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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 September 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 36,026,509 as of October 31, 2007.



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##### Table of Contents

SIGMATEL, INC.

FORM 10-Q

TABLE OF CONTENTS



|          |  |                                                                                                                               |  |         
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | --------
|          |  |                                                                                                                               |  | Page No.
|PART I:   |  | FINANCIAL INFORMATION                                                                                                         |  |         
|          |  |                                                                                                                              
|Item 1.   |  | Financial Statements (unaudited)                                                                                              |  |         
|          |  |                                                                                                                              
|          |  | Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006                                          |  | 3       
|          |  |                                                                                                                              
|          |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and September 30, 2006 |  | 4       
|          |  |                                                                                                                              
|          |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and September 30, 2006           |  | 5       
|          |  |                                                                                                                              
|          |  | Notes to Condensed Consolidated Financial Statements                                                                          |  | 6       
|          |  |                                                                                                                              
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                         |  | 15      
|          |  |                                                                                                                              
|Item 3.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                                    |  | 27      
|          |  |                                                                                                                              
|Item 4.   |  | Controls and Procedures                                                                                                       |  | 27      
|          |  |                                                                                                                              
|PART II:  |  | OTHER INFORMATION                                                                                                             |  |         
|          |  |                                                                                                                              
|Item 1.   |  | Legal Proceedings                                                                                                             |  | 27      
|          |  |                                                                                                                              
|Item 1A.  |  | Risk Factors                                                                                                                  |  | 28      
|          |  |                                                                                                                              
|Item 2.   |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                   |  | 41      
|          |  |                                                                                                                              
|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)



|                                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                            |  | September 30,2007 |         |   | December 31,2006 |  
|ASSETS                                                                                                                                                                                      |  |                   |         |   |                  |   |         |  
|Current assets:                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                                   |  | $                 | 27,134  |   |                  | $ | 30,686  |  
|Restricted cash                                                                                                                                                                             |  |                   | 184     |   |                  |   | 7,354   |  
|Short-term investments                                                                                                                                                                      |  |                   | 47,237  |   |                  |   | 62,800  |  
|Accounts receivable, net                                                                                                                                                                    |  |                   | 20,099  |   |                  |   | 12,556  |  
|Inventories, net                                                                                                                                                                            |  |                   | 17,502  |   |                  |   | 20,794  |  
|Income tax receivable                                                                                                                                                                       |  |                   | 2,486   |   |                  |   | 3,365   |  
|Prepaid expenses and other assets                                                                                                                                                           |  |                   | 2,735   |   |                  |   | 5,591   |  
|                                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total current assets                                                                                                                                                                        |  |                   | 117,377 |   |                  |   | 143,146 |  
|Property, equipment and software, net                                                                                                                                                       |  |                   | 10,337  |   |                  |   | 13,301  |  
|Intangible assets, net                                                                                                                                                                      |  |                   | 15,023  |   |                  |   | 15,370  |  
|Non-current income tax receivable                                                                                                                                                           |  |                   | 5,250   |   |                  |   |        |  
|Other assets                                                                                                                                                                                |  |                   | 1,193   |   |                  |   | 1,574   |  
|                                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                                                                                                |  | $                 | 149,180 |   |                  | $ | 173,391 |  
|                                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                                            |  |                  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                        |  |                   |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                                        |  |                   |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                                            |  | $                 | 20,439  |   |                  | $ | 16,338  |  
|Accrued compensation                                                                                                                                                                        |  |                   | 6,551   |   |                  |   | 8,712   |  
|Other accrued expenses                                                                                                                                                                      |  |                   | 2,802   |   |                  |   | 5,328   |  
|Deferred revenue                                                                                                                                                                            |  |                   | 5,507   |   |                  |   | 1,242   |  
|Income tax payable                                                                                                                                                                          |  |                   | 3,025   |   |                  |   | 2,728   |  
|Current portion of long-term obligations                                                                                                                                                    |  |                   | 345     |   |                  |   | 229     |  
|                                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                                   |  |                   | 38,669  |   |                  |   | 34,577  |  
|Non-current income taxes payable                                                                                                                                                            |  |                   | 4,787   |   |                  |   | 4,453   |  
|Other liabilities                                                                                                                                                                           |  |                   | 2,189   |   |                  |   | 809     |  
|                                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                           |  |                   | 45,645  |   |                  |   | 39,839  |  
|                                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Commitments and contingencies (see Note 11)                                                                                                                                                 |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                                            |  |                  
|Stockholders equity:                                                                                                                                                                       |  |                   |         |   |                  |   |         |  
|Common stock, $0.0001 par value; 170,000 shares authorized; shares issued and outstanding: 36,111 and 36,021 at September 30, 2007 and
35,603 and 35,513 at December 31, 2006, respectively |  |                   | 4       |   |                  |   | 4       |  
|Additional paid-in capital                                                                                                                                                                  |  |                   | 203,628 |   |                  |   | 197,711 |  
|Notes receivable from stockholders                                                                                                                                                          |  |                   |        |   |                  |   | (5      | )
|Treasury stock, 90 common shares at cost                                                                                                                                                    |  |                   | (741    | ) |                  |   | (741    | )
|Accumulated deficit                                                                                                                                                                         |  |                   | (99,679 | ) |                  |   | (63,687 | )
|Accumulated other comprehensive income                                                                                                                                                      |  |                   | 323     |   |                  |   | 270     |  
|                                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                                  |  |                   | 103,535 |   |                  |   | 133,552 |  
|                                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                  |  | $                 | 149,180 |   |                  | $ | 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 EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                         |  | 2007                            |        |   | 2006                           |   |         | 2007 |  |   | 2006    |  
|Revenues, net                            |  | $                               | 41,178 |   |                                | $ | 45,008  |      |  | $ | 93,931  |   |  | $ | 121,841 |  
|Cost of goods sold                       |  |                                 | 23,545 |   |                                |   | 27,801  |      |  |   | 56,894  |   |  |   | 70,983  |  
|                                         |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Gross profit                             |  |                                 | 17,633 |   |                                |   | 17,207  |      |  |   | 37,037  |   |  |   | 50,858  |  
|                                         |  |                                 |        |  
|Operating expenses:                      |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Research and development                 |  |                                 | 16,363 |   |                                |   | 23,416  |      |  |   | 51,966  |   |  |   | 68,670  |  
|Selling, general and administrative      |  |                                 | 6,519  |   |                                |   | 11,294  |      |  |   | 24,628  |   |  |   | 37,925  |  
|Loss (gain) on asset disposition         |  |                                 |       |   |                                |   | (45,673 | )    |  |   | 594     |   |  |   | (45,673 | )
|                                         |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total operating expenses (income)        |  |                                 | 22,882 |   |                                |   | (10,963 | )    |  |   | 77,188  |   |  |   | 60,922  |  
|                                         |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Operating (loss) income                  |  |                                 | (5,249 | ) |                                |   | 28,170  |      |  |   | (40,151 | ) |  |   | (10,064 | )
|                                         |  |                                 |        |  
|Interest income, net                     |  |                                 | 1,048  |   |                                |   | 914     |      |  |   | 3,084   |   |  |   | 2,118   |  
|Foreign exchange (loss) benefit          |  |                                 | 56     |   |                                |   | (67     | )    |  |   | (77     | ) |  |   | (171    | )
|                                         |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total other income                       |  |                                 | 1,104  |   |                                |   | 847     |      |  |   | 3,007   |   |  |   | 1,947   |  
|                                         |  |                                 |        |  
|(Loss) income before income taxes        |  |                                 | (4,145 | ) |                                |   | 29,017  |      |  |   | (37,144 | ) |  |   | (8,117  | )
|                                         |  |                                 |        |  
|Income tax (benefit) expense             |  |                                 | (127   | ) |                                |   | 17,507  |      |  |   | (3,361  | ) |  |   | 2,172   |  
|                                         |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net (loss) income                        |  | $                               | (4,018 | ) |                                | $ | 11,510  |      |  | $ | (33,783 | ) |  | $ | (10,289 | )
|                                         |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|BASIC NET (LOSS) INCOME PER SHARE        |  | $                               | (0.11  | ) |                                | $ | 0.33    |      |  | $ | (0.94   | ) |  | $ | (0.29   | )
|                                         |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|DILUTED NET (LOSS) INCOME PER SHARE      |  | $                               | (0.11  | ) |                                | $ | 0.32    |      |  | $ | (0.94   | ) |  | $ | (0.29   | )
|                                         |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|WEIGHTED AVERAGE SHARES USED TO COMPUTE: |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic net (loss) income per share        |  |                                 | 35,845 |   |                                |   | 35,043  |      |  |   | 35,864  |   |  |   | 35,245  |  
|Diluted net (loss) income per share      |  |                                 | 35,845 |   |                                |   | 35,608  |      |  |   | 35,864  |   |  |   | 35,245  |  

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)



|                                                                            |  |                                 |          |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | ------- | -
|                                                                            |  | Nine Months Ended September 30, |         
|                                                                            |  | 2007                            |          |   | 2006 |  
|Cash flows from operating activities:                                       |  |                                 |          |   |      |   |         |  
|Net loss                                                                    |  | $                               | (33,783  | ) |      | $ | (10,289 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |          |   |      |   |         |  
|Depreciation and amortization                                               |  |                                 | 8,556    |   |      |   | 10,806  |  
|Stock-based compensation expense                                            |  |                                 | 5,279    |   |      |   | 6,947   |  
|Sabbatical leave benefit                                                    |  |                                 | (120     | ) |      |   |        |  
|Lease abandonment charges                                                   |  |                                 | 577      |   |      |   |        |  
|Excess tax benefit from employee stock plans                                |  |                                 |         |   |      |   | (916    | )
|Other non-cash expense                                                      |  |                                 | 68       |   |      |   | 184     |  
|Loss (gain) on asset disposition                                            |  |                                 | 594      |   |      |   | (45,673 | )
|Changes in assets and liabilities:                                          |  |                                 |          |   |      |   |         |  
|Accounts receivable, net                                                    |  |                                 | (7,543   | ) |      |   | 20,346  |  
|Inventories, net                                                            |  |                                 | 3,292    |   |      |   | (12,294 | )
|Prepaid expenses and other assets                                           |  |                                 | 2,859    |   |      |   | 279     |  
|Other non-current assets                                                    |  |                                 | 545      |   |      |   |        |  
|Deferred tax assets & liabilities                                           |  |                                 | (167     | ) |      |   | (4,464  | )
|Accounts payable                                                            |  |                                 | 3,059    |   |      |   | (20,736 | )
|Accrued expenses                                                            |  |                                 | (4,687   | ) |      |   | (354    | )
|Current portion of long-term obligations                                    |  |                                 | (255     | ) |      |   |        |  
|Income taxes receivable and payable                                         |  |                                 | (4,855   | ) |      |   | 9,546   |  
|Deferred revenue                                                            |  |                                 | 4,266    |   |      |   | (4,248  | )
|Other liabilities                                                           |  |                                 | 444      |   |      |   |        |  
|                                                                            |  |                                 |          |   |      |   |         |  
|Net cash used in operating activities                                       |  |                                 | (21,871  | ) |      |   | (50,866 | )
|                                                                            |  |                                 |          |   |      |   |         |  
|Cash flows from investing activities:                                       |  |                                 |          |   |      |   |         |  
|Proceeds from maturities of short-term investments                          |  |                                 | 122,269  |   |      |   | 37,174  |  
|Purchases of short-term investments                                         |  |                                 | (106,695 | ) |      |   | (44,043 | )
|Purchases of property, equipment, software and intangible assets            |  |                                 | (5,325   | ) |      |   | (9,013  | )
|Proceeds from the sale of fixed assets                                      |  |                                 | 82       |   |      |   | 70,639  |  
|Decreases (increases) of restricted cash                                    |  |                                 | 7,170    |   |      |   | (7,229  | )
|                                                                            |  |                                 |          |   |      |   |         |  
|Net cash provided by investing activities                                   |  |                                 | 17,501   |   |      |   | 47,528  |  
|                                                                            |  |                                 |          |   |      |   |         |  
|Cash flows from financing activities:                                       |  |                                 |          |   |      |   |         |  
|Payments on capital lease obligations                                       |  |                                 | (194     | ) |      |   | (28     | )
|Common stock repurchases                                                    |  |                                 |         |   |      |   | (29,999 | )
|Excess tax benefit from employee stock plans                                |  |                                 |         |   |      |   | 916     |  
|Proceeds from issuance of common stock, net of issuance costs               |  |                                 | 1,014    |   |      |   | 2,315   |  
|                                                                            |  |                                 |          |   |      |   |         |  
|Net cash provided by (used in) financing activities                         |  |                                 | 820      |   |      |   | (26,796 | )
|                                                                            |  |                                 |          |   |      |   |         |  
|Effect of exchange rate changes on cash and cash equivalents                |  |                                 | (2       | ) |      |   | 71      |  
|Net decrease in cash and cash equivalents                                   |  |                                 | (3,552   | ) |      |   | (30,063 | )
|Cash and cash equivalents, beginning of period                              |  |                                 | 30,686   |   |      |   | 65,712  |  
|                                                                            |  |                                 |          |   |      |   |         |  
|Cash and cash equivalents, end of period                                    |  | $                               | 27,134   |   |      | $ | 35,649  |  
|                                                                            |  |                                 |          |   |      |   |         |  

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 nine months ended
September 30, 2007, are not necessarily indicative of the results that may be expected for the year ending December 31, 2007, or any other period.

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 nine months ended September 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 EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                                              |  | 2007                            |        |   | 2006                           |   |        | 2007 |  |   | 2006    |  
|Numerator:                                                                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net (loss) income                                                                             |  | $                               | (4,018 | ) |                                | $ | 11,510 |      |  | $ | (33,783 | ) |  | $ | (10,289 | )
|Denominator:                                                                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Weighted-average common stock outstanding                                                     |  |                                 | 35,845 |   |                                |   | 35,212 |      |  |   | 35,864  |   |  |   | 35,478  |  
|Less: weighted-average shares subject to repurchase                                           |  |                                 |       |   |                                |   | (25    | )    |  |   |        |   |  |   | (26     | )
|Less: shares held in escrow                                                                   |  |                                 |       |   |                                |   | (144   | )    |  |   |        |   |  |   | (207    | )
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Weighted-average shares used in computing basic net (loss) income per share                   |  |                                 | 35,845 |   |                                |   | 35,043 |      |  |   | 35,864  |   |  |   | 35,245  |  
|Dilutive potential common shares used in computing diluted net (loss) income per share        |  |                                 |       |   |                                |   | 565    |      |  |   |        |   |  |   |        |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total weighted-average number of shares used in computing diluted net (loss) income per share |  |                                 | 35,845 |   |                                |   | 35,608 |      |  |   | 35,864  |   |  |   | 35,245  |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  



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Sigmatel, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)



The following weighted average 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 EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|                                 |  | 2007                            |  | 2006                           |  | 2007  |  | 2006 
|Options to purchase common stock |  | 4,752                           |  | 4,456                          |  | 4,954 |  | 5,333
|Restricted stock units           |  | 390                             |  | 191                            |  | 427   |  | 226  
|                                 |  |                                 |  |                                |  |       |  |      
|                                 |  | 5,142                           |  | 4,647                          |  | 5,381 |  | 5,559
|                                 |  |                                 |  |                                |  |       |  |      

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 Companys 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 $1.5 million and $5.3 million in the three and nine months ended September 30, 2007
for stock based compensation. This expense includes $1.2 million for stock options, $0.2 million for RSUs, and $0.1 million for the ESPP in the three months ended September 30, 2007. The table below presents the costs recorded related to
stock-based compensation for the three and nine months ended September 30, 2007 and 2006, respectively (amounts shown are in thousands):



|                                  |  |                                 |       |                                |   |       |  |      |       |  |   |      
|--------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                  |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|                                  |  | 2007                            |       | 2006                           |   | 2007  |  | 2006
|Research and development          |  | $                               | 1,041 |                                | $ | 1,251 |  | $    | 3,804 |  | $ | 4,622
|Sales, general and administrative |  |                                 | 448   |                                |   | 632   |  |      | 1,475 |  |   | 2,325
|                                  |  |                                 |       |                                |   |       |  |      |       |  |   |      
|Total stock-based compensation    |  | $                               | 1,489 |                                | $ | 1,883 |  | $    | 5,279 |  | $ | 6,947
|                                  |  |                                 |       |                                |   |       |  |      |       |  |   |      

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; 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 has historically calculated the expected term using the simplified method, as prescribed in Staff
Accounting Bulletin No. 107, Share-Based Payment. The Company used the simplified method for the first two fiscal quarters of 2007. Beginning in the third quarter of 2007, the Company began using historical exercise activity
and other factors to determine the expected term. 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 nine months ended September 30, 2007
and 2006, were estimated using the Black-Scholes option pricing model with the following assumptions:



|                    |  |                                 |  |                                |  |            |  |           
|------------------- |  | ------------------------------- |  | ------------------------------ |  | ---------- |  | ----------
|                    |  | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|                    |  | 2007                            |  | 2006                           |  | 2007       |  | 2006      
|Dividend yield      |  |                                |  |                               |  |           |  |          
|Expected life       |  | 4.5 years                       |  | 4.5 years                      |  | 4.5 years  |  | 4.5 years 
|Expected volatility |  | 64%                             |  | 69%                            |  | 64%        |  | 60  69%  
|Risk-free rate      |  | 4.2%                            |  | 4.9%                           |  | 4.2  4.7% |  | 4.6  5.0%



8



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##### Table of Contents

Sigmatel, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)



ESPP

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



|                    |  |                                 |  |                                |  |            |  |           
|------------------- |  | ------------------------------- |  | ------------------------------ |  | ---------- |  | ----------
|                    |  | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 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%                           |  | 4.7  5.1% |  | 4.4  5.0%

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



|                                            |  |        |   |  |                                       |      
|------------------------------------------- |  | ------ | - |  | ------------------------------------- | -----
|Stock Options Under the 1995 and 2003 Plans |  | Shares |   |  | Weighted Average ExercisePrice       
|Outstanding at December 31, 2006            |  | 5,112  |   |  | $                                     | 15.60
|Granted                                     |  | 1,432  |   |  |                                       | 3.55 
|Exercised                                   |  | (121   | ) |  |                                       | 1.36 
|Cancelled or expired                        |  | (1,659 | ) |  |                                       | 17.11
|                                            |  |        |   |  |                                       |      
|Outstanding at September 30, 2007           |  | 4,764  |   |  | $                                     | 11.83
|                                            |  |       
|Restricted Stock Units                      |  | Shares |   |  | Weighted AverageGrant Date Fair Value
|Nonvested at December 31, 2006              |  | 278    |   |  | $                                     | 7.30 
|Granted                                     |  | 259    |   |  |                                       | 3.55 
|Vested                                      |  | (40    | ) |  |                                       | 8.34 
|Cancelled or expired                        |  | (98    | ) |  |                                       | 5.92 
|                                            |  |        |   |  |                                       |      
|Nonvested at September 30, 2007             |  | 399    |   |  | $                                     | 5.10 

During the nine month ended September 30, 2007, 40,223 RSUs vested. The Company had $8.2
million of total unrecognized compensation cost related to stock options and RSUs at September 30, 2007, that is expected to be recognized over a weighted-average period of 1.3 years. There was no stock compensation cost capitalized into assets
as of September 30, 2007.

For the nine months ended September 30, 2007 and 2006, approximately $1.0 million and $2.3 million,
respectively, were received for the exercise of stock options and purchase of shares under the ESPP.



9



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##### Table of Contents

Sigmatel, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)



5. Comprehensive (loss) income

The components of comprehensive (loss) income 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 EndedSeptember 30, |        | Nine Months EndedSeptember 30, |     
|                                                     |  | 2007                            |        |                                | 2006 |   | 2007   |  |   | 2006    |  
|Net (loss) income                                    |  | $                               | (4,018 | )                              |      | $ | 11,510 |  | $ | (33,783 | ) |  | $ | (10,289 | )
|Foreign currency translation adjustments, net of tax |  |                                 | (30    | )                              |      |   | 55     |  |   | 52      |   |  |   | 206     |  
|Unrealized (loss) gain on securities                 |  |                                 | (1     | )                              |      |   | 1      |  |   | 1       |   |  |   | 20      |  
|                                                     |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |         |  
|Total comprehensive (loss) income                    |  | $                               | (4,049 | )                              |      | $ | 11,566 |  | $ | (33,730 | ) |  | $ | (10,063 | )
|                                                     |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |         |  

6. Restricted Cash and Short-term Investments

Short-term investments at September 30, 2007 and December 31, 2006, consisting of corporate, state and municipal securities, were acquired at an
aggregate cost of $47.2 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.

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



|                               |  |                   |        |                  |   |       
|------------------------------ |  | ----------------- | ------ | ---------------- | - | ------
|                               |  | September 30,2007 |        | December 31,2006
|Available-for-sale securities: |  |                   |        |                  |   |       
|Auction-rate preferred notes   |  | $                 | 46,000 |                  | $ | 59,500
|Variable-rate demand notes     |  |                   |       |                  |   | 3,300 
|Corporate notes                |  |                   | 498    |                  |   |      
|Commercial paper               |  |                   | 739    |                  |   |      
|                               |  |                   |        |                  |   |       
|Total investments              |  |                   | 47,237 |                  |   | 62,800
|Less: unrealized (gain) loss   |  |                   |       |                  |   |      
|                               |  |                   |        |                  |   |       
|Total short-term investments   |  | $                 | 47,237 |                  | $ | 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 September 30, 2007, $1.2 million of liquid investments mature in more than three months, but less than one year, and
$46.0 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):



|                       |  |                   |        |                  |   |       
|---------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                       |  | September 30,2007 |        | December 31,2006
|Work in process        |  | $                 | 7,152  |                  | $ | 5,567 
|Finished goods         |  |                   | 10,350 |                  |   | 15,227
|                       |  |                   |        |                  |   |       
|Total inventories, net |  | $                 | 17,502 |                  | $ | 20,794
|                       |  |                   |        |                  |   |       

At September 30, 2007 and December 31, 2006, the Companys reserve for slow-moving
and obsolete inventory was approximately $2.7 million and $3.4 million, respectively. The Company monitors and analyzes its inventory for obsolescence, adjusts this reserve accordingly, and as a part of this analysis, the Company decreased the
reserve by approximately $1.9 million for inventory that was scrapped or sold, and increased the reserve by $1.2 million for slow moving inventory, resulting in a net decrease of $0.7 million during the nine months ended September 30, 2007.



10



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##### Table of Contents

Sigmatel, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)



8. Intangible Assets

Intangible assets consist of the following (in thousands):



|                                           |  |                      |        |                         |   |         |     |  |                      |        |                         |   |        |     |   |        |   |  |   |       
|------------------------------------------ |  | -------------------- | ------ | ----------------------- | - | ------- | --- |  | -------------------- | ------ | ----------------------- | - | ------ | --- | - | ------ | - |  | - | ------
|                                           |  | September 30, 2007   |        | December 31, 2006      
|                                           |  | Gross CarryingAmount |        | AccumulatedAmortization |   |         | Net |  | Gross CarryingAmount |        | AccumulatedAmortization |   |        | Net
|Intangible assets subject to amortization: |  |                      |        |                         |   |         |     |  |                      |        |                         |   |        |     |   |        |   |  |   |       
|                                           |  |                      |        |                         |   |        
|Developed product technology               |  |                      | 8,212  |                         |   | (2,851  | )   |  |                      | 5,361  |                         |   | 8,212  |     |   | (1,825 | ) |  |   | 6,387 
|                                           |  |                      |        |                         |   |        
|Trademarks and trade names                 |  |                      | 500    |                         |   | (200    | )   |  |                      | 300    |                         |   | 500    |     |   | (125   | ) |  |   | 375   
|                                           |  |                      |        |                         |   |        
|Patents                                    |  |                      | 4,440  |                         |   | (1,140  | )   |  |                      | 3,300  |                         |   | 3,703  |     |   | (689   | ) |  |   | 3,014 
|                                           |  |                      |        |                         |   |        
|Licenses to manufacture and other          |  |                      | 12,244 |                         |   | (6,182  | )   |  |                      | 6,062  |                         |   | 9,870  |     |   | (4,276 | ) |  |   | 5,594 
|                                           |  |                      |        |                         |   |         |     |  |                      |        |                         |   |        |     |   |        |   |  |   |       
|                                           |  | $                    | 25,396 |                         | $ | (10,373 | )   |  | $                    | 15,023 |                         | $ | 22,285 |     | $ | (6,915 | ) |  | $ | 15,370
|                                           |  |                      |        |                         |   |         |     |  |                      |        |                         |   |        |     |   |        |   |  |   |       

Intangible asset amortization expense for the three months ended September 30, 2007 and 2006
was $1.2 million and $1.8 million, respectively, and $3.5 million and $5.5 million for the nine months ended September 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 |  | $      | 1,158 
|For the year ending December 31, 2008             |  |        | 4,394 
|For the year ending December 31, 2009             |  |        | 3,633 
|For the year ending December 31, 2010             |  |        | 3,211 
|For the year ending December 31, 2011 and beyond  |  |        | 2,627 
|                                                  |  |        |       
|Total remaining estimated amortization expense    |  | $      | 15,023
|                                                  |  |        |       

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 net of estimated sub-lease rental income, 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.

During the third quarter of 2006, the Company completed the sale of its PC audio codec product line to Integrated Device Technology, Inc.
(IDT), for total consideration of $81.5 million and recorded a pre-tax gain of $45.6 million that is included in the gain on disposition of assets in the condensed consolidated statements of operations. The consideration consisted of
$72.0 million in cash, $5.0 million in accounts receivable retained by the Company, and $4.5 million in accounts payable assumed by IDT. In connection with the sale, the Company and IDT



11



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##### Table of Contents

Sigmatel, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)



entered into several ancillary agreements, including a transition services agreement designed to ensure a smooth transition of the PC audio codec product
line to IDT, and an intellectual property license agreement pursuant to which IDT received rights to certain intellectual property being retained by SigmaTel related to the PC audio codec product line. The disposal of these assets did not meet the
criteria established for recognition as discontinued operations under SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

10. Income Taxes

The Companys effective tax rate was 3.0% and 60.3% for the three months ended
September 30, 2007 and 2006, respectively, and 9.0% and (26.8)% for the nine months ended September 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 September 30, 2007, the Companys effective tax rate estimate for the year ended December 31, 2007 was 9.0%. 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 September 30,
2006, the Companys effective tax rate estimate for the year ended December 31, 2006 was 5.5%. 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, one time benefits related to a change in the Companys international tax strategy, and the effect of the allocation of non-deductible goodwill to the gain on the IDT transaction. The gain on the IDT
transaction resulted in tax expense of $21.3 million, all of which was recorded as a discrete period expense in the third quarter of 2006 in accordance with provisions of SFAS No. 109, Accounting for Income Taxes.

During the second quarter of 2006, the Company changed its international tax strategy (intellectual property or IP Migration strategy). As a
result, the Company made a voluntary tax election that changed the tax status of the Companys Cayman subsidiary thereby causing a deemed liquidation of the subsidiary for US federal income tax purposes. This resulted in a one-time benefit of
$9.3 million that was reported as a discrete period tax benefit in accordance with the provisions of SFAS No. 109,Accounting for Income Taxes. The change in the Companys tax strategy caused a significant change in the
Companys estimate of its effective tax rate for the year ended December 31, 2006.

The Company recognized certain tax benefits
related to equity compensation in the amount of zero and $0.2 million during the three months ended September 30, 2007 and 2006. Tax benefits of zero and $0.5 million were recognized during the nine months ended September 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 unrecognized tax benefit was offset by a receivable of $1.6
million, which was classified as a long term receivable. As of September 30, 2007, the gross amount of unrecognized tax benefits was $8.1 million, of which $4.8 million is included in long term liabilities, $0.5 million is included in current
liabilities, and $2.9 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 $2.4 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 September 30, 2007, $2.8 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 on taxes that would be payable.



12



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##### Table of Contents

Sigmatel, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)



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.

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 was 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 18 months, ending March 27,
2009. As of September 30, 2007, $0.6 million of liabilities related to the severance of the Companys former CEO were included in condensed consolidated balance sheet. As of September 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.

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



13



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##### Table of Contents

Sigmatel, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)



(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.



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|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 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, and for the digital television market in the third quarter of 2006. 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 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 $33.8
million for the nine months ended September 30, 2007, and we will likely incur net losses in the future. We have faced a number of challenges that have adversely 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, was appointed as our President and
Chief Executive Officer upon Mr. Edgertons resignation. In January 2007, we announced the refocus of our business on our three core markets: portable multimedia players; printers; and, digital televisions. We also announced immediate
steps to reduce our operating costs through cost control measures and reductions in force, to be implemented through the third quarter of 2007. These cost cutting measures were completed in the third quarter of 2007 as planned. As we implemented
these cost reductions, we remained focused on retaining our key technical talent and preserving the integrity of our core product offerings. 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.

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



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hard disk-based digital multimedia players, in October 2005. Due to delays associated with 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 assure you 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 intense
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 delays associated with our 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 from 2004 through early 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 result in higher gross margins than
indirect sales, but also involve 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 EndingSeptember 30, |   |  | Nine Months EndingSeptember 30, |  
|                                    |  | 2007                             |   |  | 2006                            |   |  | 2007 |   |  | 2006 |  
|Creative Technology Ltd             |  | 22.3                             | % |  | 25.9                            | % |  | 17.8 | % |  | 19.6 | %
|A-Max Technology Co., Ltd.          |  | 15.3                             | % |  | 10.2                            | % |  | *    |   |  | *    |  
|Samsung Electronics Taiwan Co., Ltd |  | *                                |   |  | *                               |   |  | 12.3 | % |  | *    |  

---

|* | 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 98.8% and 98.5% for the
three months ended September 30, 2007 and 2006, respectively, and 95.9% and 99.0% for the nine months ended September 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 EndingSeptember 30, |   |  | Nine Months EndingSeptember 30, |  
|                |  | 2007                             |   |  | 2006                            |   |  | 2007  |   |  | 2006  |  
|China/Hong Kong |  | 57.1                             | % |  | 38.8                            | % |  | 52.6  | % |  | 29.9  | %
|Taiwan          |  | 16.2                             |   |  | 27.5                            |   |  | 21.9  |   |  | 39.9  |  
|Singapore       |  | 23.1                             |   |  | 26.5                            |   |  | 19.1  |   |  | 20.3  |  
|United States   |  | 1.2                              |   |  | 1.5                             |   |  | 4.1   |   |  | 1.0   |  
|Other           |  | 2.4                              |   |  | 5.7                             |   |  | 2.3   |   |  | 8.9   |  
|                |  |                                  |   |  |                                 |   |  |       |   |  |       |  
|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. See Note 9 to Notes to Condensed Consolidated Financial Statements for additional information.

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. With the cost reduction measures that we announced in January 2007 now fully implemented, our research and development expenses may
increase in absolute dollars as we continue to invest in research and development activities to develop new products to be competitive in the future; 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, 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. With the cost reduction measures that we announced in January 2007 now fully implemented, we expect that selling, general and administrative expenses will remain at a similar level for the near future, although such expenses
as a percentage of revenue may fluctuate. 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 EndedSeptember 30, |    |  | Nine Months EndedSeptember 30, |  
|                                     |  | 2007                            |    |  | 2006                           |   |  | 2007  |    |  | 2006  |   
|Revenues, net                        |  | 100.0                           | %  |  | 100.0                          | % |  | 100.0 | %  |  | 100.0 | % 
|Cost of goods sold                   |  | 57.2                            |    |  | 61.8                           |   |  | 60.6  |    |  | 58.3  |   
|                                     |  |                                 |    |  |                                |   |  |       |    |  |       |   
|Gross Profit                         |  | 42.8                            |    |  | 38.2                           |   |  | 39.4  |    |  | 41.7  |   
|                                     |  |                                 |    | 
|Operating expenses:                  |  |                                 |    |  |                                |   |  |       |    |  |       |   
|Research and development             |  | 39.7                            |    |  | 52.0                           |   |  | 55.3  |    |  | 56.4  |   
|Selling, general and administrative  |  | 15.8                            |    |  | 25.1                           |   |  | 26.2  |    |  | 31.1  |   
|Loss (gain) on disposition of assets |  |                                |    |  | (101.5                         | ) |  | 0.6   |    |  | (37.5 | ) 
|                                     |  |                                 |    |  |                                |   |  |       |    |  |       |   
|Total operating expenses (income)    |  | 55.5                            |    |  | (24.4                          | ) |  | 82.1  |    |  | 50.0  |   
|                                     |  |                                 |    |  |                                |   |  |       |    |  |       |   
|Operating loss (income)              |  | (12.7                           | )  |  | 62.6                           |   |  | (42.7 | )  |  | (8.3  | ) 
|                                     |  |                                 |    | 
|Other income (expense):              |  |                                 |    |  |                                |   |  |       |    |  |       |   
|Interest income, net                 |  | 2.5                             |    |  | 2.0                            |   |  | 3.3   |    |  | 1.7   |   
|Foreign exchange gain (loss)         |  | 0.1                             |    |  | (0.1                           | ) |  | (0.1  | )  |  | (0.1  | ) 
|                                     |  |                                 |    |  |                                |   |  |       |    |  |       |   
|Total other income                   |  | 2.6                             |    |  | 1.9                            |   |  | 3.2   |    |  | 1.6   |   
|                                     |  |                                 |    |  |                                |   |  |       |    |  |       |   
|(Loss) income before income taxes    |  | (10.1                           | )  |  | 64.5                           |   |  | (39.5 | )  |  | (6.7  | ) 
|Income tax (benefit) expense         |  | (0.3                            | )  |  | 38.9                           |   |  | (3.5  | )  |  | 1.8   |   
|                                     |  |                                 |    |  |                                |   |  |       |    |  |       |   
|Net (loss) income                    |  | (9.8                            | )% |  | 25.6                           | % |  | (36.0 | )% |  | (8.4  | )%
|                                     |  |                                 |    |  |                                |   |  |       |    |  |       |   

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

Revenues, net. Revenues for the three months ended September 30, 2007, were $41.2 million compared to $45.0 million for
the three months ended September 30, 2006, a decrease of 8.5%. This decrease was due to decreased sales of our portable multimedia SoCs and to the sale of our audio codec product line to IDT in the third quarter of 2006, as well as decreased
average selling prices. Revenues from the sale of our portable multimedia SoCs accounted for approximately 75.6% of total revenue for the three months ended September 30, 2007, while our multi function printer ICs (MFP) revenue
comprised approximately 16.3% of total revenue for the period.

Portable Multimedia SoCs. Revenues from the sale of our portable
multimedia SoCs decreased 14.6% due to 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 segments of the market. We expect our 36XX and
37XX families of 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 increased 93.2% for the three months ended September 30, 2007 compared to the three months ended September 30, 2006. The increase was due to shipments resulting from
design wins with a new key customer.

Audio Codecs and Other Products. Revenues from the sale of our audio codecs decreased by 14.3%
for the three months ended September 30, 2007, compared to the three months ended September 30, 2006, 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 September 30, 2007. Revenues from the PC Audio product line totaled $3.5 million for the three months ended September 30,
2006. Revenues from other products, such as our TV audio products, increased due to a design win with a large customer.



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Revenues from Significant Customers. Sales to Creative Technology decreased to 22.3% of total
revenues during the three months ended September 30, 2007, from 25.9% of total revenues during the three months ended September 30, 2006, due to an increase in revenue from other customers as a percentage of total revenues. Sales to A-Max
increased to 15.3% of total revenues during the three months ended September 30, 2007, from 10.2%, during the three months ended September 30, 2006 due to a design win with a new key customer in the consumer electronics market segment.

Gross Profit. Gross profit as a percentage of revenues, or gross margin, was 42.8% for the three months ended September 30,
2007, compared with 38.2% for the three months ended September 30, 2006. The increase in gross margin was primarily due to reduced unit costs for inventory sold.

Research and Development. Research and development expenses decreased in total dollars to $16.3 million, or 39.7% of revenues, for the three months ended September 30, 2007, from $23.4 million, or 52.0% of
revenues, for the three months ended September 30, 2006. This dollar decrease of $7.1 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 $6.6 million, or 15.8% of revenue, for the three months ended September 30, 2007, compared to $11.3 million, or 25.1% of revenues, for the three months
ended September 30, 2006. This dollar decrease of $4.7 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 in the third quarter of 2006,
decreased litigation expense and cost-cutting measures recently implemented.

Gain on Asset Disposition. 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 and recorded a pre-tax gain of $45.6 million that is included in the gain on disposition
of assets in the condensed consolidated statements of operations. The consideration consisted of $72.0 million in cash, $5.0 million in accounts receivable which we retained, and $4.5 million in accounts payable assumed by IDT.

Stock Based Compensation

We
recognized $1.5 million in the three months ended September 30, 2007 for stock based compensation, compared to $1.9 million for the three months ended September 30, 2006. For three months ended September 30, 2007, this expense
included $1.2 million for stock options, $0.2 million for RSUs, and $0.1 million for our ESPP. The table below presents the costs recorded in the respective line items in the statement of operations related to stock based compensation for the three
months ended September 30, 2007 and 2006, (amounts shown are in thousands):



|                                  |  |                                 |       |      |      
|--------------------------------- |  | ------------------------------- | ----- | ---- | -----
|                                  |  | Three months endedSeptember 30,
|                                  |  | 2007                            |       | 2006
|Research and development          |  | $                               | 1,041 |      | 1,251
|Sales, general and administrative |  |                                 | 448   |      | 632  
|                                  |  |                                 |       |      |      
|Total stock-based compensation    |  | $                               | 1,489 |      | 1,883
|                                  |  |                                 |       |      |      

Interest Income. Interest income increased to $1.1 million for the three months ended
September 30, 2007, from $0.9 million for the three months ended September 30, 2006. This was due to an increase in available interest rates, 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 $0.1 million for the three months ended September 30, 2007, which represents a decrease from the income tax expense of $17.5 million we recognized for the three months ended September 30, 2006. This decrease was primarily due to a the
taxable gain on the disposition



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of assets in the IDT transaction in the three months ended September 30, 2006, offset by the change in the estimate of our effective tax rate applied to
our loss before income taxes. At September 30, 2007, our effective tax rate estimate for the year ended December 31, 2007, was 9.0%. 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 September 30, 2006, our effective
tax rate estimate for the year ended December 31, 2006 was 5.5%. 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, one time benefits related to unwinding our intellectual property (IP) or IP migration strategy in the second quarter of 2006, and the effect of the allocation of non-deductible goodwill to the gain on the IDT transaction.
The gain on the IDT transaction resulted in tax expense of $21.3 million, all of which was recorded as a discrete period expense in the third quarter of 2006 in accordance with provisions of SFAS No. 109, Accounting for Income Taxes.

Comparison of Nine Months Ended September 30, 2007 to Nine Months Ended September 30, 2006

Revenues, net. Revenues for the nine months ended September 30, 2007, were $93.9 million compared to $121.8 million for the nine months ended
September 30, 2006, a decrease of 22.9%. This decrease was primarily due to the 59.0% decrease in sales of our audio codecs as a result of the sale of our PC audio product line in July 2006, therefore we had no revenue from PC Audio product
line in the nine months ended September 30, 2007, and a 22.4% decrease from the sale of our portable multimedia SoCs due to decreased average selling prices. Revenues from our TV audio codecs increased to 8.2% of total revenue in the nine
months ended September 30, 2007. Revenues from the sale of our portable multimedia SoCs accounted for approximately 74.1% of total revenue for the nine months ended September 30, 2007, while MFP revenue comprised approximately 16.9% of
total revenue for the period.

Portable Multimedia SoCs. The decrease of 22.5% in revenues from the sale of our portable multimedia
SoCs was primarily due to 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 segments of the market. We expect our 36XX and 37XX
families of 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 increased 29.0% for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. The increase was due to increased units shipped and 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 nine months ended
September 30, 2007. Revenues from the PC Audio product line totaled $18.9 million for the nine months ended September 30, 2006. Revenues from our TV audio products increased due to a design win with a large customer.

Revenues from Significant Customers. Sales to Creative Technology decreased to 17.8% of total revenues during the nine months ended
September 30, 2007, from approximately 19.6% of total revenues during the nine months ended September 30, 2006, due to an increase in the revenue of other customers as a percentage of total revenues. Sales to Samsung increased to
approximately 12.3% of total revenues during the nine months ended September 30 2007, from less than 10% of total revenues, during the nine months ended September 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.

Gross Profit. Gross profit as a percentage of
revenues, or gross margin, was 39.4% for the nine months ended September 30, 2007, compared with 41.7% for the nine months ended September 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.



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Research and Development. Research and development expenses decreased in total dollars to $51.9
million, or 55.3% of revenues, for the nine months ended September 30, 2007, from $68.7 million, or 56.4% of revenues, for the nine months ended September 30, 2006. This dollar decrease of $16.8 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 $24.7 million, or 26.2% of revenue, for the nine
months ended September 30, 2007 compared to $37.9 million, or 31.1% of revenues, for the nine months ended September 30, 2006. This dollar decrease of $13.2 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.

Gain on Asset Disposition. 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 and recorded a pre-tax gain of $45.6 million that is included in the gain on disposition of assets in the condensed consolidated statements of operations. The consideration
consisted of $72.0 million in cash, $5.0 million in accounts receivable which we retained, and $4.5 million in accounts payable assumed by IDT.

Stock Based Compensation.We recognized $5.3 million in the nine months ended September 30, 2007 for stock based compensation, compared to $6.9 million for the nine months ended September 30, 2006. For the nine months
ending September 30, 2007, this expense included $4.5 million for stock options, $0.5 million for RSUs, and $0.3 million for our ESPP. The table below presents the costs recorded in the respective line items in the statement of operations
related to stock based compensation for the nine months ended September 30, 2007 and 2006 (amounts shown are in thousands):



|                                  |  |                                |       |      |   |      
|--------------------------------- |  | ------------------------------ | ----- | ---- | - | -----
|                                  |  | Nine months endedSeptember 30,
|                                  |  | 2007                           |       | 2006
|Research and development          |  | $                              | 3,804 |      | $ | 4,622
|Sales, general and administrative |  |                                | 1,475 |      |   | 2,325
|                                  |  |                                |       |      |   |      
|Total stock-based compensation    |  | $                              | 5,279 |      | $ | 6,947
|                                  |  |                                |       |      |   |      

Interest Income. Interest income increased to $3.1 million for the nine months ended
September 30, 2007, from $2.1 million for the nine months ended September 30, 2006. This was due to an increase in available interest rates, and from a shift in investment strategy that concentrates our investments in taxable securities as
a result of our current estimated tax loss position for the fiscal year 2007.

Income Tax Benefit. We recognized an income tax
benefit of $3.4 million for the nine months ended September 30, 2007, which represents a decrease from the income tax expense of $2.2 million we recognized for the nine months ended September 30, 2006. This decrease was primarily due to a
change in the estimate of our effective tax rate, the taxable gain on the disposition of assets in the IDT transaction in the nine months ended September 30, 2006, offset by the benefits recognized due to changing our international tax strategy
in the nine months ended September 30, 2006. At September 30, 2007, our effective tax rate estimate for the year ended December 31, 2007, was 9.0%. 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
September 30, 2006, our effective tax rate estimate for the year ended December 31, 2006 was 5.5%. 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, one time benefits related to unwinding our IP migration strategy in the second quarter of 2006, and the effect of the allocation of non-deductible goodwill to the gain on the IDT transaction. The gain on
the IDT transaction resulted in tax expense of $21.3 million, all of which was recorded as a discrete period expense in the third quarter of 2006 in accordance with provisions of SFAS No. 109, Accounting for Income Taxes.



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During the nine months ended September 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 nine months ended September 30, 2006.

Liquidity and Capital Resources

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



|                             |  |                   |        |                  |   |                    |  |   |         |  
|---------------------------- |  | ----------------- | ------ | ---------------- | - | ------------------ |  | - | ------- | -
|                             |  | September 30,2007 |        | December 31,2006 |   | Increase(Decrease) | 
|Working capital              |  | $                 | 78,708 |                  | $ | 108,569            |  | $ | (29,861 | )
|Cash and cash equivalents(1) |  |                   | 27,134 |                  |   | 30,686             |  |   | (3,552  | )
|Short-term investments(1)    |  |                   | 47,237 |                  |   | 62,800             |  |   | (15,563 | )

---

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

Our working capital as of September 30, 2007, represents a decrease from our working capital as of December 31, 2006 primarily due to the $21.9
million of cash used in our operations and the $5.3 million used for equipment and intangible asset purchases in the nine months ended September 30, 2007.

We have historically financed our operations primarily through cash from our financing 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 September 30, 2007, consisted of $74.2 million in cash, cash equivalents, and short-term investments. As of September 30, 2007, our
short-term investments consisted of state and municipal debt securities, primarily auction-rate preferred notes, corporate bonds and commercial paper.

Operating Activities. Net cash used in operations was $21.9 million during the nine months ended September 30, 2007, compared to $50.9 million for the nine months ended September 30, 2006. Net cash
used in operating activities decreased in the nine months ended September 30, 2007, compared to the nine months ended September 30, 2006, primarily due to reductions in research and development and selling, general and administrative
expenses. Other factors that affected our cash used in operations included an increase in accounts receivable of $7.5 million during the nine months ended September 30, 2007, due to increases in revenues and the timing of customer payments,
compared to a decrease of $20.3 million, during the nine months ended September 30, 2006. Our inventory decreased by $3.3 million in the nine months ended September 30, 2007, compared to an increase of $12.3 million in the nine months
ended September 30, 2006, as a result of increased management focus on reducing inventory levels. Our accounts payable increased $3.0 million during the nine months ended September 30, 2007 due to increased inventory purchases for the most
recent three months to meet expected demand. This compares to a decrease of $20.7 million in accounts payable during the nine months ended September 30, 2006.

The increase in deferred revenue and other liabilities of approximately $4.7 million during the nine months ended September 30, 2007, includes a $4.3 million increase in deferred revenue and a $0.4 million
increase in deferred rent and other liabilities. The increase in deferred revenue is primarily due to distributors building inventories for expected demand.

Investing Activities. Our investing activities provided cash of $17.5 million and $47.2 million during the nine months ended September 30, 2007 and 2006, respectively. Investing activities during the nine
months ended September 30, 2007 primarily represented net proceeds from short-term investments.

The fair value of our investments in
marketable securities at September 30, 2007, was $47.3 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 our 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.



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Capital expenditures were $5.3 million and $9.0 million during the nine months ended September 30,
2007 and 2006, respectively. These expenditures during the nine months ended September 30, 2007, were incurred primarily for the purchase of engineering tools, computer equipment, software, and intangible assets.

Financing Activities. Our financing activities provided $0.8 million and used $26.8 million of cash during the nine months ended
September 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 $1.0 million and $2.3 million in proceeds from the exercise of employee stock options and our ESPP during the nine months ended September 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. 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, the amount of our net losses and our ability to return to profitability, 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).

Revenue Recognition. We recognize
revenues in accordance with Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 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



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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 nine months ended September 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. The Company has historically calculated the expected term using the simplified method, as prescribed in Staff Accounting Bulletin No. 107, Share-Based Payment. The Company
used the simplified method for the first two fiscal quarters of 2007. Beginning in the third quarter of 2007, the Company began using historical exercise activity and other factors to determine the expected term.

We continue to base our 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.

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.



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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 low
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. Our provision for income taxes includes amounts intended to satisfy unfavorable adjustments by the Internal Revenue Service and tax authorities in other jurisdictions in an
examination of our income tax returns.

Recent Accounting Pronouncements

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.

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.

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



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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).



|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
September 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 operating expenses 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 September 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.

In April 2007, we implemented a global enterprise resource planning (ERP) system to help us improve our planning and
management processes. The implementation of this system carried over into the three months ended September 30, 2007. 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 September 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



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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.



|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 $33.8 million for the nine months ended September 30, 2007 and a net loss of $109.0 million for the year ended
December 31, 2006. Our operating activities used $21.9 million of cash in the nine months ended September 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 our portable multimedia SoCs. We have in the past and expect in the future to reduce the average unit prices of
our products in anticipation of or in response to competitive pricing pressures, new product introductions by us or our competitors and due to 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, 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



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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 200 positions globally during the last 12 months, and implemented additional cost cutting measures during 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. The
implementation of this system carried over into the three months ended September 30, 2007. We have experienced, and may continue to experience challenges with 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 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 nine months ended September 30, 2007, sales to our top five customers accounted for approximately 56.3% 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.



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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 33.9% of our revenues for the nine months ended September 30, 2007, and 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. To manage these relationships properly, often requires a significant amount of sales
managements time and system resources. 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, 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



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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 74.1% of our revenues for the nine months ended September 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 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;
| | - |  | ------------------------------------------------------------------------------------------------------



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| |  |  | 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;
| | - |  | --------------------------



| |  |  | 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;
| | - |  | ------------------------------------------------------------



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| |  |  | 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.

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.



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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;
| | - |  | --------------------------------------------------------------------------



| |  |  | the availability of third-party foundry assembly and test 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



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| |  |  | 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.

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.



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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 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.



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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 95.9%
for the nine months ended September 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.

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.



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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. Although our dispute with Actions is now settled, such matters resulted in
significant legal fees and costs to us, as well as requiring significant management attention. 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 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.



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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.

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.



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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. 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. As a result of this material
weakness in our internal control over financial reporting, we took numerous steps to remediate this weakness and to improve our internal control in this area. 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 in our financial guidance, 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;
| | - |  | -------------------------------------------------------------------



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



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



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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 asset dispositions we make could
harm our financial condition and future results of operations

In connection with the sale of our PC Audio Codec product line, we
incurred various risks. This disposition and any asset 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.



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



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



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



| | (c) | The following table summarizes repurchases of our stock during the three months ended September 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
|7/1/07  7/31/07 |  | 400                                 |  | $                            | 3.49 |                                                                                |  |                                                                             | 
|8/1/07  8/31/07 |  | 513                                 |  | $                            | 2.82 |                                                                                |  |                                                                             | 
|9/1/07  9/30/07 |  | 242                                 |  | $                            | 2.65 |                                                                                |  |                                                                             | 

---

|(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.
|------- | ----------------------------------------------------

Not applicable.



|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: November 2, 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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