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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549



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FORM 10-K



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(Mark One)

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

For the fiscal year ended December 31, 2006

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)

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



|                                |  |                                     
|------------------------------- |  | ------------------------------------
|Title of each class             |  | Name of exchange on which registered
|Common Stock, $0.0001 Par Value |  | The NASDAQ Stock Market LLC         

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

None



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

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

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ̈

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

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common
equity was last sold as of the last business day of the registrants most recently completed second fiscal quarter (June 30, 2006) was $145,650,258 (assuming, for this purpose, that only directors and executive officers are deemed affiliates).

The number of shares outstanding of the registrants Common Stock, $0.0001 par value, was 35,528,928 as of January 31, 2007.

Documents Incorporated by Reference

Portions of the Proxy Statement for the registrants 2007 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.



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SIGMATEL, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS



|           |  |                                                                                                              |  |         
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | --------
|           |  |                                                                                                              |  | Page No.
|PART I:    |  |                                                                                                              |  |         
|Item 1.    |  | Business                                                                                                     |  | 4       
|Item 1A.   |  | Risk Factors                                                                                                 |  | 13      
|Item 1B.   |  | Unresolved Staff Comments                                                                                    |  | 23      
|Item 2.    |  | Properties                                                                                                   |  | 24      
|Item 3.    |  | Legal Proceedings                                                                                            |  | 24      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 25      
|           |  |                                                                                                             
|PART II:   |  |                                                                                                              |  |         
|Item 5.    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 26      
|Item 6.    |  | Selected Financial Data                                                                                      |  | 27      
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 27      
|Item 7A.   |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 40      
|Item 8.    |  | Financial Statements and Supplementary Data                                                                  |  | 40      
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 41      
|Item 9A.   |  | Controls and Procedures                                                                                      |  | 41      
|Item 9B.   |  | Other Information                                                                                            |  | 42      
|           |  |                                                                                                             
|PART III:  |  |                                                                                                              |  |         
|Item 10.   |  | Directors, Executive Officers, and Corporate Governance                                                      |  | 42      
|Item 11.   |  | Executive Compensation                                                                                       |  | 42      
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 42      
|Item 13.   |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 42      
|Item 14.   |  | Principal Accounting Fees and Services                                                                       |  | 43      
|           |  |                                                                                                             
|PART IV:   |  |                                                                                                              |  |         
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                   |  | 43      
|Signatures |  | 44                                                                                                          



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CAUTIONARY STATEMENT

Except for the historical financial information contained herein, the matters discussed in this report on Form 10-K (as well as documents incorporated herein by reference) may be considered 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 forward-looking statements are based upon current expectations that involve
risks and uncertainties and include declarations regarding the intent, belief or current expectations of us and our management and may be signified by the words believes, anticipates, plans, expects,
intends and similar expressions. 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 Risk Factors and elsewhere in this report. 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, whether as a result of new information, future events, or otherwise. All discussion in this report should be read in conjunction with our consolidated financial statements and the accompanying notes contained in this
report. Unless expressly stated or the context otherwise requires, the terms we, our, us and SigmaTel refer to SigmaTel, Inc. and its consolidated subsidiaries.

PART I



|Item 1. | Business.
|------- | ---------

Overview

We are a fabless semiconductor company that designs, develops, and markets proprietary, analog-intensive, mixed-signal integrated circuits, or ICs, for a
variety of digital multimedia products in the consumer electronics markets, including digital media players, printers, and digital televisions. We provide our customers complete, system-level solutions that include highly-integrated ICs,
customizable firmware, software development tools, reference designs, and applications support. Our focus on providing system-level solutions enables our customers to rapidly introduce and offer electronic products that are small, light-weight,
power-efficient, reliable, cost-effective, and capable of performing multiple desired functions.

We were founded in 1993 with an initial
focus on providing semiconductor design services on a contract basis. In 1995, we began developing our own IC products. In early 2001, we redirected our development efforts towards host audio codecs and portable multimedia systems on chips
(SoCs). We made our first commercial shipments of portable multimedia SoCs in 2001. The primary market for these products is the portable multimedia player market. During 2001, we also began to sell our audio codecs into the consumer
electronics market for products such as DVD players and set-top boxes. We made our first commercial shipments of both printer ICs and digital video camera ICs in the third quarter of 2005 as a result of the Oasis Semiconductor, Inc.
(Oasis) and Protocom Corporation (Protocom) acquisitions (see Note 7 of Notes to Consolidated Financial Statements).

Our principle executive offices are located at 1601 S. MoPac Expressway, Suite 100, Austin, Texas 78746 and our telephone number at that location is 512-381-3700. We also have international offices and operations in Hong Kong, Taipei,
Taiwan, Shenzhen, China, Singapore, Seoul, South Korea, Tokyo, Japan, and Cambridge, England. Our internet address is www.sigmatel.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge from our website as soon as reasonably practicable after we electronically file such material with,
or furnish it to, the Securities and Exchange Commission. Our common stock trades on the Nasdaq Global Market under the symbol SGTL. The inclusion of our website address in this report does not include or incorporate by reference into
this report any information on our website.

Industry Background

Analog ICs monitor and manipulate real world signals such as sound, light, pressure, motion, temperature, and electrical current, and are used in a wide
variety of electronic products such as Personal Computers, or PCs, cellular handsets, DVD players, digital still and video cameras, printers, automotive electronics, and medical imaging equipment. Digital ICs perform arithmetic functions on data
represented by a series of ones and zeroes, provide critical processing power, and have enabled many of the computing and communication advances of recent years. As digital systems proliferate, there is a growing need for analog functionality to
enable these digital systems to interface with the real world.

Several powerful trends are driving demand for analog-intensive,
mixed-signal ICs in electronic devices:



| |  |  | Smaller, Lighter and More Power-Efficient Portable Electronic Devices. Consumers are increasingly demanding portable electronic devices that enable them to
enjoy digital media, communicate, and compute independent of physical location. Consumers increasingly desire electronic devices that include wireless connectivity technologies, such as Wireless LAN or Bluetooth connectivity. To respond to demand
for smaller, lighter and more power-efficient portable electronic devices, manufacturers are increasingly seeking highly-integrated semiconductor solutions.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Demand for Enhanced Audio and Visual Capabilities. Increasing broadband usage, a growing selection of digital media content, such as compressed digital audio
and video files and digital photographs, and a rapid decline in the cost of electronic storage, such as flash memory, are driving consumer desire for digital media content and the devices that play such content. In addition, several developments are
driving industry growth. In April 2003, Apple Computer introduced its iTunes Music Store, and according to Apple in February 2007, its customers have purchased and downloaded more than 2 billion songs from this online service since inception. In
addition to Apples iTunes, more than a dozen Microsoft Windows Media Audio (WMA) based pay-per-download music sites have become established over the last two and a half years. These sites include MSN Music, Real Networks, Napster,
MusicMatch, Walmart, and others. Factors supporting the increase in legitimate, paid-content online music sales include (i) the recording industrys simultaneous legal challenges to free distribution of copyrighted audio content and its
cooperation with companies that distribute digital audio content and (ii) the development of protected, digital rights management plans that allow for varying payment and ownership schemes, such as direct purchases of songs or
subscription-based plans. Today, substantially all PCs, and many DVD players and digital TVs feature advanced audio capabilities such as software equalization, which enables control of sound frequencies through software, and sound spatialization,
which provides enhanced stereo effects. To continue to satisfy increasing consumer demand for high-quality audio and visual experiences, manufacturers require ICs that incorporate high-fidelity, analog circuitry for converting digital data, such as
compressed audio files, into real- world sounds, such as music.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower Cost Consumer Electronic Products and Growth in Worldwide Consumer Markets. Economic growth and increases in discretionary income in populous
developing countries, such as China, are increasing global demand for consumer electronics. At the same time, consumer electronic devices continue to become more affordable. Together, these trends are accelerating worldwide demand for consumer
electronic devices.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Integrating analog and digital components on a single, mixed-signal IC can enable manufacturers to
make portable electronic devices that are small, light-weight, power-efficient, reliable and cost-effective. However, creating mixed-signal ICs is complex. Significant experience is required to effectively partition an IC between analog and digital
functions to achieve optimal performance and cost. Moreover, combining high-speed digital circuits and sensitive analog circuits onto a single, mixed-signal IC can create electromagnetic interference, or noise, which reduces IC performance. Finally,
in contrast to digital circuit design, there are very few automated electronic design tools to effectively assist in the development and reuse of analog portions of mixed signal ICs. Instead, analog circuits usually are designed and integrated with
digital circuits through a difficult and time-consuming manual process. Years of experience are required to effectively design mixed-signal ICs, and engineers with these skills are in short supply.

Many analog IC companies offer broad product lines of general-purpose building block components. These analog components usually must be combined with
other ICs, resulting in larger and heavier products that consume more power, require larger and more complex printed circuit boards, are more expensive, and can be less reliable than SoCs that are optimized for specific product applications. Many
analog IC companies also do not have the software and firmware design capabilities or system-level expertise required to provide integrated system-level solutions to electronics manufacturers.

Manufacturers of electronic products are under increasing pressure to bring their products to market rapidly, at lower cost and with differentiated
features. In response to these pressures, manufacturers have reduced their own research and development efforts and are increasingly turning to third-party, mixed-signal IC companies that are capable of providing higher levels of integration,
greater functionality in a smaller size with lower power consumption, at a reduced total bill of materials cost. They are also seeking to work with mixed-signal IC companies with system-level expertise that are capable of supplying them with
complete hardware and software solutions to enable them to quickly introduce customized products to meet rapidly changing consumer preferences.

SigmaTels Solution

We are a provider of analog-intensive, mixed-signal ICs for a variety of digital multimedia
products in the consumer electronics markets, including digital media players, printers, and digital televisions. We offer a complete, system-level solution including highly-integrated ICs, customizable firmware, software development tools,
reference designs, and applications support.

Our analog-intensive, mixed-signal ICs provide our customers with the following benefits:

Mixed-Signal Integration Reduces Size and Cost. We are able to integrate into a single IC many of the components of an entire
electronic system or sub-system. For example, in our portable multimedia SoCs, we incorporate standard digital components such as a processor and memory, certain peripheral connections such as a USB interface, as well as proprietary analog
components such as



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analog-to-digital and digital-to-analog converters, a DC-DC converter for dynamic power management, and audio signal amplifiers. Our integration of such a
large number of analog and digital components on the same IC eliminates significant design challenges that would otherwise be faced by our customers, enabling them to reduce their overall bill of materials cost and to produce smaller, lighter, more
reliable and more power-efficient portable products. For example, A-MAX Technology, Apple, Creative Technology, Samsung and Sandisk have used our portable multimedia SoCs to produce portable multimedia players which are approximately the size of a
package of chewing gum. Further, we provide a mixed-signal system controller that integrates substantially all of the electronic processing functions of a multi-function printer product onto a single IC, significantly lowering customers bills
of materials by reducing the number of other components in their printers.

Power Management Expertise Enables Extended Battery
Life. Our ICs enhance the battery life of our customers portable devices. We integrate proprietary DC-DC conversion technology to optimize voltage levels to run different functional areas of our ICs at the minimum power necessary. We also
use proprietary design techniques to reduce power consumption, such as the partition or division of our ICs into multiple clock domains to enable us to shut off functional areas of our ICs when not in use. Further, we use highly-optimized software
and firmware to reduce the amount of processing power and memory required for a given function, further reducing power consumption. For example, some of our customers have found that their portable multimedia players that use our ICs provide up to
70 hours of battery life on a AA battery. Instead of extending battery life, many of our customers use smaller batteries, thus enabling them to significantly reduce the overall size, weight and cost of their devices.

Complete, System-Level Solution Accelerates Customer Time to Market. We enable our customers to shorten their time to market and reduce their
execution risk by offering complete system-level solutions. As a result, our customers can avoid the need to negotiate with and purchase multiple analog and digital ICs from separate vendors and engineer larger, more complex printed circuit boards,
or PCBs, required to accommodate multiple ICs. Less complex PCBs also enable our customers to reduce the time required to set up their manufacturing lines and to reduce overall assembly time, further shortening the time to market for their products.
Finally, our customers are not required to engage in the time-consuming process of writing their own firmware or software. Instead, we provide our customers with customizable firmware and software and design tools, through a software development
kit, to allow them to rapidly add features to differentiate their products.

Hardware and Software Design for Enhanced End-User
Experience. We enable our customers to offer products with superior audio quality and advanced features. Our circuit design expertise has enabled us to design highly-integrated products with low noise levels, and thus high audio quality. Our
hardware and firmware architecture, combined with our software development kit, also enables our customers to customize their products with features such as menu structure and options, configuration of buttons, and other aspects of the user
interface.

The SigmaTel Strategy

Our objective is to be a leading supplier of highly-integrated, analog-intensive, mixed-signal ICs for the consumer electronics market. To achieve this goal, we are pursuing the following strategies:

Target Multiple High-Growth Portable and Non-Portable Electronic Device Markets. By leveraging our proprietary design methodologies and extensive
experience, we intend to introduce new analog-intensive, mixed-signal ICs that are small and power-efficient. We have applied our capabilities successfully to expand into the portable multimedia player, printer, and digital television markets. We
are currently a leading supplier of portable multimedia SoCs for use in flash memory-based portable multimedia players. We believe our integration expertise and proprietary power management technology will enable us to efficiently develop new
products for existing and emerging portable device market opportunities.

Focus on Industry-Leading Customers. Many of our customers
are industry leaders in their respective markets. We are focused on developing close relationships with industry leaders to facilitate rapid adoption of our products, drive higher sales volumes, and gain greater insight into market trends to help us
more efficiently develop new products. For a given customer, we seek to expand our product opportunities both within an existing application as well as within new application segments served by these customers. In addition, our goal is to build
strong, collaborative relationships with leading original device manufacturers (ODMs) to help ensure the adoption of our products in their next generation products.

Reuse Core Technologies to Create New Products. We have designed many of the proprietary circuits contained in our mixed-signal ICs to be
reusable. By redeploying these reusable circuits, we intend to develop new ICs for use in existing or emerging applications to minimize the risk of and accelerate new product development. Our reuse of proven circuit blocks not only accelerates our
internal circuit design process, but also reduces the manufacturing risks associated with the development of new products, allowing us to realize higher product performance, reliability, and manufacturing yields.

Continue to Invest in Technology Development to Extend Market Leadership Position. We believe we have established a reputation as a technology
leader in the design and development of analog-intensive, mixed-signal ICs. We intend to extend our



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technology leadership by leveraging our talented pool of engineers and investing significant resources in recruiting and developing additional expertise in
analog-intensive, mixed-signal IC design. As of February 28, 2007, we held 79 U.S. patents and 8 international patents. We are actively expanding our intellectual property position by aggressively investing in research and development and
pursuing additional patent applications.

Capitalize on Highly-Focused Business Model. We are a fabless semiconductor company,
utilizing third parties to manufacture, assemble and test our products. This approach reduces our capital and operating requirements and enables us to focus on product development. We use standard digital CMOS technology in mature process geometries
to reduce our costs and time to market. We rely on a worldwide network of distributors and sales representatives to sell our products, as well as on direct sales efforts. We believe this approach to sales reduces our selling and marketing expenses
while enabling us to rapidly grow our business.

Recent Developments

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. 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. $7.2 million of the purchase price was deposited
into an escrow account upon closing for purposes of settling indemnification claims for the one-year period following the closing. The cash consideration was offset by $2.5 million in closing costs.

Pursuant to the terms of the sale, approximately 60 employees and associated contractors became employees of IDT. In connection with the sale, we entered
into several ancillary agreements with IDT, 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 us related to the PC audio codec product line. As part of the sale, we agreed not to engage in transactions with the PC audio codec product line for a period of two years following the
closing.

Effective December 11, 2006, Ross A. Goolsby resigned from his positions as our Vice President of Finance and Chief
Financial Officer. Mr. Goolsby held these positions since September 2001. R. Scott Schaefer, formerly our Director of Finance, was appointed as our Vice President of Finance and Chief Financial Officer effective December 11, 2006.

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 held these positions since March 2001. Phillip E. Pompa, formerly our Senior Vice President of Portable Systems Group, has been appointed as our President and Chief Executive Officer. William P.
Osborne, one of our directors since September 2001, was appointed as Chairman of the board of directors, effective January 1, 2007.

In January 2007, we announced that we are refocusing our business on our three core markets: portable multimedia players; printers; and, digital televisions. We also announced that we are immediately taking steps to reduce our operating
costs through cost control measures and reductions in force. As we implement these cost reductions, we will remain focused on retaining our key technical talent and preserving the integrity of our core product offerings. As part of this plan, we
have terminated future development efforts with respect to the digital video camera, USB and infrared peripheral, and certain consumer audio codec markets. We expect these cost cutting measures to be completed in the third quarter of 2007.

SigmaTels Markets and Products

We currently design, develop and market proprietary, analog-intensive, mixed-signal ICs for portable multimedia players, printers, and digital televisions.

Portable Multimedia SoCs

Advances in file compression technology and growth in broadband internet
usage have made it increasingly convenient to store and transfer digital multimedia files. The most common audio standard today, MP3, typically provides a greater than ten-to-one file size reduction for digital audio content. Other standards, such
as WMA, and mp3 PRO, offer even greater compression capabilities. The MPEG4 and H.264 video compression standards similarly allow for greater compression of digital video. In recent years, there has been increasing demand for products that play
similarly compressed digital multimedia files. These products require ICs to decode the compressed files into audible sounds and visible images.

Our portable multimedia SoCs are highly-integrated, battery-optimized ICs designed to encode and decode compressed multimedia files, such as MP3 and MPEG4 files. We offer a broad range of portable multimedia SoCs at various price points and
with a variety of features. Our portable multimedia SoC product offerings are currently divided into the 35XX and 36XX product families.



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The 35XX family is our third generation portable multimedia SoC, which we first introduced in the fourth
quarter of 2003. Within the 35XX family, we offer a variety of different part numbers with different price points, features and capabilities. All of our 35XX portable multimedia SoCs are based on a 75MHz processing core and mostly support
flash-based players. The more advanced products in our 35XX family of portable multimedia SoCs support MP3, WMA, JPEG and motion video playback, MP3 encoding, digital rights management, and voice recording capabilities. Our most advanced 35XX
product offerings provide for a battery life of up to fifty hours of MP3 playback, using a single AA battery and listening at medium volume levels. Sales of our 35XX portable multimedia SoCs represented a majority of our revenue for the years ended
December 31, 2004, 2005 and 2006. However, as the requirements and complexity of portable multimedia players continue to increase, and average selling prices of our 35XX portable multimedia SoCs continue to decrease, we are focusing more on our
implementation of newer-generation portable multimedia SoCs, including the 36XX family.

Our fourth generation of portable multimedia SoC,
the 36XX family of products, was first introduced in the fourth quarter of 2005. The 36XX family also encompasses a variety of different part numbers with different price points, features and capabilities. All of our 36XX portable multimedia SoCs
are based on a 200 MHz ARM9 processing core, and are designed to support both flash and hard-drive multimedia players. In addition to the features of the most advanced 35XX portable multimedia SoC, our 36XX portable multimedia SoCs offer more
advanced video playback functionality and can provide for a battery life of up to seventy hours of MP3 playback, using a single AA battery while listening at medium volume levels.

As portable multimedia players continue to evolve and offer newer, more advanced features, we will continue to evaluate our current product offerings and
to consider, and where appropriate, develop new generations of portable multimedia SoCs.

We also offer a companion product to our portable
multimedia SoCs, the SigmaTels STFM 1000, which is an FM tuner designed to provide the added capability of receiving signals from FM radio stations. The STFM 1000 was designed to use significant blocks of circuitry found on our portable
multimedia SoCs, eliminating redundant circuitry which would typically be found in an off-the-shelf FM tuner, which results in an IC that generally consumes less power and is smaller than off-the-shelf FM tuners.

Multi-Function Printer Products

We entered the
printer system controller market through our September 2005 acquisition of Oasis. Multi-function printers are complex devices capable of performing multiple tasks, such as printing, copying, scanning and receiving a facsimile. These devices require
a variety of high performance semiconductor components, multiple motor controls, print engine control, connectivity technologies, such as analog modems and universal serial bus, or USB, and extensive firmware and software.

Printer vendors face intense pressure to offer high performance products with rich features that are easy to use at attractive prices. Many vendors are
finding it is not cost-effective to develop and maintain complex printer technologies. As a result, many printer brand name companies are outsourcing some or all of the design and manufacturing of their printers to third-party contract
manufacturers.

Our multi-function printer system controller solutions include: mixed-signal ICs, extensive firmware, reference designs,
and development tools. We offer our multi-function printer system controller solutions as application-specific standard products, or ASSPs, so that a wide range of printer vendors can utilize them in their printer products. Our multi-function
printer system controller solutions provide substantially all of a printers electronic processing functionality, including image capture and processing, motor control, print engine control and connectivity with PCs, and other peripherals. By
offering ASSPs with extensive firmware, we enable our customers to rapidly introduce and market high-quality printers and other related products that offer ease of use at an attractive price. Our current printer ASSP products include our DigiColor2,
DigiColor2000, DigiColor2100, and STDC 1100 product families.

The DigiColor2 is a color multi-function printer system controller which
first went into production in the fourth quarter of 2001. In developing the DigiColor2, we reused the core technology of our earlier DigiColor1 (our first color multi-function printer system controller which first went into production in the first
quarter of 2000), increased the power of the microcontroller, and integrated additional image-processing features, USB 1.1 connectivity, and printer controller functionality which allows our multi-function printer system controller solutions to
control inkjet print heads directly.

The DigiColor2000 is a mixed-signal, color multi-function printer system controller which first went
into production in 2004. In developing the DigiColor2000, we reused the core technology of our DigiColor2 and integrated numerous additional analog and digital features, resulting in lower system cost and greater system functionality. Upgraded
features added to the DigiColor2000 include USB 2.0 and USB host support, 802.11 and IrDA wireless support, digital camera support, a scanner analog front-end, a real-time clock, and universal print controller functionality.

The DigiColor2100 is a mixed-signal, color multi-function printer system controller which first went into production in 2005. In developing the
DigiColor2100, we reused the core technology of our DigiColor2000 and integrated numerous additional features,



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resulting in greater system functionality, including direct printing of photographs and dramatically faster image processing. Updated features added to the
DigiColor 2100 include DDR DRAM support, full hardware JPEG compression and decompression, color LCD and TV interface capabilities, and support for flash memory cards like CompactFlash, SD and MemoryStick.

During 2006, we introduced the STDC1100 family of mixed-signal, color multi-function printer system controller solutions. This product family is focused
on the lower-cost segment of the printer market and is targeted at customers whose products do not require the full performance and feature set of the DigiColor2100.

Additionally, we are applying our printing and printer technologies to some new imaging markets. For example, beginning in 2005, we successfully reused our knowledge of imaging systems to develop chips to address the
digital photo frame market. This new product category allows customers to display and organize digital photographs on a flat panel by inserting a flash memory card or by directly connecting their digital camera. During 2006, we also began applying
our printer controller offerings to the dye-sublimation personal photo printer market. Our integrated solution provides advantage in those markets because of our superior image processing, our built-in connectivity solutions and our reusable
firmware stacks.

Digital Television Audio

During 2006, we introduced a new product family targeted at the digital television market. The SGTV58xx is a family of products which handle all the audio processing functions within a digital television. We integrated several functions
into one device including 9 Stereo ADC, SCART DAC, multi-function audio processor, worldwide stereo demodulator, SPDIF I/O, digital I/O, audio switch and headphone amplifier. By integrating all these functions into one device, we simplified the
board design and reduced the overall bill of material cost for the audio portion of a digital television. Our target customers included large OEMs as well as ODMs building flat-panel televisions, rear-projection televisions and larger size CRT
televisions.

Revenues From Key Product Lines

The following table sets forth our revenues for each product class which accounted for greater than 10% of our revenues during any of the last three years (Audio Codecs include both notebook and desktop PC audio codecs and consumer audio
codecs):



|                                   |  |                        |   |  |      |   |  |      |  
|---------------------------------- |  | ---------------------- | - |  | ---- | - |  | ---- | -
|                                   |  | Year EndedDecember 31, |  
|                                   |  | 2006                   |   |  | 2005 |   |  | 2004 |  
|Portable MultiMedia SoCs           |  | 75.3                   | % |  | 90.6 | % |  | 89.3 | %
|Audio Codecs(1)                    |  | 12.1                   | % |  | *    |   |  | *    |  
|Multi-Function Peripheral Products |  | 11.9                   | % |  | *    |   |  | *    |  

---

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

|(1) | Reported revenues consist primarily of revenues from our PC Audio codec product line which was sold on
July 31, 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------

Customers, Sales and Marketing

Our marketing and sales strategy is to achieve design wins with technology leaders and emerging participants in the portable multimedia player, printer and digital television markets. We rely heavily on both
distributors and direct sales efforts to market our products. Our direct and indirect customers include both OEMs and ODMs.

Many of the
leading OEMs in our markets use ODMs to manufacture their products. Accordingly, a significant portion of our revenues are based on sales to ODMs by us or our distributors. We have sold products to more than 275 direct and indirect customers during
the last twelve months. During the year ended December 31, 2006, Creative Technology, an affiliate until October 2005, contributed 18.9% of our revenues. During the year ended December 31, 2005, G.M.I. Technology, a distributor, ASUSTEK
Computer Inc., an ODM, and Creative Technology, an affiliate until October 2005, contributed 18.3%, 14.8% and 13.5% of our revenues, respectively.

We utilize independent sales representatives and distributors with locations throughout the world. These SigmaTel Qualified Distributors and Sales Representatives have been selected based on their understanding of the
mixed-signal IC marketplace and are measured on their ability to provide effective field sales support for our products. To supplement these sales representatives and distributors, we maintain direct sales offices in Texas, California,
Massachusetts, Hong Kong, Taiwan, South Korea, China, Singapore, and Japan. We also utilize application engineers to provide technical, local support and assistance to existing and potential customers in designing, testing and qualifying systems
that incorporate our products. Information about our revenues and long-lived assets in different geographic regions of the world is provided in Note 17 of our Notes to Consolidated Financial Statements.



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##### Table of Contents

##### Index to Financial Statements

Our marketing group focuses on our product strategy, product development road maps, new product
introduction process, demand assessment and competitive analysis. The group works closely with our sales and research and development groups to align our product development road maps to meet key channel technology requirements. In coordination with
our development, operations and sales groups, as well as our ODMs, OEMs and distributors, the marketing group also ensures strategically that product development activities, product launches, channel marketing program activities, and ongoing demand
and supply planning occur in a well-managed, timely manner.

Our sales are made primarily pursuant to customer purchase orders. Because
industry practice allows customers to reschedule or cancel orders on relatively short notice, we believe that backlog is not a good indicator of our future sales.

Research and Development

We engage in substantial research and development to develop new products to support our growth.
We employ product designers who have expertise in system architecture, mixed-signal design, customizable firmware and software, and software development tools. As of February 28, 2007, we had 244 full-time employees engaged in research and
development. Our research and development expense was $90.6 million, $76.0 million, and $33.7 million for the years ended December 31, 2006, 2005 and 2004, respectively. Development of most of our products is carried out using
ISO9001:2000-certified and HSPM-certified design processes, and our design tools are frequently enhanced to improve design, fabrication, and verification of our products.

Technology

We have several key technological core competencies and have assembled multiple,
worldwide development teams with extensive mixed-signal design expertise to capitalize on these competencies. Where cost-effective, we purchase designed and verified function blocks, such as ARM 9 series processing cores, a DSP core, standard cells,
SRAM instances, and a USB controller, from third-party vendors.

We combine high performance analog functionality on the same chip with
digital functionality. One attribute of digital circuits is high-speed switching between logic states which generates transients known as electromagnetic interference or electrical noise. There are significant design and development challenges
involved in mixing noisy digital circuits with noise-sensitive high performance analog circuits on the same IC. Our designers are skilled at solving these problems to achieve high quality multimedia performance on a highly-integrated mixed-signal
SoC.

Our engineers possess a high degree of systems-level knowledge of both the customers OEM system functionality and the
advantages and limits to the analog and digital signal processing that may be performed on the SoC. Optimizing the partitioning of system functionality between analog and digital signal processing, whether through hardware, firmware or software, is
key to minimizing die size while maintaining functional flexibility via programmability.

We design all of our ICs to be manufactured using
industry standard digital CMOS technologies. While it is significantly more difficult to design high performance analog-in-digital CMOS processes, as opposed to processes especially adapted to analog, there are multiple advantages to this approach,
including reduced cost, reduced manufacturing risk, and greater worldwide foundry capacity.

Manufacturing

We design and develop our products and electronically transfer our proprietary designs to third-party foundries to process silicon wafers and produce the
ICs. The wafers are then shipped from foundries to our subcontractors, where they are assembled into finished, packaged ICs and electronically tested before delivery to our customers. We believe that our outsourced manufacturing model significantly
reduces our capital requirements and allows us to focus our resources on the design, development and marketing of our ICs. In addition, we benefit from our suppliers manufacturing expertise, and from the flexibility to select those vendors
that we believe offer the best capability and value.

IC Fabrication

Our principal foundries are Taiwan Semiconductor Manufacturing Company in Taiwan, United Microelectronics Corporation in Taiwan, Chartered Semiconductor Manufacturing in Singapore, and Silterra in Malaysia. These
foundries currently fabricate our devices using mature and stable CMOS process technology with feature sizes of 90 nanometers and higher. We regularly evaluate the benefits and feasibility, on a product by product basis, of migrating to smaller
process geometries to reduce cost and improve performance.



10



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##### Index to Financial Statements

Assembly and Test

Following wafer processing, our wafers are shipped to our subcontractors where they are singulated into die, assembled into finished IC packages, and electrically tested. Our products are designed to use low cost,
industry-standard packages and be tested with widely available automatic test equipment. We develop and control all product test programs used by our subcontractors. These test programs are developed based on product specifications, thereby
maintaining our ownership for the functional and parametric performance of our devices. We currently rely on ASAT Holdings in Hong Kong and China, United Test and Assembly Center in Singapore, and Advanced Semiconductor Engineering in Taiwan to
assemble and test our products.

Quality Assurance

We have designed and implemented a quality management system that provides the framework for continual improvement of products, processes and customer service. We apply well-established design rules and practices for
CMOS devices through standard design, layout and test processes. We also rely on in-depth simulation studies, testing and practical application testing to validate and verify our products. We emphasize a strong supplier quality management practice
in which our manufacturing suppliers are pre-qualified by our operations and quality teams. In October 2005, we were granted registration from IECQ/ECCB for the IECQ-Hazardous Substance Process Management, or HSPM, which is based on the Electrical
and Electronic Components and Products Hazardous Substance Free Standard, EIA/ECCB-954 International Standard. SigmaTels HSPM certification ensures that we have the internal processes to recognize our customers, as well as statutory and
regulatory, requirements for hazardous substance free products. Suppliers are required to have a quality management system, certified to ISO9000 standard, an environmental management system certified to ISO14000 standard, and to be HSPM certified
and/or have third party certificates of compliance on all materials used in SigmaTel products. To ensure consistent product quality, reliability and yields, we closely monitor the production cycle by reviewing electrical, parametric and
manufacturing process data from each wafer foundry and assembly subcontractor.

Competition

The markets for our ICs are intensely competitive. We believe that the principal bases of competition in our industry are as follows:



| |  |  | product performance, level of integration, power efficiency, reliability, and price;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | the ability to influence and comply with industry standards;
| | - |  | ------------------------------------------------------------



| |  |  | software and reference designs;
| | - |  | -------------------------------



| |  |  | timeliness of new product introductions;
| | - |  | ----------------------------------------



| |  |  | ability to obtain foundry capacity;
| | - |  | -----------------------------------



| |  |  | intellectual property position;
| | - |  | -------------------------------



| |  |  | customer support; and
| | - |  | ---------------------



| |  |  | reputation and financial resources.
| | - |  | -----------------------------------

We believe that we compete favorably with respect to each of these factors. However, some of our larger competitors have greater financial resources, a greater ability to influence industry standards, and much more extensive patent
portfolios than we do. We anticipate that the market for our products will be subject to rapid technological change. As we enter new markets and pursue additional applications for our products, we expect to face competition from a larger number of
competitors. We face significant competition in each of our product lines. Within the portable multimedia player market, we primarily compete with Actions Semiconductor, ALi, Freescale Semiconductor, Philips Semiconductor, NVIDIA, Rock Chip,
Samsung, Sunplus, Telechips, and Texas Instruments. In the digital television audio markets, we compete primarily with Micronas and ST Microelectronics. Within the printer market, we compete primarily with Zoran Corporation and in-house captive
suppliers. We expect to face competition in the future from our current competitors, other manufacturers and designers of semiconductors, and innovative start-up semiconductor design companies. Some of our customers have developed products or
technologies internally which are competitive with our products. Other customers could develop internal solutions or enter into strategic relationships with or acquire existing mixed-signal IC providers. Any of these actions could replace their need
for our products.



11



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##### Index to Financial Statements

Intellectual Property

Key to our success and future growth is our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark and trade secret laws, contractual provisions, and licenses to protect our
intellectual property. We also attempt to protect our trade secrets and other proprietary information through agreements with our customers, suppliers, employees and consultants, and through other security measures.

As of December 31, 2006, we held 79 issued U.S. patents and eight international patents. Our patents and patent applications generally cover
features employed in our existing product families. Our patents have expiration dates ranging from 2015 to 2026. We continue to actively pursue the filing of additional patent applications.

We claim copyright protection for the proprietary documentation used in our products and for the firmware and software components of our products. We
have registered several U.S. copyrights, covering certain of our firmware and software applications. We have also registered the SigmaTel name and logo as trademarks in the U.S. and also have certain other trademarks with respect to
products of businesses we have acquired.

We intend to protect our rights vigorously, but there can be no assurance that our efforts will
be successful. Thus, despite our precautions, a third party may copy or otherwise obtain and use our products, services or technology without authorization, develop similar technology independently or design around our patents. In addition,
effective copyright, trademark and trade secret protection may be unavailable or limited in certain foreign countries. Moreover, we often incorporate the intellectual property of third parties into our designs, and we have certain obligations with
respect to the non-use and non-disclosure of such intellectual property. There can be no assurance that the steps we have taken to prevent misappropriation or infringement of our intellectual property or third parties will be successful.

Employees

As of February 28, 2007, we
employed 407 full-time people, including 244 in research and development, 33 in operations, 73 in sales and marketing, and 57 in administration. We have never had a work stoppage and none of our employees is represented by a labor organization. We
consider our employee relations to be good.



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##### Index to Financial Statements

|Item 1A. | Risk Factors.
|-------- | -------------

Our business is inherently risky.
You should carefully consider the risks described below and all of the other information contained in this annual report on Form 10-K and our other filings with the Securities and Exchange Commission in evaluating our business. The risks and
uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

We have incurred net losses in prior periods, and we will likely incur losses in the future, and if we cannot return to sustained profitability, our liquidity and
ability to operate our business effectively could be adversely affected.

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 $109.0 million for the year ended December 31, 2006. 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. Even though we have achieved profitability in the past, we may not be able to become
profitable again or sustain or increase profitability on a quarterly or an annual basis. Our operating activities used $49.9 million of cash in the year ended December 31, 2006, compared to cash provided by operating activities of $81.4 million
for the year ended December 31, 2005. 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 limited history of sales of our newer products makes it difficult to evaluate our prospects.

We began shipping our latest portable multimedia SoC product, the STMP 36XX family, in the fourth quarter of 2005. Sales of the STMP 35XX and STMP 36XX
families of products are highly dependent upon continued acceptance of portable multimedia players by consumers. Since we cannot accurately monitor sell-through of our ultimate end customers portable multimedia players which contain our
portable multimedia SoCs, it is possible that some of these products may not be selling through. As a result, our customers could experience inventory growth that could cause them to purchase fewer products from us or seek to return products to us
in the future. There can be no assurance that our customers have not or will not place orders in excess of their requirements in response to actual or perceived shortages in the supply of our ICs. In such event, it will be more difficult for us to
forecast our future revenues and budget our operating expenses, and our operating results would be adversely affected to the extent such excess orders are cancelled or rescheduled. We have limited historical financial data from which to predict our
future sales and operating results for our portable multimedia SoCs and other key products that we have recently introduced. Our limited operating experience with these products, combined with the rapidly evolving nature of the markets in which we
sell our products, including decreases in the overall average selling prices of our products, and other factors which are beyond our control, limit our ability to accurately forecast quarterly or annual sales. Because most of our expenses are fixed
in the short term or incurred in advance of anticipated sales, we may not be able to decrease our expenses in a timely manner to offset any shortfall in sales.

We do not expect to return to our historic growth rate in the future.

Due primarily to increased sales of our portable
multimedia SoCs in the past we experienced significant revenue growth and gained significant market share in a relatively short period of time. However, revenues decreased from $324.5 million for the year ended December 31, 2005, to $159.4
million for the year ended December 31, 2006, and we do not expect revenue growth or market share gains similar to those that we experienced from 2002 to 2005 in future periods. 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. Although we have taken and are continuing to take 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. Accordingly, you should not rely on the results of any prior quarterly or annual periods as an indication of our future operating performance.

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

For the years ended December 31, 2006 and 2005, sales to our top five customers accounted for
approximately 49.4% and 60.9%, respectively, 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. Because our sales are made by means of customer purchase orders rather than long term contracts, we cannot assure you that our customers will continue to
purchase our products at current levels, or at all.



13



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##### Index to Financial Statements

The recent changes in our organization, including management resignations, recent acquisitions, attrition and
reductions in force 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 or any organization changes.

Our organization has changed rapidly and further organizational changes may be required to address our strategic objectives and
potential growth in our customer base. We have changed our organization through acquisitions and dispositions, opening international locations and through increasing and reducing headcount internationally. We announced the resignation of our former
Chief Executive and Chief Financial Officers in January 2007 and December 2006, respectively. We also announced the elimination of a total of 60 positions in the U.S. during the fourth quarter of 2006, and will be implementing additional cost
cutting measures, including reductions in force, through the third quarter of 2007. In January 2007, we also announced the refocusing 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 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. To successfully manage our organization, we believe we must do the following effectively:



| |  |  | hire, train, integrate, manage, and retain qualified engineers for research and development activities, sales and marketing personnel, and financial and information
technology personnel;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | continue to enhance our customer resource management and manufacturing management systems;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | expand and upgrade our core technologies;
| | - |  | -----------------------------------------



| |  |  | manage multiple relationships with our distributors, suppliers, and other third parties;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | manage our refocusing on our core markets and departure from other markets; and
| | - |  | -------------------------------------------------------------------------------



| |  |  | manage the global reductions in force, and other cost cutting measures through the third quarter of 2007.
| | - |  | ---------------------------------------------------------------------------------------------------------

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

We rely heavily on the services of our key employees, including our
senior management. In addition, 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 upon our
ability to retain these key employees and our ability to attract and retain other skilled managerial, engineering and sales and marketing personnel. Any of our current employees may terminate their employment with us at any time. The competition for
such personnel is intense in our industry. 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, which may also negatively impact our ability to sell them.

We rely on a small number of distributors to market and distribute our products, and if we fail to maintain or expand these sales channels, our revenues would likely decline.

Sales to a small number of distributors generate a significant amount of our revenues. Our sales through distributors accounted for 35.9% and 52.5% of our
revenues for the years ended December 31, 2006 and 2005, respectively. Despite the decreases as a percentage of total revenues, the dollar amount of our products sold through distributors is significant. 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 and expand our relationships with distributors, 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 indirect sales force. 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.



14



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##### Table of Contents

##### Index to Financial Statements

Our business is highly dependent on the consumer electronics market, which is characterized by short product life
cycles, fluctuations in demand and seasonality, and 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.

The expansion of the consumer electronics market, in general, and the demand for portable multi-media products in particular, may be adversely impacted by the enforcement of limits on file sharing and downloadable
content. The major record labels have complained about consumers downloading music off of the Internet without paying fees or royalties to the owners of that music. In particular, the Recording Industry Association of America, a recording industry
trade group, has sued numerous individuals who illegally distribute copyrighted songs over the Internet. If the record labels, other music producers, or other parties are successful in limiting the ability of consumers to obtain free music or video
content on the Internet, the demand for consumer electronic devices such as portable multi-media players that use our ICs may decline. Any decline in consumer spending, whether relating to general economic conditions, future terrorist attacks or
disease outbreaks, such as bird flu, could also limit the expansion of the consumer electronics market, thus adversely affecting our business.

Because many of our ICs are designed for use in consumer electronic products, such as portable multimedia players, printers, and digital televisions, we expect our business to be subject to seasonality, with increased revenue in the third
and fourth quarters of each year, when customers place orders to meet year-end holiday demand, and lower revenue in the first and second quarters of each year. However, our historic revenues volatility 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:



| |  |  | 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.



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##### Index to Financial Statements

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 successful new products in a timely manner, our operating results and competitive position could be harmed.

Sales of our portable multimedia SoCs accounted for 75.3% and 90.6% of our revenues for the years ended December 31, 2006 and 2005, respectively. Our future success depends on our ability to develop successful
new products in a timely and cost-effective manner. We are required to continually evaluate expenditures for planned product developments and choose among alternatives based upon our expectations of future market trends. 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;
| | - |  | ----------------------------------------------------------------------



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



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



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



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



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



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



| |  |  | changes in industry standards.
| | - |  | ------------------------------

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



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



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



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



16



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##### Table of Contents

##### Index to Financial Statements

| |  |  | 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.

Our third-party foundries, other subcontractors and many of our customers and end customers are located in the Pacific Rim, an area subject to significant earthquake
risk and adverse consequences related to the outbreak of bird flu, and other public health concerns and other factors that could negatively impact our third-party foundries or customers.

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. The occurrence of an earthquake or other natural disaster near these



17



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##### Table of Contents

##### Index to Financial Statements

foundries or subcontractors could result in damage, power outages and other disruptions that impair their production and assembly 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. The 2003 outbreak of SARS curtailed travel to and from certain countries (primarily in the Asia-Pacific region) and limited travel and shopping
within those countries and any future outbreaks of SARS, bird flu, or other public health concerns could have similar consequences. In addition, outbreaks of disease or other disasters could limit consumer demand for our ICs or the products that use
our ICs.

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, as follows:



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



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



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



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



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



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



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



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



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



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



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



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##### Index to Financial Statements

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



| |  |  | natural disasters, particularly earthquakes, or disease outbreaks, such as the recent outbreaks of bird flu affecting countries in which we conduct our business or
in which our products are manufactured, assembled, or tested;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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. Other factors that could cause our stock to be highly volatile are announcements of changes to senior management and changes in earnings estimates or investment recommendations by analysts.

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

We may experience substantial period-to-period fluctuations in future operating results due to the erosion of our average selling
prices, particularly for portable multimedia SoCs. We have in the past and expect in the future to reduce the average unit price of our products in anticipation of or in response to competitive pricing pressures, new product introductions by us or
our competitors and other factors. If we are unable to offset any such reductions in our average selling prices by increasing our sales volumes and reducing production costs, 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.

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.

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 and ST Microelectronics. We expect to face increased competition in the future from our current and emerging competitors. In
addition, some of our customers have developed and other customers could develop their own internal ICs that could replace their need for our products or otherwise reduce demand for our products.

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

Many of our current and potential competitors have longer operating histories, greater name recognition, access to larger customer bases, broader product
offerings, and significantly greater financial, sales, marketing, manufacturing, distribution, and 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.



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##### Index to Financial Statements

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.

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. Defects could also lead to liability for defective products as a result of lawsuits against us or against our customers. We have agreed to indemnify our customers in some circumstances against liability from defects in our products. A
successful product liability claim could require us to make significant damage payments.

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, 0.13 micron, and 0.16 micron geometry processes. We have migrated our next generation of
portable multimedia SOCs to 90 nanometer process technologies. 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. 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; Shenzhen,
China; Cambridge, England; Taipei, Taiwan; and Shenzhen, China. The percentage of our revenues, from customers located outside of the U.S., was 97.5%, 97.6% and 99.9% for the years ended December 31, 2006, 2005 and 2004, respectively. 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;
| | - |  | ---------------------------------------------------------------------



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



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



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



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



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##### Index to Financial Statements

| |  |  | 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.
| | - |  | ----------------------------------------------------------------------------------------------------------

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

We may be unable to effectively protect our intellectual property, 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 U.S. 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 2000, we settled a patent infringement and trade secret claim filed by Cirrus Logic related to our audio codec products. 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. 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 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 management 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.
| | - |  | -----------------------------------------------------------------------------------------------



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##### Table of Contents

##### Index to Financial Statements

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.

We may be required to record a significant charge to earnings if our amortizable intangible assets become impaired.

Under generally accepted accounting principles, we are required to review our goodwill for impairment at least annually or when
events or changes in circumstances indicate the carrying value may not be recoverable. Amortizable intangible assets are reviewed when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may
be considered a change in circumstances indicating that the carrying value of our amortizable intangible assets or goodwill may not be recoverable include a decline in stock price and market capitalization, deterioration of our
performance, and slower growth rates for our products and the products of acquired businesses. We may be required to record a significant charge to earnings in our financial statements during the period in which we determine that our
amortizable intangible assets or goodwill have been impaired. Any such charge would adversely impact our results of operations. As a result of our annual goodwill impairment analysis and recoverability of long-lived assets testing, we recorded
goodwill impairment of $63.3 million and an $18.5 million write-down of long-lived assets for the year ended December 31, 2006. As of December 31, 2006, our amortizable intangible assets, net of amortization, totaled approximately $15.4
million.

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.

The emergence of alternative models for downloading digital music content may
impact our business in ways we cannot anticipate.

Currently, most purchased music content is available through a pay-per-download model
in which consumers purchase and own the song file which they can then download and play on their personal media player. Microsoft has launched digital rights management software which provides personal media players access to music content on a
subscription basis in which consumers can pay a subscription fee to rent, rather than own, the song file. The technology adds a security feature to Microsofts digital rights management technology to allow a personal media player to determine
when a specific file has expired. If this technology is successful and our customers are better able to interface with such technology, it could compete with existing pay-per-download music services. We cannot predict the impact on our business
should this or other similar technology or other content distribution models become widely adopted. In addition, to the extent other providers of digital content or providers of platforms or components for personal media players take market share
away from our customers products and services, our business and results of operations could be adversely impacted.

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

The
trading market for our common stock will depend on the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade
our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price
or trading volume to decline.



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##### Table of Contents

##### Index to Financial Statements

Our products may be found to be defective, product liability claims may be asserted against us and we may not have
sufficient liability insurance.

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.

Changes to financial accounting standards may affect our results of operations and cause us
to change our business practices.

We prepare our financial statements to conform to generally accepted accounting principles, or GAAP,
in the U.S. These accounting principles are subject to interpretation by the Financial Accounting Standards Board, or FASB, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting policies. A
change in those policies can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect
our reported financial results or the way we conduct our business. For example, we adopted FASB Statement No. 123R, effective January 1, 2006, and we are now required to apply certain expense recognition provisions to share-based payments
to employees using the fair value method. Any other changes in accounting policies in the future may result in significant accounting charges.

If our
internal control over financial reporting does not comply with the requirements of the Sarbanes-Oxley Act, our business and stock price could be adversely affected.

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

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

Although our management has determined that our internal control over financial reporting was effective as of
December 31, 2006, 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.



|Item 1B. | Unresolved Staff Comments.
|-------- | --------------------------

None.



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##### Index to Financial Statements

|Item 2. | Properties.
|------- | -----------

Our main executive, administrative and technical offices occupy approximately 98,000
square feet in Austin, Texas under lease agreements expiring in August 2013.

We continue to lease approximately 56,000 additional square
feet in Austin, Texas which space was formerly used for our headquarters. The leases for this space expire in September 2007 with respect to approximately 9,000 square feet, and in August 2013 with respect to approximately 46,000 square feet. We do
not currently occupy or utilize any of this space and sublet all of it to unrelated third parties pursuant to sublease agreements which extend until the expiration dates of our leases for this space.

Our printer products group occupies approximately 49,000 square feet in Waltham, Massachusetts pursuant to a lease which expires in February 2011. We
continue to lease approximately 36,000 additional square feet in Waltham, Massachusetts pursuant to a lease which expires in February 2011, which was formerly used by our printer products group. We do not currently occupy or utilize any of this
space and sublet 27,000 square feet to this space to unrelated third parties pursuant to sublease agreements which expire in August 2007 with respect to approximately 21,000 square feet, and in January 2011 with respect to approximately 6,000 square
feet.

We also lease approximately 15,000 square feet in Cupertino, California pursuant to a lease which expires in July 2007.

In addition to these domestic properties, we lease international facilities with varying square footage in Hong Kong; Taiwan; China; Korea; Japan;
Singapore; and Cambridge, England for sales, marketing, administrative, design and manufacturing support activities with expiration dates extending to July 2012.

We believe that our facilities are adequate for our current needs and that suitable additional or substitute space will be available as needed to accommodate the future needs of our operations.



|Item 3. | Legal Proceedings.
|------- | ------------------

Many participants in the semiconductor industry have a significant number of
patents and have frequently demonstrated a willingness to commence litigation based on allegations of patent and other intellectual property infringement. From time to time, we have received, and expect to continue to receive, notices of claims of
infringement, misappropriation or misuse of other parties proprietary rights. Some of these claims have led to litigation. We cannot assure you that we will prevail in these actions, or that other actions alleging infringement by us of
third-party patents, misappropriation or misuse by us of third-party trade secrets, or invalidity of our patents will not be asserted or prosecuted against us, or that any assertions of infringement, misappropriation or misuse or prosecutions
seeking to establish the invalidity of our patents will not materially and adversely affect our business, financial condition and results of operations. As of December 31, 2006 we were party to the following legal proceedings:

SigmaTel v. Actions Semiconductor.

On January 4, 2005, we filed a lawsuit against Actions Semiconductor Company, Ltd., based in Zhuhai, Guangdong, China (Actions), in the U.S. District Court for the Western District of Texas, Austin Division. We asserted
that certain Actions ICs that are incorporated as components in MP3 players being shipped into the U.S. infringe multiple SigmaTel patents related to our portable multimedia SoCs. We sought damages and requested a permanent injunction prohibiting
Actions from designing, manufacturing or selling the infringing MP3 integrated circuits in the U.S. We also requested a permanent injunction prohibiting further shipment of products into the U.S. that use Actions ICs. In May, 2005, this U.S.
District Court case was formally stayed, by mutual agreement of the parties, during the pendency of the U.S. International Trade Commission (the ITC) investigation described below. On January 3, 2007, SigmaTel dismissed this lawsuit
without prejudice.

On March 14, 2005, we filed a complaint requesting that the ITC initiate an investigation of Actions
Semiconductor, for violation of Section 337 of the Tariff Act of 1930, in the importation, sale for importation and sale in the U.S. after importation of certain audio processing ICs and other products containing these audio processing ICs. In
our complaint, as amended, we asked the ITC to investigate whether certain Actions products infringe one or more of the claims of U.S. Patent Nos. 6,137,279 (the 279 patent) and 6,366,522 (the 522 patent). On
April 18, 2005, the ITC instituted an investigation into Actions actions based on our allegations. We sought a permanent exclusion order banning the importation into the U.S. of the allegedly infringing products and a cease-and-desist
order halting the sale of these infringing products, as well as other relief the ITC deemed appropriate. During the course of the ITC investigation, we dropped our infringement assertion of the 279 patent and asserted an additional
patentPatent No. 6,633,187 (the 187 patent). The ITC conducted a hearing on the merits in late November 2005. In March 2006, the ITC administrative law judge, (ALJ), determined that Actions infringed the two
patents asserted by us and recommended that an exclusion order be issued which prevents the importation of infringing Actions chips and certain MP3 players which contain these chips. The ALJs initial decision was reviewed by the full
ITC, which, in June 2006, issued a decision that altered the ALJs construction of one of the patents at issue and asked the ALJ to make some further determinations. On August 4, 2006, the ALJ concluded that in light of the ITCs
revised claim construction, certain Actions chips, when operating under the control of a particular firmware version, do not infringe our 522 patent.



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##### Index to Financial Statements

On September 15, 2006, the ITC issued a Limited Exclusion Order (the Order), in favor of
SigmaTel. The Order precludes the importation into the U.S. of MP3 players containing certain chips manufactured by Actions which contain 2 GB of flash memory or less. A complete copy of the Order is available at the ITCs website 
www.usitc.gov.

After the ITC issued the Order, Actions requested that the U.S. Customs and Border Protection arm of the U.S. Government
(CBP) examine a redesigned Actions SoC IC in order to determine whether this redesigned IC falls within the scope of the ITCs Order. (The CBP is the government agency responsible for enforcing the Order.) CBP has invited us to participate in
the proceedings, and we are negotiating with Actions to identify the scope of such proceedings. We expect that the proceedings and determination by the CBP will take place during the second quarter of 2007.

On November 22, 2006, Actions requested that the U.S. Patent and Trademark Office (USPTO) reexamine the Companys 187 and 522
patents in light of certain prior art references which Actions believes render our two patents invalid and unenforceable. The USPTO granted Actions request to reexamine the 522 patent and we expect to hear whether the USPTO will grant
Actions reexamination request for the 187 patent during the first or second quarter of 2007.

On January 4, 2007, Actions
filed a Notice of Appeal with the U.S. Court of Appeals for the Federal Circuit (CAFC). In this Notice, Actions states its intention to appeal the ITCs Limited Exclusion Order. The CAFC has entered an order permitting our
intervention in that appeal. Various briefs will be submitted to the CAFC during 2007, according to a schedule set by the CAFC.

Actions
Semiconductor v. SigmaTel

On September 13, 2006, Actions announced it had filed a patent infringement lawsuit against us in
Shenzhen, China. Later, we learned that the complaint had been filed in the Shenzhen Intermediate Peoples Court (the Court), against us and our subsidiaries. According to Actions, this complaint alleges that we and our subsidiaries
infringe one of Actions Chinese patents. At this time, we have not been served with the complaint. Based on information contained in letters distributed by Actions to various third parties, however, we learned that Actions asserts in the
complaint that our 35XX family of SoCs infringes an audio signal processing patentZL01145044.4, owned by Actions. Actions seeks to halt the infringement of its patent in China by prohibiting the design, manufacture, sale, and use of the
infringing ICs, as well as devices containing the allegedly infringing ICs, and payment of damages in the amount of approximately US$12.5 million. Actions is also asking 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. Despite never being served with
a copy of the complaint, we have submitted a document to the Court which details why the Court should not issue an injunction against us and our subsidiaries. This document was filed on December 13, 2006, and presents substantive, technical
arguments as to why our 35XX products do not infringe the patent at issue. At this time, the Court has not issued any findings, but an injunction could be issued by the Court at any time.

On December 12, 2006, we filed an invalidation petition with the Chinese Patent Office to invalidate Actions ZL 01145044.4 patent in the
Peoples Republic of China. On January 12, 2007, we filed a supplemental submission in further support of the invalidation petition.

Telechips Inc.

On April 4, 2006, we filed a lawsuit against Telechips Inc., based in Seoul, South Korea
(Telechips), in the U.S. District Court for the Eastern District of Texas, Marshall Division. We assert that certain Telechips ICs that are incorporated as components in MP3 players being shipped into the U.S. infringe multiple SigmaTel
patents. On July 27, 2006, we dismissed this lawsuit, without prejudice.



|Item 4. | Submission of Matter to a Vote of Security Holders.
|------- | ---------------------------------------------------

None.



25



---

##### Table of Contents

##### Index to Financial Statements

PART II



|Item 5. | Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
|------- | -----------------------------------------------------------------------------------------------------------------

Our common stock has been quoted on the Nasdaq Global Market (previously the NASDAQ National Market), under the symbol SGTL since September 19, 2003. Prior to this time, there was no public market for
our common stock. The following table sets forth, for the periods indicated, the high and low sale prices per share for our common stock as reported on the Nasdaq Global Market. As of January 31, 2007, there were 140 holders of record of our
common stock.



|                 |  |                    |       |     |   |      
|---------------- |  | ------------------ | ----- | --- | - | -----
|                 |  | Common Stock Price
|                 |  | High               |       | Low
|Fiscal Year 2005 |  |                    |       |     |   |      
|First Quarter    |  | $                  | 45.50 |     | $ | 30.20
|Second Quarter   |  | $                  | 37.99 |     | $ | 17.02
|Third Quarter    |  | $                  | 21.58 |     | $ | 15.95
|Fourth Quarter   |  | $                  | 20.50 |     | $ | 12.80
|Fiscal Year 2006 |  |                    |       |     |   |      
|First Quarter    |  | $                  | 14.33 |     | $ | 8.50 
|Second Quarter   |  | $                  | 9.34  |     | $ | 3.71 
|Third Quarter    |  | $                  | 5.38  |     | $ | 3.45 
|Fourth Quarter   |  | $                  | 6.01  |     | $ | 3.90 

We have never declared or paid any cash dividends on our common stock, and we currently do not
intend to pay cash dividends on our common stock. We currently expect to retain any future earnings to fund the operation and expansion of our business. Any future determination to pay cash dividends on our common stock will be at the discretion of
our board of directors and will be dependent upon our financial condition, operating results, capital requirements and other factors that our board deems relevant.

Set forth below is a line graph comparing the annual percentage change in the cumulative total
return on our common stock with the cumulative total returns of the NASDAQ Composite Index and the Philadelphia Semiconductor Index (SOX) for the period commencing on September 19, 2003 and ending on December 31,
2006.(1)

Comparison of Cumulative Total Return From September 19, 2003 through December 31,
2006(1):

SigmaTel, NASDAQ Composite Index, and Philadelphia Semiconductor Index

LOGO



|                   |  |                |        |                        |   |                                  |  |   |       
|------------------ |  | -------------- | ------ | ---------------------- | - | -------------------------------- |  | - | ------
|Date               |  | SigmaTel, Inc. |        | NASDAQ Composite Index |   | Philadelphia Semiconductor Index
|September 19, 2003 |  | $              | 100.00 |                        | $ | 100.00                           |  | $ | 100.00
|December 31, 2003  |  |                | 124.65 |                        |   | 112.02                           |  |   | 107.80
|December 31, 2004  |  |                | 179.44 |                        |   | 121.43                           |  |   | 87.21 
|December 31, 2005  |  |                | 66.16  |                        |   | 124.10                           |  |   | 98.49 
|December 31, 2006  |  |                | 22.12  |                        |   | 136.84                           |  |   | 91.20 

---

|(1) | Assumes that $100 was invested on September 19, 2003, at the closing price on such date, in our Common Stock and each index, and that all dividends have been reinvested. No
cash dividends have been declared on our Common Stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



26



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##### Table of Contents

##### Index to Financial Statements

|Item 6. | Selected Financial Data.
|------- | ------------------------

The selected consolidated balance sheet data as of December 31,
2006 and 2005, and the selected consolidated statements of operations data for the years ended December 31, 2006, 2005 and 2004 have been derived from audited financial statements included in this Form 10-K. The selected consolidated balance
sheet data as of December 31, 2004, 2003 and 2002 and the selected consolidated statements of operations data for the years ended December 31, 2003 and 2002 have been derived from audited financial statements not included in this Form
10-K. You should read this selected financial data in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the notes to those statements
included in this Form 10-K.



|                                                                        |  |                                       |          |   |      |   |         |  |      |         |  |      |         |   |  |   |        |  
|----------------------------------------------------------------------- |  | ------------------------------------- | -------- | - | ---- | - | ------- |  | ---- | ------- |  | ---- | ------- | - |  | - | ------ | -
|                                                                        |  | Year Ended December 31,               |         
|                                                                        |  | 2006                                  |          |   | 2005 |   | 2004    |  | 2003 |         |  | 2002 |        
|                                                                        |  | (in thousands, except per share data) |         
|Statements of Operations Data:                                          |  |                                       |          |   |      |   |         |  |      |         |  |      |         |   |  |   |        |  
|Revenues, net                                                           |  | $                                     | 159,365  |   |      | $ | 324,457 |  | $    | 194,805 |  | $    | 100,225 |   |  | $ | 30,917 |  
|Gross profit                                                            |  |                                       | 64,679   |   |      |   | 175,371 |  |      | 105,618 |  |      | 47,734  |   |  |   | 11,287 |  
|Research and development                                                |  |                                       | 90,640   |   |      |   | 75,976  |  |      | 33,736  |  |      | 19,849  |   |  |   | 11,956 |  
|Selling, general and administrative                                     |  |                                       | 50,245   |   |      |   | 43,033  |  |      | 18,777  |  |      | 12,109  |   |  |   | 4,969  |  
|Goodwill impairment                                                     |  |                                       | 63,334   |   |      |   |        |  |      |        |  |      |        |   |  |   |       |  
|Impairment of long-lived assets                                         |  |                                       | 18,477   |   |      |   |        |  |      |        |  |      |        |   |  |   |       |  
|Gain on asset disposition                                               |  |                                       | (45,673  | ) |      |   |        |  |      |        |  |      |        |   |  |   |       |  
|Litigation settlements                                                  |  |                                       |         |   |      |   |        |  |      |        |  |      | 4,500   |   |  |   |       |  
|Total operating expenses                                                |  |                                       | 177,023  |   |      |   | 119,009 |  |      | 52,513  |  |      | 36,458  |   |  |   | 16,936 |  
|Operating income (loss)                                                 |  |                                       | (112,344 | ) |      |   | 56,362  |  |      | 53,105  |  |      | 11,276  |   |  |   | (5,649 | )
|Net income (loss)                                                       |  |                                       | (109,024 | ) |      |   | 35,879  |  |      | 52,556  |  |      | 9,989   |   |  |   | (8,279 | )
|Deemed dividends on preferred stock                                     |  |                                       |         |   |      |   |        |  |      |        |  |      | (8,768  | ) |  |   | (316   | )
|Net income (loss) attributable to common stockholders                   |  | $                                     | (109,024 | ) |      | $ | 35,879  |  | $    | 52,556  |  | $    | 1,221   |   |  | $ | (8,595 | )
|Basic net income (loss) attributable to common stockholders per share   |  | $                                     | (3.09    | ) |      | $ | 0.99    |  | $    | 1.52    |  | $    | 0.09    |   |  | $ | (1.47  | )
|Diluted net income (loss) attributable to common stockholders per share |  | $                                     | (3.09    | ) |      | $ | 0.95    |  | $    | 1.39    |  | $    | 0.04    |   |  | $ | (1.47  | )
|Weighted average shares used to compute:                                |  |                                       |          |   |      |   |         |  |      |         |  |      |         |   |  |   |        |  
|Basic net income (loss) attributable to common stockholders per share   |  |                                       | 35,304   |   |      |   | 36,132  |  |      | 34,669  |  |      | 13,450  |   |  |   | 5,836  |  
|Diluted net income (loss) attributable to common stockholders per share |  |                                       | 35,304   |   |      |   | 37,912  |  |      | 37,872  |  |      | 31,086  |   |  |   | 5,836  |  



|                                                     |  |                         |         |      |   |         |  |      |         |      |   |         |  |   |         |  
|---------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | -
|                                                     |  | Year Ended December 31, |        
|                                                     |  | 2006                    |         | 2005 |   | 2004    |  | 2003 |         | 2002 |  
|                                                     |  | (in thousands)          |        
|Balance Sheet Data:                                  |  |                         |         |      |   |         |  |      |         |      |   |         |  |   |         |  
|Cash and cash equivalents and short-term investments |  | $                       | 100,840 |      | $ | 118,884 |  | $    | 141,697 |      | $ | 111,261 |  | $ | 2,859   |  
|Total assets                                         |  |                         | 173,391 |      |   | 343,442 |  |      | 219,915 |      |   | 146,877 |  |   | 18,529  |  
|Long-term debt                                       |  |                         |        |      |   |        |  |      | 7       |      |   | 63      |  |   | 7,437   |  
|Redeemable convertible preferred stock               |  |                         |        |      |   |        |  |      |        |      |   |        |  |   | 40,761  |  
|Total stockholders equity (deficit)                 |  |                         | 133,552 |      |   | 259,194 |  |      | 180,916 |      |   | 126,108 |  |   | (44,985 | )



|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|------- | --------------------------------------------------------------------------------------

The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes which appear elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and
uncertainties. Please



27



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##### Table of Contents

##### Index to Financial Statements

see the Cautionary Statement above. Our actual results could differ materially from those anticipated in these forward-looking statements as a
result of various factors, including those discussed below and elsewhere in this Form 10-K, particularly in Item 1A. under the heading Risk Factors.

Overview

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

Net Loss, Cost Reductions and Refocus.We incurred a net loss of $109.0 million for the year ended December 31, 2006, and we will likely
incur net losses in the future. We have faced a number of challenges that have affected our operating results during the past year and a half, 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 held these positions since March 2001. Phillip E. Pompa, formerly our Senior Vice President of Portable Systems Group, has been appointed as our President and Chief Executive Officer. In January 2007, we
announced that we are refocusing our business on our three core markets: portable multimedia players; printers; and, digital televisions. We also announced that we are immediately taking steps to reduce our operating costs through cost control
measures and reductions in force. As we implement these cost reductions, we will remain focused on retaining our key technical talent and preserving the integrity of our core product offerings. As part of this plan, we have terminated future efforts
with respect to the digital video camera, USB and infrared peripheral, and certain consumer audio codec markets. We expect these cost cutting measures to be completed in the third quarter of 2007. These changes have placed, and any future
organizational changes will continue to place, a significant strain on our management, personnel, systems and resources. If we are unable to manage our organizational changes effectively, we may not be able to take advantage of market opportunities,
develop new products, enhance our technological capabilities, satisfy customer requirements, execute on our business plan or respond to competitive pressures.

New Product Introduction and Acceptance. In October of 2005, we introduced our STMP 36XX family of portable multimedia SoCs, our newest SoC for flash-based and hard disk-based digital multimedia players. Our
historical revenue growth has been primarily from sales of our STMP 35XX family of portable multimedia SoCs, which accounted for 58.6% of our revenue in the year ended December 31, 2006. We introduced the STMP 35XX family of portable multimedia
SoCs in the fourth quarter of 2003 and, despite continued sales of the STMP 35XX SoCs, as those products have matured, their average selling prices have declined, which is typical for the semiconductor industry. Our future success depends on our
ability to market and sell our existing products, 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 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. 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. 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, increasing our sales volumes and reducing our costs, our gross profits and revenues will
suffer.



28



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##### Table of Contents

##### Index to Financial Statements

Historical Growth; Recent Pressures. Our business has grown rapidly since our inception as a
result of acquisitions, the opening of international locations and through hiring, both domestically and internationally. The historical expansion of our business and operations, which includes the acquisitions of Oasis and Protocom, has placed, and
any future expansion will continue to place, a significant strain on our management, personnel, systems and resources, and has significantly increased our operating expenses. During the third and fourth quarter of 2006, we eliminated approximately
60 positions in Cupertino, California, Austin, Texas and Waltham, Massachusetts. In January 2007, we announced that we are immediately taking steps to reduce our operating costs through cost control measures and reductions in force. If we are unable
to manage these 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, regain profitability or
respond to competitive pressures. Accordingly, you should not rely on the results of any prior quarterly or annual periods as an indication of our future operating performance.

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

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:



|                       |  |                         |   |  |      |   |  |      |  
|---------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                       |  | Year Ended December 31, |  
|                       |  | 2006                    |   |  | 2005 |   |  | 2004 |  
|Creative Technology(1) |  | 18.9                    | % |  | 13.5 | % |  | 14.1 | %
|G.M.I. Technology      |  | *                       |   |  | 18.3 |   |  | 27.3 |  
|ASUSTEK Computer Inc.  |  | *                       |   |  | 14.8 |   |  | *    |  
|Holystone Enterprise   |  | *                       |   |  | *    |   |  | 17.0 |  

---

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

|(1) | Creative Technology held more than 5% of our outstanding stock during the periods indicated, until
October 2005. Creative also had a representative on our Board of Directors until his resignation on June 10, 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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
97.5%, 97.6%, and 99.9% for the years ended December 31, 2006, 2005, and 2004, 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:



|                |  |                         |   |  |       |   |  |       |  
|--------------- |  | ----------------------- | - |  | ----- | - |  | ----- | -
|                |  | Year Ended December 31, |  
|                |  | 2006                    |   |  | 2005  |   |  | 2004  |  
|Taiwan          |  | 36.8                    | % |  | 37.5  | % |  | 37.1  | %
|China/Hong Kong |  | 33.3                    |   |  | 38.7  |   |  | 40.0  |  
|Singapore       |  | 19.8                    |   |  | 13.9  |   |  | 15.2  |  
|U.S.            |  | 2.5                     |   |  | 2.4   |   |  | 0.1   |  
|Other           |  | 7.6                     |   |  | 7.5   |   |  | 7.6   |  
|                |  |                         |   |  |       |   |  |       |  
|Total           |  | 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



29



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##### Table of Contents

##### Index to Financial Statements

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.

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. 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. $7.2
million of the purchase price was deposited into an escrow account upon closing for purposes of settling indemnification claims for the one-year period following the closing. The cash consideration was offset by $2.5 million in closing costs.
Pursuant to the terms of the sale, approximately 60 employees and associated contractors became employees of IDT. In connection with the sale, we entered into several ancillary agreements with IDT, 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 us related to the PC audio codec product
line. As part of the sale, we agreed not to engage in transactions with the PC audio codec product line for a period of two years following the closing.

Statement of Operations Overview

The following describes certain line items in our 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 or acquire new products and subsequently
achieve customer acceptance of newly introduced products.

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

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

Selling, General and Administrative. Selling, general and administrative expense consists primarily of salaries and related costs, including stock compensation, occupancy costs, sales commissions to independent
sales representatives, amortization of acquired intangible assets and related overhead costs for sales, marketing and administrative personnel, legal and accounting services, as well as marketing activities. We expect that selling, general and
administrative expenses should decrease in absolute dollars as we reduce our personnel and other spending in this area, while continuing to support our future operations. We also expect to continue to incur litigation expenses in the future as we
protect and defend our intellectual property and technology.



30



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##### Index to Financial Statements

Goodwill Impairment and Impairment of Long-Lived Assets. We recorded goodwill impairment of $63.3
million and an $18.5 million write-down of long-lived assets for the year ended December 31, 2006. These charges resulted from our annual goodwill impairment analysis and testing for the recoverability of long-lived assets. No such
charges were recorded for the year ended December 31, 2005. See Note 6 of the Notes our Notes to Consolidated Financial Statements.

Gain on Asset Disposition. During the third quarter of 2006, we completed the sale of our PC audio codec product line to 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 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. $7.2
million of the purchase price was deposited into an escrow account upon closing for purposes of settling indemnification claims for the one-year period following the closing and is classified as restricted cash in the consolidated balance sheets.
The cash consideration was offset by $2.5 million in closing costs.

In July 2006, the Company sold a patent to a limited partnership for
approximately $1.1 million. A gain of approximately $28,000 was recognized as a result of this sale and is included in the gain on disposition of assets line in the consolidated statement of operations.

Other Income (Expense).Other income consists of interest income and foreign exchange income or losses. Interest income reflects interest earned
on cash equivalents and short-term investment balances. Foreign exchange loss reflects realized gains and losses on foreign currency transactions.

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. The provision for income taxes also includes amounts intended to satisfy unfavorable adjustments by tax authorities in any current or future
examination of our income tax returns. Refer to Note 11 of Notes to Consolidated Financial Statements.

Results of Operations

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



|                                               |  |                         |    |  |      |   |  |       |  
|---------------------------------------------- |  | ----------------------- | -- |  | ---- | - |  | ----- | -
|                                               |  | Year Ended December 31, |   
|                                               |  | 2006                    |    |  | 2005 |   |  | 2004  |  
|Revenues, net                                  |  | 100                     | %  |  | 100  | % |  | 100.0 | %
|Cost of goods sold                             |  | 59.4                    |    |  | 45.9 |   |  | 45.8  |  
|                                               |  |                         |    |  |      |   |  |       |  
|Gross profit                                   |  | 40.6                    |    |  | 54.1 |   |  | 54.2  |  
|Operating expenses:                            |  |                         |    |  |      |   |  |       |  
|Research and development                       |  | 56.9                    |    |  | 23.4 |   |  | 17.3  |  
|Selling, general and administrative            |  | 31.5                    |    |  | 13.3 |   |  | 9.6   |  
|Goodwill impairment                            |  | 39.7                    |    |  |     |   |  |      |  
|Impairment of long lived assets                |  | 11.6                    |    |  |     |   |  |      |  
|Gain on asset disposition                      |  | (28.7                   | )  |  |     |   |  |      |  
|                                               |  |                         |    |  |      |   |  |       |  
|Total operating expenses                       |  | 111.1                   |    |  | 36.7 |   |  | 27.0  |  
|                                               |  |                         |    |  |      |   |  |       |  
|Operating (loss) income                        |  | (70.5                   | )  |  | 17.4 |   |  | 27.3  |  
|Other income (expense)                         |  | 1.8                     |    |  | 1.2  |   |  | 0.9   |  
|(Loss) income before income taxes              |  | (68.7                   | )  |  | 18.6 |   |  | 28.1  |  
|                                               |  |                         |    |  |      |   |  |       |  
|Income tax (benefit) expense                   |  | (0.3                    | )  |  | 7.6  |   |  | 1.2   |  
|                                               |  |                         |    |  |      |   |  |       |  
|Net (loss) income                              |  | (68.4                   | )  |  | 11.1 |   |  | 27.0  |  
|Net income attributable to common stockholders |  | (68.4                   | )% |  | 11.1 | % |  | 27.0  | %
|                                               |  |                         |    |  |      |   |  |       |  

Comparison of Year Ended December 31, 2006 to Year Ended December 31, 2005

Revenues.Revenues for the year ended December 31, 2006, were $159.4 million compared to $324.5 million for the year ended December 31,
2005, a decrease of 50.9%. This decrease was primarily due to a 60.1% decrease in revenues from our portable multimedia SoCs. Revenues from the sale of our portable multimedia SoCs accounted for approximately 75.3% of total revenue for the year
ended December 31, 2006, compared to 90.6% of for the year ended December 31, 2005.

Portable Multimedia SoCs. The
decrease in revenues from the sale of our portable multimedia SoCs was primarily due to a decline in market share, significantly decreased average selling prices and our failure to deliver the STMP 36XX family of portable multimedia SoCs and
supporting software as early as we had targeted. We expect the trend of declining average selling prices for existing portable multimedia SoC 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. The 36XX family of products is now selling in production quantities and we expect these products to increase as a part
of our SoC revenue mix in future quarters.



30



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##### Index to Financial Statements

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.

Revenues from Significant Customers. Sales to Creative Technology, an affiliate until October 2005, were 18.9% of total revenues during the year ended December 31, 2006, up from 13.5% during the year ended
December 31, 2005. Creative Technology purchases our standard products at prices and on terms similar to other customers who buy similar products and volumes. Revenues from G.M.I. Technology, a distributor until November, 2006, located in Hong
Kong and Taiwan, decreased from 18.3% to less than 10% of total revenues during the years ended December 31, 2005 and 2006, respectively, due to decreased sales of our SoCs that are used in portable digital audio players their customers
manufacture, as well as increased sales to direct customers. Sales to ASUSTEK Computer Inc. decreased to less than 10% of total revenues during the year ended December 31, 2006, from 14.8% during the year ended December 31, 2005, due to
the sale of the PC audio codec product line and a decrease in demand for our products compared to 2005, when one of their large customers launched its new portable audio player.

Gross Profit. Gross profit as a percentage of revenues, or gross margin, was 40.6% for the year ended December 31, 2006, compared with 54.1%
for the year ended December 31, 2005. The decrease in gross margin was primarily due to an aggressive pricing program on our portable multimedia SoCs that targeted the value and mid-tier segments of the overall portable multimedia player
market. The lower gross margins were also due to $2.7 million of amortization of developed technology from acquired companies during the year ended December 31, 2006. We expect the trend of declining average selling prices for existing
portable multimedia SoCs products to continue, which may have a negative impact on our future gross margins if we cannot reduce our associated costs accordingly and sell newer products with enhanced features at relatively higher prices.

Research and Development. Research and development expenses increased in total dollars to $90.6 million, or 56.9% of revenues, for the year
ended December 31, 2006, from $76.0 million, or 23.4% of revenues, for the year ended December 31, 2005. Included in the 2005 total for research and development expense was $11.6 million for the write-off of in-process research and
development (IP R&D) expenses associated with our acquisitions of Rio, Protocom and Oasis in 2005. Excluding the $11.6 million of IP R&D expenses from the 2005 total research and development expenses, the net increase in research
and development expenses from 2005 to 2006 was $26.2 million. This increase was primarily due to the increase in headcount resulting from our acquisitions in late 2005, which increased salary and salary related expense by $12.7 million, and
approximately $5.8 million in stock compensation expense, resulting from our adoption of the Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),Share-Based Payment (SFAS 123R) in the first
quarter of fiscal year 2006. The increase in expense is also due to our pursuit of new product development opportunities.

Selling,
General and Administrative. Selling, general and administrative expenses increased to $50.2 million, or 31.5% of revenues, for the year ended December 31, 2006, from $43.0 million or 13.3% of revenues, for the year ended December 31,
2005. This dollar increase of $7.2 million was primarily due to approximately $3.2 million of stock compensation expense resulting from our adoption of SFAS 123R in the first fiscal quarter of 2006, which was offset by the reduction in expense
associated with the PC audio codec product line disposition. In addition, selling, general and administrative expenses for the year ended December 31, 2006, include $2.4 million of severance and stock compensation expense recorded in
conjunction with the resignation of our former president and chief executive officer.

Goodwill Impairment and Impairment of Long Lived
Assets. We recorded a goodwill impairment of $63.3 million and an $18.5 million impairment of long-lived assets for the year ended December 31, 2006. These charges resulted from our annual goodwill impairment analysis and a detailed
assessment of the recoverability of long-lived assets. The goodwill impairment was primarily the result of a decline in stock price and market capitalization, deterioration of our performance, and slower growth rates for our products and the
products of acquired businesses. The impairment of long-lived assets was due to managements changed intentions with the use of particular products. No such charges were recorded for the year ended December 31, 2005. See Note 6 of the
Notes our Notes to Consolidated Financial Statements.

Gain on Asset Disposition. During the third quarter of 2006, we completed the
sale of our PC audio codec product line to 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 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. Of the purchase price, $7.2 million was deposited into an escrow account upon closing for
purposes of settling indemnification claims for the one-year period following the closing and is classified as restricted cash in the consolidated balance sheets. The cash consideration was offset by $2.5 million in closing costs. See Note 8 of the
Notes our Notes to Consolidated Financial Statements.



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##### Index to Financial Statements

In July 2006, the Company sold a patent to a limited partnership for approximately $1.1 million. A gain
of approximately $28,000 was recognized as a result of this sale and is included in the gain on disposition of assets line in the consolidated statement of operations.

Other Income (Expense). Interest income decreased to $3.1 million for the year ended December 31, 2006, from $4.1 million for the year ended December 31, 2005. This was due to decreased income earned
on our average cash balances and investments in short-term marketable securities during the year ended December 31, 2006.

Income
Tax Expense. We had a net income tax benefit of $0.4 million for the year ended December 31, 2006, compared to a net income tax expense of $24.5 million for the year ended December 31, 2005. This decrease was primarily due to a
significant decrease in income (loss) before income taxes and one time benefits related to a change in our international tax strategy in the second quarter of 2006, offset by non-deductible charges related to the impairment of our goodwill in the
fourth quarter, the effect of the allocation of non-deductible goodwill to the gain on the IDT transaction in the third quarter, and a charge to establish a valuation allowance against our net U.S. deferred tax asset as management has determined it
is more likely than not that the company will not realize its full value based on current assumptions related to forecasted future income.

Our effective tax rate for the year ended December 31, 2006, was 0.4%. This estimate differed from the statutory rate primarily due to one time benefits related to a change in our international tax strategy offset by non-deductible
charges related to the impairment of our goodwill, the effect of the allocation of non-deductible goodwill to the gain on the IDT transaction, and a charge to establish a valuation allowance against our net deferred tax asset. Our effective tax rate
for the year ended December 31, 2005, was 40.6%. This estimate differed from the statutory rate primarily due to non-deductible write-offs of acquired in-process research and development and charges associated with transferring operations and
licensing intellectual property to foreign subsidiaries, offset by research and development tax credits.

Comparison of Year Ended December 31,
2005, to Year Ended December 31, 2004

Revenues. Revenues for the year ended December 31, 2005, were $324.5
million compared to $194.8 million for the year ended December 31, 2004, an increase of 66.6%. This increase was due to an increase in revenues from the sale of our portable multimedia SoCs of 69.0% and from the sale of our audio codecs of
27.1%. Revenues from the sale of our portable multimedia SoCs and of our audio codecs were 90.6% and 6.5%, respectively, of total revenues for the year ended December 31, 2005.

Portable Multimedia SoCs. The increase in revenues from the sale of our portable multimedia SoCs was due to the continued growth of the portable
multimedia player market and our competitive position within that market as well as increased unit shipments to support new design wins at certain customers. The increase in revenues from the sale of our portable multimedia SoCs was partially offset
by declines in our overall average selling prices as certain portable multimedia SoCs products matured and as a result of an aggressive pricing program on our portable multimedia SoCs that target the value segment of the overall portable multimedia
player market.

Audio Codecs and Other Products. The increase in revenues from the sale of our audio codecs was due to increased
unit shipments to support new design wins at certain customers. Revenues from Oasis and Protocom products totaled $7.3 million from the closing date of the respective acquisitions through December 31, 2005.

Revenues From Significant Customers. Sales to Creative Technology, an affiliate until October 2005, decreased to 13.5% of total revenues during
the year ended December 31, 2005, from 14.1% during the year ended December 31, 2004, due to stronger relative demand for our portable multimedia SoCs from other customers as well as Creative Technology experiencing softer than expected
overall market demand for their portable multimedia players during the period. Creative Technology purchases our standard products at prices and on terms similar to other customers who buy similar products and volumes. Revenues from G.M.I.
Technology, a distributor located in Hong Kong and Taiwan, decreased from 27.3% to 18.3% of total revenues during the year ended December 31, 2004 and 2005, respectively, due to increased sales to direct customers. Revenues from Holystone
Enterprise, a distributor located in Taiwan, decreased to less than 10% of total revenues during the year ended December 31, 200,5 from 17.0% during the year ended December 31, 2004, primarily due to increases in our direct sales to
customers, rather than making such sales through Holystone Enterprise, and to increased reliance on other distributors to make sales of our portable multimedia SoCs in geographic regions such as China. Sales to ASUSTEK Computer Inc. increased to
14.8% of total revenues during the year ended December 31, 2005 from less than 10% during the year ended December 31, 2004 due to increased unit shipments resulting from increased demand for our portable multimedia SoCs by ASUSTEK Computer
Inc.s customers, primarily Apple Computer.

Gross Profit. Gross profit as a percentage of revenues, or gross margin, was
54.1% for the year ended December 31, 2005, compared with 54.2% for the year ended December 31, 2004. The slight decrease in gross margin was primarily due to an aggressive



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##### Index to Financial Statements

pricing program on our portable multimedia SoCs that target the value segment of the overall portable multimedia player market, which was mostly offset by
reductions in our manufacturing costs. We also expect the trend of declining average selling prices for existing portable multimedia SoCs products to continue as these products mature further in the market and as the market becomes more competitive,
which may have a negative impact on our future margins if we cannot reduce our associated costs accordingly and sell newer products with enhanced features at relatively higher prices.

Research and Development. Research and development expenses increased to $76.0 million, or 23.4% of revenues, for the year ended
December 31, 2005 from $33.7 million, or 17.3% of revenues, for the year ended December 31, 2004. This dollar increase of 125.5% was primarily due to increases in our engineering headcount, including independent contractors, acquired
IPR&D costs totaling $11.6 million during the year from the acquisitions of Protocom, Oasis, and Apogee, as well as increases in the costs of design tools and mask sets. The headcount increases were primarily to support hardware and software
development on our latest portable multimedia SoCs, the STMP 36XX family of products, audio codecs targeted for applications in the PC market, including the Intel High Definition Audio standard, a new digital FM tuner product, and various USB
peripheral ICs, as well as development efforts on new audio products for consumer applications. The Protocom IPR&D relates to the PR838 project, a next generation portable imaging SoC that adds new features such as H.264 (an advanced video codec
technology) and high definition output capability. The Oasis IPR&D relates to efforts on six different multi-function peripheral products, each of which adds new features or addresses new imaging markets. The Apogee IPR&D relates to a next
generation Direct Digital Amplification (DDX®)
product. As of the closing date of each acquisition, we expected to incur $1.9 million, $7.7 million and $1.8 million in costs to bring the Protocom product, Oasis products and Apogee product, respectively, to commercialization.

Selling, General and Administrative. Selling, general and administrative expenses increased to $43.0 million, or 13.3% of revenues, for the
year ended December 31, 2005, from $18.8 million, or 9.6% of revenues, for the year ended December 31, 2004. This dollar increase of 128.7% was primarily due to increases in headcount of sales, marketing, and administrative personnel
including a substantial increase in personnel located in the Asia-Pacific region, as well as $7.3 million in legal costs primarily related to ongoing intellectual property litigation against Actions Semiconductor, located in China. The increase was
also due to increased lease expenses related to additional leased office space both domestically and internationally, as well as increases in legal expenses related to setting up and maintaining our international subsidiaries. We paid $1.1 million
in 2005 from general corporate funds related to the lease abandonment charge taken in 2004.

Amortization of Deferred Stock-Based
Compensation. We record deferred stock-based compensation for the difference between the exercise price of option grants and the fair value of our common stock at the time of such grants which resulted in amortization expense of $1.3 million and
$2.2 million for the years ended December 31, 2005, and 2004, respectively.

Other Income (Expense). Interest income
increased to $4.1 million for the year ended December 31, 2005, from $1.7 million for the year ended December 31, 2004. This was due to increased income earned on our cash balances and investments in short-term marketable securities.

Income Tax Expense. Our income tax expense increased to $24.5 million for the year ended December 31, 2005, from $2.3
million for the year ended December 31, 2004. This increase in expense was primarily due to non-deductible charges related to acquisitions in the third fiscal quarter of 2005, and the release of the valuation allowance against our deferred tax
assets in the third fiscal quarter of 2004. Our effective tax rate for the year ended December 31, 2005 was 40.6%. This estimate differed from the statutory rate primarily due to non-deductible write-offs of acquired in-process research and
development and charges associated with transferring operations and licensing intellectual property to foreign subsidies, offset by research and development tax credits. Our effective tax rate for the year ended December 31, 2004, was 4.1%.
This estimate differed from the statutory rate primarily due to the release of the valuation allowance against our deferred tax assets based on managements assessment that it was more likely than not that a portion of our deferred tax asset
would be realized.

Liquidity and Capital Resources

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



|                                |  |                   |         |                   |   |                     |  |   |         |  
|------------------------------- |  | ----------------- | ------- | ----------------- | - | ------------------- |  | - | ------- | -
|                                |  | December 31, 2006 |         | December 31, 2005 |   | Increase (Decrease) | 
|Working capital                 |  | $                 | 108,569 |                   | $ | 131,037             |  | $ | (22,468 | )
|Cash and cash equivalents(1)(2) |  |                   | 38,040  |                   |   | 65,712              |  |   | (27,672 | )
|Short-term investments(1)       |  |                   | 62,800  |                   |   | 53,172              |  |   | 9,628   |  

---

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

|(2) | Includes restricted cash of $7.4 million.
|--- | -----------------------------------------



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##### Index to Financial Statements

Our working capital as of December 31, 2006, represents a decrease from our working capital as of
December 31, 2005 primarily due to $30.0 million in cash used in repurchasing our common stock in February 2006, $49.9 million of cash used by operating activities during the year ended December 31, 2006, as well as $12.1 million used for
equipment and IP purchases. This decrease was partially offset by the $72.0 million in proceeds received from the disposition of the PC audio codec product line in the third quarter of 2006.

We have historically financed our operations primarily through cash from our financing activities and our operating activities. Our principal source of
liquidity as of December 31, 2006, consisted of $100.8 million in cash, cash equivalents and short-term investments. As of December 31, 2006, our short-term investments consisted of state and municipal debt securities, primarily
auction-rate preferred notes and variable-rate demand notes. During the third quarter of 2006, we completed the sale of our PC audio codec product line to IDT for total consideration of $81.5 million. 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. Of the purchase price, $7.2 million was deposited into an escrow account upon closing for purposes of settling indemnification claims
for the one-year period following the closing and is classified as restricted cash in the consolidated balance sheets. The cash consideration was offset by $2.5 million in closing costs. Refer to Note 8 of Notes to Consolidated Financial Statements
for additional information on this disposition.

Operating Activities. Net cash used in operating activities was $49.9 million
during the year ended December 31, 2006, compared to net cash provided of $81.4 million for the year ended December 31, 2005. Operating cash flows during the year ended December 31, 2006, reflect our net loss for $109.0 million, and a
gain on asset dispositions of $45.7 million, offset by adjustments primarily for the goodwill impairment of $63.3 million and write-down of long lived assets for $18.5 million, depreciation, amortization, and stock-based compensation expense of
$24.7 million, excess tax expense from employee stock option plans of $1.0 million, and a net decrease from the changes in assets and liabilities of $0.8 million. Our accounts receivable decreased $36.1 million during the year ended
December 31, 2006, due to decreases in revenues and the timing of customer payments, compared to an increase of $11.6 million, during the year ended December 31, 2005. Our accounts payable decreased $29.4 million during the year ended
December 31, 2006, primarily due to less inventory purchases, compared to an increase of $23.5 million, during the year ended December 31, 2005. Our inventories increased $3.1 million during the year ended December 31, 2006, due to
decreases in demand for our products during the beginning of 2006, compared to a decrease of $2.0 million during the year ended December 31, 2005. In 2005, the increase in inventory was driven by the higher levels of demand for our products at
that time, primarily from Creative and ASUSTEK Computer, Inc. Our reserve for slow-moving and obsolete inventory as a percentage of total inventory was 13.9% and 9.0% as of December 31, 2006, and December 31, 2005, respectively. We monitor
and analyze our inventory for obsolescence, adjust this reserve accordingly, and as a result, the reserve increased by $1.0 million during the year ended December 31, 2006.

The decrease in deferred revenue and other liabilities of $9.1 million during the year ended December 31, 2006, includes an $8.9 million decrease in
deferred revenue and a $0.2 million decrease in deferred rent and other liabilities. The decrease in deferred revenue is primarily due to reduced product shipments in 2006, as well as improved management of distributor inventory. Our deferred
revenue and other liabilities decreased by $1.2 million during the year ended December 31, 2005 due to a shift to direct sales and improved management of distributor inventory levels. Income taxes payable decreased by $1.0 million and $3.2
million for the years ended December 31, 2006 and 2005, respectively.

Investing Activities. Our investing activities provided
cash of $41.6 million and used cash of $47.0 million during the years ended December 31, 2006 and 2005, respectively. Cash received from investing activities during the year ended December 31, 2006, consisted primarily of the proceeds
received from the sale of our PC audio codec product line to IDT. Cash used for investing activities during the year ended December 31, 2005 consisted primarily of the cash used in the acquisitions of Protocom, Oasis, and certain assets from
Rio and Apogee. Investing activities during the years ended December 31, 2006 and 2005 also included proceeds from maturities of and purchases of short-term investments, and purchases of property, plant, equipment, software and intangible
assets.

The fair value of our investments in marketable securities at December 31, 2006, was $62.8 million. Investments with
maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. Our investment policy is to manage our
investment portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio through the full investment of available funds. We diversify the marketable securities portfolio by investing in multiple types of
investment-grade securities. Our investment portfolio is primarily invested in short-term securities, with at least an investment grade rating, to minimize interest rate and credit risk as well as to provide for an immediate source of funds.



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##### Index to Financial Statements

Capital expenditures were $12.1 million and $15.4 million during the years ended December 31, 2006
and 2005, respectively. These expenditures during the year ended December 31, 2006, were incurred primarily for the purchase of engineering tools, computer equipment, and software.

Financing Activities. Our financing activities used $26.9 million and provided $4.1 million of cash during the years ended December 31, 2006
and 2005, 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 $2.4 million and $4.2 million in proceeds from the exercise of employee stock options and our Employee Stock Purchase Plan (ESPP) during the years ended December 31, 2006 and 2005, 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.

Contractual Obligations. The following table describes our commitments to settle contractual obligations in cash as of December 31, 2006:



|                                                                                      |  |                                       |        |                  |   |           |  |           |        |                  |   |        |  |   |      
|------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ---------------- | - | --------- |  | --------- | ------ | ---------------- | - | ------ |  | - | -----
|                                                                                      |  | Amount of Commitment Maturing by Year
|                                                                                      |  | (in thousands)                       
|                                                                                      |  | Total                                 |        | Less than 1 year |   | 1-3 years |  | 3-5 years |        | More than5 years
|Operating leases                                                                      |  | $                                     | 37,320 |                  | $ | 7,485     |  | $         | 12,790 |                  | $ | 10,478 |  | $ | 6,567
|Capital leases                                                                        |  |                                       | 406    |                  |   | 256       |  |           | 150    |                  |   |       |  |   |     
|Long-term liabilities (excluding amounts related to operating leases presented above) |  |                                       | 51     |                  |   | 36        |  |           |       |                  |   |       |  |   | 15   
|Other liabilities                                                                     |  |                                       | 1,145  |                  |   | 635       |  |           | 510    |                  |   |       |  |   |     
|Purchase obligations (primarily inventory)                                            |  |                                       | 15,712 |                  |   | 11,722    |  |           | 3,094  |                  |   | 896    |  |   |     
|                                                                                      |  |                                       |        |                  |   |           |  |           |        |                  |   |        |  |   |      
|Total commitments                                                                     |  | $                                     | 54,634 |                  | $ | 20,134    |  | $         | 16,544 |                  | $ | 11,374 |  | $ | 6,582

Capital Requirements. We expect to reduce our operating expenses in future periods from
current levels. Additionally, we may evaluate opportunities to invest in or acquire other businesses, intellectual property or technologies that would compliment or expand our current offerings, expand the breadth of our markets or enhance our
technical capabilities. We intend to fund these activities with cash generated from operations and existing cash balances. We anticipate that operating expenses, changes in working capital, and capital expenditures will continue to constitute a
material use of our cash resources.

Based on current business conditions and our current operating and financial plans, we believe our
existing cash, restricted cash and short-term investments balances, will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our level of revenues,
the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products, the costs to ensure access to adequate manufacturing capacity, and the continuing
market acceptance of our products. We could be required, or could elect, to seek additional funding through public or private equity or debt financing and additional funds may not be available on terms acceptable to us or at all. If we are unable to
obtain additional financing if needed, we may be required to reduce the scope of our planned product development and sales and marketing efforts, which could harm our business, financial conditions, and operating results. We may enter into strategic
arrangements in the future which also could require us to seek additional equity or debt financing. We would have recognized a more significant net loss for the year ended December 31, 2006, if we excluded the $45.6 million pre-tax gain on the
sale of our PC audio codec product line to IDT and 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 U.S. The preparation of these financial



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##### Index to Financial Statements

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 Consolidated Financial Statements).

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

Inventory Valuation. We value our inventory at the lower of the standard costs 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. Prior to fiscal 2006, we accounted for employee stock awards under the Companys compensation plans
under the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,Financial Accounting Standards Board (FASB) Interpretation
No. 44, Emerging Issues Task Force (EITF) Issue No. 00-23, and the related interpretations, as permitted by SFAS 123, Accounting for Stock-Based Compensation (SFAS 123). Compensation costs related to stock options
granted at fair value were not recognized in the consolidated statements of operations. Compensation costs related to stock options granted below fair value were recognized in the consolidated statements of operations. In December 2004, FASB issued
SFAS 123 (revised 2004), Share-Based Payment (SFAS 123R). Under the new standard, companies are no longer able to account for share-based compensation transactions using the intrinsic value method in accordance with APB Opinion
No. 25. Instead, companies are required to account for such transactions using a fair-value method and recognize the expense in their statements of operations.

Effective January 1, 2006, we adopted SFAS 123R using the modified-prospective transition method. Under this transition method, stock compensation cost recognized beginning January 1, 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. Upon adoption of SFAS 123R, the Company elected to use the
transition method described in FASB Staff Position No. 123R-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards, in determining windfall pool of tax benefits. Results of prior periods have not
been restated (see Note 10 of Notes to Consolidated Financial Statement).

On December 31, 2005, we accelerated the vesting of
approximately 1.8 million unvested stock options outstanding under our stock plans with exercise prices per share of $20.00 or higher. The options had a range of exercise prices between $20.03 and $55.86



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##### Index to Financial Statements

and a weighted average exercise price of $31.10. The closing price of our common stock on December 16, 2005, the day our Board of Directors approved the
acceleration, was $13.34. In accordance with SFAS No. 123, we expensed the remaining unrecognized compensation cost associated with the options with accelerated vesting in the pro forma disclosure. These actions were taken in order to avoid
expense recognition in future financial statements upon adoption of SFAS 123R. The aggregate pre-tax expense associated with the accelerated options that would have been reflected in our consolidated financial statements in future fiscal years was
approximately $25.9 million, which was included in the pro forma disclosure of stock-based employee compensation expense for the year ended December 31, 2005.

As a result of adopting SFAS 123R on January 1, 2006, our loss before income taxes for the year ended December 31, 2006, included $10.2 million of stock compensation expense that would not have been
recognized if we continued to account for share-based compensation under APB Opinion No. 25. Applying the provisions of SFAS 109, Accounting for Income Taxes (SFAS 109), on an annual basis, the adoption of SFAS 123R had a
negative $8.0 million impact on the net loss for the year ended December 31, 2006. Also, basic and diluted loss per share for the same period were $0.23 higher due to our adopting SFAS 123R.

Prior to adopting SFAS 123R, we presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the
consolidated statements of cash flows. SFAS 123R requires the cash flows resulting from the tax benefits from tax deductions in excess of recognized compensation cost (excess tax benefits) to be classified as financing cash flows. This requirement
reduced net operating cash flows and increased net financing cash flows for the year ended December 31, 2006, by approximately $1.0 million.

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

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

During the year ended December 31, 2006, no Restricted Stock Units (RSUs) vested. We had $15.5 million
of total unrecognized compensation costs related to stock options and RSUs at December 31, 2006, that are expected to be recognized over a weighted-average period of 2.5 years.

Impairment of Long-Lived Assets. We evaluate long-lived assets held and used by us for impairment 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.

Goodwill. Goodwill is tested for impairment at the reporting unit level at least annually
during the fourth quarter of each fiscal year and more frequently if events and circumstances indicate that goodwill may be impaired. Impairment of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair
value of a reporting unit with its carrying value. We estimate the fair values of our reporting units using a weighted calculation of a discounted cash flow method and a market capitalization method. These methods require estimates of our future
revenues, profits, capital expenditures, working capital, and other relevant factors, as well as selecting appropriate guideline publicly-traded companies for each reporting unit. We estimate these amounts by evaluating historical trends, current
budgets, operating plans, industry data, and other relevant factors. If the carrying amount of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the fair value and carrying value of the goodwill of
that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.



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##### Index to Financial Statements

Acquired In-Process Research and Development (IPR&D). When we acquire another
entity, or material assets of another entity, the purchase price is allocated, as applicable, between net tangible assets, IPR&D, other identifiable intangible assets, and goodwill. Our policy defines IPR&D as the value assigned to those
projects for which the related products have not reached technological feasibility and have no alternative future use. Determining the portion of the purchase price allocated to IPR&D requires SigmaTel to make significant estimates. The amount
of the purchase price allocated to IPR&D is determined by estimating the future cash flows of each project or technology and discounting the net cash flows back to their present values. The discount rate used is determined at the time of
acquisition, in accordance with accepted valuation methods, and includes consideration of the assessed risk of the project not being developed to a stage of commercial feasibility. The $11.6 million in IPR&D related to the 2005 Protocom, Oasis
and Apogee acquisitions was charged to operations during the year ended December 31, 2005.

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

As a multinational corporation, we are subject to taxation in numerous jurisdictions. The determination of the provision for income taxes requires
SigmaTel to take positions on certain issues where there is uncertainty in the application of the tax law. The 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 SigmaTels income tax returns. The ultimate resolution of these uncertainties may result in an assessment that is materially different from the current estimate of the liability and may
result in significant income tax benefits or expenses being recognized in a future period.

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 our 2008 fiscal year. The adjustment to reflect the difference between the fair value and the carrying amount would be
accounted for as a cumulative-effect adjustment to retained earnings as of the date of initial adoption. We are currently evaluating the impact, if any, of SFAS 159 on our Consolidated Financial Statements.

In September 2006, the FASB issued Statement 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 September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a
materiality assessment. SAB 108 is effective for fiscal years ending after November 17, 2006, allowing a one-time transitional cumulative effect adjustment to beginning retained earnings as of January 1, 2006, for errors that were not
previously deemed material, but are material under the guidance in SAB 108. The Company adoption of SAB 108 has not had an impact on the Companys consolidated financial statements.

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



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##### Index to Financial Statements

deemed to accumulate, then the compensation cost associated with a sabbatical or other similar benefit arrangement should be accrued over the requisite
service period. The provisions of this Issue are effective for fiscal years beginning after December 15, 2006 and allow for either retrospective application or a cumulative effect adjustment to retained earnings approach upon adoption. We will
apply the accounting prescribed by Issue 06-2 to our sabbatical leave policy in fiscal year 2007 and we are currently evaluating the impact, if any, that the adoption of this Issue will have on our 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. FIN 48 is effective for fiscal years beginning after December 15, 2006. The differences between the amounts recognized in the statements of financial position prior to the adoption of FIN
48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. We are still evaluating the impact, if any, of adopting the provisions of FIN 48 on our
financial position, results of operations.



|Item 7A. | 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 December 31, 2006, all of our investments were in money market accounts or investment grade securities.

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



|Item 8. | Financial Statements and Supplementary Data.
|------- | --------------------------------------------

The
consolidated financial statements and supplementary data required by this item are included in Part IV, Item 15 of this Form 10-K and are presented beginning on page F-1.

The following tables set forth our unaudited quarterly statements of operations for each of the eight quarters ended December 31, 2006, as well as
such data expressed as a percentage of our revenues for the quarters presented. We have prepared the unaudited information on the same basis as our audited financial statements. This table includes all adjustments, consisting only of normal
recurring adjustments that we consider necessary for a fair statement. Operating results for any quarter are not necessarily indicative of results for any future periods.



|                                                                         |  |                                                   |          |   |                   |   |         |              |  |   |               |   |  |                  |         |   |                   |   |        |              |  |   |               |   |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------ |  | ------------------------------------------------- | -------- | - | ----------------- | - | ------- | ------------ |  | - | ------------- | - |  | ---------------- | ------- | - | ----------------- | - | ------ | ------------ |  | - | ------------- | - |  | - | ------ | - |  | - | ------ | -
|                                                                         |  | Three Months Ended                                |         
|                                                                         |  | December 31,2006                                  |          |   | September 30,2006 |   |         | June 30,2006 |  |   | March 31,2006 |   |  | December 31,2005 |         |   | September 30,2005 |   |        | June 30,2005 |  |   | March 31,2005 |  
|                                                                         |  | (in thousands, except per share data) (unaudited) |         
|Statements of Operations Data:                                           |  |                                                   |          |   |                   |   |         |              |  |   |               |   |  |                  |         |   |                   |   |        |              |  |   |               |   |  |   |        |   |  |   |        |  
|Revenues, net                                                            |  | $                                                 | 37,524   |   |                   | $ | 45,008  |              |  | $ | 43,812        |   |  | $                | 33,021  |   |                   | $ | 82,007 |              |  | $ | 73,540        |   |  | $ | 69,572 |   |  | $ | 99,338 |  
|Gross profit                                                             |  |                                                   | 13,822   |   |                   |   | 17,207  |              |  |   | 18,922        |   |  |                  | 14,730  |   |                   |   | 42,397 |              |  |   | 37,358        |   |  |   | 38,573 |   |  |   | 57,044 |  
|Research and development                                                 |  |                                                   | 21,971   |   |                   |   | 23,416  |              |  |   | 23,061        |   |  |                  | 22,192  |   |                   |   | 22,260 |              |  |   | 28,691        |   |  |   | 13,024 |   |  |   | 12,001 |  
|Selling, general and administrative                                      |  |                                                   | 12,320   |   |                   |   | 11,294  |              |  |   | 12,639        |   |  |                  | 13,993  |   |                   |   | 15,668 |              |  |   | 10,772        |   |  |   | 9,430  |   |  |   | 7,163  |  
|Goodwill impairment                                                      |  |                                                   | 63,334   |   |                   |   |        |              |  |   |              |   |  |                  |        |   |                   |   |       |              |  |   |              |   |  |   |       |   |  |   |       |  
|Impairment of long lived assets                                          |  |                                                   | 18,477   |   |                   |   |        |              |  |   |              |   |  |                  |        |   |                   |   |       |              |  |   |              |   |  |   |       |   |  |   |       |  
|Gain on asset disposition                                                |  |                                                   |         |   |                   |   | (45,673 | )            |  |   |               |   |  |                  |         |   |                   |   |        |              |  |   |               |   |  |   |        |   |  |   |        |  
|Total operating expenses                                                 |  |                                                   | 116,102  |   |                   |   | (10,963 | )            |  |   | 35,700        |   |  |                  | 36,185  |   |                   |   | 37,928 |              |  |   | 39,463        |   |  |   | 22,454 |   |  |   | 19,164 |  
|Operating income (loss)                                                  |  |                                                   | (102,280 | ) |                   |   | 28,170  |              |  |   | (16,778       | ) |  |                  | (21,455 | ) |                   |   | 4,469  |              |  |   | (2,105        | ) |  |   | 16,119 |   |  |   | 37,880 |  
|Net income (loss)                                                        |  |                                                   | (98,735  | ) |                   |   | 11,510  |              |  |   | 2,927         |   |  |                  | (24,726 | ) |                   |   | 4,646  |              |  |   | (5,193        | ) |  |   | 10,896 |   |  |   | 25,530 |  
|Basic net income (loss) per share                                        |  | $                                                 | (2.78    | ) |                   | $ | 0.33    |              |  | $ | 0.08          |   |  | $                | (0.69   | ) |                   | $ | 0.13   |              |  | $ | (0.14         | ) |  | $ | 0.31   |   |  | $ | 0.72   |  
|Diluted net income (loss) per share                                      |  | $                                                 | (2.78    | ) |                   | $ | 0.32    |              |  | $ | 0.08          |   |  | $                | (0.69   | ) |                   | $ | 0.12   |              |  | $ | (0.14         | ) |  | $ | 0.29   |   |  | $ | 0.68   |  
|Basic weighted-average number of shares used in per share calculations   |  |                                                   | 35,483   |   |                   |   | 35,043  |              |  |   | 34,881        |   |  |                  | 35,787  |   |                   |   | 37,141 |              |  |   | 36,267        |   |  |   | 35,704 |   |  |   | 35,398 |  
|Diluted weighted-average number of shares used in per share calculations |  |                                                   | 35,483   |   |                   |   | 35,608  |              |  |   | 35,695        |   |  |                  | 35,787  |   |                   |   | 38,541 |              |  |   | 36,267        |   |  |   | 37,351 |   |  |   | 37,756 |  
|                                                                         |  |                                                   |          |   |                   |   |         |             
|As a Percentage of Revenues:                                             |  |                                                   |          |   |                   |   |         |              |  |   |               |   |  |                  |         |   |                   |   |        |              |  |   |               |   |  |   |        |   |  |   |        |  
|Revenues, net                                                            |  |                                                   | 100.0    | % |                   |   | 100.0   | %            |  |   | 100.0         | % |  |                  | 100.0   | % |                   |   | 100    | %            |  |   | 100.0         | % |  |   | 100.0  | % |  |   | 100.0  | %
|Gross profit                                                             |  |                                                   | 36.8     |   |                   |   | 38.2    |              |  |   | 43.2          |   |  |                  | 44.6    |   |                   |   | 51.7   |              |  |   | 50.8          |   |  |   | 55.4   |   |  |   | 57.4   |  
|Research and development                                                 |  |                                                   | 58.6     |   |                   |   | 52.0    |              |  |   | 52.6          |   |  |                  | 67.2    |   |                   |   | 27.1   |              |  |   | 39.0          |   |  |   | 18.7   |   |  |   | 12.1   |  
|Selling, general and administrative                                      |  |                                                   | 32.8     |   |                   |   | 25.1    |              |  |   | 28.8          |   |  |                  | 42.4    |   |                   |   | 19.1   |              |  |   | 14.6          |   |  |   | 13.6   |   |  |   | 7.2    |  
|Goodwill impairment                                                      |  |                                                   | 168.8    |   |                   |   |        |              |  |   |              |   |  |                  |        |   |                   |   |       |              |  |   |              |   |  |   |       |   |  |   |       |  
|Impairment of long lived assets                                          |  |                                                   | 49.2     |   |                   |   |        |              |  |   |              |   |  |                  |        |   |                   |   |       |              |  |   |              |   |  |   |       |   |  |   |       |  
|Gain on asset disposition                                                |  |                                                   |          |   |                   |   | (101.5  | )            |  |   |              |   |  |                  |        |   |                   |   |       |              |  |   |              |   |  |   |       |   |  |   |       |  
|Total operating expenses                                                 |  |                                                   | 309.4    |   |                   |   | (24.4   | )            |  |   | 81.5          |   |  |                  | 109.6   |   |                   |   | 46.3   |              |  |   | 53.7          |   |  |   | 32.2   |   |  |   | 19.3   |  
|Operating income (loss)                                                  |  |                                                   | (272.6   | ) |                   |   | 62.6    |              |  |   | (38.3         | ) |  |                  | (65.0   | ) |                   |   | 5.4    |              |  |   | (2.9          | ) |  |   | 23.2   |   |  |   | 38.1   |  
|Net income (loss)                                                        |  |                                                   | (263.1   | ) |                   |   | 25.6    |              |  |   | 6.7           |   |  |                  | (74.9   | ) |                   |   | 5.7    |              |  |   | (7.1          | ) |  |   | 15.7   |   |  |   | 25.7   |  



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##### Index to Financial Statements

|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
|------- | -------------------------------------------------------------------------------------

None.



|Item 9A. | Controls and Procedures
|-------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely
decisions regarding required disclosure.

We carried out an evaluation under the supervision and with the participation of our management,
including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2006. Based upon this evaluation, our CEO and CFO have concluded that, because of the material weakness in
internal control over financial reporting described below, our disclosure controls and procedures were not effective at the reasonable assurance level as of December 31, 2006. Due to the material weakness described below, we performed additional
analysis and other post-closing procedures to ensure that the consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in
this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

Managements Report on Internal Control over Financial Reporting

Our management is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2006. In making its assessment of internal
control over financial reporting, management used the criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented or detected. As of December 31, 2006, 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. This control deficiency resulted in a reclassification in the income taxes payable accounts in the Companys interim consolidated financial statements for the second quarter of 2006. Additionally, this control deficiency could result
in a misstatement to the income tax provision or income taxes payable accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management
has determined that this control deficiency constitutes a material weakness. Because of this material weakness, management (including our CEO and CFO) has concluded that, as of December 31, 2006, we did not maintain effective internal control over
financial reporting, based on the criteria established in Internal Control  Integrated Framework issued by the COSO.

Managements assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their
report which is included herein.



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Plan for Remediation of Material Weakness in Internal Control over Financial Reporting

We are taking the following steps to remediate the material weakness in internal control over financial reporting described above:



| |  |  | implement new processes around the analysis of the income tax provision, primarily related to tax reserves;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | implement additional procedures around the identification, analysis and recording of the tax effects of significant transactions; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | have the outside experts who assist us with the preparation and review of the consolidated tax provision, balance sheet and footnote disclosures spend additional
time in performing their review of the provision and key issues.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We believe these steps will enable us to remediate the
material weakness reported at December 31, 2006. As part of our 2007 assessment of internal control over financial reporting, our management will conduct sufficient testing and evaluation of the controls to be implemented as part of this remediation
plan to ascertain that they operate effectively.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2006 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.



|Item 9B. | Other Information.
|-------- | ------------------

None.

PART III

Certain information required by Part III is omitted from this report because we intend to file
a definitive Proxy Statement pursuant to Regulation 14A (the Proxy Statement) no later than 120 days after the end of the fiscal year covered by this report, and certain information to be included therein is incorporated herein by
reference.



|Item 10. | Directors, Executive Officers and Corporate Governance.
|-------- | -------------------------------------------------------

The information required by this Item is incorporated by reference to the Proxy Statement under the sections captioned Management, Section 16A Beneficial Ownership Reporting Compliance, and Corporate
Governance.



|Item 11. | Executive Compensation.
|-------- | -----------------------

The information under the
captions Executive Compensation, Corporate Governance, and Compensation Committee Report appearing in the Proxy Statement is incorporated herein by reference.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
|-------- | -----------------------------------------------------------------------------------------------

The information under the captions Ownership of Securities and Equity Compensation Plan Information appearing in the Proxy
Statement is incorporated herein by reference.



|Item 13. | Certain Relationships and Related Transactions, and Director Independence.
|-------- | --------------------------------------------------------------------------

The information under the caption Certain Relationships and Related Transactions, and Corporate Governance appearing in the Proxy Statement is incorporated herein by reference.



42



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##### Table of Contents

##### Index to Financial Statements

|Item 14. | Principal Accountant Fees and Services.
|-------- | ---------------------------------------

The
information under the caption Principal Accountant Fees and Services appearing in the Proxy Statement is incorporated herein by reference.

PART IV



|Item 15. | Exhibits and Financial Statement Schedules.
|-------- | -------------------------------------------



| | (a) | 1. Financial Statements
| | --- | -----------------------



|                                                           |  |     
|---------------------------------------------------------- |  | ----
|                                                           |  | Page
|Report of Independent Registered Public Accounting Firm    |  | F-2 
|Consolidated Balance Sheets                                |  | F-4 
|Consolidated Statements of Operations                      |  | F-5 
|Consolidated Statements of Changes in Stockholders Equity |  | F-6 
|Consolidated Statements of Cash Flows                      |  | F-7 
|Notes to Consolidated Financial Statements                 |  | F-8 

2. Schedules

See Schedule II  Valuation and Qualifying Accounts at page S-1.

3. Exhibits

The exhibits listed on the accompanying index to exhibits in Item 15(c) below are filed as part of, or hereby incorporated by reference into, this Form 10-K.



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

See Exhibit Index after the
signature page hereto.



43



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##### Table of Contents

##### Index to Financial Statements

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in Austin, Texas, on March 16, 2007.



SIGMATEL, INC.By:

/s/ Phillip E. PompaPhillip E. PompaPresident and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:



|                                            |  |                                                                                                    |  |               
|------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | --------------
|NAME                                        |  | TITLE                                                                                              |  | DATE          
|                                            |  |                                                                                                   
|/s/ Phillip E. Pompa Phillip E.
Pompa       |  | President and Chief Executive Officer (principal
executive officer)                                |  | March 16, 2007
|                                            |  |                                                                                                   
|/s/ R. Scott Schaefer R. Scott
Schaefer     |  | Vice President of Finance and Chief Financial Officer (principal financial and accounting officer) |  | March 16, 2007
|                                            |  |                                                                                                   
|/s/ William P. Osborne William P.
Osborne   |  | Chairman of the Board of Directors                                                                 |  | March 16, 2007
|                                            |  |                                                                                                   
|/s/ Robert T. Derby Robert T.
Derby         |  | Director                                                                                           |  | March 16, 2007
|                                            |  |                                                                                                   
|/s/ Alexander M. Davern Alexander M.
Davern |  | Director                                                                                           |  | March 16, 2007



44



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##### Table of Contents

##### Index to Financial Statements

EXHIBIT INDEX



|               |  |                                                                                                                                                                                                                                                                                               
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  |                                                                                                                                                                                                                                                                                               
|2.1(1)         |  | Agreement and Plan of Reorganization, dated July 26, 2005, by and between SigmaTel, Inc., Amoeba Acquisition Corporation, Amoeba II Acquisition Corporation, Protocom Corporation, certain
shareholders of Protocom, and Ren-Yuh Wang, as shareholders agent for the shareholders of Protocom
|               | 
|2.2(2)         |  | Agreement and Plan of Reorganization, dated September 6, 2005, by and between SigmaTel, Inc., PPR Acquisition Corporation, Oasis Semiconductor, Inc., certain stockholders of Oasis and William H.
Wrean, Jr., as stockholders agent for the stockholders of Oasis                           
|               | 
|2.3(3)         |  | Asset Purchase Agreement, dated July 25, 2006, by and between Sigmatel and IDT.                                                                                                                                                                                                               
|               | 
|3.1(4)         |  | Second Restated Certificate of Incorporation of SigmaTel, Inc.                                                                                                                                                                                                                                
|               | 
|3.2(5)         |  | Amended and Restated Bylaws of SigmaTel, Inc.                                                                                                                                                                                                                                                 
|               | 
|4.1(5)         |  | Specimen certificate for shares of common stock                                                                                                                                                                                                                                               
|               | 
|10.1(9)        |  | SigmaTel 1995 Stock Option/Stock Issuance Plan, as amended to date                                                                                                                                                                                                                            
|               | 
|10.2(6)        |  | SigmaTel 2003 Equity Incentive Plan                                                                                                                                                                                                                                                           
|               | 
|10.3           |  | Forms of Stock Option and Restricted Stock Units Agreements and Stock Option and Restricted Stock Units Grant Notices                                                                                                                                                                         
|               | 
|10.4(7)        |  | Lease Agreement effective August 6, 1999, by and between SigmaTel and Desta Two Partnership Ltd.                                                                                                                                                                                              
|               | 
|10.5(8)        |  | Amendment No. 1 to Lease Agreement, effective January 1, 2000, by and between SigmaTel and Desta Two Partnership Ltd.                                                                                                                                                                         
|               | 
|10.6(9)        |  | Sublease dated July 16 2001, by and between SigmaTel and Texas Networking, Inc.                                                                                                                                                                                                               
|               | 
|10.7(10)       |  | Office Building Lease Agreement dated June 12, 2000, by and between SigmaTel and BC Plaza II/III Ltd.                                                                                                                                                                                         
|               | 
|10.8(11)       |  | Executive Employment Agreement dated as of March 26, 2001 by and between Ronald Edgerton and SigmaTel                                                                                                                                                                                         
|               | 
|10.9(12)       |  | Form of Indemnification Agreement for directors and officers                                                                                                                                                                                                                                  
|               | 
|10.10(13)      |  | Executive Employment Agreement dated as of May 20, 2003 by and between Ross Goolsby and SigmaTel                                                                                                                                                                                              
|               | 
|10.11(14)      |  | Lease Agreement dated July 29, 2004, by and between SigmaTel, Inc. and Prentiss Properties Acquisition Partners, L.P.                                                                                                                                                                         
|               | 
|10.12(15)      |  | Independent Contracting Agreement between SigmaTel, Inc. and Robert Derby, effective October 19, 2004                                                                                                                                                                                         
|               | 
|10.13(16)      |  | Incentive Bonus Plan                                                                                                                                                                                                                                                                          
|               | 
|10.14(17)      |  | First Amendment to Lease dated November 2, 2005, by and between SigmaTel, Inc. and Prentiss Properties Acquisition Partners, L.P.                                                                                                                                                             
|               | 
|10.14(17)      |  | SigmaTel, Inc. Executive Change in Control Severance Plan                                                                                                                                                                                                                                     
|               | 
|10.15(18)      |  | SigmaTel, Inc. Executive Change in Control Severance Plan.                                                                                                                                                                                                                                    
|               | 
|21.1           |  | List of SigmaTels subsidiaries                                                                                                                                                                                                                                                               
|               | 
|23.1           |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                      
|               | 
|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 the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 1, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------



45



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##### Table of Contents

##### Index to Financial Statements

|(2) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 12, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to exhibit 2.1 to the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 28, 2006.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 25, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to exhibit 10.7 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to exhibit 10.8 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference to exhibit 10.9 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference to exhibit 10.10 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.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference to exhibit 10.12 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.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference to exhibit 10.15 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.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Incorporated by reference to exhibit 10.16 to the Registrants Form S-1 Registration Statement (Registration No. 333-112280), filed with the Securities and Exchange Commission
on January 28, 2004.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Incorporated by reference to exhibit 10.17 to the Registrants Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on October 19, 2004.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) | Incorporated by reference to exhibit 99.1 to the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 19, 2004.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(16) | Incorporated by reference to exhibit 10.1 to the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 2, 2005.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(17) | Incorporated by reference to exhibit 10.16 to the Registrants Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 24, 2006.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(18) | Incorporated by reference to exhibit 2.1 to the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 28, 2006.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------



46



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Index to Consolidated Financial Statements



|                                                           |  |     
|---------------------------------------------------------- |  | ----
|                                                           |  | Page
|Report of Independent Registered Public Accounting Firm    |  | F-2 
|Consolidated Balance Sheets                                |  | F-4 
|Consolidated Statements of Operations                      |  | F-5 
|Consolidated Statements of Changes in Stockholders Equity |  | F-6 
|Consolidated Statements of Cash Flows                      |  | F-7 
|Notes to Consolidated Financial Statements                 |  | F-8 



F-1



---

##### Table of Contents

##### Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of SigmaTel, Inc.:

We have completed integrated audits of SigmaTel, Inc.s consolidated financial statements and of its internal control over financial reporting as of
December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial
statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of SigmaTel, Inc. and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are
the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the
consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2006.

Internal control over
financial reporting

Also, we have audited managements assessment, included in Managements Report on Internal Control over Financial
Reporting appearing under Item 9A, that SigmaTel, Inc. did not maintain effective internal control over financial reporting as of December 31, 2006, because of the effect of not maintaining effective controls over the completeness and accuracy of
the income tax provision and related income taxes payable and deferred income tax accounts, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to
express opinions on managements assessment and on the effectiveness of the Companys internal control over financial reporting based on our audit.

We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over
financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



F-2



---

##### Table of Contents

##### Index to Financial Statements

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in managements assessment. As of December 31, 2006, the
Company 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, the Company 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. This control deficiency resulted in a reclassification in the income taxes payable accounts in the
Companys interim consolidated financial statements for the second quarter of 2006. Additionally, this control deficiency could result in a misstatement to the income tax provision or income taxes payable accounts that would result in a
material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. This material weakness wasconsidered in determining the nature, timing, and extent of audit tests applied in our audit
of the 2006 consolidated financial statements, and our opinion regarding the effectiveness of the Companys internal control over financial reporting does not affect our opinion on those consolidated financial statements.

In our opinion, managements assessment that SigmaTel, Inc. did not maintain effective internal control over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on criteria established in Internal Control  Integrated Framework issued by the COSO. Also, in our opinion, because of the effect of the material weakness described above on the achievement of the
objectives of the control criteria, SigmaTel, Inc. has not maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control  Integrated Framework issued by the
COSO.

PricewaterhouseCoopers LLP

Austin, Texas

March 14, 2007



F-3



---

##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Consolidated Balance Sheets

(in thousands)



|                                                                                                                                                                 |  |              |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                 |  | December 31, |        
|                                                                                                                                                                 |  | 2006         |         |   | 2005 |  
|ASSETS                                                                                                                                                           |  |              |         |   |      |   |         |  
|Current Assets:                                                                                                                                                  |  |              |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                                        |  | $            | 30,686  |   |      | $ | 65,712  |  
|Restricted cash                                                                                                                                                  |  |              | 7,354   |   |      |   |        |  
|Short-term investments                                                                                                                                           |  |              | 62,800  |   |      |   | 53,172  |  
|Accounts receivable, net                                                                                                                                         |  |              | 12,556  |   |      |   | 48,633  |  
|Inventories, net                                                                                                                                                 |  |              | 20,794  |   |      |   | 23,534  |  
|Income tax receivable                                                                                                                                            |  |              | 3,365   |   |      |   | 5,492   |  
|Prepaid expenses and other assets                                                                                                                                |  |              | 5,591   |   |      |   | 8,723   |  
|                                                                                                                                                                 |  |              |         |   |      |   |         |  
|Total current assets                                                                                                                                             |  |              | 143,146 |   |      |   | 205,266 |  
|                                                                                                                                                                 |  |             
|Property, equipment and software, net                                                                                                                            |  |              | 13,301  |   |      |   | 14,200  |  
|Intangible assets, net                                                                                                                                           |  |              | 15,370  |   |      |   | 37,678  |  
|Goodwill                                                                                                                                                         |  |              |        |   |      |   | 84,203  |  
|Other assets                                                                                                                                                     |  |              | 1,574   |   |      |   | 2,095   |  
|                                                                                                                                                                 |  |              |         |   |      |   |         |  
|Total assets                                                                                                                                                     |  | $            | 173,391 |   |      | $ | 343,442 |  
|                                                                                                                                                                 |  |              |         |   |      |   |         |  
|                                                                                                                                                                 |  |             
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                             |  |              |         |   |      |   |         |  
|Current Liabilities:                                                                                                                                             |  |              |         |   |      |   |         |  
|Accounts payable                                                                                                                                                 |  | $            | 16,338  |   |      | $ | 50,146  |  
|Accrued compensation                                                                                                                                             |  |              | 8,712   |   |      |   | 7,020   |  
|Other accrued expenses                                                                                                                                           |  |              | 8,056   |   |      |   | 6,442   |  
|Deferred revenue                                                                                                                                                 |  |              | 1,242   |   |      |   | 10,093  |  
|Current portion of long-term obligations                                                                                                                         |  |              | 229     |   |      |   | 528     |  
|                                                                                                                                                                 |  |              |         |   |      |   |         |  
|Total current liabilities                                                                                                                                        |  |              | 34,577  |   |      |   | 74,229  |  
|Non-current income taxes payable                                                                                                                                 |  |              | 4,453   |   |      |   | 7,906   |  
|Other liabilities                                                                                                                                                |  |              | 809     |   |      |   | 2,113   |  
|                                                                                                                                                                 |  |              |         |   |      |   |         |  
|Total liabilities                                                                                                                                                |  |              | 39,839  |   |      |   | 84,248  |  
|                                                                                                                                                                 |  |              |         |   |      |   |         |  
|                                                                                                                                                                 |  |             
|Commitments and contingencies (see Note 12)                                                                                                                      |  |              |         |   |      |   |         |  
|                                                                                                                                                                 |  |             
|Stockholders Equity:                                                                                                                                            |  |              |         |   |      |   |         |  
|Common stock, $0.0001 par value; 170,000 shares authorized; shares issued and outstanding: 35,603 and 35,513 at 2006 and 37,507 and 37,417 at
2005, respectively |  |              | 4       |   |      |   | 4       |  
|Additional paid-in capital                                                                                                                                       |  |              | 197,711 |   |      |   | 218,492 |  
|Notes receivable from stockholders                                                                                                                               |  |              | (5      | ) |      |   | (5      | )
|Deferred stock-based compensation                                                                                                                                |  |              |        |   |      |   | (3,874  | )
|Treasury stock, 90 common shares at cost                                                                                                                         |  |              | (741    | ) |      |   | (741    | )
|Accumulated surplus (deficit)                                                                                                                                    |  |              | (63,687 | ) |      |   | 45,337  |  
|Accumulated other comprehensive income (loss)                                                                                                                    |  |              | 270     |   |      |   | (19     | )
|                                                                                                                                                                 |  |              |         |   |      |   |         |  
|Total stockholders equity                                                                                                                                       |  |              | 133,552 |   |      |   | 259,194 |  
|                                                                                                                                                                 |  |              |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                                                       |  | $            | 173,391 |   |      | $ | 343,442 |  
|                                                                                                                                                                 |  |              |         |   |      |   |         |  

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



F-4



---

##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)



|                                                                        |  |                         |          |   |      |   |         |      |  |   |        
|----------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | ------- | ---- |  | - | -------
|                                                                        |  | Year Ended December 31,
|                                                                        |  | 2006                    |          |   | 2005 |   |         | 2004
|Revenues, net                                                           |  | $                       | 159,365  |   |      | $ | 324,457 |      |  | $ | 194,805
|Cost of goods sold                                                      |  |                         | 94,686   |   |      |   | 149,086 |      |  |   | 89,187 
|                                                                        |  |                         |          |   |      |   |         |      |  |   |        
|Gross profit                                                            |  |                         | 64,679   |   |      |   | 175,371 |      |  |   | 105,618
|Operating expenses:                                                     |  |                         |          |   |      |   |         |      |  |   |        
|Research and development                                                |  |                         | 90,640   |   |      |   | 75,976  |      |  |   | 33,736 
|Selling, general and administrative                                     |  |                         | 50,245   |   |      |   | 43,033  |      |  |   | 18,777 
|Goodwill impairment (Note 6)                                            |  |                         | 63,334   |   |      |   |        |      |  |   |       
|Impairment of long-lived assets (Note 6)                                |  |                         | 18,477   |   |      |   |        |      |  |   |       
|Gain on asset disposition                                               |  |                         | (45,673  | ) |      |   |        |      |  |   |       
|                                                                        |  |                         |          |   |      |   |         |      |  |   |        
|Total operating expenses                                                |  |                         | 177,023  |   |      |   | 119,009 |      |  |   | 52,513 
|                                                                        |  |                         |          |   |      |   |         |      |  |   |        
|Operating (loss) income                                                 |  |                         | (112,344 | ) |      |   | 56,362  |      |  |   | 53,105 
|Other income (expense):                                                 |  |                         |          |   |      |   |         |      |  |   |        
|Interest income, net                                                    |  |                         | 3,084    |   |      |   | 4,096   |      |  |   | 1,709  
|Foreign exchange loss                                                   |  |                         | (221     | ) |      |   | (69     | )    |  |   |       
|Other income                                                            |  |                         | 50       |   |      |   |        |      |  |   |       
|                                                                        |  |                         |          |   |      |   |         |      |  |   |        
|(Loss) income before income taxes                                       |  |                         | (109,431 | ) |      |   | 60,389  |      |  |   | 54,814 
|                                                                        |  |                         |          |   |      |   |         |      |  |   |        
|Income tax (benefit) expense                                            |  |                         | (407     | ) |      |   | 24,510  |      |  |   | 2,258  
|                                                                        |  |                         |          |   |      |   |         |      |  |   |        
|Net (loss) income attributable to common stockholders                   |  | $                       | (109,024 | ) |      | $ | 35,879  |      |  | $ | 52,556 
|                                                                        |  |                         |          |   |      |   |         |      |  |   |        
|Basic net (loss) income attributable to common stockholders per share   |  | $                       | (3.09    | ) |      | $ | 0.99    |      |  | $ | 1.52   
|Diluted net (loss) income attributable to common stockholders per share |  | $                       | (3.09    | ) |      | $ | 0.95    |      |  | $ | 1.39   
|Weighted average shares used to compute:                                |  |                         |          |   |      |   |         |      |  |   |        
|Basic net income (loss) attributable to common stockholders per share   |  |                         | 35,304   |   |      |   | 36,132  |      |  |   | 34,669 
|Diluted net income (loss) attributable to common stockholders per share |  |                         | 35,304   |   |      |   | 37,912  |      |  |   | 37,872 

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



F-5



---

##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Consolidated Statements of Changes In Stockholders Equity

(in thousands)



|                                                                                       |  |              |        |                          |        |   |                                 |  |   |                                 |   |  |               |      |   |                                             |   |        |                                 |  |                             |      |   |                           |   |     |   |  |   |     |  |   |          |   |  |   |          |  
|-------------------------------------------------------------------------------------- |  | ------------ | ------ | ------------------------ | ------ | - | ------------------------------- |  | - | ------------------------------- | - |  | ------------- | ---- | - | ------------------------------------------- | - | ------ | ------------------------------- |  | --------------------------- | ---- | - | ------------------------- | - | --- | - |  | - | --- |  | - | -------- | - |  | - | -------- | -
|                                                                                       |  | Common Stock |        | AdditionalPaid-InCapital |        |   | NotesReceivablefromStockholders |  |   | DeferredStock-BasedCompensation |   |  | TreasuryStock |      |   | AccumulatedOtherComprehensiveIncome or Loss |   |        | CumulativeTranslationAdjustment |  | AccumulatedSurplus(Deficit) |      |   | Total StockholdersEquity |  
|                                                                                       |  | Shares       |        |                          | Amount |   |                                 |  |   |                                 |   |  |              
|Balance, December 31, 2003                                                             |  | $            | 34,271 |                          |        | $ | 3                               |  | $ | 173,737                         |   |  | $             | (115 | ) |                                             | $ | (3,678 | )                               |  | $                           | (741 | ) |                           | $ |    |   |  | $ |    |  | $ | (43,098  | ) |  | $ | 126,108  |  
|Net income                                                                             |  |              |       |                          |        |   |                                |  |   |                                |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   | 52,556   |   |  |   | 52,556   |  
|Issuance of common stock upon exercise of options                                      |  |              | 1,477  |                          |        |   | 1                               |  |   | 3,807                           |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 3,808    |  
|Issuance of common stock upon follow-on equity offering, net of issuance costs of $699 |  |              | 250    |                          |        |   |                                |  |   | 5,271                           |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 5,271    |  
|Issuance of common stock upon offering from Employee Stock Purchase Plan               |  |              | 112    |                          |        |   |                                |  |   | 1,623                           |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 1,623    |  
|Issuance of common stock upon net exercise of warrants                                 |  |              | 477    |                          |        |   |                                |  |   |                                |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   |         |  
|Repurchase and cancellation of 1,382 shares of common stock                            |  |              | (1,382 | )                        |        |   |                                |  |   | (21,021                         | ) |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | (21,021  | )
|Payment of amounts receivable from stockholders                                        |  |              |       |                          |        |   |                                |  |   |                                |   |  |               | 109  |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 109      |  
|Interest on amounts receivable from stockholders                                       |  |              |       |                          |        |   |                                |  |   |                                |   |  |               | (1   | ) |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | (1       | )
|Tax benefit related to exercise of employee stock options                              |  |              |       |                          |        |   |                                |  |   | 9,860                           |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 9,860    |  
|Deferred stock-based compensation                                                      |  |              |       |                          |        |   |                                |  |   | 203                             |   |  |               |     |   |                                             |   | 238    |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 441      |  
|Amortization of deferred stock-based compensation                                      |  |              |       |                          |        |   |                                |  |   |                                |   |  |               |     |   |                                             |   | 2,162  |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 2,162    |  
|                                                                                       |  |              |        |                          |        |   |                                 |  |   |                                 |   |  |               |      |   |                                             |   |        |                                 |  |                             |      |   |                           |   |     |   |  |   |     |  |   |          |   |  |   |          |  
|Balance, December 31, 2004                                                             |  |              | 35,205 |                          |        |   | 4                               |  |   | 173,480                         |   |  |               | (7   | ) |                                             |   | (1,278 | )                               |  |                             | (741 | ) |                           |   |    |   |  |   |    |  |   | 9,458    |   |  |   | 180,916  |  
|                                                                                       |  |              |        |                          |        |   |                                 |  |   |                                 |   |  |               |      |   |                                             |   |        |                                 |  |                             |      |   |                           |   |     |   |  |   |     |  |   |          |   |  |   |          |  
|Components of comprehensive income:                                                    |  |              |        |                          |        |   |                                 |  |   |                                 |   |  |               |      |   |                                             |   |        |                                 |  |                             |      |   |                           |   |     |   |  |   |     |  |   |          |   |  |   |          |  
|Net income                                                                             |  |              |       |                          |        |   |                                |  |   |                                |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   | 35,879   |   |  |   | 35,879   |  
|Unrealized loss on short-term investments, net of taxes                                |  |              |       |                          |        |   |                                |  |   |                                |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   | (19 | ) |  |   |    |  |   |         |   |  |   | (19      | )
|                                                                                       |  |              |        |                          |        |   |                                 |  |   |                                 |   |  |               |      |   |                                             |   |        |                                 |  |                             |      |   |                           |   |     |   |  |   |     |  |   |          |   |  |   |          |  
|Total comprehensive income                                                             |  |              |        |                          |        |   |                                 |  |   |                                 |   |  |               |      |   |                                             |   |        |                                 |  |                             |      |   |                           |   |     |   |  |   |     |  |   |          |   |  |   | 35,860   |  
|Issuance of common stock upon exercise of options                                      |  |              | 773    |                          |        |   |                                |  |   | 2,491                           |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 2,491    |  
|Issuance of common stock upon offering from Employee Stock Purchase Plan               |  |              | 92     |                          |        |   |                                |  |   | 1,711                           |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 1,711    |  
|Issuance of common stock in conjunction with acquisition                               |  |              | 1,437  |                          |        |   |                                |  |   | 28,179                          |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 28,179   |  
|Options assumed in conjunction with purchase acquisitions                              |  |              |       |                          |        |   |                                |  |   | 5,179                           |   |  |               |     |   |                                             |   | (3,843 | )                               |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 1,336    |  
|Payments of amounts receivable from stockholders                                       |  |              |       |                          |        |   |                                |  |   |                                |   |  |               | 2    |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 2        |  
|Tax benefit related to exercise of employee stock options                              |  |              |       |                          |        |   |                                |  |   | 7,743                           |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 7,743    |  
|Deferred stock-based compensation                                                      |  |              |       |                          |        |   |                                |  |   | (291                            | ) |  |               |     |   |                                             |   | (6     | )                               |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | (297     | )
|Amortization of deferred compensation                                                  |  |              |       |                          |        |   |                                |  |   |                                |   |  |               |     |   |                                             |   | 1,253  |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 1,253    |  
|                                                                                       |  |              |        |                          |        |   |                                 |  |   |                                 |   |  |               |      |   |                                             |   |        |                                 |  |                             |      |   |                           |   |     |   |  |   |     |  |   |          |   |  |   |          |  
|Balance, December 31, 2005                                                             |  |              | 37,507 |                          |        |   | 4                               |  |   | 218,492                         |   |  |               | (5   | ) |                                             |   | (3,874 | )                               |  |                             | (741 | ) |                           |   | (19 | ) |  |   |    |  |   | 45,337   |   |  |   | 259,194  |  
|                                                                                       |  |              |        |                          |        |   |                                 |  |   |                                 |   |  |               |      |   |                                             |   |        |                                 |  |                             |      |   |                           |   |     |   |  |   |     |  |   |          |   |  |   |          |  
|Components of comprehensive loss:                                                      |  |              |        |                          |        |   |                                 |  |   |                                 |   |  |               |      |   |                                             |   |        |                                 |  |                             |      |   |                           |   |     |   |  |   |     |  |   |          |   |  |   |          |  
|Net loss                                                                               |  |              |       |                          |        |   |                                |  |   |                                |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   | (109,024 | ) |  |   | (109,024 | )
|Cumulative translation adjustment                                                      |  |              |       |                          |        |   |                                |  |   |                                |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   | 270 |  |   |          |   |  |   | 270      |  
|Unrealized gain on short-term investments, net of taxes                                |  |              |       |                          |        |   |                                |  |   |                                |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   | 19  |   |  |   |    |  |   |         |   |  |   | 19       |  
|                                                                                       |  |              |        |                          |        |   |                                 |  |   |                                 |   |  |               |      |   |                                             |   |        |                                 |  |                             |      |   |                           |   |     |   |  |   |     |  |   |          |   |  |   |          |  
|Total comprehensive loss                                                               |  |              |        |                          |        |   |                                 |  |   |                                 |   |  |               |      |   |                                             |   |        |                                 |  |                             |      |   |                           |   |     |   |  |   |     |  |   |          |   |  |   | (108,735 | )
|Issuance of common stock upon exercise of options                                      |  |              | 358    |                          |        |   |                                |  |   | 684                             |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 684      |  
|Issuance of common stock upon offering from Employee Stock Purchase Plan               |  |              | 337    |                          |        |   |                                |  |   | 1,676                           |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 1,676    |  
|Repurchase of common stock                                                             |  |              | (2,599 | )                        |        |   |                                |  |   | (29,999                         | ) |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | (29,999  | )
|Tax benefit related to exercise of employee stock options                              |  |              |       |                          |        |   |                                |  |   | 537                             |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 537      |  
|Effect of adoption of SFAS 123R                                                        |  |              |       |                          |        |   |                                |  |   | (3,874                          | ) |  |               |     |   |                                             |   | 3,874  |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   |         |  
|Stock based compensation                                                               |  |              |       |                          |        |   |                                |  |   | 10,195                          |   |  |               |     |   |                                             |   |       |                                 |  |                             |     |   |                           |   |    |   |  |   |    |  |   |         |   |  |   | 10,195   |  
|                                                                                       |  |              |        |                          |        |   |                                 |  |   |                                 |   |  |               |      |   |                                             |   |        |                                 |  |                             |      |   |                           |   |     |   |  |   |     |  |   |          |   |  |   |          |  
|Balance, December 31, 2006                                                             |  |              | 35,603 |                          |        | $ | 4                               |  | $ | 197,711                         |   |  | $             | (5   | ) |                                             | $ |       |                                 |  | $                           | (741 | ) |                           | $ |    |   |  | $ | 270 |  | $ | (63,687  | ) |  | $ | 133,552  |  
|                                                                                       |  |              |        |                          |        |   |                                 |  |   |                                 |   |  |               |      |   |                                             |   |        |                                 |  |                             |      |   |                           |   |     |   |  |   |     |  |   |          |   |  |   |          |  

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



F-6



---

##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Consolidated Statements of Cash Flows

(in thousands)



|                                                                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|----------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                            |  | Year Ended December 31, |         
|                                                                                                            |  | 2006                    |          |   | 2005 |   |          | 2004 | 
|Cash flows from operating activities:                                                                       |  |                         |          |   |      |   |          |      |  |   |          |  
|Net (loss) income                                                                                           |  | $                       | (109,024 | ) |      | $ | 35,879   |      |  | $ | 52,556   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                           |  |                         |          |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                                                               |  |                         | 14,471   |   |      |   | 8,860    |      |  |   | 4,814    |  
|Goodwill impairment                                                                                         |  |                         | 63,334   |   |      |   |         |      |  |   |         |  
|Impairment of long-lived assets                                                                             |  |                         | 18,477   |   |      |   |         |      |  |   |         |  
|Gain on disposition of assets                                                                               |  |                         | (45,673  | ) |      |   |         |      |  |   |         |  
|Stock-based compensation                                                                                    |  |                         | 10,195   |   |      |   | 1,253    |      |  |   | 2,162    |  
|Write off of in-process research and development                                                            |  |                         |         |   |      |   | 11,610   |      |  |   |         |  
|Excess tax benefit from employee stock plans                                                                |  |                         | (1,004   | ) |      |   | 7,743    |      |  |   | 9,860    |  
|Lease abandonment adjustments                                                                               |  |                         |         |   |      |   | (385     | )    |  |   | 1,946    |  
|Other non-cash (benefit) expenses                                                                           |  |                         | 174      |   |      |   | (76      | )    |  |   | 817      |  
|Changes in assets and liabilities, net of assets acquired and liabilities assumed in business combinations: |  |                         |          |   |      |   |          |      |  |   |          |  
|Accounts receivable, net                                                                                    |  |                         | 36,077   |   |      |   | (11,574  | )    |  |   | (18,206  | )
|Inventories, net                                                                                            |  |                         | (3,135   | ) |      |   | (1,991   | )    |  |   | (9,507   | )
|Prepaid expenses and other assets                                                                           |  |                         | 2,099    |   |      |   | (2,811   | )    |  |   | (3,514   | )
|Deferred tax assets and liabilities                                                                         |  |                         | 53       |   |      |   | 5,674    |      |  |   | (8,166   | )
|Accounts payable                                                                                            |  |                         | (29,345  | ) |      |   | 23,515   |      |  |   | 13,047   |  
|Accrued expenses                                                                                            |  |                         | 1,480    |   |      |   | 1,745    |      |  |   | 3,274    |  
|Income taxes payable                                                                                        |  |                         | 1,036    |   |      |   | 3,157    |      |  |   |         |  
|Deferred revenue and other liabilities                                                                      |  |                         | (9,090   | ) |      |   | (1,163   | )    |  |   | 3,507    |  
|                                                                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash (used in) provided by operating activities                                                         |  |                         | (49,875  | ) |      |   | 81,436   |      |  |   | 52,590   |  
|                                                                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash flows from investing activities:                                                                       |  |                         |          |   |      |   |          |      |  |   |          |  
|Proceeds from maturities of short-term investments                                                          |  |                         | 37,724   |   |      |   | 166,956  |      |  |   | 77,801   |  
|Purchases of short-term investments                                                                         |  |                         | (47,343  | ) |      |   | (105,831 | )    |  |   | (143,211 | )
|Purchases of property, equipment, software and intangible assets                                            |  |                         | (12,110  | ) |      |   | (15,352  | )    |  |   | (11,517  | )
|Proceeds from asset dispositions                                                                            |  |                         | 70,715   |   |      |   |         |      |  |   |         |  
|Increase in restricted cash                                                                                 |  |                         | (7,354   | ) |      |   |         |      |  |   |         |  
|Acquisition of businesses, net of cash acquired                                                             |  |                         |         |   |      |   | (92,820  | )    |  |   |         |  
|                                                                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                                                         |  |                         | 41,632   |   |      |   | (47,047  | )    |  |   | (76,927  | )
|                                                                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash flows from financing activities:                                                                       |  |                         |          |   |      |   |          |      |  |   |          |  
|Payments of capital lease obligations                                                                       |  |                         | (252     | ) |      |   | (57      | )    |  |   | (48      | )
|Common stock repurchases                                                                                    |  |                         | (29,999  | ) |      |   |         |      |  |   | (21,021  | )
|Proceeds from notes receivable from stockholders                                                            |  |                         |         |   |      |   | 2        |      |  |   | 109      |  
|Excess tax benefit from employee stock plans                                                                |  |                         | 1,004    |   |      |   |         |      |  |   |         |  
|Proceeds from issuance of common stock, net of issuance costs                                               |  |                         | 2,360    |   |      |   | 4,202    |      |  |   | 10,702   |  
|                                                                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash (used in) provided by financing activities                                                         |  |                         | (26,887  | ) |      |   | 4,147    |      |  |   | (10,258  | )
|                                                                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Effect of exchange rate changes on cash and cash equivalents                                                |  |                         | 104      |   |      |   | (70      | )    |  |   |         |  
|Net (decrease) increase in cash and cash equivalents                                                        |  |                         | (35,026  | ) |      |   | 38,466   |      |  |   | (34,595  | )
|Cash and cash equivalents, beginning of year                                                                |  |                         | 65,712   |   |      |   | 27,246   |      |  |   | 61,841   |  
|                                                                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents, end of year                                                                      |  | $                       | 30,686   |   |      | $ | 65,712   |      |  | $ | 27,246   |  
|                                                                                                            |  |                         |          |   |      |   |          |      |  |   |          |  

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



F-7



---

##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements

1. Organization

SigmaTel, Inc. (the
Company or SigmaTel) was incorporated on December 28, 1993, and is a fabless designer of analog-intensive mixed-signal integrated circuits headquartered in Austin, Texas. Since July 2004, SigmaTel has established
international subsidiaries and/or opened offices in Hong Kong; Taipei, Taiwan; Shenzhen, China; Singapore; Seoul, South Korea; Tokyo, Japan; and, Cambridge, England. As a result of SigmaTels acquisitions of Protocom Corporation
(Protocom) and Oasis Semiconductor, Inc. (Oasis) in the third quarter of 2005 (see Note 7 for additional information on these acquisitions), SigmaTel also now has wholly-owned subsidiaries associated with the operations of
Protocom and Oasis. The accompanying consolidated financial statements include the accounts of SigmaTel and each of its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

2. Summary of Significant Accounting Policies

Basis of
Presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America. Certain reclassifications have been made to prior periods presented in the consolidated financial statements to conform to the current year presentation. Previously, the Company recorded amortization of stock
compensation as a separate line item in the consolidated statements of operations. In March 2005, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 107 (SAB 107), which states that
companies should present the expense related to share-based payment arrangements in the same line or lines as cash compensation paid to the same employees. Accordingly, the Company has reclassified share-based payments previously recorded as
Amortization of deferred stock-based compensation to the appropriate functional categories. The reclassifications had no impact on the Companys financial position, operating income, or net income (loss). The following table summarizes
stock-based compensation expense that is now recorded within functional categories in the consolidated statements of operations (in thousands):



|                                    |  |                         |        |      |   |       |  |   |      
|----------------------------------- |  | ----------------------- | ------ | ---- | - | ----- |  | - | -----
|                                    |  | Year Ended December 31,
|                                    |  | 2006                    |        | 2005 |   | 2004 
|Research and development            |  | $                       | 5,781  |      | $ | 869   |  | $ | 1,483
|Selling, general and administrative |  |                         | 4,428  |      |   | 384   |  |   | 679  
|                                    |  | $                       | 10,209 |      | $ | 1,253 |  | $ | 2,162

In the opinion of management, all adjustments and reclassifications 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.

Use of Estimates

The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The fair values of the Companys cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses approximate carrying values due to their short maturities.



F-8



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



Risks and Uncertainties and Concentrations of Risk

The Companys operating results are significantly dependent on its ability to market and develop products. The inability of the Company to
successfully develop and market its products as a result of competition or other factors would have a material adverse affect on the Companys business, financial condition and results of operations. The majority of the Companys products
are currently manufactured by three companies in Asia. The Company does not have long-term agreements with any of these suppliers. A manufacturing disruption experienced by one or more of these manufacturing entities would impact the production of
the Companys products for a substantial period of time which could have a material adverse effect on its business, financial condition and results of operations. The Companys customers are mainly in Asia.



|                                             |  |                                                                         |   |  |                                                              |   |  |      |   |  |      |   |  |      |  
|-------------------------------------------- |  | ----------------------------------------------------------------------- | - |  | ------------------------------------------------------------ | - |  | ---- | - |  | ---- | - |  | ---- | -
|                                             |  | Customers That AccountedFor Greater Than 10% ofAccounts Receivable, net |   |  | Customers That AccountedFor Greater Than 10% ofRevenues, net |  
|                                             |  | December 31,                                                            |   |  | Year Ended December 31,                                      |  
|                                             |  | 2006                                                                    |   |  | 2005                                                         |   |  | 2006 |   |  | 2005 |   |  | 2004 |  
|Customer A (an affiliate until October 2005) |  | 15.0                                                                    | % |  | 16                                                           | % |  | 19   | % |  | 14   | % |  | 14   | %
|Customer B                                   |  |                                                                        |   |  |                                                             |   |  |     |   |  |     |   |  | 17   | %
|Customer C                                   |  |                                                                        |   |  | 21                                                           | % |  |     |   |  | 15   | % |  |     |  
|Customer D                                   |  |                                                                        |   |  | 14                                                           | % |  |     |   |  | 18   | % |  | 27   | %
|Customer E                                   |  | 14.9                                                                    |   |  |                                                             |   |  |     |   |  |     |   |  |     |  

The Company performs ongoing credit evaluations of its customers financial condition and has
a foreign trade insurance policy for significant international customers to minimize credit risk. The Company maintains an allowance for doubtful accounts to cover the uninsured portion of trade receivables and estimated losses resulting from
uncollectible accounts. The Company will write off a receivable account once the account is deemed uncollectible. Accounts receivable write-offs to date have been minimal. As of December 31, 2006 and 2005, the Company had an allowance for
doubtful accounts of $0.7 million and $0.6 million, respectively. Financial instruments that potentially subject the Company to significant concentrations of risk consist primarily of cash, cash equivalents, short-term investments and accounts
receivable. The Company places its short-term investments primarily in multiple types of investment-grade securities.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The
Company is exposed to credit risk in the event of default by the financial institutions and issuers of the investments. The Company maintains cash and cash equivalent balances in highly-rated financial institutions and has not experienced any
material losses relating to any cash or cash equivalents.

Restricted Cash

The Company classifies amounts as restricted cash if the funds are not available for general corporate use as of the balance sheet date. As of
December 31, 2006, approximately $7.4 million was classified as current restricted cash on the consolidated balance sheet. At December 31, 2005 there was no restricted cash. This restricted cash relates to amounts held in escrow, with
interest, for one year for the sale of the PC audio codec product line to IDT (see Note 8).

Short-term Investments

Short-term investments consist of corporate, state and municipal securities with readily determinable fair market values and original maturities in excess
of three months. 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. The
Companys investments are classified as available-for-sale and accordingly are reported at fair value, with unrealized gains and losses reported as a component of stockholders equity. Unrealized losses are charged against
income when a decline in the fair market value of an individual security is determined to be other than temporary. Realized gains and losses on investments are included in interest income and are determined on the specific identification method;
however, for the years ended December 31, 2006, 2005 and 2004, there were no realized gains or losses.

Inventories

Inventories are stated at the lower of cost or market using the first-in, first-out method. Provisions are made to reduce excess or obsolete inventories
to their estimated net realizable values.



F-9



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



Property, Equipment and Software

Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Amortization of assets under capital leases is included in depreciation and is
computed using the straight-line method over the shorter of the estimated useful lives of the assets or the lease term.

Purchased software
is capitalized and stated at cost and depreciated using the straight-line method over the estimated useful life of the software.

Leasehold
improvements, which are grouped with furniture and fixtures in Note 5 to the consolidated financial statements, are depreciated over the length of the applicable lease or the useful life of the asset, whichever is shorter.

Upon disposal of assets, related accumulated depreciation is removed from the accounts and the related gain or loss is included in operations. Repairs
and maintenance costs are expensed as incurred.

Impairment of Long-lived Assets

The Company evaluates long-lived assets held and used by the Company for impairment whenever events or changes in circumstances indicate that their net
book value may not be recoverable. When such factors and circumstances exist, the Company compares 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. Refer to Note 6 for discussion of impairments recorded in 2006.

Intangible Assets

Intangible assets consist of developed product technology, customer relationships, trademarks and trade names, patents and licenses to use intellectual
property in manufacturing. Intangible assets are recorded at cost and amortized over the shorter of the contractual life or the estimated useful life, which is generally between five to nine years. Amortization of developed product technology is
reflected in cost of goods sold in the consolidated statements of operations. Refer to Note 6 for discussion of impairments recorded in 2006.

The Company records acquired developed product technology as an intangible asset separate from goodwill when the developed product technology is capable of being separated or divided from the acquired entity and sold, transferred, licensed,
rented, or exchanged, and the developed product technology represents a feasible product or product component at the date of acquisition.

The Company estimates the useful lives of acquired developed product technologies based on factors which include the planned use of the developed product technology and the expected pattern of future cash flows to be derived from each
developed product technology. Amortization of developed product technology is included in cost of goods sold in the consolidated statements of operations.

Treasury Stock

The Company has repurchased shares of its common stock which have been held as treasury stock. The Company
accounts for treasury stock under the cost method. Upon the retirement of treasury stock shares, the par value and any related additional paid-in capital are removed from the accounts.

Income Taxes

The Company accounts for income taxes under Statement of Financial Accounting Standards
(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 the Companys consolidated balance sheet. The Company then assesses 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 the Company believes that recovery is not likely based on the level of historical taxable income and projections for future taxable income over the periods in which the temporary differences are deductible.



F-10



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



Revenue Recognition

Revenues from product sales are recognized when persuasive evidence of an agreement exists and upon shipment, or later if required by shipping terms, provided title is transferred, prices are fixed or determinable,
and collection is deemed probable. Revenues primarily consist of product sales to direct customers and distributors. Revenues and related costs of goods sold on sales to distributors with rights of return and price protection on products unsold are
deferred and subsequently recognized upon sell-through to their end customer. In conjunction with our acquisitions, we have deferred revenue from nonrecurring engineering fees (NRE). We defer revenues from NRE until the obligations under
the NRE agreements have been met and the related products are shipped in production quantities.

Sales Returns and Product Warranty

The Company may provide replacements for products which its customers purchased and which have been authorized for return. Warranty returns have been
infrequent and relate to defective or off-specification parts. The Company records an allowance for sales returns, based on evaluations of returns experience and revenues, to provide for the anticipated costs associated with product returns. To
date, the Company has not experienced significant costs associated with warranty returns.

Insurance and Self-Insurance Reserves

The Company is primarily self-insured for employee health benefits. The Companys self-insurance liability is limited in the aggregate based on total
participants at the end of the plan year and limited to $60,000 per insured. The Company records its self-insurance liability based on claims filed and an estimate of claims incurred but not yet reported. If more claims are made than were estimated
or if the costs of actual claims increases beyond what was anticipated, reserves recorded may not be sufficient and additional accruals may be required in future periods.

Shipping and Handling Costs

Costs of shipping and handling for delivery of the Companys
products that are reimbursed by its customers are recorded as revenue in the statement of operations. Shipping and handling costs are charged to cost of goods sold as incurred.

Goodwill

The Company made certain acquisitions in the third and fourth quarters of 2005 that
resulted in the recognition of goodwill. Goodwill is tested for impairment on an annual basis in the fourth quarter of each year. Additionally, goodwill will be tested in the interim if events and circumstances indicate that goodwill may be
impaired. Impairment of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, the
second step of the process involves a comparison of the fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is
recognized in an amount equal to the excess. Aggregate goodwill acquired during the year ended December 31, 2006 was zero and $84.2 million for the year ended December 31, 2005.

Acquired In-Process Research and Development (IPR&D)

When the Company acquires another entity or the material assets of another entity, the purchase price is allocated, as applicable, between net tangible assets, IPR&D, other identifiable intangible assets, and
goodwill. Company policy defines IPR&D as the value assigned to those projects for which the related products have not reached technological feasibility and have no alternative future use. Determining the portion of the purchase price allocated
to IPR&D requires the Company to make significant estimates. The amount of the purchase price allocated to IPR&D is determined by estimating the future cash flows of each project or technology and discounting the net cash flows back to their
present values. The discount rate used is determined at the time of acquisition, in accordance with accepted valuation methods, and includes consideration of the assessed risk of the project not being developed to a stage of commercial feasibility.
Acquired IPR&D was zero for the year ended December 31, 2006, and was $11.6 million for the year ended December 31, 2005. The IPR&D charge is reflected in research and development operating expenses in the consolidated statements
of operations for the year ended December 31, 2005.



F-11



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



Consolidation and Foreign Currency Translation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany
balances and transactions have been eliminated. The reporting currency of the Companys foreign subsidiaries is the U.S. dollar and the functional currency is the local currency in which the foreign subsidiaries operate. Assets and liabilities
are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at the average monthly exchange rates for the periods. Resulting translation adjustments are recorded as a component of
stockholders equity. There were $0.3 million and zero cumulative translation adjustments at December 31, 2006 and 2005, respectively. Gains and losses from currency transactions denominated in currencies other than the functional currency
are recorded as other income or expense in the consolidated statements of operations.

Research and Development

Costs for research and development of the Companys products are expensed as incurred. These costs include salaries, contractor fees, and allocated
expenses.

Advertising Costs

Advertising costs are expensed as incurred and are included in selling, general and administrative expense. Total advertising and promotional expenses were approximately $1.1 million, $0.8 million and $0.1 million for the years ended
December 31, 2006, 2005 and 2004, respectively.

Stock-Based Compensation

Prior to fiscal 2006, the Company accounted for employee stock awards under the Companys compensation plans under the recognition and measurement
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,Financial Accounting Standards Board (FASB) Interpretation No. 44, Emerging Issues Task Force
(EITF) Issue No. 00-23, and the related interpretations, as permitted by FASB SFAS 123, Accounting for Stock-Based Compensation (SFAS 123). Compensation costs related to stock options granted at fair value were not
recognized in the consolidated statements of operations. Compensation costs related to stock options granted below fair value were recognized in the consolidated statements of operations. In December 2004, FASB issued SFAS 123 (revised 2004),
Share-Based Payment (SFAS 123R). Under the new standard, companies are no longer able to account for share-based compensation transactions using the intrinsic value method in accordance with APB Opinion No. 25. Instead,
companies are required to account for such transactions using a fair-value method and recognize the expense in their statements of operations.

Effective January 1, 2006, the Company adopted SFAS 123R using the modified-prospective-transition method. Under this transition method, stock compensation cost recognized beginning January 1, 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. Upon adoption of SFAS 123R, the Company elected to use the transition
method described in FASB Staff Position No. 123R-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards, in determining windfall pool of tax benefits. Results of prior periods have not been
restated (see Note 10).

Net Income per Share

Basic net income attributable to common stockholders per share is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net income
attributable to common stockholders per share is computed giving effect to all potential dilutive common stock, including options, warrants, and common stock subject to repurchase.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income attributable to common stockholders per share
follows (in thousands):



|                                                                                                                                  |  |                         |          |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                  |  | Year Ended December 31, |         
|                                                                                                                                  |  | 2006                    |          |   | 2005 |   |        | 2004 | 
|Numerator:                                                                                                                        |  |                         |          |   |      |   |        |      |  |   |        |  
|Net (loss) income attributable to common stockholders                                                                             |  | $                       | (109,024 | ) |      | $ | 35,879 |      |  | $ | 52,556 |  
|                                                                                                                                  |  |                         |          |   |      |   |        |      |  |   |        |  
|Denominator:                                                                                                                      |  |                         |          |   |      |   |        |      |  |   |        |  
|Weighted-average common stock outstanding                                                                                         |  |                         | 35,482   |   |      |   | 36,237 |      |  |   | 34,715 |  
|Less: weighted-average shares subject to repurchase                                                                               |  |                         | (23      | ) |      |   | (21    | )    |  |   | (46    | )
|Less: shares held in escrow                                                                                                       |  |                         | (155     | ) |      |   | (84    | )    |  |   |       |  
|                                                                                                                                  |  |                         |          |   |      |   |        |      |  |   |        |  
|Weighted-average shares used in computing basic net income (loss) attributable to common stockholders per share                   |  |                         | 35,304   |   |      |   | 36,132 |      |  |   | 34,669 |  
|Dilutive potential common shares used in computing diluted net income (loss) attributable to common stockholders per share        |  |                         |         |   |      |   | 1,780  |      |  |   | 3,203  |  
|                                                                                                                                  |  |                         |          |   |      |   |        |      |  |   |        |  
|Total weighted-average number of shares used in computing diluted net income (loss) attributable to common stockholders per
share |  |                         | 35,304   |   |      |   | 37,912 |      |  |   | 37,872 |  
|                                                                                                                                  |  |                         |          |   |      |   |        |      |  |   |        |  



F-12



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



In connection with the acquisition of Protocom, 239,550 of the shares issued as consideration were
placed into an escrow account for purposes of settling indemnification claims for the one-year period following the closing. The following outstanding options were excluded from the computation of diluted net income per share as they had an
anti-dilutive effect (in thousands):



|                                 |  |                         |  |       |  |     
|-------------------------------- |  | ----------------------- |  | ----- |  | ----
|                                 |  | Year Ended December 31,
|                                 |  | 2006                    |  | 2005  |  | 2004
|Options to purchase common stock |  | 5,112                   |  | 1,676 |  | 499 

No deemed dividends were included in the calculation of net income attributable to common
stockholders for the years ended December 31, 2006, 2005, and 2004.

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 SigmaTels 2008 fiscal year. The adjustment to reflect the difference between the fair value and the carrying
amount would be accounted for as a cumulative-effect adjustment to retained earnings as of the date of initial adoption. The Company is currently evaluating the impact, if any, of SFAS 159 on the Companys Consolidated Financial Statements.

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
January 1, 2008, 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 September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a
materiality assessment. SAB 108 is effective for fiscal years ending after November 17, 2006, allowing a one-time transitional cumulative effect adjustment to beginning retained earnings as of January 1, 2006, for errors that were not
previously deemed material, but are material under the guidance in SAB 108. The Company adoption of SAB 108 has not had an impact on the Companys consolidated financial statements.

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. The provisions of Issue 06-2 are effective for fiscal years
beginning after December 15, 2006 and allow for either retrospective application or a cumulative effect adjustment to accumulated deficit approach upon adoption. The Company will apply the accounting prescribed by Issue 06-2 in fiscal year 2007
and is currently evaluating the impact, if any, that the adoption of this Issue will have on its financial statements.



F-13



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



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. FIN 48 is effective for fiscal years beginning after December 15, 2006. The differences between the amounts recognized in the
statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company is still evaluating
the impact, if any, of adopting the provisions of FIN 48 on its financial position, results of operations and liquidity.

3. Short-term Investments

Short-term investments at December 31, 2006 and 2005, consisting of corporate, state and municipal securities, were acquired at an
aggregate cost of $62.8 million and $53.2 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 presented and were not
different than the aggregate cost at December 31, 2006 or 2005.

Short-term investments consisted of the following as of
December 31, 2006 (in thousands):



|                               |  |                 |        |   |                  |   |    |                   |  |            |   |  |   |        |  
|------------------------------ |  | --------------- | ------ | - | ---------------- | - | -- | ----------------- |  | ---------- | - |  | - | ------ | -
|                               |  | Amortized Costs |        |   | Unrealized Gains |   |    | Unrealized Losses |  | Fair Value |  
|Available-for-sale securities: |  |                 |        |   |                  |   |    |                   |  |            |   |  |   |        |  
|Auction-rate preferred notes   |  |                 | 59,500 |   |                  |   |   |                   |  |            |  |  |   | 59,500 |  
|Variable-rate demand notes     |  |                 | 3,300  |   |                  |   |   |                   |  |            |  |  |   | 3,300  |  
|Commercial paper               |  |                 | 7,717  |   |                  |   | 1  |                   |  |            |  |  |   | 7,718  |  
|                               |  |                 |        |   |                  |   |    |                   |  |            |   |  |   |        |  
|Total investments              |  |                 | 70,517 |   |                  |   | 1  |                   |  |            |  |  |   | 70,518 |  
|Less cash equivalents          |  |                 | (7,717 | ) |                  |   | (1 | )                 |  |            |  |  |   | (7,718 | )
|                               |  |                 |        |   |                  |   |    |                   |  |            |   |  |   |        |  
|                               |  | $               | 62,800 |   |                  | $ |   |                   |  | $          |  |  | $ | 62,800 |  
|                               |  |                 |        |   |                  |   |    |                   |  |            |   |  |   |        |  

Short-term investments consisted of the following as of December 31, 2005 (in thousands):



|                               |  |                 |        |                  |   |                   |  |   |            |   |  |   |       
|------------------------------ |  | --------------- | ------ | ---------------- | - | ----------------- |  | - | ---------- | - |  | - | ------
|                               |  | Amortized Costs |        | Unrealized Gains |   | Unrealized Losses |  |   | Fair Value
|Available-for-sale securities: |  |                 |        |                  |   |                   |  |   |            |   |  |   |       
|Auction-rate preferred notes   |  |                 | 47,225 |                  |   |                  |  |   |           |   |  |   | 47,225
|U.S. Agencies                  |  |                 | 2,498  |                  |   |                  |  |   | (12        | ) |  |   | 2,486 
|Corporate notes                |  |                 | 3,468  |                  |   |                  |  |   | (7         | ) |  |   | 3,461 
|                               |  |                 |        |                  |   |                   |  |   |            |   |  |   |       
|Total investments              |  |                 | 53,191 |                  |   |                  |  |   | (19        | ) |  |   | 53,172
|Less cash equivalents          |  |                 |       |                  |   |                  |  |   |           |   |  |   |      
|                               |  |                 |        |                  |   |                   |  |   |            |   |  |   |       
|                               |  | $               | 53,191 |                  | $ |                  |  | $ | (19        | ) |  | $ | 53,172
|                               |  |                 |        |                  |   |                   |  |   |            |   |  |   |       

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 December 31, 2006, liquid investments total $70.5 million, of which $7.7 million mature within three months, and $62.8
million, mature beyond five years, but have interest reset maturities of less than thirty days.



F-14



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



4. Inventories

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



|                |  |              |        |      |   |       
|--------------- |  | ------------ | ------ | ---- | - | ------
|                |  | December 31,
|                |  | 2006         |        | 2005
|Work-in-process |  | $            | 5,567  |      | $ | 13,515
|Finished goods  |  |              | 15,227 |      |   | 10,019
|                |  |              |        |      |   |       
|                |  | $            | 20,794 |      | $ | 23,534
|                |  |              |        |      |   |       

At December 31, 2006 and 2005, the Companys reserve for slow-moving and obsolete
inventory was approximately $3.4 million and $2.3 million, respectively.

5. Property, Equipment and Software

Property, equipment and software is comprised of the following (in thousands):



|                                               |  |                               |      |              |         |      |  |   |         |  
|---------------------------------------------- |  | ----------------------------- | ---- | ------------ | ------- | ---- |  | - | ------- | -
|                                               |  | EstimatedUseful Livesin Years |      | December 31, |        
|                                               |  |                               | 2006 |              |         | 2005 | 
|Computers and equipment                        |  | 2-5                           |      | $            | 17,513  |      |  | $ | 14,732  |  
|Furniture and fixtures                         |  | 5                             |      |              | 7,148   |      |  |   | 7,009   |  
|Purchased software                             |  | 3                             |      |              | 13,354  |      |  |   | 10,542  |  
|                                               |  |                               |      |              |         |      |  |   |         |  
|                                               |  |                               |      |              | 38,015  |      |  |   | 32,283  |  
|Less accumulated depreciation and amortization |  |                               |      |              | (24,714 | )    |  |   | (18,083 | )
|                                               |  |                               |      |              |         |      |  |   |         |  
|                                               |  |                               |      | $            | 13,301  |      |  | $ | 14,200  |  
|                                               |  |                               |      |              |         |      |  |   |         |  

Depreciation expense for the years ended December 31, 2006, 2005 and 2004 was approximately
$7.2 million, $5.7 million and $3.8 million, respectively. At December 31, 2006 and 2005, property, equipment and software under capital leases consist of equipment and furniture and fixtures of approximately $0.5 million and $0.2 million,
respectively. Accumulated amortization for equipment and furniture and fixtures under capital leases totaled $0.1 million and $0.2 million as of December 31, 2006 and 2005, respectively.

6. Goodwill and Other Intangible Assets

As of
December 31, 2005, SigmaTel had goodwill in the amount of $84.2 million associated with the acquisitions of Oasis, Protocom, certain assets and intellectual property of D&M Holdings, Inc (Rio) and Apogee Technology, Inc.
(Apogee), and certain assets of Mooji Corporation Limited (Mooji) of which approximately $13.7 million was deductible for income tax purposes. These acquisitions were accounted for using the purchase method of accounting (see
Note 7). In the third quarter of 2006, $21.3 million of goodwill was transferred in the sale of the Companys PC audio codec product line (see Note 8). For the year ended December 31, 2006, goodwill increased by approximately $0.1 million
due to foreign exchange rate fluctuations and by approximately $0.3 million due to adjustments to acquired deferred tax assets and liabilities.

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company assesses the impairment of goodwill annually in the fourth quarter, or more frequently if other indicators of potential impairment arise. During
the annual impairment analysis performed in the fourth quarter of 2006, it was determined that all of the goodwill attributable to the above mentioned acquisitions and assets was impaired. This impairment was primarily the result of a decline in
stock price and market capitalization, deterioration of our performance, and slower growth rates for our products and the products of acquired businesses. Impairment is measured based on the excess of a reporting units carrying value over its
fair value. The fair value of the reporting units was calculated by a weighted combination of discounted projected cash flows and observations of market capitalization. A charge of $63.3 million was taken to operations in the fourth quarter of 2006
and is included in the Goodwill impairment line item in the Consolidated Statements of Operations.



F-15



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



The Company records intangible assets in accordance with SFAS No. 141 Business Combinations(SFAS 141) and SFAS 142. The developed-product technologies the Company acquired from the above acquisitions were as follows: the Oasis acquisition consisted of three integrated circuit products (and the intellectual property
contained therein) (chips), used to control the operation of devices which can scan, fax and print documents; the Protocom acquisition consisted of chips that are used in camcorders and other video capture equipment and implement
different video compression and decompression algorithms; the Rio acquisition consisted of computer programs, intellectual property and other proprietary know-how related to the hard-drive MP3 player business; and the Apogee acquisition consisted of
chips, which perform digital audio amplification functions and can be used in a variety of different consumer audio applications. The developed-product technologies above were feasible at the date of acquisition as they were being actively marketed
and sold by the acquired companies at the respective dates of acquisition. The developed-product technologies were recognized as intangible assets separate from goodwill as they were capable of being separated or divided from the acquired entities
and sold or licensed. The estimated useful lives were primarily based on the weighted average time to cash flows for each respective developed product technology.

The Company evaluates long-lived assets held and used by the Company for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable in accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. During the fourth quarter of 2006, due to managements changed intentions with the use of particular products, long-lived assets were tested for
recoverability. Management determined that the carrying value of some assets exceeded the fair value. The Company used the discounted cash flow and cost approaches to determine the fair value. This resulted in an impairment charge of $18.5 million
that was recorded against intangibles and is included in the Impairment of Long-Lived Assets line item in the consolidated statements of operations. The impairment charge consists of approximately $5.1 million for developed-product
technology, $11.2 million for customer relationships, $1.4 for trademarks and trade names, and $0.8 million for licenses to manufacture and other. The amounts listed below are shown net of the $0.1 million of patents that were transferred in the
sale of the Companys PC audio codec product line (see Note 8).

Goodwill and other intangibles consist of the following (in
thousands):



|                                                 |  |                      |        |                         |   |        |     |  |                      |        |                         |   |         |     |   |        |   |  |   |        
|------------------------------------------------ |  | -------------------- | ------ | ----------------------- | - | ------ | --- |  | -------------------- | ------ | ----------------------- | - | ------- | --- | - | ------ | - |  | - | -------
|                                                 |  | December 31, 2006    |        | December 31, 2005      
|                                                 |  | Gross CarryingAmount |        | AccumulatedAmortization |   |        | Net |  | Gross CarryingAmount |        | AccumulatedAmortization |   |         | Net
|Goodwill                                         |  | $                    |       |                         | $ |       |     |  | $                    |       |                         | $ | 84,203  |     | $ |       |   |  | $ | 84,203 
|Other intangible assets subject to amortization: |  |                      |        |                         |   |        |     |  |                      |        |                         |   |         |     |   |        |   |  |   |        
|Developed product technology                     |  |                      | 8,212  |                         |   | (1,825 | )   |  |                      | 6,387  |                         |   | 15,060  |     |   | (904   | ) |  |   | 14,156 
|Customer relationships                           |  |                      |       |                         |   |       |     |  |                      |       |                         |   | 13,232  |     |   | (502   | ) |  |   | 12,730 
|Trademarks and trade names                       |  |                      | 500    |                         |   | (125   | )   |  |                      | 375    |                         |   | 2,200   |     |   | (106   | ) |  |   | 2,094  
|Patents                                          |  |                      | 3,703  |                         |   | (689   | )   |  |                      | 3,014  |                         |   | 3,327   |     |   | (237   | ) |  |   | 3,090  
|Licenses to manufacture and other                |  |                      | 9,870  |                         |   | (4,276 | )   |  |                      | 5,594  |                         |   | 8,226   |     |   | (2,618 | ) |  |   | 5,608  
|                                                 |  |                      |        |                         |   |        |     |  |                      |        |                         |   |         |     |   |        |   |  |   |        
|                                                 |  | $                    | 22,285 |                         | $ | (6,915 | )   |  | $                    | 15,370 |                         | $ | 126,248 |     | $ | (4,367 | ) |  | $ | 121,881
|                                                 |  |                      |        |                         |   |        |     |  |                      |        |                         |   |         |     |   |        |   |  |   |        

The changes in the carrying amount of goodwill for the year ended December 31, 2006, are as follows (in
thousands):



|                                                            |  |         |   |  |   |       
|----------------------------------------------------------- |  | ------- | - |  | - | ------
|Balance as of January 1, 2006                               |  |         |   |  | $ | 84,203
|Transfer of goodwill in sale of PC audio codec product line |  | (21,305 | ) |  |   |       
|Foreign exchange rate fluctuations                          |  | 127     |   |  |   |       
|Adjustments to acquired deferred tax assets and liabilities |  | 309     |   |  |   |       
|Impairment losses                                           |  | (63,334 | ) |  |   |       
|                                                            |  |         |   |  |   |       
|Balance as of December 31, 2006                             |  |         |   |  | $ |      
|                                                            |  |         |   |  |   |       

Intangible asset amortization expense was $7.4 million, $3.1 million, and $1.0 million for the
years ended December 31, 2006, 2005 and 2004, respectively. Estimated aggregate intangible asset amortization expense is expected to be $4.2 million for 2007 and is estimated to be $3.6 million in 2008, $2.8 million in 2009, $2.6 million in
2010, and $1.6 million in 2011. 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, 9 years for customer
relationships, 7 years for trademarks and trade names, 7 years for patents, and 2 to 5 years for licenses to manufacture.



F-16



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



7. Acquisitions

On July 1, 2005, the Company acquired assets related to the sale of SigmaTel products in Korea from its long-time Korean distributor, Mooji, for $1.9 million, including direct acquisition costs of approximately
$0.2 million. In 2006, as a result of the annual goodwill and intangible asset impairment review, all of the acquired goodwill and intangible assets related to Mooji were written off.

On July 26, 2005, the Company acquired certain assets, intellectual property and engineering resources associated with the Rio® portable audio product line from Rio for $10.2 million,
including direct acquisition costs of approximately $0.2 million. The amount of $0.5 million of the acquisition consideration is being held in an escrow account for purposes of settling indemnification claims for the one-year period following the
closing. This escrow amount and all earnings thereon were released in full by the Company on July 26, 2006. In 2006, as a result of the annual goodwill and intangible asset impairment review, all of the goodwill assigned to the Rio acquisition
and other related intangible assets were written off, totaling $8.5 million. Acquired patents from Rio on the December 31, 2006, balance sheet total $0.1 million.

On August 24, 2005, the Company completed the acquisition of all of the issued and outstanding shares of Protocom, a privately held provider of integrated circuits to the digital video camera market, for $18.8
million in cash and $28.2 million in the form of 1,437,304 shares of SigmaTel common stock. The Company incurred direct acquisition costs of approximately $1.1 million and recorded $4.2 million as the value assigned to the unvested Protocom stock
options assumed which entitle the holders to receive up to 234,223 shares of the Companys common stock upon vesting and exercise and are being amortized over the remaining vesting period of the related options. In connection with the
acquisition, 239,550 of the shares issued as consideration in this acquisition were placed into an escrow account for purposes of settling indemnification claims for the one-year period following the closing. These escrow shares were released in
full by the Company on August 24, 2006. In accordance with EITF Issue No. 99-12, Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination, we have used $19.64 as the per
share amount to value the common stock consideration paid to Protocom shareholders (representing the average of the closing prices of SigmaTels common stock for the three days before, after and on the merger agreement date of July 26,
2005), less $50,000, an estimate for the registration costs which have been included in transaction costs. The unvested Protocom stock options assumed and the related deferred stock-based compensation were valued in accordance with FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Compensation, and Interpretation of APB Opinion No. 25. Pursuant to the terms of the acquisition, the Company established an employee retention bonus plan for the
former Protocom employees. Under this plan, $1.0 million was paid to former Protocom employees in September 2006. No bonuses will be paid under this plan in future years.

On September 6, 2005, the Company acquired all of the issued and outstanding shares of Oasis, a privately held provider of integrated circuits for the printer market, for $57 million in cash. The Company incurred
direct acquisition costs of approximately $2.0 million. In connection with this acquisition, the Company also agreed to make an additional payment of up to $25 million in cash pursuant to the terms of an earn-out provision based on the achievement
by the Oasis business of certain calendar year 2006 revenues. The amount of $5.7 million of the initial purchase price payment was deposited in an escrow account for purposes of settling indemnification claims for the one-year period following the
closing. This escrow amount and all earnings thereon were released in full by the Company on September 6, 2006. As there were no indemnification claims, the full amount was released from escrow and paid to the former Oasis shareholders in
September 2006. The Company also recorded $0.9 million for the value of assuming all unvested employee stock options of Oasis, which entitle the holders to receive up to 235,398 shares of the Companys common stock upon vesting and exercise and
are being amortized over the remaining vesting period of the related options. The value of the unvested Oasis stock options assumed and the related deferred stock-based compensation were valued in accordance with FASB Interpretation No. 44.
Pursuant to the terms of the acquisition, the Company has established an employee retention bonus plan for the former Oasis employees totaling $3.0 million. Bonuses under this plan are contingent upon continued employment with the Company, are
expensed as incurred, and will be payable over two years in four semi-annual installments. As of December 31, 2006, $1.5 million of bonuses under this plan have been paid to the former Oasis employees. As of December 31, 2006, $0.5 million
of retention bonuses remained as current liabilities. As of December 31, 2006, no payments have been made against the Oasis earn-out provision, and all earn-out periods related to the acquisition have expired.

On October 5, 2005, the Company acquired the Direct Digital Amplification (DDX®) technology, design team and intellectual property from Apogee for $9.4 million in cash. The Company also agreed to
make an additional payment of up to $4.5 million in cash pursuant to the terms of an earn-out provision based on the achievement of DDX® revenues during the one-year period following the closing. The purchase accounting for Apogee included $0.2 million in other transaction costs. As a
result of activities related to the earn-out provision for Apogee, a payment to Apogee totaling $0.4 million was made in November, 2006. As of December 31, 2006, all earn-out periods related to the DDX acquisition have expired.

The Oasis, Protocom, Rio, Apogee and Mooji acquisitions were accounted for using the purchase method of accounting. The purchase price for each of the
acquisitions was paid during the year ended December 31, 2005. The purchase price for the acquisitions does not include any amount for contingent considerations. Actual amounts of future consideration related to contingencies were recognized as
an adjustment to the purchase price in the period in which the contingency was resolved. For the year ended



F-17



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



December 31, 2006, there were no significant adjustments to the purchase prices of the acquisitions. The purchase price was allocated to the assets
acquired, including intangible assets and liabilities assumed, as well as IPR&D, based on estimated fair values at the date of the acquisition. The value of assets and liabilities was estimated based on purchase price and future intended use.
The value of intangible assets was derived from the present value of estimated future benefits from the various intangible assets acquired. Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets
acquired. This premium paid for the acquisitions is based on managements belief that the acquired technologies, businesses and engineering talent in the areas of image processing, video compression, amplification, firmware and software
development and SoC development were of strategic importance in the Companys multi-media SoC strategy.

The Protocom IPR&D
relates to the PR838 project, a next generation portable imaging SoC that adds new features such as H.264 (an advanced video codec technology) and high definition output capability. The Oasis IPR&D relates to efforts on six different
multi-function peripheral products, each of which adds new features or addresses new imaging markets. The Apogee IPR&D relates to a next generation DDX® product. The income approach was utilized to value this technology which incorporated the present value of future economic benefits and the
associated costs to bring the products to commercialization, which were expected to occur within one year of the acquisitions. The rate used to discount the net cash flows to their present value was 19%, 21% and 20% for Protocom, Oasis and Apogee,
respectively, giving consideration to the risk associated with the projects relative to developed product technology and future products. The $11.6 million in IPR&D related to these acquisitions was charged to operations during the year ended
December 31, 2005 since the technology has no alternative future use. We have decided to discontinue further development of the Protocom PR838 project, and the Apogee DDX® product. Of the six Oasis multi-function peripheral projects, five have been completed as of December 31, 2006,
and the remaining one is expected to be completed by December 31, 2007.

A summary of the purchase price allocations for Oasis,
Protocom, Rio and Apogee are as follows (in thousands):



|                                    |  |       |        |                     |         |          |   |                     |  |         |  |                     |        |        |         |                     |   |       |  |        
|----------------------------------- |  | ----- | ------ | ------------------- | ------- | -------- | - | ------------------- |  | ------- |  | ------------------- | ------ | ------ | ------- | ------------------- | - | ----- |  | -------
|                                    |  | Oasis |        | Amortization Period |         | Protocom |   | Amortization Period |  | Rio     |  | Amortization Period |        | Apogee |         | Amortization Period
|Developed product technology        |  | $     | 7,560  |                     | 6 years |          | $ | 2,300               |  | 6 years |  | $                   | 2,900  |        | 5 years |                     | $ | 2,300 |  | 5 years
|Customer relationships              |  |       | 7,350  |                     | 9 years |          |   | 5,700               |  | 9 years |  |                     |       |        |         |                     |   |      |  |        
|License agreement                   |  |       |       |                     |         |          |   |                    |  |         |  |                     |       |        |         |                     |   | 900   |  | 2 years
|Trademark & trade name              |  |       | 1,700  |                     | 7 years |          |   |                    |  |         |  |                     |       |        |         |                     |   | 500   |  | 5 years
|Patents                             |  |       |       |                     |         |          |   |                    |  |         |  |                     | 700    |        | 7 years |                     |   |      |  |        
|Goodwill                            |  |       | 32,352 |                     |         |          |   | 38,130              |  |         |  |                     | 6,442  |        |         |                     |   | 5,709 |  |        
|                                    |  |       |        |                     |         |          |   |                     |  |         |  |                     |        |        |         |                     |   |       |  |        
|                                    |  |       |        |                     |         |          |   |                    
|Total intangibles & goodwill        |  |       | 48,962 |                     |         |          |   | 46,130              |  |         |  |                     | 10,042 |        |         |                     |   | 9,409 |  |        
|                                    |  |       |        |                     |         |          |   |                     |  |         |  |                     |        |        |         |                     |   |       |  |        
|                                    |  |       |        |                     |         |          |   |                    
|Fair value of assets acquired       |  |       | 11,793 |                     |         |          |   | 2,865               |  |         |  |                     | 109    |        |         |                     |   |      |  |        
|Fair value of liabilities assumed   |  |       | 10,043 |                     |         |          |   | 2,718               |  |         |  |                     |       |        |         |                     |   |      |  |        
|Deferred stock-based compensation   |  |       | 433    |                     |         |          |   | 3,411               |  |         |  |                     |       |        |         |                     |   |      |  |        
|In-process research and development |  |       | 8,810  |                     |         |          |   | 2,600               |  |         |  |                     |       |        |         |                     |   | 200   |  |        
|                                    |  |       |        |                     |         |          |   |                     |  |         |  |                     |        |        |         |                     |   |       |  |        
|Purchase price                      |  | $     | 59,955 |                     |         |          | $ | 52,288              |  |         |  | $                   | 10,151 |        |         |                     | $ | 9,609 |  |        
|                                    |  |       |        |                     |         |          |   |                     |  |         |  |                     |        |        |         |                     |   |       |  |        

Operating results from the acquired businesses are included in the consolidated statements of
operations from the date of acquisition.

The following unaudited pro-forma financial information presents the results of operations for
the years ended December 31, 2005 and 2004 as if the acquisitions had occurred at the beginning of each period presented. Pro-forma net income for the year ended December 31, 2005 includes an $11.6 million non-recurring charge for
IPR&D. The pro-forma financial information for the combined entities has been prepared for comparative purposes only and is not indicative of what actual results would have been if the acquisitions had taken place at the beginning of each period
presented, or of future results.



|                                |  |                                                   |         |      |   |        
|------------------------------- |  | ------------------------------------------------- | ------- | ---- | - | -------
|                                |  | Year Ended December 31,                          
|                                |  | 2005                                              |         | 2004
|                                |  | (in thousands, except per share data) (unaudited)
|Pro forma net revenues          |  | $                                                 | 351,391 |      | $ | 242,397
|                                |  |                                                  
|Pro forma net income            |  |                                                   | 29,244  |      |   | 50,817 
|                                |  |                                                  
|Pro forma net income per share: |  |                                                   |         |      |   |        
|Basic                           |  | $                                                 | 0.79    |      | $ | 1.42   
|Diluted                         |  | $                                                 | 0.75    |      | $ | 1.28   



F-18



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



8. Disposition of Assets

In July 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 line in the 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. The amount of $7.2 million of the purchase price was deposited into an escrow account upon closing for purposes of settling indemnification claims for the one-year period following the closing and is classified as
restricted cash in the consolidated balance sheets. The cash consideration was offset by $2.5 million in closing costs. In connection with the sale, the Company and IDT 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 No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Revenues
included in the companys consolidated statement of operations from the PC Audio product line were $19.1 million, $20.5 million, and $15.4 million for the years ended December 31, 2006, 2005, and 2004, respectively.

In July 2006, the Company sold a patent to a limited partnership for approximately $1.1 million. A gain of approximately $28,000 was recognized as a
result of this sale and is included in the gain on disposition of assets line in the consolidated statement of operations.

9. Other Accrued Expenses

The companys other accrued expenses are comprised of the following at December 31, 2006 and December 31, 2005,
respectively (in thousands):



|                               |  |              |       |      |   |      
|------------------------------ |  | ------------ | ----- | ---- | - | -----
|                               |  | December 31,
|                               |  | 2006         |       | 2005
|Accrued taxes                  |  | $            | 5,952 |      | $ | 3,905
|Accrued insurance              |  |              | 749   |      |   | 866  
|Royalties payable              |  |              | 711   |      |   | 1,105
|Accrued audit and tax services |  |              | 405   |      |   | 391  
|Other                          |  |              | 239   |      |   | 175  
|                               |  |              |       |      |   |      
|                               |  | $            | 8,056 |      | $ | 6,442
|                               |  |              |       |      |   |      

10. Stockholders Equity and Stock-based Compensation

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.

On February 18, 2004, the Securities and Exchange Commission declared effective the
Companys registration statement, which the Company filed on Form S-1 under the Securities Act of 1933 in connection with a follow-on offering of its common stock. Under this registration statement, the Company registered 9,830,422 shares of
its common stock, including 1,282,229 shares subject to the underwriters over-allotment option (of which 212,229 shares were exercised), with a public offering price of $25.01 per share. The Company registered 250,000 of these shares on its
behalf and 9,580,422 on behalf of certain stockholders of the Company. The Company received $5.3 million in proceeds after deducting the underwriters fees and transaction costs.



F-19



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



Share Repurchase Plan

On January 25, 2006, the Companys board of directors authorized a share repurchase plan for up to $30.0 million of its common stock. In February 2006, approximately 2.6 million shares were repurchased
for $30.0 million and were retired. There were no share repurchases in 2005. In July of 2004, the Companys board of directors authorized a share repurchase plan for up to $30.0 million of common stock. In 2004, approximately 1.4 million
shares were repurchased for $21.0 million and were retired.

Warrants

In March 2004, the Company issued 19,900 shares in a cashless exercise of warrants issued in 2001 and 2002 to a bank in connection with modifications to a revolving line of credit. In December of 2004, the Company
issued 457,485 shares in a cashless exercise of warrants issued in 2002 to an unaffiliated customer in connection with an exclusive supply agreement. There were no warrants outstanding as of December 31, 2006, 2005, and 2004.

Stock-Based Compensation

Prior to January 1,
2006, employee stock awards under the Companys compensation plans were accounted for in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, FASB Interpretation
No. 44, Emerging Issues Task Force (EITF) Issue No. 00-23, and related interpretations. The Company accounted for equity awards issued to non-employees in accordance with the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123), as amended by SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure (SFAS 148), and EITF Issue No. 96-18, Accounting for Equity
Instruments that are Issued to other than Employees for Acquiring, or in Conjunction with Selling Goods or Services and related interpretations. For employee stock awards, the Company has historically adhered to the disclosure-only provisions of
these applicable accounting principles.

Prior to January 1, 2006, compensation costs related to stock options granted to employees
with exercise prices equal to the stocks fair value under the Companys compensation plans were not recognized in the consolidated statements of operations. Compensation costs related to options, restricted stock units (RSUs),
stock options granted to employees below fair value, and stock options granted to non employees were recognized in the consolidated statements of operations.

In December 2004, the FASB issued SFAS 123R, Share-Based Payment, and under the new standard, companies are no longer able to account for share-based compensation transactions using the intrinsic value method
of APB Opinion No. 25. Instead, companies are required to account for such transactions using a grant date fair value method and recognize the expense over the employees requisite service period in the consolidated statements of
operations.

On December 31, 2005, the Company accelerated the vesting of approximately 1.8 million unvested stock options
outstanding under the Companys stock plan with exercise prices per share of $20.00 or higher. The options had a range of exercise prices between $20.03 and $55.86 and a weighted average exercise price of $31.10. The closing price of
the Companys common stock on December 16, 2005, the day the Companys board of directors approved the acceleration, was $13.34. In accordance with SFAS No. 123, the Company expensed the remaining unrecognized compensation cost
associated with the options with accelerated vesting in the pro forma disclosure. These actions were taken in order to avoid expense recognition in future financial statements upon adoption of SFAS 123R. The aggregate pre-tax expense associated with
the accelerated options that would have been reflected in the Companys consolidated financial statements in future fiscal years was approximately $25.9 million, which was included in the pro forma disclosure of stock-based employee
compensation expense for the year ended December 31, 2005.

Effective January 1, 2006, the Company adopted the fair value
recognition provisions of SFAS 123R using the modified prospective transition method. Under that transition method, compensation cost recognized in 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 subsequent to January 1,
2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Upon adoption of SFAS 123R, the Company elected to use the transition method described in FASB Staff Position No. 123R-3, Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards, in determining the windfall pool of tax benefits. Results of prior periods have not been revised.

As a result of adopting SFAS 123R on January 1, 2006, the Companys loss before income taxes for the year ended December 31, 2006, was
$10.2 million higher than if it had continued to account for share-based compensation under APB Opinion No. 25. After the effect of income taxes, the adoption of SFAS 123R had a negative impact of $8.0 million on net loss, or $0.23 per basic
and diluted share, for the year ended December 31, 2006.



F-20



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



Prior to adopting SFAS 123R, the Company presented all tax benefits of deductions resulting from the
exercise of stock options as operating cash flows in the consolidated statements of cash flows. SFAS 123R requires the cash flows resulting from the tax benefits from tax deductions in excess of recognized compensation cost (excess tax benefits) to
be classified as financing cash flows. This requirement reduced net operating cash flows and increased net financing cash flows for the year ending December 31, 2006, by approximately $1.0 million.

1995 Stock Option/Stock Issuance Plan

As of December 31, 2006, options to purchase 1,095,803 shares of the Companys common
stock were outstanding under the Companys 1995 Stock Option/Stock Issuance Plan (the 1995 Plan). Under the 1995 Plan, incentive stock options may be granted to employees and non-statutory stock options may be granted to
non-employees, directors or consultants at prices not lower than 100% of the fair market value of the Companys common stock at the date of grant as determined by the Board of Directors. Any 10% stockholder must be granted options to purchase
the Companys common stock at an exercise price no lower than 110% of the fair market value of the Companys common stock at the date of grant as determined by the board of directors. Generally, options vest either (i) at the rate of
20% per year over five years, or (ii) over a four year period (25% at end of the first year from the date of grant, and 1/36of the remaining shares per month over the next 36 months) and are exercisable for a period of ten years from the date of grant. In February 2003, the board of directors approved an increase of 1,641,667 shares available
for issuance under the 1995 Plan. Effective upon completion of the Companys initial public offering, no more options were issued under the 1995 Plan.

2003 Equity Incentive Plan

In July 2003, the Companys board of directors and stockholders approved the 2003 Equity
Incentive Plan (the 2003 Plan) that became effective upon completion of the initial public offering. The 2003 Plan provides for the grant of incentive stock options and nonqualified stock options, stock awards, stock purchase rights and
RSUs for the purchase of up to 6,866,747 shares of the Companys common stock by officers, employees, consultants and directors of the Company. However, this share reserve shall be reduced by the exercise of stock options outstanding under the
Companys 1995 Stock Option/Stock Issuance Plan. In April 2005, the board of directors and stockholders approved an increase of 2,500,000 shares available for issuance under the 2003 Plan. As of December 31, 2006, options to purchase
4,016,350 shares and RSUs covering 278,368 shares of the Companys common stock were outstanding under the 2003 Plan.

The compensation committee of the board of directors is responsible for administration of the 2003
Plan. The compensation committee determines the term of each option, the option exercise price, the number of shares for which each option is granted and the rate at which each option is exercisable. Incentive stock options may be granted to any
officer or employee at an exercise price per share of not less than the fair value per common share on the date of the grant (not less than 110% of fair value in the case of holders of more than 10% of the Companys voting stock) and with a
term generally seven to ten years from the date of the grant (five years for incentive stock options granted to holders of more than 10% of the Companys voting stock). Generally, options vest either (i) over a four year period (25% at end
of the first year from date of grant, and 1/36of remaining shares per month over next 36 months) or
(ii) over a two year period (25% at the end of the year and 75% at the end of the second year from date of grant). Nonqualified stock options may be granted to any officer, employee, consultant or director at an exercise price per share of not
less than the market value per share.

Employee Stock Purchase Plan

In July 2003, the Companys board of directors and stockholders approved an Employee Stock Purchase Plan (ESPP) that became effective
upon completion of the Companys initial public offering. Employees who own less than 5% of the Companys stock, work more than 20 hours a week and are generally employed for greater than 5 months per year, are eligible and may designate
up to 15% of their compensation for the purchase of common stock semi-annually at the lower of 85% of the fair market value of the stock at the beginning or end of the six-month payment period, through accumulation of payroll deductions. Common
stock reserved for issuance under the ESPP is 652,283 shares at December 31, 2006.

Accounting for Stock Compensation

Stock-based compensation costs are estimated using the Black-Scholes option-pricing model on the date of grant for stock options and on the date of
enrollment for the ESPP. RSU fair values equal their intrinsic value 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 consolidated statements of cash flows.



F-21



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



The Company determined the assumptions in the Black-Scholes model for calculating fair value of
stock-based compensation costs as follows: expected volatility is a combination of the Companys historical and implied volatility; expected term is calculated using the simplified method prescribed in SAB 107, such that the term is
approximated by the mean between the vesting date and expiration of the award; the risk free rate is based on the U.S. Treasury yield curve in effect at the time of valuation; a dividend yield is not used since the Company has never paid cash
dividends and does not currently intend to pay cash dividends. The Company periodically reviews the assumptions and modifies the assumptions accordingly.

The fair value of common stock options and employee purchase rights granted during the years ended December 31, 2006, 2005, and 2004 were estimated using the Black-Scholes option pricing model with the following assumptions:



|                             |  |                         |   |  |                   |   |  |                 |  
|---------------------------- |  | ----------------------- | - |  | ----------------- | - |  | --------------- | -
|                             |  | Year ended December 31, |  
|                             |  | 2006                    |   |  | 2005              |   |  | 2004            |  
|2003 Equity Incentive Plan   |  |                         |   |  |                   |   |  |                 |  
|Dividend yield               |  |                        |   |  |                  |   |  |                |  
|Expected life                |  | 4.4 to 4.5 years        |   |  | 3.25  4 .0 years |   |  | 3.5  5.0 years |  
|Expected volatility          |  | 60 69                  | % |  | 67  75           | % |  | 63 75          | %
|Risk-free rate               |  | 4.6 5.0                | % |  | 3.2 4.4          | % |  | 3.1 3.2        | %
|Employee Stock Purchase Plan |  |                         |   |  |                   |   |  |                 |  
|Dividend yield               |  |                        |   |  |                  |   |  |                |  
|Expected life                |  | 6 months                |   |  | 6 months          |   |  | 6 months        |  
|Expected volatility          |  | 60 67                  | % |  | 75                | % |  | 63 75          | %
|Risk-free rate               |  | 4.4 5.0                | % |  | 3.2 3.8          | % |  | 3.1 3.2        | %

As part of the requirements of SFAS 123R, the Company is required to estimate potential
forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such
estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

A summary of the Companys stock compensation activity with respect to the year ended December 31, 2006, follows (share and intrinsic value
amounts in thousands):



|                                                 |  |        |   |  |                                       |       |                                                    |     |                          |   |      
|------------------------------------------------ |  | ------ | - |  | ------------------------------------- | ----- | -------------------------------------------------- | --- | ------------------------ | - | -----
|Stock Options Under the 1995 and 2003 Plans      |  | Shares |   |  | Weighted Average ExercisePrice        |       | Weighted Average RemainingContractual Term
(Years) |     | Aggregate IntrinsicValue
|Outstanding at December 31, 2005                 |  | 5,496  |   |  | $                                     | 19.07 |                                                    |     |                          |   |      
|Granted                                          |  | 1,639  |   |  |                                       | 7.34  |                                                    |     |                          |   |      
|Exercised                                        |  | (357   | ) |  |                                       | 1.92  |                                                    |     |                          |   |      
|Cancelled or expired                             |  | (1,666 | ) |  |                                       | 21.88 |                                                    |     |                          |   |      
|                                                 |  |        |   |  |                                       |       |                                                    |     |                          |   |      
|Outstanding at December 31, 2006                 |  | 5,112  |   |  | $                                     | 15.60 |                                                    | 6.1 |                          | $ | 5,408
|Vested at December 31, 2006 and expected to vest |  | 4,819  |   |  | $                                     | 15.85 |                                                    | 6.2 |                          | $ | 2,001
|Exercisable at December 31, 2006                 |  | 3,039  |   |  | $                                     | 18.73 |                                                    | 6.0 |                          | $ | 3,896
|Restricted Stock Units                           |  | Shares |   |  | Weighted Average Grant DateFair Value |       | Weighted Average RemainingVesting Term (Years)     |     | Aggregate IntrinsicValue
|Nonvested at December 31, 2005                   |  |       |   |  | $                                     |      |                                                    |     |                          |   |      
|Granted                                          |  | 345    |   |  |                                       | 7.53  |                                                    |     |                          |   |      
|Vested                                           |  |       |   |  |                                       |      |                                                    |     |                          |   |      
|Forfeited                                        |  | (67    | ) |  |                                       | 8.48  |                                                    |     |                          |   |      
|                                                 |  |        |   |  |                                       |       |                                                    |     |                          |   |      
|Nonvested at December 31, 2006                   |  | 278    |   |  | $                                     | 7.30  |                                                    | 3.5 |                          | $ | 1,219
|Vested at December 31, 2006 and expected to vest |  | 241    |   |  | $                                     | 7.32  |                                                    | 3.5 |                          | $ | 1,055
|Exercisable at December 31, 2006                 |  |       |   |  | $                                     |      |                                                    |    |                          | $ |     



F-22



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



Weighted average, grant date fair value of purchase rights exercised under the ESPP are as follows (share amounts in
thousands):



|                            |  |                         |      |      |   |       |  |   |     
|--------------------------- |  | ----------------------- | ---- | ---- | - | ----- |  | - | ----
|                            |  | Year ended December 31,
|                            |  | 2006                    |      | 2005 |   | 2004 
|Number of shares            |  |                         | 337  |      |   | 92    |  |   | 94  
|Weighted average fair value |  | $                       | 4.04 |      | $ | 10.97 |  | $ | 8.22

The following summarizes the Companys stock option values (in thousands):



|                                                            |  |                         |       |      |   |        |  |   |       
|----------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ------ |  | - | ------
|                                                            |  | Year ended December 31,
|                                                            |  | 2006                    |       | 2005 |   | 2004  
|Weighted average fair value of common stock options granted |  | $                       | 4.11  |      | $ | 15.70  |  | $ | 13.16 
|Intrinsic value of stock options exercised                  |  | $                       | 2,476 |      | $ | 23,092 |  | $ | 33,434
|Fair value of stock options that vested                     |  | $                       | 6,575 |      | $ | 4,069  |  | $ | 3,824 

During the year ended December 31, 2006, no RSUs vested. The Company had $15.5 million of
total unrecognized compensation costs related to stock options and RSUs at December 31, 2006, that are expected to be recognized over a weighted-average period of 2.5 years. There were no stock compensation costs capitalized into assets as of
December 31, 2006.

For the year ended December 31, 2006, approximately $2.4 million was received for the exercise of stock options
and employee stock purchases, and the tax benefit realized from these stock option exercises and employee stock purchases was $0.6 million. Cash was not used to settle any equity instruments previously granted. The Company issues shares from the
1995 Plan, 2003 Plan, and ESPP reserves upon the exercise of stock options, RSUs, and employee stock purchases. The Company does not currently expect to repurchase shares from any source to satisfy such obligation under the 1995 Plan, 2003 Plan, or
ESPP.

Other Stock Options

In March
2001, the Company executed an employment agreement with a key executive whereby it granted the executive an option, exercisable over five years, to purchase up to approximately 0.5 million shares of Series I Preferred Stock at an exercise price
of $2.57 per share. One half of these option shares vested immediately. The remaining option shares vested upon the closing of a firm commitment underwritten public offering, resulting in a $0.9 million expense. Due to the automatic conversion of
all of the Companys then outstanding preferred stock into common stock, in conjunction with the Companys initial public offering, the option was exercisable for approximately 0.2 million shares of common stock at an exercise price
of $6.24 per share. This option expired on April 11, 2006.

As discussed above, results for prior periods have not been revised to
reflect the effects of implementing SFAS 123R. The following table illustrates the effect on net income (loss) and earnings per share for the years ended December 31, 2005 and 2004 as if the Company had applied the fair value recognition
provisions of SFAS 123 (in thousands, except per share data):



|                                                                                                                                   |  |                         |         |   |      |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ | -
|                                                                                                                                   |  | Year Ended December 31, |        
|                                                                                                                                   |  | 2005                    |         |   | 2004 |  
|Net income attributable to common stockholders, as reported                                                                        |  | $                       | 35,879  |   |      | $ | 52,556 |  
|Add: Stock-based employee compensation expense recognized in net income attributable to common stockholders, net of tax            |  |                         | 843     |   |      |   | 1,405  |  
|Deduct: Stock-based employee compensation expense determined under the fair value based method for all employee awards, net of
tax |  |                         | (31,100 | ) |      |   | (4,036 | )
|                                                                                                                                   |  |                         |         |   |      |   |        |  
|Pro forma net income attributable to common stockholders                                                                           |  | $                       | 5,622   |   |      | $ | 49,925 |  
|                                                                                                                                   |  |                         |         |   |      |   |        |  
|Pro forma basic net income attributable to common stockholders per share                                                           |  | $                       | 0.16    |   |      | $ | 1.44   |  
|                                                                                                                                   |  |                         |         |   |      |   |        |  
|Pro forma diluted net income attributable to common stockholders per share                                                         |  | $                       | 0.15    |   |      | $ | 1.32   |  
|                                                                                                                                   |  |                         |         |   |      |   |        |  

11. Income Taxes

The provision for income taxes on income from continuing operations for the years ended December 31, 2006, 2005 and 2004 is comprised of the following (in thousands):



|         |  |                         |        |   |      |   |        |      |  |   |        |  
|-------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|         |  | Year ended December 31, |       
|         |  | 2006                    |        |   | 2005 |   |        | 2004 | 
|Current  |  |                         |        |   |      |   |        |      |  |   |        |  
|Federal  |  | $                       | 1,955  |   |      | $ | 13,993 |      |  | $ | 10,426 |  
|State    |  |                         | 90     |   |      |   | 53     |      |  |   | (2     | )
|Foreign  |  |                         | 1,939  |   |      |   | 2,539  |      |  |   |       |  
|Deferred |  |                         |        |   |      |   |        |      |  |   |        |  
|Federal  |  |                         | (4,055 | ) |      |   | 7,973  |      |  |   | (8,152 | )
|State    |  |                         | (56    | ) |      |   | (127   | )    |  |   | (14    | )
|Foreign  |  |                         | (280   | ) |      |   | 79     |      |  |   |       |  
|         |  |                         |        |   |      |   |        |      |  |   |        |  
|         |  | $                       | (407   | ) |      | $ | 24,510 |      |  | $ | 2,258  |  
|         |  |                         |        |   |      |   |        |      |  |   |        |  



F-23



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



The geographic sources of income from continuing operations before income taxes are as follows (in
thousands):



|                                                      |  |                         |          |   |      |   |        |  |   |       
|----------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | ------ |  | - | ------
|                                                      |  | Year ended December 31,
|                                                      |  | 2006                    |          |   | 2005 |   | 2004  
|United States                                         |  | $                       | (97,591  | ) |      | $ | 51,780 |  | $ | 54,791
|Foreign                                               |  |                         | (11,840  | ) |      |   | 8,609  |  |   | 23    
|                                                      |  |                         |          |   |      |   |        |  |   |       
|Income (loss) from continuing operations before taxes |  | $                       | (109,431 | ) |      | $ | 60,389 |  | $ | 54,814
|                                                      |  |                         |          |   |      |   |        |  |   |       

A reconciliation of the amount of the income tax provision that results from applying the
statutory Federal income tax rates to pretax income and the reported amount of income tax provision is as follows (in thousands):



|                                                   |  |                         |         |   |      |   |        |      |  |   |         |  
|-------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                   |  | Year Ended December 31, |        
|                                                   |  | 2006                    |         |   | 2005 |   |        | 2004 | 
|Tax provision at statutory rate                    |  | $                       | (38,301 | ) |      | $ | 21,136 |      |  | $ | 19,185  |  
|State income tax provision (benefit)               |  |                         | 23      |   |      |   | (48    | )    |  |   | 10      |  
|Effect of foreign operations                       |  |                         | (1,222  | ) |      |   | 2,222  |      |  |   |        |  
|In-process research and development                |  |                         |        |   |      |   | 4,064  |      |  |   |        |  
|Research and development credit                    |  |                         | (1,571  | ) |      |   | (2,761 | )    |  |   | (434    | )
|Stock-based compensation charge (benefit)          |  |                         | 1,340   |   |      |   | (36    | )    |  |   | (1,351  | )
|Sale of non-deductible goodwill in IDT transaction |  |                         | 5,339   |   |      |   |       |      |  |   |        |  
|Goodwill impairment                                |  |                         | 19,103  |   |      |   |       |      |  |   |        |  
|Non-deductible expenses and other                  |  |                         | (519    | ) |      |   | 59     |      |  |   | (451    | )
|Net increase (decrease) in valuation allowance     |  |                         | 15,401  |   |      |   | (126   | )    |  |   | (14,701 | )
|                                                   |  |                         |         |   |      |   |        |      |  |   |         |  
|                                                   |  | $                       | (407    | ) |      | $ | 24,510 |      |  | $ | 2,258   |  
|                                                   |  |                         |         |   |      |   |        |      |  |   |         |  

The significant components of the net deferred tax assets are as follows (in thousands):



|                                       |  |              |         |   |      |   |        |  
|-------------------------------------- |  | ------------ | ------- | - | ---- | - | ------ | -
|                                       |  | December 31, |        
|                                       |  | 2006         |         |   | 2005 |  
|Deferred tax assets:                   |  |              |         |   |      |   |        |  
|Net operating loss carryforwards       |  | $            | 4,263   |   |      | $ | 7,061  |  
|Credit carryforwards                   |  |              | 5,579   |   |      |   | 6,405  |  
|Accrued liabilities and reserves       |  |              | 2,440   |   |      |   | 1,398  |  
|Stock based compensation               |  |              | 2,019   |   |      |   |       |  
|Acquisition intangibles                |  |              | 2,375   |   |      |   |       |  
|Amortizable research and development   |  |              | 6,894   |   |      |   |       |  
|Depreciable assets                     |  |              | 332     |   |      |   |       |  
|Other                                  |  |              | 88      |   |      |   | 487    |  
|                                       |  |              |         |   |      |   |        |  
|Subtotal                               |  |              | 23,990  |   |      |   | 15,351 |  
|Deferred tax asset valuation allowance |  |              | (23,532 | ) |      |   | (6,244 | )
|                                       |  |              |         |   |      |   |        |  
|Total                                  |  |              | 458     |   |      |   | 9,107  |  
|                                       |  |             
|Deferred tax liabilities:              |  |              |         |   |      |   |        |  
|Depreciable assets                     |  |              |        |   |      |   | (706   | )
|Acquired intangibles                   |  |              |        |   |      |   | (8,259 | )
|Other                                  |  |              | (253    | ) |      |   | (25    | )
|                                       |  |              |         |   |      |   |        |  
|Total                                  |  |              | (253    | ) |      |   | (8,990 | )
|                                       |  |              |         |   |      |   |        |  
|Net deferred tax asset                 |  | $            | 205     |   |      | $ | 117    |  
|                                       |  |              |         |   |      |   |        |  



F-24



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



The table below summarizes changes in the deferred tax asset valuation allowance (in thousands):



|                             |  |                               |         |   |           |   |         |            |  |                         |        |  |   |         |  
|---------------------------- |  | ----------------------------- | ------- | - | --------- | - | ------- | ---------- |  | ----------------------- | ------ |  | - | ------- | -
|                             |  | Balance at Beginningof Period |         |   | Additions |   |         | Deductions |  | Balance at Endof Period |       
|Year ended December 31, 2004 |  | $                             | (15,971 | ) |           | $ |        |            |  | $                       | 14,701 |  | $ | (1,270  | )
|Year ended December 31, 2005 |  | $                             | (1,270  | ) |           | $ | (4,974  | )          |  | $                       |       |  | $ | (6,244  | )
|Year ended December 31, 2006 |  | $                             | (6,244  | ) |           | $ | (17,288 | )          |  | $                       |       |  | $ | (23,532 | )

As of December 31, 2006, the Company had available tax operating loss, tax capital loss and
tax credit carryforwards subject to expiration as follows (in thousands):



|                                |  |                     |  |           |  |           |  |             
|------------------------------- |  | ------------------- |  | --------- |  | --------- |  | ------------
|                                |  | Year of Expiration:
|                                |  | 2007-2011           |  | 2012-2017 |  | 2018-2025 |  | NoExpiration
|Net Operating Loss Carryforward |  |                     |  |           |  |           |  |             
|Federal                         |  |                    |  |          |  | 9,824     |  |            
|State                           |  | 3,428               |  | 6,455     |  |          |  |            
|Research & Development Credit   |  |                     |  |           |  |           |  |             
|Federal                         |  | 102                 |  | 34        |  | 881       |  |            
|State                           |  |                    |  | 177       |  | 2,254     |  | 689         
|Foreign Tax Credit              |  |                     |  |           |  |           |  |             
|Federal                         |  |                    |  | 913       |  |          |  |            
|Alternative Minimum Tax Credit  |  |                     |  |           |  |           |  |             
|Federal                         |  |                    |  |          |  |          |  | 492         
|Investment Tax Credit           |  |                     |  |           |  |           |  |             
|State                           |  | 37                  |  |          |  |          |  |            

Under the provisions of the Internal Revenue Code, certain substantial changes in the
Companys ownership may result in a limitation on the amount of net operating loss and credit carryforwards which can be used in future years. As of December 31, 2006, the Company has approximately $9.8 million of federal net operating
loss and $1.1 million of federal credit carryforwards, with limitations on the amount that can be recognized in any annual period. This limit may result in the expiration of the carryforwards prior to their utilization. Similar provisions under
state law impose limitations on $8.6 million of state net operating loss carryforwards and $1.0 million of state credit carryforwards.

The
valuation allowance for the net deferred tax asset was increased by approximately $17.3 million during 2006 due to managements determination that it is more likely than not that the Company will not realize the net U.S. deferred tax asset.
This determination was based on a number of factors, but primarily, the expected level of future income. In 2005, the valuation allowance for the net deferred tax asset was increased by approximately $5.0 million. Of the increase, approximately $4.5
million was due to uncertainty related to the utilization of certain net operating loss and credit carryforwards prior to their expiration acquired from Protocom and Oasis during 2005 due to limitations on the Companys ability to use the
carryforwards as a result of the ownership changes of the acquired businesses. The remaining increase of $0.5 million, comprised of a $0.1 million decrease to the federal valuation allowance and a $0.6 million increase to the state valuation
allowances, was related to the Companys assessment of the uncertainty of the utilization of certain other loss and credit carryforwards prior to their expiration.

During 2005, the Company acquired net deferred tax assets from Protocom and Oasis of approximately $11.0 million, including approximately $9.3 million of loss and credit carryforwards. Because of the uncertainty of
utilizing the loss and credit carryforwards



F-25



---

##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



prior to their expiration, a valuation allowance of approximately $4.5 million was recorded to reduce the carrying amount of the net deferred tax asset to
the amount the Company determined was more likely than not to be realized. An additional deferred tax liability of approximately $8.7 million was recorded as a result of intangible assets created in the acquisitions that are not amortizable for tax
purposes. Primarily due to utilization of net operating losses and credit carryforwards, the remaining value of the acquired deferred tax assets as of December 31, 2006 was approximately $5.7 million. As a result of the impairment charges
discussed in Footnote 6, the remaining value of the deferred tax liability for the acquired intangible assets was approximately $2.2 million. A valuation allowance of approximately $3.5 million, representing the difference between the deferred tax
asset value of $5.7 million and the deferred tax liability balance of $2.2 million, is included in the $23.5 million valuation allowance recorded against the Companys deferred tax asset as of December 31, 2006.

During the years ended December 31, 2006 and 2005, the Company recognized certain tax benefits related to equity compensation plans in the amount of
$1.6 million and $8.3 million, respectively. Of these benefits, $1.0 million was recorded as a reduction of income taxes payable and an increase in additional paid-in capital, $0.4 million was recorded as a reduction in income taxes payable and a
decrease in goodwill, and $0.2 million was recorded as a decrease in taxes payable and an increase in tax benefit during the year ended December 31, 2006. For the year ended December 31, 2005, $7.7 million was recorded as a reduction of
income taxes payable and an increase in additional paid-in capital, and $0.5 million was recorded as a reduction in income taxes payable and a decrease in tax expense. The excess tax benefits recorded as an increase in additional paid in capital
include direct tax benefits of equity-related tax deductions as well as indirect tax benefits included in the research and development tax credit. Additionally, certain deferred tax assets related to equity compensation plans, totaling $0.5 million
for the year ended December 31, 2006, were written off directly to additional paid-in capital in accordance with SFAS 123R.

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 $8.7 million. In the year ended December 31, 2006, management determined the company would no
longer permanently reinvest any of the earnings of its remaining foreign subsidiaries. Accordingly, deferred U.S. income taxes and foreign withholding taxes of $0.1 million have been provided on the $0.4 million undistributed cumulative earnings of
foreign subsidiaries.

The determination of the provision for income taxes requires the Company to take positions on certain issues where
there is uncertainty in the application of the tax law. In 2006, the Internal Revenue Service selected the 2004 corporate income tax return of Oasis for audit. The provision for income taxes includes amounts intended to satisfy unfavorable
adjustments by the Internal Revenue Service and other tax authorities in an examination of the Companys income tax returns. The ultimate resolution of these uncertainties may result in an assessment that is materially different from the
current estimate of the liability and, if favorable, may result in income tax benefits being recognized in a future period.

12. Commitments and
Contingencies

The Company leases its office space and certain office equipment under noncancelable operating leases. Certain of these
leases provide for periodic payments that increase over the life of the lease. The aggregate of the minimum periodic payments is expensed on a straight-line basis over the term of the related lease without consideration of renewal option periods.
The lease agreements contain provisions that require the Company to pay for normal operating expenses including repairs and maintenance, property taxes, and insurance. Total rent expense under these operating leases was approximately $9.1 million,
$7.1 million and $4.3 million for the years ended December 31, 2006, 2005 and 2004, respectively. During the years ended December 31, 2006, 2005 and 2004, the Company earned $2.3 million, $1.5 million and $0.7 million in rental income from
office space subleased to third parties.

Future minimum lease payments under capital leases and noncancelable operating leases at
December 31, 2006 are as follows (in thousands):



|                                           |  |                  |        |   |                |   |     |  
|------------------------------------------ |  | ---------------- | ------ | - | -------------- | - | --- | -
|Year ending December 31,                   |  | Operating leases |        |   | Capital leases |  
|2007                                       |  | $                | 7,485  |   |                | $ | 256 |  
|2008                                       |  |                  | 6,569  |   |                |   | 150 |  
|2009                                       |  |                  | 6,221  |   |                |   |    |  
|2010                                       |  |                  | 6,296  |   |                |   |    |  
|2011                                       |  |                  | 4,182  |   |                |   |    |  
|Future                                     |  |                  | 6,567  |   |                |   |    |  
|                                           |  |                  |        |   |                |   |     |  
|                                           |  |                  | 37,320 |   |                |   | 406 |  
|Less: sublease rental income               |  |                  | (6,699 | ) |                |   |     |  
|                                           |  |                  |        |   |                |   |     |  
|Operating lease obligation net of sublease |  | $                | 30,621 |   |                |   |     |  
|                                           |  |                  |        |   |                |   |     |  
|Less: portion representing interest        |  |                  |        |   |                |   | (26 | )
|                                           |  |                  |        |   |                |   |     |  
|Capital lease obligation                   |  |                  |        |   |                | $ | 380 |  
|                                           |  |                  |        |   |                |   |     |  



F-26



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



In connection with three of the Companys leases for office space, the Company has three unused
letters of credit with a bank. The first letter of credit is for $550,000 and automatically renews every year, with a final expiration date of June 9, 2008. The related lease agreement expired on September 28, 2006. The letter of credit
will be returned to the Company on or before October 28, 2007. The second letter of credit is for $500,000 and also automatically renews every year, with a final expiration date of November 19, 2009. In November 2005, the Company amended
the related lease to the second letter of credit and as a result, the second letter of credit will be increased from $500,000 to $1.5 million. This amount will then reduce by $375,000 per year beginning September 1, 2010 until the letter of
credit is reduced to zero on September 1, 2013, which coincides with the termination of the lease agreement. The third letter of credit is for $1,127,000 and is secured by a $1,200,000 line of credit loan. The letter of credit expires
January 23, 2008 and will be renewed annually until February 28, 2011, the end of the lease term. The underlying line of credit loan matures on April 30, 2007, and will be renewed annually until termination of the lease agreement.

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

Lease Abandonment

In December 2004, the Company abandoned a lease of office space in order to move its Austin, Texas operations to a larger location that would accommodate the Companys rapidly growing staff of engineers as well
as support staff. The total amount incurred in connection with the lease abandonment was approximately $2.0 million, which was expensed entirely in 2004. During the year ended December 31, 2005, the Company adjusted the lease abandonment charge
by approximately $0.4 million due to additional subleases that were executed in the abandoned space during the year. The adjustment is reflected in the selling, general and administrative operating expense in the consolidated statements of
operations for the year ended December 31, 2005. In 2005, the Company began subleasing this office space to unrelated third parties, for a total cash inflow of approximately $0.6 million and $0.7 million for the years ended December 31,
2005 and 2006, respectively. These subleases terminate concurrently with the Companys leases. The Company made rent and broker payments of approximately $1.7 million and $1.2 million for the years ended December 31, 2005 and 2006,
respectively. The net decrease to the lease abandonment liability in the years ended December 31, 2006 and December 31, 2005 was approximately $0.5 million and $1.5 million, respectively. At December 31, 2005, the liability was $0.5
million and was fully classified as a current liability. The lease abandonment liability was reduced to zero as of December 31, 2006. The Company does not expect any future charges related to this abandonment.

Executive Severance

On December 29, 2006,
Ronald P. Edgerton notified the Company of his decision to resign from his positions as Chairman, Director, President, and Chief Executive Officer of SigmaTel, Inc., effective January 1, 2007. In connection with Mr. Edgertons
resignation, a Separation and Release Agreement (the Agreement) was executed on January 1, 2007 between SigmaTel and Mr. Edgerton The Agreement was approved by the Board of Directors in a special meeting, and provides in
conjunction with his executive employment agreement, for the following severance benefits: a) Payment of base salary at the rate in effect on the date of his resignation, less applicable withholding taxes, through March 27, 2009, b) Payment of
COBRA premiums through March 27, 2009, or until Mr. Edgerton secures health insurance pursuant to other employment or otherwise, whichever occurs first, c) Payment of $114,750, less applicable withholding taxes, on or prior to
February 2, 2007 in full settlement of any amounts owed to him under SigmaTels Incentive Bonus Plan, d) Payment of $92,000, less applicable withholding taxes, which occurred on January 19, 2007, Continuation of vesting and
exercisability of Mr. Edgertons equity awards (other than his March 16, 2004 and March 15, 2005 stock option grants of 75,000 shares each) through March 27, 2009, and f) Reimbursement of up to $5,000 for fees and expenses
associated with negotiating the Agreement.

The total charge incurred in connection with the executive severance was approximately $2.4
million, $1.1 million of which was recorded in other accrued expenses at December 31, 2006. The remaining $1.3 million of the expense is stock compensation expense due to the extended vesting and exercisability of equity awards provided by the
Agreement. The entire $2.4 million of expense is included in the selling, general and administrative expense in the consolidated statements of operations. At December 31, 2006, the liability is classified as current. The Company does not expect
any future charges related to this arrangement.



F-27



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



Other Severance

During the third and fourth quarter of 2006, we eliminated approximately 60 positions in Cupertino, CA; Austin, TX; and Waltham, MA. The total charge of $0.7 million incurred with the employee severance was expensed
as incurred during the third and fourth quarters of 2006. The expense of $0.1 million is included in the selling, general and administrative and $0.6 million was included in research and development expense in the consolidated statement of
operations. The company does not expect any future charges related to this reduction in force.

Litigation

On January 4, 2005, the Company filed a lawsuit against Actions Semiconductor Company, Ltd., based in Zhuhai, Guangdong, China (Actions),
in the U.S. District Court for the Western District of Texas, Austin Division. The Company asserted that certain Actions ICs that are incorporated as components in MP3 players being shipped into the U.S. infringe multiple SigmaTel patents related to
the Companys portable multimedia SoCs. The Company sought damages and requested a permanent injunction prohibiting Actions from designing, manufacturing or selling the infringing MP3 integrated circuits in the U.S. The Company also requested a
permanent injunction prohibiting further shipment of products into the U.S. that use Actions ICs. In May, 2005, this U.S. District Court case was formally stayed, by mutual agreement of the parties, during the pendency of the U.S. International
Trade Commission (the ITC) investigation described below. On January 3, 2007, the Company dismissed this lawsuit without prejudice.

On March 14, 2005, the Company filed a complaint requesting that 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 U.S. Patent Nos. 6,137,279 (the 279 patent) and 6,366,522 (the 522 patent). On April 18, 2005, the ITC instituted an investigation into Actions actions based on the
Companys allegations. The Company sought a permanent exclusion order banning the importation into the U.S. of the allegedly infringing products and a cease-and-desist order halting the sale of these infringing products, as well as other relief
the ITC deems appropriate. During the course of the ITC investigation, the Company dropped its infringement assertion of the 279 patent and asserted an additional patentPatent No. 6,633,187 (the 187 patent). The
ITC conducted a hearing on the merits in late November 2005. In March 2006, the ITC administrative law judge, (ALJ), determined that Actions infringed the two patents asserted by the Company and recommended that an exclusion order be
issued which prevents the importation of infringing Actions chips and certain MP3 players which contain these chips. The ALJs initial decision was reviewed by the full ITC, which, in June 2006, issued a decision that altered the
ALJs construction of one of the patents at issue and asked the ALJ to make some further determinations. On August 4, 2006, the ALJ concluded that in light of the ITCs revised claim construction, certain Actions chips, when operating
under the control of a particular firmware version, do not infringe the Companys 522 patent.

On September 15, 2006, the
ITC issued a Limited Exclusion Order in favor of SigmaTel (the Order). The Order precludes the importation into the U.S. of MP3 players containing certain chips manufactured by Actions which contain 2 GB of flash memory or less. A
complete copy of the Order is available at the ITCs website  www.usitc.gov.

After the ITC issued the Limited Exclusion Order,
Actions requested that the U.S. Customs and Border Protection arm of the U.S. Government (CBP) examine a redesigned Actions SoC IC in order to determine whether this redesigned IC falls within the scope of the ITCs Order. (The CBP is the
government agency responsible for enforcing the Order.) CBP has invited the Company to participate in the proceedings, and the Company is negotiating with Actions to identify the scope of such proceedings. The Company expects that the proceedings
and determination by the CBP will take place during the second quarter of 2007.

On November 22, 2006, Actions requested that the U.S.
Patent and Trademark Office (USPTO) reexamine the Companys 187 and 522 patents in light of certain prior art references which Actions believes render the Companys two patents invalid and unenforceable. The USPTO granted
Actions request to reexamine the 522 patent and the Company expects to hear whether the USPTO will grant Actions reexamination request for the 187 patent during the first or second quarter of 2007.

On January 4, 2007, Actions filed a Notice of Appeal with the U.S. Court of Appeals for the Federal Circuit (CAFC). In this Notice,
Actions states its intention to appeal the ITCs Limited Exclusion Order. The CAFC has entered an order permitting our intervention in that appeal. Various briefs will be submitted to the CAFC during 2007, according to a schedule set by the
CAFC.

On September 13, 2006, Actions announced it had filed a patent infringement lawsuit against the Company in Shenzhen, China.
Later, the Company learned that the complaint had been filed in the Shenzhen Intermediate Peoples Court against Sigmatel and its subsidiaries. According to Actions, this complaint alleges that SigmaTel and its subsidiaries infringe one of
Actions Chinese



F-28



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



patents. At this time, Sigmatel has not been served with the complaint. Based on information contained in letters distributed by Actions to various third
parties, however, the Company learned that Actions asserts in the complaint that Sigmatels 3500 family of SoCs infringes an audio signal processing patentZL01145044.4, owned by Actions. Actions seeks to halt the infringement of its
patent in China by prohibiting the design, manufacture, sale, and use of the infringing ICs as well as devices containing the allegedly infringing ICs, and payment of damage in the amount of approximately US$12.5 million. Actions is also
asking 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. Despite never being served with a copy of the complaint, the Company has submitted a document to the Shenzhen Intermediate Peoples Court which details why the Court should not issue an injunction
against SigmaTel and its subsidiaries. This document was filed on December 13, 2006, and presents substantive, technical arguments as to why SigmaTels 3500 products do not infringe the patent at issue. At this time, the Court has not
issued any findings, but an injunction could be issued by the Court at any time.

On December 12, 2006, the Company filed an
invalidation petition with SIPO (a.k.a. the Chinese Patent Office) to invalidate Actions ZL 01145044.4 patent in the PRC. On January 12, 2007, the Company filed a supplemental submission in further support of the invalidation petition.
This matter is in its earliest stages and SIPO has not announced a schedule for completing the matter. The Company expects that invalidating Actions patent would have a favorable impact to the Company in the lawsuit initiated by Actions
involving the same patent.

On April 4, 2006, the Company filed a lawsuit against Telechips Inc., based in Seoul, South Korea
(Telechips), in the U.S. District Court for the Eastern District of Texas, Marshall Division. The Company asserts that certain Telechips ICs that are incorporated as components in MP3 players being shipped into the U.S. infringe multiple
SigmaTel patents. On July 27, 2006, the Company dismissed this lawsuit, without prejudice.

13. Related Party Transactions

Revenues from an affiliated customer, who as of October 2005 no longer held more than 5% of our outstanding stock, were approximately
$30.1 million, $43.9 million and $27.5 million for the years ended December 31, 2006, 2005 and 2004, respectively. Accounts receivable from sales to this affiliated customer were approximately $1.9 million and $7.8 million as of
December 31, 2006 and 2005, respectively.

In July 2006, the Company sold a patent to a limited partnership, approximately 20% of
which is owned by a family member of one of the Companys executive officers, for approximately $1.1 million. A gain of approximately $28,000 was recorded as a result of this sale.

14. Employee Benefit Plans

The Company has a defined contribution plan (the 401(k)
Plan) which is qualified under Section 401(k) of the Internal Revenue Code. Eligible employees may make voluntary contributions to the 401(k) Plan, not to exceed the statutory amount, and the Company may make discretionary matching
contributions. The Companys matching contributions to the 401(k) Plan for the years ended December 31, 2006, 2005 and 2004 were $1.1 million, $0.8 million and $0.4 million, respectively.

15. Supplemental Cash Flow Information



|                                                           |  |                         |        |   |      |   |        |  |   |    
|---------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ |  | - | ---
|                                                           |  | Year Ended December 31,
|                                                           |  | (in thousands)         
|                                                           |  | 2006                    |        |   | 2005 |   | 2004  
|Cash paid for interest                                     |  | $                       | 14     |   |      | $ | 9      |  | $ | 21 
|Cash (refunded) paid for taxes                             |  |                         | (1,807 | ) |      |   | 6,075  |  |   | 523
|Non-cash investing and financing activities:               |  |                         |        |   |      |   |        |  |   |    
|Stock issued for acquisition of business                   |  |                         |       |   |      |   | 28,179 |  |   |   
|Acquisition of property and equipment under capital leases |  |                         | 514    |   |      |   |       |  |   |   



F-29



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##### Table of Contents

##### Index to Financial Statements

SigmaTel, Inc.

Notes to Consolidated Financial Statements - (Continued)



16. License of Technology

In October 2001, the Company entered into an asset purchase and license agreement with Metanoia, a company started by a former officer and then-current common stockholder of SigmaTel. The agreement requires SigmaTel
to exclusively license DSL technology developed and owned by SigmaTel to Metanoia (the License). The total consideration payable to SigmaTel included (i) approximately 1,400,000 shares of Metanoias preferred stock;
(ii) $207,000 payable in cash; and (iii) a note receivable of $1,000,000 bearing interest at 8% per annum payable on April 24, 2002 (the Original Note). In March 2002, prior to the maturity of the Original note,
Metanoia exercised its option to extend the maturity date to January 24, 2003 (the New Maturity Date). In December 2002, prior to the New Maturity Date, the Company entered into an agreement with Metanoia to extend the maturity of
the Original Note to January 24, 2005 and to remove certain licensing restrictions for the use of the technology. In consideration for the amendment, Metanoia issued a new note in the amount of $500,000 to SigmaTel bearing interest at
8% per annum and maturing on January 24, 2004 (together with the Original Note, the Metanoia Notes). Despite its efforts, Metanoia continued to fail at seeking additional capital for its business operations. On April 6,
2006, the Company entered into an Accord and Satisfaction Agreement with Metanoia providing for (i) the revocation of the License, (ii) the cancellation of the Metanoia Notes and the forgiveness by SigmaTel of all amounts covered by the
Metanoia Notes, and (iii) the payment by Metanoia to SigmaTel of $50,000 in cash, which SigmaTel has received. As of December 31, 2006, SigmaTel had not recognized a gain on the non-cash consideration received because Metanoia had not
generated operating cash flows and there is no active trading market for Metanoia securities.

17. Operating Segment and Geographic Information

The Company operates as a single segment. The Companys chief operating decision maker is considered to be the Chief Executive
Officer. The chief operating decision maker allocates resources and assesses performance of the business at the entity-wide level to manage the business.

The following table summarizes the percentages of revenues by geographic region:



|                |  |                         |   |  |       |   |  |       |  
|--------------- |  | ----------------------- | - |  | ----- | - |  | ----- | -
|                |  | Year Ended December 31, |  
|                |  | 2006                    |   |  | 2005  |   |  | 2004  |  
|Taiwan          |  | 36.8                    | % |  | 37.5  | % |  | 37.1  | %
|China/Hong Kong |  | 33.3                    |   |  | 38.7  |   |  | 40.0  |  
|Singapore       |  | 19.8                    |   |  | 13.9  |   |  | 15.2  |  
|U.S.            |  | 2.5                     |   |  | 2.4   |   |  | 0.1   |  
|Other           |  | 7.6                     |   |  | 7.5   |   |  | 7.6   |  
|                |  |                         |   |  |       |   |  |       |  
|Total           |  | 100.0                   | % |  | 100.0 | % |  | 100.0 | %
|                |  |                         |   |  |       |   |  |       |  

The table below summarizes the percentage of long-lived assets by geographic region:



|              |  |              |   |  |      |   |  |      |  
|------------- |  | ------------ | - |  | ---- | - |  | ---- | -
|              |  | December 31, |  
|              |  | 2006         |   |  | 2005 |   |  | 2004 |  
|United States |  | 87           | % |  | 86   | % |  | 88   | %
|Hong Kong     |  | 5            |   |  | 4    |   |  | 5    |  
|Taiwan        |  | 2            |   |  | 4    |   |  | 1    |  
|Other         |  | 6            |   |  | 6    |   |  | 6    |  
|              |  |              |   |  |      |   |  |      |  
|              |  | 100          | % |  | 100  | % |  | 100  | %
|              |  |              |   |  |      |   |  |      |  

The following table sets forth the Companys revenues for each product class which accounted
for greater than 10% of its revenues during any of the last three years (Audio Codecs include both notebook and desktop PC audio codecs and consumer audio codecs):



|                                   |  |                         |   |  |      |   |  |      |  
|---------------------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                                   |  | Year Ended December 31, |  
|                                   |  | 2006                    |   |  | 2005 |   |  | 2004 |  
|Portable Multimedia SoCs           |  | 75                      | % |  | 91   | % |  | 89   | %
|Audio Codecs                       |  | 12                      |   |  | *    |   |  | *    |  
|Multi-Function Peripheral Products |  | 12                      |   |  | *    |   |  | *    |  

---

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



F-30



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##### Table of Contents

##### Index to Financial Statements

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

For Each of the Three Years Ended December 31, 2006

(in thousands)



|                                           |  |                               |   |  |           |   |  |            |  |                         |  
|------------------------------------------ |  | ----------------------------- | - |  | --------- | - |  | ---------- |  | ----------------------- | -
|                                           |  | Balance at Beginning ofPeriod |   |  | Additions |   |  | Deductions |  | Balance at End ofPeriod |  
|Allowance for sales returns:               |  |                               |   |  |           |   |  |            |  |                         |  
|Year ended December 31, 2004               |  | (100                          | ) |  | (159      | ) |  | 109        |  | (150                    | )
|Year ended December 31, 2005               |  | (150                          | ) |  | (402      | ) |  | 402        |  | (150                    | )
|Year ended December 31, 2006               |  | (150                          | ) |  | (150      | ) |  | 150        |  | (150                    | )
|Reserve for excess and obsolete inventory: |  |                               |   |  |           |   |  |            |  |                         |  
|Year ended December 31, 2004               |  | (1,415                        | ) |  | (2,238    | ) |  | 1,470      |  | (2,183                  | )
|Year ended December 31, 2005               |  | (2,183                        | ) |  | (1,381    | ) |  | 1,234      |  | (2,330                  | )
|Year ended December 31, 2006               |  | (2,330                        | ) |  | (3,920    | ) |  | 2,882      |  | (3,368                  | )
|Allowance for doubtful accounts:           |  |                               |   |  |           |   |  |            |  |                         |  
|Year ended December 31, 2004               |  | (400                          | ) |  | (118      | ) |  | 12         |  | (506                    | )
|Year ended December 31, 2005               |  | (506                          | ) |  | (115      | ) |  | 30         |  | (591                    | )
|Year ended December 31, 2006               |  | (591                          | ) |  | (348      | ) |  | 232        |  | (707                    | )



S-1