cycles, we may incur substantial expenses before we earn associated revenues because a significant portion of our
operating expenses is relatively fixed and based on expected revenues. The lengthy sales cycles of our products make forecasting the volume and timing of orders difficult. In addition, the delays inherent in lengthy sales cycles raise additional
risks that customers may cancel or change their orders. Our sales are made by purchase orders. Because industry practice allows customers to reschedule or cancel orders on relatively short notice, backlog is not always a good indicator of our future
sales. If customer cancellations or product changes occur, this could result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory and operating expenses.

We derive a substantial portion of our revenues from our portable multimedia SoCs, the selling prices of which tend to decline over time, and if we are unable to
develop and introduce successful new products in a timely and cost-effective manner or to achieve market acceptance of our new products, our operating results and competitive position could be harmed.

Sales of our portable multimedia SoCs accounted for 72.9% of our revenues for the six months ended June 30, 2007, and for 75.3% or our revenues for
the year ended December 31, 2006. Our future success depends on our ability to develop successful new products in a timely and cost-effective manner, and to convince customers to select these products for design into their own new products. Our
products are generally incorporated into our customers products at the design stage. We often incur significant expenditures on the development of a new product without any assurance that a potential customer will select our product for design
into its own product. Once a potential customer designs a competitors product into its product offering, it becomes significantly more difficult for us to sell our products to that customer because changing suppliers involves significant cost,
time, effort and risk for the



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customer. Even if a potential customer designs one of our products into its product offering, we have no assurances that its product will be commercially
successful or that we will receive any revenue from sales of that product. Sales of our products largely depend on the commercial success of our customers products. Our customers are typically not obligated to purchase our products and can
choose at any time to stop using our products if their own products are not commercially successful or for any other reason.

We are
required to continually evaluate expenditures for planned product developments and choose among alternatives based upon our expectations of future market trends. From time to time we have experienced delays in completing the development and
introduction of new products. We cannot assure you that we will be able to develop and introduce new or enhanced products in a timely and cost-effective manner or that our products will generate significant revenues. The development of our ICs is
highly complex, and successful product development and market acceptance of our products depend on a number of factors, including the following:



| |  |  | our accurate prediction of the changing requirements of our customers and evolving industry standards;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | our timely completion and introduction of new designs;
| | - |  | ------------------------------------------------------



| |  |  | our ability to successfully develop and implement the software necessary to integrate our products into our customers products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to license any desired third party technology or intellectual property rights;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | the ability to transition customers from one generation of our products to the next;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | the availability of third-party manufacturing, assembly, and test capacity;
| | - |  | ---------------------------------------------------------------------------



| |  |  | the ability of our foundries to achieve high manufacturing yields for our products;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | our ability to transition to smaller manufacturing process geometries to achieve lower cost and higher levels of design integration;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the quality, price, performance, power efficiency and size of our products and those of our competitors;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | our management of our indirect sales channels;
| | - |  | ----------------------------------------------



| |  |  | the availability, quality, price and performance of competing products and technologies;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | our customer service capabilities and responsiveness; and
| | - |  | ---------------------------------------------------------



| |  |  | the success of our relationships with existing and potential customers.
| | - |  | -----------------------------------------------------------------------

As is typical in the semiconductor industry, the selling prices of our products tend to decline significantly over the life of the products. If we are
unable to offset any reductions in the selling prices of our products by introducing new products at higher prices or by reducing our costs, our revenues, gross margins and operating results would be adversely affected.

We rely on third-party contractors to manufacture, assemble and test our products and our failure to successfully manage our relationships with these contractors
could damage our relationships with our customers, decrease our sales, and limit our growth.

We do not have our own wafer fab
manufacturing facilities. Therefore, we rely on third-party contractors to manufacture, assemble, and test our ICs. We currently do not have long-term supply contracts with any of our third-party vendors. None of our third-party vendors are
obligated to perform services or supply products to us for any specific period, or in any specific quantities, except as may be provided in a particular purchase order. There are significant risks associated with our reliance on these third-party
contractors, including:



| |  |  | potential price increases;
| | - |  | --------------------------



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| |  |  | potential insolvency of the third-party contractors;
| | - |  | ----------------------------------------------------



| |  |  | capacity shortages;
| | - |  | -------------------



| |  |  | their inability to increase production and achieve acceptable yields on a timely basis;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | their inability to supply or support new or changing packaging technologies;
| | - |  | ----------------------------------------------------------------------------



| |  |  | reduced control over delivery schedules and product quality;
| | - |  | ------------------------------------------------------------



| |  |  | increased exposure to potential misappropriation of our intellectual property;
| | - |  | ------------------------------------------------------------------------------



| |  |  | limited warranties on wafers or products supplied to us;
| | - |  | --------------------------------------------------------



| |  |  | shortages of materials that foundries use to manufacture our products;
| | - |  | ----------------------------------------------------------------------



| |  |  | failure to qualify a selected supplier;
| | - |  | ---------------------------------------



| |  |  | labor shortages or labor strikes; and
| | - |  | -------------------------------------



| |  |  | actions taken by our third-party contractors that breach our agreements.
| | - |  | ------------------------------------------------------------------------

Because future foundry capacity may be limited and because we do not have long-term agreements with our foundries, we may not be able to secure adequate manufacturing capacity to satisfy the demand for our
products.

We generally try to make our products to be foundry-portable. In general, each of our products is primarily manufactured at a
single foundry. We provide these foundries with monthly rolling forecasts of our production requirements; however, the ability of each foundry to provide silicon wafers to us is limited by the foundrys available capacity. Moreover, the price
of our wafers will fluctuate based on changes in available industry capacity. We do not have long term supply contracts with any of our foundries; therefore, our foundry suppliers could choose to prioritize capacity for other customers, particularly
larger customers, reduce or eliminate deliveries to us on short notice or increase the prices they charge us. Accordingly, we cannot be certain that our foundries will allocate sufficient capacity to satisfy our requirements. If we are not able to
obtain foundry capacity as required, our relationships with our existing customers would be harmed and our sales would likely decline.

If our foundries
do not achieve satisfactory yields or quality, our sales could decrease, and our relationships with our customers and our reputation may be harmed.

Minor deviations in the IC manufacturing process can cause substantial decreases in yields, and in some cases, cause production to be suspended. Our foundries are responsible for yield losses due to their errors, but
these yield losses could cause us to delay shipments to our customers. Our parts are qualified with our foundries, at which time a minimum acceptable yield is established. If actual yield is below the minimum, the foundry incurs the cost of the
wafers. If actual yield is above the minimum, we incur the cost of the wafers. The manufacturing yields for our new products tend to be lower initially and increase as we achieve full production. Our product pricing is based on the assumption that
an increase in manufacturing yields will continue, even with the increasing complexity of our ICs. Shorter product life cycles require us to develop new products faster and to manufacture these products for shorter periods of time. In many cases,
these shorter manufacturing periods will not reach the longer, high volume manufacturing periods conducive to higher manufacturing yields and declining costs. As a result, if our foundries fail to deliver fabricated silicon wafers of satisfactory
quality in the volume and at the price required, we will be unable to meet our customers demand for our products or to sell those products at an acceptable profit margin, which would adversely affect our sales and margins and damage our
customer relationships.



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We often build our products based on forecasts provided by customers before receiving purchase orders for the products
and may therefore incur product shortages or excess product inventory.

In order to ensure availability of our products for some of our
largest customers, we begin the manufacturing of our products in advance of receiving purchase orders based on forecasts provided by these customers and our distributors. These forecasts, however, do not represent binding purchase commitments and we
do not recognize sales for these products until they are shipped to the customer. As a result, we incur inventory and manufacturing costs in advance of anticipated sales. Because demand for our products may not materialize, manufacturing based on
forecasts subjects us to increased risks of high inventory carrying costs and increased obsolescence and may increase our operating costs. These inventory risks are exacerbated when our customers purchase indirectly through contract manufacturers
because this causes us to have less visibility regarding the accumulated levels of inventory for such customers. A resulting write-off of unusable or excess inventories would adversely affect our operating results.

The third-party contractors that manufacture, assemble and test our products, and many of our customers and end customers, are concentrated in the same geographic
region, which increases the risk that a natural disaster, epidemic, labor strike, war or political unrest could disrupt our operations or sales.

All of the principal foundries that manufacture our products and all of the principal subcontractors that assemble, package, and test our products are located in Malaysia, Singapore, China or Taiwan. Many of our customers are also located
in these areas. The risk of an earthquake in these Pacific Rim locations is significant due to the proximity of major earthquake fault lines in the area. We are not currently covered by insurance against business disruption caused by earthquakes as
such insurance is not currently available on terms that we believe are commercially reasonable. Earthquakes, fire, flooding, lack of water or other natural disasters, an epidemic, political unrest, war, labor strikes or work stoppages in countries
where our semiconductor manufacturers, assemblers and test subcontractors are located, likely would result in the disruption of our foundry, assembly or test capacity. Any disruption resulting from earthquakes, other natural disasters or other
events that would disrupt or impair our foundries or subcontractors production and assembly capacity could cause significant delays in the production or shipment of our products until we are able to shift our manufacturing, assembling,
packaging or production testing from the affected contractor to another third-party vendor. While we have some foundry capacity in the U.S., we may not be able to increase our foundry capacity in the U.S., or obtain other alternate foundry capacity
on favorable terms, if at all. In addition, a natural disaster, epidemic, labor strike, war or political unrest where our customers facilities are located would likely reduce our sales to such customers.

We have and continue to experience significant period-to-period quarterly and annual fluctuations in our revenues and operating results, which has and continues to
result in volatility in our stock price.

We have in the past and may in the future experience significant period-to-period fluctuations
in our revenues and operating results due to a number of factors, including the following and other risks identified throughout this Risk Factors section:



| |  |  | the timing and volume of purchase orders and cancellations from our customers;
| | - |  | ------------------------------------------------------------------------------



| |  |  | the rate of acceptance of our products by our customers;
| | - |  | --------------------------------------------------------



| |  |  | discontinuation of the use of our products by our customers;
| | - |  | ------------------------------------------------------------



| |  |  | the rate of growth of the market for analog-intensive, mixed-signal ICs;
| | - |  | ------------------------------------------------------------------------



| |  |  | fluctuation and seasonality in demand for our products;
| | - |  | -------------------------------------------------------



| |  |  | technological innovations or new products by our competitors, customers or us;
| | - |  | ------------------------------------------------------------------------------



| |  |  | the acquisition and disposition of product lines;
| | - |  | -------------------------------------------------



| |  |  | increases in prices charged by our foundries and other third-party subcontractors;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | decreases in the overall average selling prices of our products;
| | - |  | ----------------------------------------------------------------



| |  |  | increased competition in product lines, and competitive pricing pressures;
| | - |  | --------------------------------------------------------------------------



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| |  |  | the availability of third-party foundry capacity;
| | - |  | -------------------------------------------------



| |  |  | the availability of components used in our customers products, such as flash memory or hard disk drives, which are key components in many portable multimedia
players;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | fluctuations in manufacturing yields;
| | - |  | -------------------------------------



| |  |  | the difficulty of forecasting and managing our inventory and production levels;
| | - |  | -------------------------------------------------------------------------------



| |  |  | the rate at which new markets emerge for products we are currently developing or our ability to develop new products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | our involvement in litigation;
| | - |  | ------------------------------



| |  |  | cost associated with acquisitions and dilution from the issuance of our stock in connection with acquisitions;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | costs associated with severance and reductions in force and restructuring the business;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | costs associated with subleasing or abandoning office space;
| | - |  | ------------------------------------------------------------



| |  |  | charges associated with impairments to intangible assets;
| | - |  | ---------------------------------------------------------



| |  |  | charges associated with new accounting regulations;
| | - |  | ---------------------------------------------------



| |  |  | employee attrition and changes in senior management;
| | - |  | ----------------------------------------------------



| |  |  | the timing of new product introductions or enhancements by us and our competitors;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | changes in our product mix; and
| | - |  | -------------------------------



| |  |  | the evolution of industry standards.
| | - |  | ------------------------------------

Any variations in our quarter-to-quarter performance may cause our stock price to fluctuate. It is likely that in some future period our operating results will be below the expectations of public market analysts or investors. If this
occurs, our stock price may drop, perhaps significantly.

We are subject to the highly cyclical nature of the semiconductor industry.

The semiconductor industry is highly cyclical. The industry has experienced significant downturns, often in connection with, or in anticipation of,
maturing product cycles (of both semiconductor companies and their customers products) and declines in general economic conditions. These downturns have been characterized by production overcapacity, high inventory levels and accelerated
erosion of average selling prices. Any future downturns could significantly harm our sales, reduce our profitability or prevent us from regaining profitability for a prolonged period of time. From time to time, the semiconductor industry also has
experienced periods of increased demand and production capacity constraints. We may experience substantial changes in future operating results due to general semiconductor industry conditions, general economic conditions and other factors.

Because the markets in which we compete are highly competitive and many of our competitors have greater resources than us, we cannot be certain that
our products will compete favorably in the marketplace.

The markets in which we compete are intensely competitive and are characterized
by rapid technological change, declining average unit selling prices and rapid product obsolescence. We expect competition to increase in the future from existing competitors and from other companies that may enter our existing or future markets
with solutions which may be less costly or provide higher performance or more desirable features than our products. Competition typically occurs at the design stage, when customers evaluate alternative design approaches requiring integrated
circuits. Because of short product life cycles, there are frequent design win competitions for next-generation systems.



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We face competition from a relatively large number of competitors in each of our targeted markets. In the
portable multimedia player market, our principal competitors include Actions Semiconductor, ALi, Freescale Semiconductor, Philips Semiconductor, NVIDIA, Rock Chip, Samsung, Sunplus, Telechips, and Texas Instruments. Within the printer market, we
compete primarily with Zoran Corporation and in-house captive suppliers. In the digital television audio market, we compete primarily with Micronas, ST Microelectronics, MStar and MediaTek. We expect to face increased competition in the future from
our current and emerging competitors. In addition, some of our customers have developed and other customers could develop their own internal ICs that could replace their need for our products or otherwise reduce demand for our products.

The consumer electronics market, which is the principal end market for our ICs, has historically been subject to intense price competition. In many
cases, low cost, high volume producers have entered markets and driven down profit margins. If a low cost, high volume producer should develop products that are competitive with our products, our sales and profit margins would suffer.

Many of our current and potential competitors have longer operating histories, greater name recognition, access to larger customer bases, broader product
offerings, and significantly greater financial, sales, marketing, manufacturing, distribution, technical and other resources than us. As a result, they may be able to respond more quickly to changing customer demands or devote greater resources to
the development, promotion and sales of their products than we can. Our current and potential competitors may develop and introduce new products that will be priced lower, provide superior performance or achieve greater market acceptance than our
products. In addition, in the event of a manufacturing capacity shortage, these competitors may be able to obtain capacity when we are unable to do so. Furthermore, our current or potential competitors have established, or may establish, financial
and strategic relationships among themselves or with existing or potential customers or other third parties to increase the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors
or alliances among competitors could emerge and rapidly acquire significant market share, which would harm our business.

Our products are complex and
may require modifications to resolve undetected errors or failures in our hardware and software, which could lead to an increase in our costs, a loss of customers or a delay in market acceptance of our products. Product liability claims may be
asserted against us for certain defects in our products and we may not have sufficient liability insurance.

Our ICs are complex and may
contain undetected hardware and software errors or failures when first introduced or as new versions are released. These errors could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from product
development efforts and cause significant customer relations and business reputation problems. If we deliver products with errors, defects or bugs, our credibility and the market acceptance and sales of our products could be harmed. One or more of
our products may be found to be defective after shipment, requiring a product replacement, recall or a software solution that would cure the defect but impede performance of the product. We may also be subject to product returns which could impose
substantial costs and harm our business. In addition, product liability claims may be asserted with respect to our technology or products. Our products are typically sold at prices that are significantly lower than the cost of the end-products into
which they are incorporated. A defect or failure in our product could give rise to failures in our customers end-product, so we may face claims for damages that are disproportionately higher than the revenues and profits we receive from the
products involved, especially if our customer seeks to recover for damage claims made against it by its own customers. While we maintain insurance, there can be no assurance that we have obtained a sufficient amount of insurance coverage, that
asserted claims will be within the scope of coverage of the insurance, or that we will have sufficient resources to satisfy any asserted claims.

We may
experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses.

To remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller line width geometries. This transition
requires us to modify the manufacturing processes for our products and to redesign some products as well as standard cells and other IC designs that we may use in multiple products. We periodically evaluate the benefits, on a product-by-product
basis, of migrating to smaller geometry process technologies to reduce our costs. Currently most of our products are manufactured in 0.35 micron, 0.18 micron, 0.16 micron and 90 nanometer geometry processes. In the past, we have experienced some
difficulties in shifting to smaller geometry



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process technologies and 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. We are dependent on our relationships with our foundry subcontractors to transition to smaller geometry processes
successfully. We cannot assure you that the foundries that we use will be able to effectively manage the transition or that we will be able to maintain our existing foundry relationships or develop new ones. If we or any of our foundry
subcontractors experience significant delays in this transition or fail to efficiently implement this transition, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, all of which could harm our
relationships with our customers and adversely impact our operations. As smaller geometry processes become more prevalent, we expect to continue to integrate more functionality, as well as third party intellectual property, into our products;
however, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis, if at all. Moreover, even if we are able to achieve higher levels of design integration, such integration may have a
short-term adverse impact on our operating results, as we may reduce our revenue by integrating the functionality of multiple chips into a single chip.

We have substantial international activities, which expose us to additional business risks including increased logistical complexity and political instability.

We have established international subsidiaries and opened offices in Hong Kong; Singapore; Seoul, South Korea; Tokyo, Japan; Cambridge, England; Taipei,
Taiwan; and Shenzhen, China. The percentage of our revenues, from customers located outside of the U.S., was 93.6% for the six months ended June 30, 2007 and 97.5% for the year ended December 31, 2006. Our international sales and
operations are subject to a number of risks, including:



| |  |  | increased complexity and costs of managing international sales and operations;
| | - |  | ------------------------------------------------------------------------------



| |  |  | protectionist laws and business practices that favor local competition in some countries;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | multiple, conflicting and changing laws, regulations and tax schemes;
| | - |  | ---------------------------------------------------------------------



| |  |  | difficulties in protecting our intellectual property;
| | - |  | -----------------------------------------------------



| |  |  | difficulties in achieving headcount reductions;
| | - |  | -----------------------------------------------



| |  |  | restrictions on transfers of funds and other assets of our subsidiaries between jurisdictions;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | disruption in air transportation between the United States and overseas facilities;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | longer sales cycles;
| | - |  | --------------------



| |  |  | public health concerns and natural disasters, such as earthquakes and tsunamis;
| | - |  | -------------------------------------------------------------------------------



| |  |  | greater difficulty in accounts receivable collection and longer collection periods;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | foreign currency exchange rate fluctuations;
| | - |  | --------------------------------------------



| |  |  | difficulties with financial reporting in foreign countries;
| | - |  | -----------------------------------------------------------



| |  |  | political and economic instability; and
| | - |  | ---------------------------------------



| |  |  | difficulties and costs in staffing and managing international operations, as well as cultural differences.
| | - |  | ----------------------------------------------------------------------------------------------------------

Any conflict or uncertainty in the countries in which we operate, including public health or safety, natural disasters or general economic factors, could
have a material adverse effect on our business. Any of the above risks, should they occur, could result in an increase in the cost of components, production delays, general business interruptions, delays from difficulties in obtaining export
licenses for certain technology, tariffs and other barriers and restrictions, potentially longer payment cycles, potentially increased taxes, restrictions on the repatriation of funds and the burdens of complying with a variety of foreign laws, any
of which could ultimately have a material adverse effect on us.



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To date, all of our sales to international customers and purchases of components from international
suppliers have been denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive for our international customers, thus potentially leading to a reduction
in sales and profitability. Furthermore, many of our competitors are foreign companies that could benefit from such a currency fluctuation making it more difficult for us to compete with those companies.

We may be unable to effectively protect our intellectual property in the U.S. or abroad, which would negatively affect our ability to compete.

We believe that the protection of our intellectual property rights will continue to be important to the success of our business. We rely on a combination
of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants and business partners, and
control access to and distribution of our documentation and other proprietary information. Despite these efforts, unauthorized parties have infringed our intellectual property in the past, and may attempt to copy or otherwise obtain and use our
intellectual property in the future. Monitoring unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent infringement of our intellectual property, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as do the laws of the United States. Many U.S. companies have encountered substantial infringement problems in foreign countries, including countries in which we sell products.
We currently hold relatively few non-U.S. patents. We cannot be certain that patents will be issued as a result of our pending applications, nor can we be certain that any issued patents would protect or benefit us or give us adequate protection
from competing products. For example, issued patents may be circumvented or challenged and declared invalid or unenforceable. We also cannot be certain that others will not copy our unpatented intellectual property or develop effective competing
technologies on their own.

Significant litigation over intellectual property in our industry may cause us to become involved in costly and lengthy
litigation, which could subject us to liability, require us to stop selling our products or force us to redesign our products.

In
recent years, there has been significant litigation in the U.S. involving patents and other intellectual property rights in the semiconductor industry. In the past, we have found it necessary to engage in litigation to enforce and defend our
intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others. For example, in January 2005, we filed a lawsuit against Actions Semiconductor and requested the U.S. International
Trade Commission initiate an investigation against Actions Semiconductors products, seeking to halt Actions infringement of our intellectual property rights. As a result of that lawsuit, Actions sought to invalidate certain of our
patents and also sued us for patent infringement in an unrelated case. We believe future litigation involving intellectual property could occur.

From time to time, we receive letters from various industry participants alleging one or more of our products infringe the participants patents or trade secrets. We typically respond when appropriate and as advised by legal counsel.
Any lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights. Additionally, lawsuits arising in foreign countries where the intellectual property laws are not as developed
as those in the U.S. create greater uncertainty in the outcome of the lawsuit and the potential damages that might be available to the asserting party than comparable lawsuits in the U.S. Any lawsuit, regardless of its success, would likely be
time-consuming and expensive to resolve and would divert employee time and attention. Any intellectual property litigation also could force us to do one or more of the following:



| |  |  | stop selling products or using technology that contain the allegedly infringing intellectual property;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | pay damages to the party claiming infringement;
| | - |  | -----------------------------------------------



| |  |  | attempt to obtain a license to the relevant intellectual property, which may not be available on reasonable terms or at all; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | attempt to redesign those products that contain the allegedly infringing intellectual property.
| | - |  | -----------------------------------------------------------------------------------------------

Although patent disputes in the semiconductor industry have often been settled through cross-licensing arrangements, we may not be able in any or every
instance to settle an alleged patent infringement claim through a



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cross-licensing arrangement. We have a more limited patent portfolio than many of our competitors. If a successful claim is made against us or any of our
customers and a license is not made available to us on commercially reasonable terms or we are required to pay substantial damages or awards, our business, financial condition and results of operations would be materially adversely affected.

Our products incorporate technology licensed from third parties

We incorporate technology (including software) licensed from third parties in our products. We could be subjected to claims of infringement regardless of our lack of involvement in the development of the licensed
technology. Although a third party licensor is typically obligated to indemnify us if the licensed technology infringes on another partys intellectual property rights, such indemnification is typically limited in amount and may be worthless if
the licensor becomes insolvent. Furthermore, any failure of third party technology to perform properly would adversely affect sales of our products incorporating such technology.

Our intellectual property indemnification practices may adversely impact our business.

We have
historically indemnified our customers for certain costs and damages of patent infringement in circumstances where our product is the factor creating the customers infringement exposure, and this practice may subject us to significant
indemnification claims by our customers. In some instances, our products are designed for use in devices manufactured by our customers that comply with international standards, such as the MP3 standard. These international standards are often
covered by patent rights held by third parties, which may include our competitors. The combined costs of identifying and obtaining licenses from all holders of patent rights essential to such international standards could be high and could reduce
our profitability or increase our losses. The cost of not obtaining such licenses could also be high if a holder of such patent rights brings a claim for patent infringement. We are aware that certain of our customers have received notices from
third parties seeking to grant a royalty bearing patent license to those customers and claiming that those customers manufacture and sale of products capable of decoding MP3 files violates patents in which the third parties have the right to
enforce. In the contracts under which we distribute MP3 decoding products, we generally (but not always) have not agreed to indemnify our customers with respect to patent claims related to MP3 decoding technology. However, we cannot assure you that
claims for indemnification will not be made or that if made, such claims would not have a material adverse effect on our business, operating results or financial condition.

The industry standards supported by our products are continually evolving and our success depends on our ability to adapt our products to meet these changing industry standards.

Our ability to compete in the future will depend on our ability to ensure that our products are compliant with evolving industry standards, such as the
introduction of new compression algorithms for portable multimedia players. The emergence of new industry standards could render our products incompatible with products developed by other suppliers. As a result, we could be required to invest
significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards for a significant period of time, we could
miss opportunities to achieve crucial design wins. We may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance and such efforts may require substantial time
and expense.

If securities or industry analysts do not continue to publish research or reports about our business, our stock price and trading volume
could decline.

The trading market for our common stock will depend on the research and reports that industry or securities analysts
publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade 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.



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We had a material weakness in our internal control over financial reporting as of December 31, 2006 and
March 31, 2007 and cannot assure you that additional material weaknesses will not be identified in the future, or that our remediation efforts will be successful. If our internal control over financial reporting or disclosure controls and
procedures are not effective, there may be errors in our financial statements that could require a restatement or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in
our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control
over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in our annual reports. Section 404 also requires our independent registered
public accounting firm to attest to, and report on, managements assessment of our internal control over financial reporting.

Our
management, including our CEO and CFO, does not expect that our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
There exist inherent limitations in all control systems, so no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, involving SigmaTel have been, or will be, detected. These inherent
limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple human error. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more
people, or by an override of those controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals
under all potential future conditions. Controls may become inadequate over time because of changes in conditions or deterioration in the compliance with policies or procedures. For example, given our recent reductions in force and attrition, a
significant decrease in the headcount of our finance personnel and/or significant turnover among our finance personnel could result in less segregation of duties and/or less familiarity among finance staff with internal control policies and
procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We cannot assure you that we will not identify a material weakness in our internal controls in the
future. A material weakness in our internal control over financial reporting would require management to evaluate our internal control over financial reporting as ineffective. If our internal control over financial reporting is considered
ineffective, we may experience a loss of public confidence, which could have an adverse effect on our business and our stock price.

Our stock price may
be volatile.

The market price of our common stock has been volatile in the past and may be volatile in the future. The market price of
our common stock may be significantly affected by the following factors:



| |  |  | actual or anticipated fluctuations in our operating results;
| | - |  | ------------------------------------------------------------



| |  |  | changes in financial estimates by securities analysts or our failure to perform in line with such estimates;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | changes in market valuations of other technology companies, particularly semiconductor companies;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | introduction of technologies or product enhancements that reduce the need for our products;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | the loss of, or decrease in sales to, one or more key customers;
| | - |  | ----------------------------------------------------------------



| |  |  | a large sale of stock by a significant stockholder;
| | - |  | ---------------------------------------------------



| |  |  | dilution from the issuance of our stock in connection with acquisitions;
| | - |  | ------------------------------------------------------------------------



| |  |  | the addition or removal of our stock to or from a stock index fund;
| | - |  | -------------------------------------------------------------------



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| |  |  | departures of key personnel; and
| | - |  | --------------------------------



| |  |  | the required expensing of stock options.
| | - |  | ----------------------------------------

The stock market has experienced extreme volatility that often has been unrelated to the performance of particular companies. These market fluctuations may cause our stock price to fall regardless of our performance.

Any dispositions we make could harm our financial condition

In connection with the sale of our PC Audio Codec product line, we incurred various risks. This disposition and any disposition that we may make in the future entail a number of risks that could materially and adversely affect our business
and operating results, including:



| |  |  | diversion of managements time and attention from our core business;
| | - |  | --------------------------------------------------------------------



| |  |  | difficulties separating the divested business;
| | - |  | ----------------------------------------------



| |  |  | risks to relations with customers who previously purchased products from our disposed product lines;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | reduced leverage with suppliers due to reduced aggregate volume;
| | - |  | ----------------------------------------------------------------



| |  |  | risks related to employee relations;
| | - |  | ------------------------------------



| |  |  | risks associated with the transfer and licensing of intellectual property;
| | - |  | --------------------------------------------------------------------------



| |  |  | security risks and other liabilities related to the transition services provided in connection with the disposition;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | tax issues associated with dispositions; and
| | - |  | --------------------------------------------



| |  |  | disposition-related disputes, including disputes over earn-outs and escrows.
| | - |  | ----------------------------------------------------------------------------

Provisions in our charter documents and Delaware law could prevent or delay a change in control of SigmaTel.

Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These include provisions:



| |  |  | prohibiting a merger with a party that has acquired control of 15% or more of our outstanding common stock, such as a party that has completed a successful tender
offer, until three years after that party acquired control of 15% of our outstanding common stock;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | authorizing the issuance of up to 30,000,000 shares of blank check preferred stock;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | eliminating stockholders rights to call a special meeting of stockholders; and
| | - |  | -------------------------------------------------------------------------------



| |  |  | requiring advance notice of any stockholder nominations of candidates for election to our board of directors.
| | - |  | -------------------------------------------------------------------------------------------------------------

We are also subject to the anti-takeover laws of Delaware that may prevent, delay or impede a third party from acquiring or merging with us, which may adversely affect
the market price of our common stock.



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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.



| | (a) | Not applicable.
| | --- | ---------------



| | (b) | Not applicable.
| | --- | ---------------



| | (c) | The following table summarizes repurchases of our stock during the three months ended June 30, 2007:
| | --- | ----------------------------------------------------------------------------------------------------



|                 |  |                                     |  |                              |      |                                                                                |   |                                                                             |  
|---------------- |  | ----------------------------------- |  | ---------------------------- | ---- | ------------------------------------------------------------------------------ | - | --------------------------------------------------------------------------- | -
|Period           |  | Total Number of SharesPurchased (1) |  | Average Price Paid per Share |      | Total Number of Shares Purchased as Part of PubliclyAnnounced Plansor Programs |   | Maximum Number of Shares that May yet BePurchased Underthe Plans orPrograms
|4/1/07  4/30/07 |  | 6,924                               |  | $                            | 3.14 |                                                                                |  |                                                                             | 
|5/1/07  5/31/07 |  | 218                                 |  | $                            | 3.40 |                                                                                |  |                                                                             | 
|6/1/07  6/30/07 |  | 241                                 |  | $                            | 3.08 |                                                                                |  |                                                                             | 

---

|(1) | Consists entirely of shares of our common stock withheld by us to satisfy employee tax obligations upon vesting of RSUs granted under our 2003 Equity Incentive Plan.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders .

On May 15, 2007, we held our Annual
Meeting of Stockholders. The matters voted upon at the meeting and the results of those votes were as follows:

Election of Class I Director



|                   |  |                              |  |                                      
|------------------ |  | ---------------------------- |  | -------------------------------------
|                   |  | Total Vote for Each Director |  | Total Vote WithheldFrom Each Director
|William P. Osborne |  | 26,430,831                   |  | 991,582                              

In addition to the above Class I directors, the following directors terms of office as director
extended beyond the date of the meeting: Class II director (Robert T. Derby), and Class III director (Alexander M. Davern), who will serve until the annual meetings of stockholders to be held in 2008 and 2009, respectively.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

See Exhibit Index.



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SIGMATEL, INC.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                      |  |                |  |                                                      
|--------------------- |  | -------------- |  | -----------------------------------------------------
|                      |  | SIGMATEL, INC.
|                      |  |               
|Dated: August 9, 2007 |  | By:            |  | /s/ R. Scott Schaefer                                
|                      |  |                |  | R. Scott Schaefer                                    
|                      |  |                |  | Vice President of Finance and Chief Financial Officer
|                      |  |                |  | (Principal Financial and Accounting Officer)         



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                  
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  |                                                                                                                                                                                  
|              | 
|3.1(1)        |  | Second Restated Certificate of Incorporation of SigmaTel, Inc.                                                                                                                   
|              | 
|3.2(2)        |  | Amended and Restated Bylaws of SigmaTel, Inc.                                                                                                                                    
|              | 
|4.1(2)        |  | Specimen certificate for shares of common stock.                                                                                                                                 
|              | 
|31.01         |  | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|              | 
|31.02         |  | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|              | 
|32.01*        |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   

---

|* | This exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section,
nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any
filings.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(1) | Incorporated by reference to Exhibit 3.3 of the Registrants Form S-1 Registration Statement (Registration No. 333-106796), declared effective by the Securities and
Exchange Commission on September 18, 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to the exhibit of the same number to the Registrants Form S-1 Registration Statement (Registration No. 333-106796), declared effective by the
Securities and Exchange Commission on September 18, 2003.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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