Edgar Filing: SIGMA DESIGNS INC

Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended May 5, 2007

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

For the transition period from ____________ to ____________

Commission file number 001-32207

Sigma Designs, Inc.

(Exact name of registrant as specified in its charter)

California	94-2848099
*(State or other jurisdiction of* *incorporation or organization)*	*(I.R.S. Employer* *Identification No.)*

1221 California Circle

Milpitas, California 95035

(Address of principal executive offices including Zip Code)

(408) 262-9003

(Registrant’s telephone number, including area code)

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

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

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. YES ¨ NO x

As of May 31, 2007, we had 23,766,478 shares of Common Stock issued and outstanding.

SIGMA DESIGNS, INC.

Throughout this report, we refer to Sigma Designs, Inc., together with its subsidiaries, as “we,” “us,” “our company,” “Sigma” or “the Company.”

THIS FORM 10-Q FOR THE THREE MONTHS ENDED MAY 5, 2007, CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS ABOUT THE CONTINUED STRENGTH OF OUR BUSINESS AND OPPORTUNITIES FOR FUTURE GROWTH, EXPECTED RESULTS OF OPERATIONS, ANTICIPATED REVENUES, GROSS MARGINS AND EXPENSES, OUR ABILITY TO REMEDIATE OUR INTERNAL CONTROLS AND OUR AVAILABLE CASH RESOURCES. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS “MAY,” “WILL,” “SHOULD,” “EXPECT,” “PLAN,” “INTEND,” “ANTICIPATE,” “BELIEVE,” “ESTIMATE,” “PREDICT,” “POTENTIAL,” OR “CONTINUE,” THE NEGATIVE OF SUCH TERMS OR OTHER COMPARABLE TERMINOLOGY. WE BELIEVE THAT OUR EXPECTATIONS ARE REASONABLE AND ARE BASED ON REASONABLE ASSUMPTIONS. HOWEVER, SUCH FORWARD-LOOKING STATEMENTS BY THEIR NATURE INVOLVE RISKS AND UNCERTAINTIES.

WE CAUTION THAT A VARIETY OF FACTORS, INCLUDING BUT NOT LIMITED TO THE FOLLOWING, COULD CAUSE OUR BUSINESS AND FINANCIAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN FORWARD-LOOKING STATEMENTS: ACTIONS BY THE SECURITIES AND EXCHANGE COMMISSION OR OTHER REGULATORY AGENCIES AS A RESULT OF THEIR REVIEW OF OUR STOCK OPTION PRACTICES, AND DERIVATIVE LITIGATION OR OTHER ACTIONS RELATING TO THE FOREGOING; OUR DEPENDENCE ON THE EXPANSION OF EVOLVING SEGMENTS OF THE COMSUMER ELECTRONICS MARKET; FLUCTUATING OPERATING RESULTS; PRICING PRESSURES; OUR ABILITY TO ATTRACT AND RETAIN QUALIFIED PROFESSIONALS; INDUSTRY COMPETITION; CHANGES IN INTERNATIONAL REGULATIONS; MONETARY AND FISCAL POLICIES; AND OTHER FACTORS DISCUSSED MORE FULLY IN MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND THE RISK FACTORS SET FORTH BELOW, AS WELL AS IN OTHER REPORTS SUBSEQUENTLY FILED FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION. WE ASSUME NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS.

SIGMA DESIGNS, INC.

TABLE OF CONTENTS

	Page No.
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets (Unaudited) - May 5, 2007 and February 3, 2007	4

Condensed Consolidated Statements of Operations (Unaudited) — Three months ended May 5, 2007 and April 29, 2006 (Restated)	5

Condensed Consolidated Statements of Cash Flows (Unaudited) — Three months ended May 5, 2007 and April 29, 2006 (Restated)	6

Notes to Condensed Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3. Quantitative and Qualitative Disclosures About Market Risk	29

Item 4. Controls and Procedures	30

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	32

Item 1A. Risk Factors	33

Item 4. Submission of Matters to a Vote of Security Holders	40

Item 5. Other Information	40

Item 6. Exhibits	40

Signatures	42

Exhibit index	43

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIGMA DESIGNS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, unaudited)

	May 5, 2007			February 3, 2007
				(Restated)
Assets
Current assets:
Cash and cash equivalents	$	25,685		$	24,413
Short-term investments		8,625			8,791
Accounts receivable, net		12,753			11,231
Inventories		15,560			16,003
Prepaid expenses and other current assets		992			1,095
Total current assets		63,615			61,533

Equipment and leasehold improvements, net		3,497			3,364
Long-term investments		263			263
Goodwill		5,020			5,020
Other intangible assets, net		5,221			5,527
Other non-current assets		393			377
Total Assets	$	78,009		$	76,084


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	7,454		$	13,723
Accrued liabilities		8,796			8,800
Current portion of bank term loan		188			226
Total current liabilities		16,438			22,749

Bank term loan		−			15
Other long-term liabilities		240			348
Total liabilities		16,678			23,112
Commitments and contingencies
Shareholders’ equity:
Common stock		122,203			119,301
Shareholder notes receivable		(29	)		(58	)
Accumulated other comprehensive income		412			351
Accumulated deficit		(61,255	)		(66,622	)
Total shareholders’ equity		61,331			52,972
Total Liabilities and Shareholders’ Equity	$	78,009		$	76,084

The accompanying notes are an integral part of these financial statements

SIGMA DESIGNS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended
	May 5, 2007		April 29, 2006
			(Restated)

Net revenues	$	36,016	$	14,799
Cost of revenues		18,206		7,369
Gross profit		17,810		7,430

Operating expenses:
Research and development		6,089		5,227
Sales and marketing		2,232		1,779
General and administrative		4,249		1,954
Total operating expenses		12,570		8,960

Income (loss) from operations		5,240		(1,530	)
Interest and other income, net		320		176
Income (loss) before income taxes		5,560		(1,354	)
Provision for income taxes		191		2
Net income (loss)	$	5,369	$	(1,356	)

Basic net income (loss) per share	$	0.23	$	(0.06	)
Shares used in computing per share amount		22,979		22,423

Diluted net income (loss) per share	$	0.20	$	(0.06	)
Shares used in computing per share amount		26,825		22,423

The accompanying notes are an integral part of these financial statements

SIGMA DESIGNS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended
	May 5, 2007			April 29, 2006
				(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	5,369		$	(1,356	)
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Depreciation and amortization		761			475
Stock-based compensation expense		1,326			1,191
Provision for inventory valuation		183			12
Provision for bad debts and sales returns		236			123
Long-term investment gain		(31	)		−
Accretion of contributed leasehold improvements		(29	)		(20	)
Changes in operating assets and liabilities:
Accounts receivable		(1,758	)		(4,542	)
Inventories		260			(4,194	)
Prepaid expenses and other current assets		103			223
Other non-current assets		(16	)		4
Accounts payable		(6,281	)		4,610
Accrued liabilities and others		(336	)		1,145
Other non-current liabilities		(108	)		−
Net cash used in operating activities		(321	)		(2,329	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments		(10,558	)		(8,035	)
Sale of short-term investments		10,725			6,206
Purchase of equipment		(215	)		(575	)
Recovery of long-term investment loss		31			−
Cash received in business acquisition, net of cash paid		−			146
Net cash used for investing activities		(17	)		(2,258	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Shareholder note receivables		29			−
Net proceeds from sale of common stock		1,574			438
Repayment of bank line of credit		(53	)		(49	)
Net cash provided by financing activities		1,550			389
Effect of foreign exchange rates changes on cash		60			41


INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,272			(4,157	)

CASH AND CASH EQUIVALENTS:
Beginning of period		24,413			16,827
End of period	$	25,685		$	12,670

SIGMA DESIGNS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In thousands)

(Unaudited)

	Three Months Ended
	May 5, 2007		April 29, 2006
			(Restated)
Supplemental disclosure of cash flow information:
Common stock issued and stock options assumed for Blue7 Acquisition	$	−	$	11,414
Cash paid for interest	$	5	$	8
Cash paid for income taxes	$	6	$	5

The accompanying notes are an integral part of these financial statements

SIGMA DESIGNS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Operations

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

2. Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (US GAAP) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by US GAAP for complete financial statements. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended February 3, 2007 included in the Company’s 2007 Annual Report on Form 10-K filed with the SEC.

The condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the Company’s consolidated financial position at May 5, 2007 and February 3, 2007, the consolidated results of its operations for the three months ended May 5, 2007 and April 29, 2006, and the consolidated cash flows for the three months ended May 5, 2007 and April 29, 2006. The results of operations for the three months ended May 5, 2007 and April 29, 2006 are not necessarily indicative of the results to be expected for future quarters or the year. We have restated our Condensed Consolidated Balance Sheet and Statements of Operation and Condensed Consolidated Statement of Cash Flows as of April 29, 2006 and for the three months then ended − refer to our 2007 Annual Report on Form 10-K for more information.

Each of the Company’s fiscal quarters includes 13 weeks and ends on the last Saturday of the period. The first quarter of fiscal 2008 ended on May 5, 2007. The first quarter of fiscal 2007 ended on April 29, 2006.

On February 16, 2006, we completed the acquisition of Blue7 Communications (“Blue7”). See Note 11.

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

Goodwill and Other Intangibles

In accordance with Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” we review our goodwill for impairment annually, or more frequently, when events or changes in circumstances indicate that the carrying amount may not be recoverable. The provisions of SFAS 142 require that a two-step test be performed to assess goodwill for impairment. First, the fair value of each reporting unit is compared to its carrying value. If the fair value exceeds the carrying value, goodwill is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. The fair value of a reporting unit is allocated to all the assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination at the date of the impairment test. The fair value of tangible net assets and both recognized and unrecognized intangible assets is deducted from the fair value of the reporting unit to determine the implied fair value of reporting unit goodwill. The implied fair value of the reporting unit’s goodwill must be compared to the carrying value of the goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the difference will be recorded.

Intangible assets with definite lives are amortized over their estimated useful life and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.”

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

Stock-Based Compensation

During the first quarter of fiscal 2007, we adopted the provisions of, and accounted for stock-based compensation in accordance with, the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards No. 123 — revised 2004 (“SFAS 123(R)”), “Share-Based Payment.” Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a ratable basis over the requisite service period, which is the vesting period. The valuation provisions of SFAS 123(R) apply to new grants and to grants that were outstanding as of the effective date which are subsequently modified. Estimated compensation for grants that were outstanding as of the effective date will be recognized over the remaining service period using the compensation cost estimated for the SFAS 123 pro forma disclosures.

The adoption of SFAS 123(R) had a material impact on our consolidated financial position, results of operations and cash flows. See Note 5 for further information regarding our stock-based compensation assumptions and expenses.

Provision for Income Taxes

On July 13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in any entity’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes” and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized as the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.

We adopted the provisions of FIN 48 on February 4, 2007. The total amount of unrecognized tax benefits as of the date of adoption was $2.4 million. As a result of the implementation of FIN 48, we recognized no increase in the liability for unrecognized tax benefits, which was accounted for during previous reporting periods.

Included in the balance of unrecognized tax benefits at February 4, 2007, are $374,000 of tax benefits that, if recognized, would affect the effective tax rate, $2.0 million of unrecognized benefits that would affect deferred tax assets, and none would affect other accounts such as additional-paid-in capital.

We have adopted the accounting policy that interest recognized in accordance with Paragraph 15 of FIN 48 and penalty recognized in accordance with Paragraph 16 of FIN 48 are classified as part of our income taxes. The total amount of interest and penalty recognized in the statement of operations and statement of financial position was $36, 000 as of February 4, 2007.

Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions. Significant estimates and judgments are required in determining our worldwide provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result.

Tax authorities may challenge the allocation of profits between our subsidiaries and may challenge certain tax benefits claimed on our tax returns, and we may not prevail in any such challenge. If we were not to prevail, we could be subject to higher tax rates or lose certain tax benefits that could result in a higher tax rate.

We are subject to taxation in the U.S. and various states and foreign jurisdictions. The French taxing authority is currently auditing the research and development tax credit that we claimed through the 2005 fiscal year. There are no other ongoing income tax examinations by taxing authorities at this time. Our tax filings for the tax years from 1990 to 2006 remain open in various taxing jurisdictions.

3. Short-Term Investments

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

4. Long-Term Investments

On February 16, 2006, the Company acquired the remaining 83% ownership of Blue7 in which the Company had previously invested $1.0 million in fiscal 2006. After the acquisition, Blue7 became the Company’s 100%-owned subsidiary.

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

5. Stock-Based Compensation

On January 29, 2006, we adopted SFAS 123(R) as interpreted by Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including equity awards related to the 2001 Employee Stock Option Plan (the “2001 Option Plan”), 2003 Director Stock Option Plan (the “2003 Director Plan”) and 2001 Employee Stock Purchase Plan (the “2001 Purchase Plan”) based on estimated fair values.

We adopted SFAS 123(R) using the modified prospective transition method, which required the application of the accounting standard as of January 29, 2006, the first day of our fiscal year 2007. Stock-based compensation expense recognized under SFAS 123(R) for the three months ended May 5, 2007 and April 29, 2006 were $1.2 million and $1.1 million, respectively, which consisted of stock-based compensation expenses related to the grant of stock options and stock purchase rights.

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in our Condensed Consolidated Statements of Operations.

Stock-based compensation expense recognized under FAS 123(R) is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense for the three months ended May 5, 2007 and April 29, 2006 included compensation expense for share-based payment awards granted prior to, but not yet vested as of January 29, 2006 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense for the share-based payment awards granted subsequent to January 29, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). As stock-based compensation expense recognized for the three months ended May 5, 2007 and April 29, 2006 is based on awards ultimately expected to vest, such amount has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Impact of SFAS 123(R)

The effect of recording stock-based compensation for the three-months ended May 5, 2007 and April 29, 2006 was as follows (in thousands):

	Three Months Ended May 5, 2007			Three months Ended April 29, 2006
Stock-based compensation by type of award:
Stock options	$	1,158		$	1,085
Employee stock purchase plan		57			51
Total stock-based compensation		1,215			1,136
Tax effect on stock-based compensation		(42	)		−
Net effect on net income	$	1,173		$	1,136
Effect on income per share:
Basic	$	0.05		$	0.05
Diluted	$	0.04		$	0.05

Valuation Assumptions

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

We estimate the fair value of stock options using a Black-Scholes valuation model, consistent with the provisions of SFAS 123(R), SAB No. 107 and our prior period pro forma disclosures of net earnings, including stock-based compensation expense (determined under a fair value method as prescribed by SFAS 123). The weighted-average estimated value of employee stock options granted during the three months ended May 5, 2007 and April 29, 2006 was $17.54 and $13.12 per share, respectively. The weighted-average estimated fair value of employee stock purchase rights granted pursuant to the Employee Stock Purchase Plan during the three months ended May 5, 2007 and April 29, 2006 was $8.44 and $4.44 per share. The fair value of each option and employee stock purchase right grant is estimated on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:

	Three Months Ended May 5, 2007				Three months Ended April 29, 2006
	Stock Options		Employee Stock Purchase Plan		Stock Options		Employee Stock Purchase Plan
Expected volatility		68.33%		62.91%		73.39%		49.60%
Risk free interest rate		4.57%		5.11%		4.63%		4.40%
Expected term of options and purchase rights (in years)		6.10		.50		5.32		.50
Dividend yield		None		None		None		None

The expected volatility is based on an equal weighted average of implied volatilities from traded options of the Company’s stock and the historical volatility of the Company’s stock. The risk-free interest rate is based on the yield available on U.S. Treasury securities with an equivalent remaining term. The expected life of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards and vesting schedules. The expected life of purchase is the period of time remaining in the current offering period. The dividend yield assumption is based on our history of not paying dividends and assumption of not paying dividends in the future.

Expense Information Under SFAS 123(R)

2001 Option Plan and 2003 Director Plan

A summary of activity under the above captioned plan is as follows:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Options outstanding at February 3, 2007		5,492,738		$	5.92
Options granted		176,000		$	26.81
Options forfeited		(33,829	)	$	12.53
Options exercised		(648,816	)	$	2.42

Options outstanding at May 5, 2007		4,986,093		$	7.06		6.20	$	103,547,263
Options vested and expected to vest May 5, 2007		4,790,919		$	6.86		6.12	$	100,448,608
Options exercisable at May 5, 2007		2,781,023		$	3.95		4.88	$	66,415,552

The aggregate intrinsic value, which is not equivalent to the value determined by Black-Scholes, is calculated as the difference between the exercise price of the underlying awards and the quoted price of our common stock. The aggregate intrinsic value of all vested and unvested options outstanding as of May 5, 2007, based on our then current closing price of $27.83, was $103.5 million. The aggregate intrinsic value of options exercised under our stock option plans was $15.9 million and $2.7 million for the three months ended May 5, 2007 and April 29, 2006, respectively, determined as of the date of option exercise. The fair value of options that vested during the three months ended May 5, 2007 and April 29, 2006 was $1.2 million and $1.1 million, respectively.

The options outstanding and currently exercisable at May 5, 2007 were in the following exercise price ranges:

				Options Outstanding						Options Exercisable
Range of Exercise Prices				Number Outstanding at May 5, 2007		Weighted Average Remaining Life		Weighted Average Exercise Price		Number Exercisable at May 5, 2007		Weighted Average Exercise Price
$	0.95	$	1.69		869,676		4.86	$	1.42		812,893	$	1.41
$	1.71	$	3.22		517,445		3.39	$	2.79		443,659	$	2.76
$	3.40	$	3.50		554,313		4.42	$	3.45		505,138	$	3.46
$	4.25	$	5.38		164,608		3.38	$	4.40		155,758	$	4.34
$	5.43	$	5.43		650,954		7.17	$	5.43		330,027	$	5.43
$	5.60	$	9.57		466,181		5.70	$	6.57		297,201	$	6.26
$	9.89	$	9.89		706,216		8.46	$	9.89		199,073	$	9.89
$	11.06	$	11.06		601,000		9.31	$	11.06		-	$	-
$	12.54	$	26.34		399,700		6.20	$	20.30		37,274	$	15.33
$	27.83	$	27.83		56,000		10.00	$	27.83		-	$	-
$	0.95	$	27.83		4,986,093		6.20	$	7.06		2,781,023	$	3.95

As of May 5, 2007, the total unrecognized compensation expense related to unvested share-based compensation arrangements granted under our option plans was $14.0 million which will be recognized over an estimated weighted average amortization period of 2.75 years. The amortization period is based on the expected term of the option, which is defined as the period from grant date to exercise date.

2003 Employee Stock Purchase Plan

Under the Company’s Employee Stock Purchase Plan, eligible employees can participate and purchase shares semi-annually through payroll deductions at the lower of 85% of the fair market value of the stock at the commencement or end of the offering period. The Purchase Plan permits eligible employees to purchase common stock through payroll deductions for up to 10% of qualified compensation. The Company accounts for the Employee Stock Purchase Plan as a compensatory plan and recorded compensation expense of $57,000 and $51,000 for the quarter ended May 5, 2007 and April 29, 2006, respectively, in accordance with SFAS 123R.

Non-Employee Related Stock-Compensation Expenses

In accordance with the provisions of SFAS No. 123(R) and Emerging Issues Task Force, Issue 96-18, “Accounting for Equity Instruments That Are Issued To Other Than Employees For Acquiring, Or In Conjunction With Selling, Goods or Services” (EITF 96-18), the Company recorded share-based compensation expense for options issued to non-employees based on the fair value of the options as estimated on the measurement date, which is typically the date of vesting, using the Black-Scholes option pricing model with the following assumptions.

	Three Months Ended
	May 5, 2007		April 29, 2006

Expected volatility		68%		90%
Risk free interest rate		4.57%		4.91%
Expected term of options and purchase rights (in years)		6.29		6.66
Dividend yield		None		None

The Company recognizes share-based compensation expense over the corresponding service periods, which are typically five years. As of the May 5, 2007 and April 29, 2007, the Company recorded compensation expense of $107,000 and $55,000, respectively.

6. Inventories

Inventories consisted of the following (in thousands):

	May 5, 2007		February 3, 2007
Raw materials	$	7,608	$	7,696
Work in process		2,866		1,680
Finished goods		5,086		6,627
	$	15,560	$	16,003

7. Current and Long-Term debt

Credit Facilities

On August 12, 2005, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with United Commercial Bank (the “Bank”). The Loan Agreement provides for a maximum borrowing amount of approximately $15.5 million across three credit facilities consisting of two 2-year Lines of Credit of $15 million and a 30-month Term Loan of $0.5 million.

The Company’s Lines of Credit are used to fund daily operating cash needs. During the ordinary course of business, the use of the Lines of Credit is driven by collection and disbursement activities. The Company’s daily cash needs generally follow a predictable pattern that parallels its payroll cycles, which drive, as necessary, short term borrowing requirements. The Company will continue to maintain its cash reserve and increase its short term borrowing to finance other business activities as required.

On May 15, 2006, the Company utilized $2.8 million of its first 2-year Line of Credit for a standby letter of credit to a supplier. As of May 5, 2007, the Company had no outstanding balance under either of our two Lines of Credit and had availability to draw down an approximate amount of $9.5 million.

Principal amounts under the Term Loan will become due and payable on a monthly basis such that the Term Loan will be fully repaid in February 2008. The Term Loan has a floating interest rate of the Wall Street Journal Prime Rate plus 0.5% per annum. The average interest rate paid on the Term Loan for the first three months of fiscal 2008 and fiscal 2007 were approximately 8.75% and 8.00%, respectively. As of May 5, 2007, the Company had $0.2 million outstanding under the Term Loan. The amounts of the Term Loan that mature in the next five years and thereafter are as follows (in thousands):

Maturities	Loan Payment
Less than one year	$	188
One year or more		−
Total	$	188

Under the Loan Agreement, the Company is subject to certain financial covenants. As of May 5, 2007, the Company was in compliance with all of the covenants contained in the Loan Agreement.

8. Net income (loss) per Share

“Net income (loss) per share - basic” for the periods presented is computed by dividing net income (loss) by the weighted average number of common shares outstanding (excluding shares subject to repurchase). Net income (loss) per share - diluted for the periods presented in which the Company had net income (loss) is computed by including shares subject to repurchase as well as dilutive options and warrants outstanding; in periods when the Company had a net loss, these potential dilutive securities have been excluded as they would be anti-dilutive.

The following table sets forth the basic and diluted net income (loss) per share computation for the periods presented (in thousands, except per share data):

	Three Months Ended
	May 5, 2007			April 29, 2006
				(Restated)
Numerator:
Net income (loss), as reported	$	5,369		$	(1,356	)
Denominator:
Weighted average common shares outstanding		23,010			22,502
Escrowed shares related to Blue7 acquisition		(31	)		(79	)
Shares used in computation, basic		22,979			22,423
Effect of dilutive securities:
Escrowed shares related to Blue7 acquisition		31			-
Stock options		3,815			-
Shares used in computation, diluted	$	26,825		$	22,423

Net income (loss) per share:
Basic	$	0.23		$	(0.06	)
Diluted	$	0.20		$	(0.06	)

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

	Three months ended
	May 5, 2007		April 29, 2006
Stock options		245		4,991

9. Comprehensive Income (Loss)

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

	Three months ended
	May 5, 2007		April 29, 2006
			(Restated)
Net income (loss)	$	5,369	$	(1,356	)
Other comprehensive income:
Unrealized gain on available-for-sale securities		1		26
Cumulative foreign currency translation adjustment		59		40
Total comprehensive income (loss)	$	5,429	$	(1,290	)

10. Acquisition

On February 16, 2006, we completed the acquisition of Blue7 Communications (“Blue7”) for $11.9 million. Blue7’s balance sheet and results of operations are included in our consolidated balance sheet and statements of operations from the Acquisition Date (February 16, 2006). Prior to the acquisition, Sigma held approximately 17% of the outstanding shares of Blue7 and provided loans totaling $900,000 to Blue7. Blue7 focuses on the development of advanced wireless technologies and Ultra-Wideband (UWB) semiconductor products. The transaction was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations.”

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

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

As a result of the acquisition, we issued approximately 583,870 shares of Sigma common stock based on an exchange ratio of 0.0529101 shares of Sigma common stock for each outstanding share of Blue7 common stock as of February 16, 2006 to the Blue7 shareholders other than Sigma. Of the 583,870 shares of Sigma common stock issued, 98,470 shares are held in escrow to satisfy any obligations of Blue7 to indemnify Sigma against any claims against Blue7 for any breaches of its representations or warranties contained in or made pursuant to the Merger Agreement and certain other matters set forth in the Merger Agreement. For purposes of calculating the fair value of shares issued by Sigma in the acquisition, we used the average market price per share of Sigma common stock of $14.03 which was the average closing sales prices of Sigma common stock for five consecutive trading days from December 13, 2005 to December 19, 2005 surrounding the announcement date (December 15, 2005) of the proposed transaction.

Under the terms of the merger agreement, each Blue7 stock option that was outstanding and unexercised was converted into an option to purchase Sigma common stock and we assumed that stock option in accordance with the terms of the applicable Blue7 stock option plan and terms of the stock option agreement relating to that Blue7 stock option. Based on Blue7’s stock options outstanding at February 16, 2006, we converted options to purchase approximately 4.8 million shares of Blue7 common stock into options to purchase approximately 231,137 shares of Sigma common stock. The fair value of options assumed was determined using the Black Scholes valuation model.

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

Purchase Price Allocation:

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

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

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

Identifiable intangible assets—Developed technology includes existing wireless technology for digital entertainment applications which has reached technological feasibility, and is expect to be used in HDTV, set-top box, DVD and other related electronics.

The assumptions used to value the Blue7 assumed stock options are as follows:

Expected term (in years)			3.33 years
Volatility			56%
Risk free interest rate			4.44%

The risk-free interest rate used in the valuation was the zero-coupon yield implied from U.S. Treasury securities with equivalent remaining terms. We do not anticipate paying any cash dividends in the foreseeable future and therefore an expected dividend yield of zero was used in the valuation. The expected option term was determined using the historical data for estimating expected option life. The volatility for each option grant was estimated using the weighted average of historical daily price changes of the Company’s common stock over the most recent period equal to the expected option life of the grant, adjusted for activity which is not expected to occur in the future.

The results of operations of Blue7 have been included in the Company’s consolidated financial statements subsequent to the date of acquisition.

11. Goodwill and intangibles

During the three months ended April 29, 2006, goodwill of $5.0 million was recorded due to the acquisition of Blue7. Refer to Note 10 for further information regarding this acquisition.

Acquired intangible assets, subject to amortization, were as follows as of May 5, 2007 (in thousands):

	Cost		Accumulated Amortization			Net
Developed technology	$	5,300	$	(915	)	$	4,385
Noncompete agreements		1,400		(564	)		836
Total acquired intangible assets	$	6,700	$	(1,479	)	$	5,221

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

	Cost		Accumulated Amortization			Net
Developed technology	$	5,300	$	(726	)	$	4,574
Noncompete agreements		1,400		(447	)		953
Total acquired intangible assets	$	6,700	$	(1,173	)	$	5,527

Amortization expense related to the acquired intangible assets was $306,000 and $255,000 for the three months ended May 5, 2007 and April 29, 2006, respectively. As of May 5, 2007, we expect amortization expense in future periods to be as shown below:

Fiscal year	Developed Technology		Noncompete Agreements		Total
Remainder of fiscal year 2008	$	567	$	350	$	917
2009		757		467		1,224
2010		757		19		776
2011		757		—		757
2012		757		—		757
Thereafter		790		—		790
	$	4,385	$	836	$	5,221

12. Segment and related information

The Company follows the requirements of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The Company’s operating segments consist of its geographically based entities in the United States, Hong Kong and France. All such operating segments have similar economic characteristics, as defined in SFAS No. 131. Accordingly, it is the Company’s opinion that it operates in one aggregated reportable segment: the development, manufacturing and marketing of multimedia computer devices and products.

13. Significant customers

Three customers accounted for more than 10% of total net revenues during the three months ended May 5, 2007 and two customers accounted for more than 10% of total net revenues during the three months ended April 29, 2006.

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

			Three months ended
Customers	Region		May 5, 2007		April 29, 2006
Uniquest		Asia		22%		24%
Scientific Atlanta		Europe		15%		*
Freebox		Europe		12%		15%

* Revenue from the customer was less than 10% of our total net revenues.

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

Customers	Region		May 5, 2007		February 3, 2007
Uniquest		Asia		15%		15%
Freebox		Europe		15%		24%
MTC Singapore		Asia		*		12%
Scientific Atlanta		Europe		*		18%

* Customer’s balance was less than 10% of our total net receivables.

14. Concentration of other risks

Foundry Partners and Subcontractors

The Company outsources all of its manufacturing. The Company primarily relies on one foundry in Taiwan to fabricate wafers for the Company’s products and substantially all of the assembly, packaging and testing of the Company’s chipset products is done by one subcontractor in Taiwan.

Supplier and industry risks associated with outsourced manufacturing that could limit the Company’s suppliers’ ability to supply products to the Company involve production capacity, delivery schedules, quality assurance and production costs. Other risks include the potential for unfavorable economic conditions, political strife, prolonged work stoppages, natural or manmade disasters, power shortages and other phenomena.

15. Related Party Transactions

On April 10, 2006, the Company entered into a sublease agreement to rent approximately 2,500 square feet of a facility from Grandis, Inc., a start-up company founded by Mr. William J. Almon, a member of the Company’s board of directors. Mr. Almon resigned from Grandis as Chairman and CEO effective June 2, 2006. This is a month-to-month operating lease with base rent of $4,000 plus a proportionate share of operating costs commencing April 1, 2006. This sublease will expire in September 2007.

In June 2005, the Company loaned $500,000 to Blue7, a California corporation, in which the Company had invested $1.0 million, for an approximately 17% ownership interest. One of the Company’s board members had invested $100,000 for a 2% ownership interest during fiscal 2005. In November 2005 and January 2006, the Company loaned an additional $250,000 and $150,000 to Blue7, respectively. As of February 16, 2006, the total loan balance of $900,000 was forgiven and accounted for as part of the Blue7 acquisition cost.

16. Product Warranty

In general, the Company sells products with a one-year limited warranty that the Company’s products will be free from defects in materials and workmanship. Warranty cost is estimated at the time revenue is recognized, based on historical activity. Accrued warranty cost includes both hardware and software support costs.

Details of the change in accrued warranty for the three months ended May 5, 2007 and April 29, 2006 are as follows (in thousands):

	Balance Beginning of Period		Additions		Deductions			Balance End of Period
Accrued Warranty Three Months
ended May 5, 2007	$	556	$	79	$	(116	)	$	519
ended April 29, 2006		289		94		(108	)		275

17. Contingencies

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

Legal Proceedings

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

Plaintiffs in the Federal and State Actions allege that the individual defendants breached their fiduciary duties to the Company in connection with the alleged backdating of stock option grants during the period from 1994 through 2005 and that certain defendants were unjustly enriched. Plaintiffs in the Federal Action assert derivative claims against the individual defendants based on alleged violations of Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934, and Rules 10b-5 and 14a-9 promulgated thereunder. They also allege that the individual defendants aided and abetted one another’s alleged breaches of fiduciary duty and violated California Corporations Code section 25402 and bring claims for an accounting and rescission. In the State Action, plaintiffs also allege that the individual defendants wasted corporate assets. Both Actions seek to recover unspecified money damages, disgorgement of profits and benefits and equitable relief. The Federal Action also seeks treble damages, rescission of certain defendants’ option contracts, imposition of a constructive trust over executory option contracts and attorney’s fees. The Company is named as a nominal defendant in both the Federal and State Actions; thus, no recovery against the Company is sought.

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

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

In May 2007, the IRS sent us an information and document request indicating it was opening an employment tax audit for our 2004 and 2005 tax years. The audit is in an early stage, and the IRS has not yet proposed any tax, interest or penalty deficiency amounts. We are currently in discussions with the IRS regarding this matter.

18. Commitments

The Company’s primary facilities are leased under a non-cancelable lease which expires in September 2007. In February 2007, the Company entered into a new lease agreement for a facility to which the Company intends to relocate its headquarters. The new lease will expire in September 2012. As of May 5, 2007, future minimum annual payments under operating leases are as follows (in thousands):

Fiscal Years	Operating Leases
2008	$	535
2009		609
2010		636
2011		675
2012		715
Thereafter		448
TOTAL MINIMUM LEASE PAYMENTS	$	3,618

19. Recently Issued Accounting Pronouncements

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

20. Subsequent event

Tender Offer to Amend the Exercise Price of Certain Options

On May 15, 2007, we filed a Tender Offer Statement on Schedule TO with the U.S. Securities and Exchange Commission and commenced an offer (the “Offer”) to amend certain options granted under our Amended and Restated 1994 Stock Plan or our 2001 Employee Stock Option Plan that had original exercise prices per share that were less than the fair market value per share of the common stock underlying the option on the option’s measurement date for financial reporting purposes and were unvested as of December 31, 2004. Under the terms of the Offer, individuals eligible to participate in the Offer must have been: (i) a non-executive employee of the company or one of its subsidiaries as of the date on which the Offer commenced and on June 13, 2007, the date on which the Offer expired; (ii) subject to federal income tax in the United States; and (iii) holding a discount option grant that was unvested as of December 31, 2004 (“Eligible Options”). Our executive officers and directors were not eligible to participate in the Offer.

The terms of the Offer provided that employees could elect to have Eligible Options amended to increase their exercise price per share to be equal to the fair market value used for financial reporting purposes and to receive a cash payment with respect to such amended options equal to the difference between the amended exercise price and the original exercise price of each Eligible Option, less applicable withholding taxes. The cash payments will be made on the first payroll date following January 1, 2008, regardless of whether the holder of the amended Eligible Option remains employed with us on the actual cash payment date.

As of June 13, 2007, the date on which the Offer expired, we had received election forms from eligible employees agreeing to amend and increase to fair value the exercise price with respect to approximately 1.2 million Eligible Options. Under the terms of the Offer, we will make cash payments in January 2008 totaling approximately $2.4 million to the individuals who have amended their Eligible Options, which amount will be fully accrued in the second quarter of our 2008 fiscal year.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes in this Form 10-Q and the 2007 Form 10-K previously filed with the Securities and Exchange Commission. Except for historical information, the following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements, which include, among other things, statements regarding our capital resources and needs (including the adequacy of our current cash reserves and access to our lines of credit) and statements regarding our anticipated revenues from sales of our board, chipset and other products in general and more particularly to customers in the internet protocol (IP) video technology market, connected DVD/media player market, high definition television (HDTV) market and personal computer (PC) add-in and other markets; statements regarding our long-term investments; gross margins; sales and marketing expenses; research and development expenses and general and administrative expenses, and statements involving our expected future receipt of incentive payments, involve risks and uncertainties. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those discussed in the forward-looking statements include, but are not limited to, those discussed under Item 1A “Risk Factors” in this Form 10-Q as well as other information found in the documents we file from time to time with the Securities and Exchange Commission.

The information below has been adjusted to reflect the restatement of our financial results for the three months ended April 26, 2006, which is more fully described in the fiscal 2007 Form 10-K as filed.

EXECUTIVE OVERVIEW

We have been providing video-oriented product solutions for over twenty years.

We have chipset and board solutions for emerging convergence products, including video over IP (IPTV), high definition (HD) DVD playback, HDTV reception, personal video recording (PVR) and video-on-demand (VOD). We specialize in silicon-based digital media processor chipsets. Our core technology allows us to offer highly-integrated chipsets that provide high-quality decoding of H.264, MPEG-4, MPEG-2, MPEG-1 and Windows^® Media Video 9 (WMV9) content. We sell our products to manufacturers of consumer electronic devices and products. Our products are sold worldwide through a direct sales force and distributors. We work with consumer electronics manufacturers and network service providers to allow them to deploy their IPTV services, digital media adapters, networked DVD players, and high definition televisions. These opportunities have led to technology investments in media processor chips, streaming video, digital rights management and a number of other technologies.

Our common stock is listed on the NASDAQ Global Market under the symbol SIGM. Our corporate headquarters are located in Milpitas, California, and we also have a research and development center in France as well as a sales office in Hong Kong. In addition, we have sales representatives in China, Japan and Taiwan and Europe.

Our primary product groups include chipset and board solutions. Our chipset products consist primarily of video and audio decoding chips under the names of EM8400 series, EM8500 series, EM8610 series, EM8620L series and SMP8630 series for the IP video technology market, connected media player market as well as the PC add-in market. We began volume shipments in the fourth quarter of fiscal 2006 of our SMP8630 series chipset product, which is our latest solution in the IPTV, Blu-ray and HD DVD, HDTV, and Digital Media Adapter markets. This chipset product series represented 95% and 91% of our revenues in the three months ended May 5, 2007 and April 29, 2006, respectively. Our chipset sales increase in the three months ended May 5, 2007, over the corresponding period in the prior year was in part attributable to our customers having their products launch after successful initial trials. We believe our success with the SMP8630 series chipset product demonstrates our success in the recently emerging, high-growth IPTV and connected media markets. Our board products consist primarily of certain customized development boards that are sold into the Internet Protocol (IP) video technology market, connected media player market and PC add-in market and, more recently to a lesser extent, a series of PC based solutions using the NetStream and Xcard brand names. We also offer development kits, engineering support services, and chipset customization engineering development.

Our primary market segments are the IPTV, connected media players, HDTV, and PC-based add-ins. The IPTV market consists primarily of a range of consumer and commercial products that perform the distribution and receiving of streaming video using IP. The connected media player market consists primarily of a range of set-top and portable products that perform playback of local digital media stored on optical or hard disk formats. The HDTV product market consists primarily of a range of digital television sets offering high definition capability. The PC-based add-in market consists primarily of a range of decoding solutions for PC-based DVD playback and streaming video.

We derive our revenues from sales of our chipset and board products to corporate customers and original equipment manufacturers, or OEMs, who in turn incorporate our products into technologies that are sold into the consumer electronics market. We do not enter into long-term commitment contracts with our OEMs and receive substantially all of our revenues based on purchase orders. We work with both OEMs and end users of our products to better understand the market demands and the necessary specifications for our technologies.

The vast majority of our revenues are derived from our chipset product solutions. Our markets are characterized by intense price competition. The willingness of customers to design our chips into their products depends to a significant extent upon our ability to sell our products at competitive prices. In the past, we have had to reduce our prices significantly to meet customer requirements. We expect the average selling prices of our products to decline significantly over the life of each product as the markets for our products mature, new technologies emerge and competition increases. If we are unable to reduce our costs sufficiently to offset declines in product selling prices or are unable to introduce more advanced products with higher margins in a timely manner, we could see declines in our market share or gross margins.

RECENT DEVELOPMENTS

NASDAQ

In late April 2007, we received a NASDAQ Listing Qualifications Staff letter stating that the Nasdaq Listing Qualifications Staff determined that the Company had demonstrated compliance with all Nasdaq Marketplace Rules. Accordingly, the Company's securities will continue to be listed on The NASDAQ Global Market.

Tender Offer to Amend the Exercise Price of Certain Options

CRITICAL ACCOUNTING POLICIES & ESTIMATES

Use of Estimates

Our interim condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions that affect the amounts reported in our financial statements and accompanying notes. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The significant accounting policies that we believe are the most critical in understanding and evaluating our reported financial results include the following:

Revenue Recognition;

Accounts Receivable;

Inventories;

Stock-based compensation;

Goodwill and Purchased Intangible Assets;

Litigation and Settlement Costs; and

For further discussion of our critical accounting policies and estimates, see Management’s Discussion and Analysis of Financial Condition and the Results of Operation in Item 7 of our Annual Report on Form 10-K for the year ended February 3, 2007 filed with the Securities and Exchange Commission.

Litigation and Settlement Costs

From time to time, we are involved in disputes, litigation and other legal proceedings. We defend these matters aggressively. However, there are many uncertainties associated with any litigation, and we cannot assure you that these actions or other third party claims against us will be resolved without costly litigation and/or substantial settlement charges. If any of these events were to happen, our business, financial condition and results of operations and cash flows could be materially and adversely affected. We record a charge equal to at least the minimum estimated liability for litigation costs or loss contingency only when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated. However, the actual liability in any such litigation may be materially different from our estimates, which could result in the need to record additional expenses.

Recent Accounting Pronouncements

RESULTS OF OPERATIONS

Overview.

The following table sets forth our historical operating results for the periods indicated (in thousands):

	Three Months Ended
	May 5, 2007		April 29, 2006
			(Restated)
Net revenues	$	36,016	$	14,799
Cost of revenue		18,206		7,369
Gross profit		17,810		7,430
Operating expenses:
Research and development		6,089		5,227
Sales and marketing		2,232		1,779
General and administrative		4,249		1,954
Interest income (expense) and other income (loss), net		320		176
Provision for income taxes		191		2
Net Income (loss)	$	5,369	$	(1,356	)

The following table shows certain items as a percentage of net revenues, which are included in our Consolidated Statements of Operations:

	Three Months Ended
	May 5, 2007		April 29, 2006
			(Restated)
Net revenues		100%		100%
Cost of revenue		51%		50%
Gross margin		49%		50%
Operating expenses:
Research and development		17%		35%
Sales and marketing		6%		12%
General and administrative		12%		13%
Interest income and other income, net		1%		1%
Provision for income taxes		—		—
Net Income (loss)		15%		(9)%

Net Revenues

Net revenues for the three months ended May 5, 2007 increased $21.2 million, or 143%, as compared to the corresponding period last year. The increase in net revenues for the three months ended May 5, 2007 was primarily attributable to increased chipset sales into the IPTV, Blu-ray and HD DVD, HDTV and Digital Media Adaptor marketplaces.

Net Revenues by Product Group.

We have three main product groups: chipsets, board and “other” products. The following table sets forth our net revenues in each of our major product groups and the percentage of total net revenues represented by each product group, for the first quarters of fiscal 2008 and 2007 (in thousands):

	Three months ended
	May 5,		% of net		April 29,		% of net
	2007		revenues		2006		revenues
Chipsets	$	34,392		95%	$	13,482		91%
Boards		475		1%		864		6%
Other		1,149		4%		453		3%
Total net revenues	$	36,016		100%	$	14,799		100%

Chipsets. Our chipsets are targeted toward manufacturers and large volume OEM customers building products for the IPTV, Blu-ray and HD DVD, HDTV, Digital Media Adaptor, and Portable Media Player markets. The increase of $20.9 million, or 155%, in net revenues from chipsets for the three months ended May 5, 2007 compared to the corresponding period in the prior year was due primarily to increases of $21.9 million for the three months ended May 5, 2007 in sales into the newer generation of IPTV, Blu-ray and HD DVD, HDTV, and Digital Media Adaptor product markets, partially offset by decreases of $1.3 million for the three months ended May 5, 2007in sales of our legacy chipset products.

Boards. Our board level product lines target OEM customers to address the DVD upgrade market, system integrators to address the computer-based training, kiosks, and corporate video-on-demand markets and consumer markets for upgraded multimedia products.

Other. The “Other” category primarily includes revenues from development kits, engineering support services for both hardware and software, engineering development for customization of chipsets, freight fees and other accessories.

Net Revenues by Market Segment.

We sell our products into four market segments which consist of the IP video technology market, the connected media player market, the HDTV product market and the PC add-in and other market. The following table sets forth our net revenues by market and the percentage of total net revenues represented by our product sales to each market segment for the first quarters of fiscal 2008 and 2007 (in thousands):

	Three months ended
	May 5, 2007		% of net revenues		April 29, 2006		% of net revenues
IP video technology market	$	27,918		78%	$	7,933		54%
Connected media player market		7,053		20%		5,791		39%
HDTV product market		511		1%		273		2%
PC add-in and other markets		534		1%		802		5%
Total net revenues	$	36,016		100%	$	14,799		100%

IP video technology market. The increase of $20.0 million, or 252%, in net revenues from the IP video technology market for the three months ended May 5, 2007 as compared to the corresponding period in the prior year was in part attributable to our customers having their products launch after successful initial trials.

Connected media player market. The increase of $1.3 million, or 22%, in net revenues from connected media player market for the three months ended May 5, 2007 as compared to the corresponding period in the prior year was primarily attributable to increase volumes of our customers’ product, including an increase in Blu-ray and digital media adapter applications.

HDTV Product Market. We experienced an increase in demand for our HDTV applications in the three months ended May 5, 2007 as compared to the same period a year ago.

PC add-in and other markets. The PC add-in and other markets consists of PC add-in board and chipset products, engineering support services for both hardware and software, engineering development for customization of chipsets, freight fees and other accessories. The decrease of $0.3 million, or 33%, in the net revenues from the PC add-in and other markets for the three months ended May 5, 2007 compared to the corresponding period in the prior year was primarily due to a decrease in unit sales of PC add-in board products.

Net Revenues by Geographic Region.

The following table sets forth our net revenues by geographic region, and the percentage of total net revenues represented by each geographic region for the first three months of fiscal 2008 and 2007 (in thousands):

	Three months ended
	May 5, 2007		% of total net revenues		April 29, 2006		% of total net revenues
Asia	$	21,787		60%	$	8,962		61%
North America		3,300		9%		2,426		16%
Europe		10,876		30%		3,395		23%
Other regions		53		−%		16		−%
Total net revenues	$	36,016		100%	$	14,799		100%

Asia. The revenues from Asia (which consists primarily of revenues from Korea, Taiwan, Japan and China) increased $12.8 million, or 143%, in the three months ended May 5, 2007 as compared to the same period in the prior year. The increase in revenues from Asia was due primarily to our customers’ initial product trials and successful product launches. Also, companies who incorporate our products and are located in other regions continued to place their orders with large OEMs located in the Asia region, which has led to a shift of our revenues from other regions into the Asia region as our direct customers are the large OEMs located in Asia. The revenues in Asia represented 60% of the total net revenues for the three months ended May 5, 2007 as compared to 61% in the same period from the prior year.

Revenues from our Asia region for the first three months of fiscal 2008 and 2007 were principally from:

	Three months ended
	May 5, 2007		April 29, 2006
Korea		22%		24%
China		9%		9%
Japan		8%		9%
Taiwan		10%		11%

North America. North American revenues increased $0.9 million, or 36%, for the three months ended May 5, 2007, as compared to the same period in the prior year. The increase was largely due to volume orders received from a new customer and existing customers for our chipset products in the IP video technology market. Our revenues from North America in any given period fluctuate depending on whether our customers place their orders locally or through overseas manufacturers who incorporate our products into their final products.

Europe. European revenues increased $7.5 million, or 220%, for the three months ended May 5, 2007, as compared to the same period in the prior year. The significant increase in revenues from Europe was primarily attributable to major deployments by our European customers using our IPTV chipsets. Our revenues from Europe in any given period fluctuate depending on whether our customers place their orders locally or through overseas manufacturers who incorporate our products into their final products.

For the three months ended May 5, 2007, our international revenues were 91% of our total net revenues as compared to approximately 84% in the same period in the prior year.

Major Customers:

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

			Three months ended
Customers	Region		May 5, 2007		April 29, 2006
Uniquest		Asia		22%		24%
Scientific Atlanta		Europe		15%		*
Freebox		Europe		12%		15%

* Revenue from customer was less than 10% of our total net revenues.

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

Customers	Region		May 5, 2007		February 3, 2007
Uniquest		Asia		15%		15%
Freebox		Europe		15%		24%
MTC Singapore		Asia		*		12%
Scientific Atlanta		Europe		*		18%

* Customer’s balance was less than 10% of our total net receivables.

Gross Profit and Gross Margin.

Our gross profit for the three months ended May 5, 2007 was $17.8 million, or 49.4%, as compared to $7.4 million, or 50.2%, for the corresponding period of the prior year. The decrease in gross margin was primarily related to the increased sales of our IPTV set-top product at expected forward volume pricing, while incurring early volume ramp production costs. This forward volume pricing was established as part of our strategy to obtain a leading share of the IPTV set-top box market. Furthermore, in the first quarter of fiscal 2008, we wrote off $226,000 in inventory associated with a program that was cancelled by a customer and recorded an increase to inventory reserves of $184,000 as cost of revenues for the three months ended May 5, 2007 as compared to $12,000 for the corresponding period of the prior year.

We believe our gross margins are trending toward the industry norms, which we believe range from 43% to 53%. In an effort to mitigate this trend, we have active cost reductions efforts that are intended to lower certain product costs. Moving forward, depending on our r ate of growth, we believe gross margins could temporarily move 2% to 4% below the current level, then return to the low 50’s in the future. If we are unable to reduce costs faster than the rate of such decline or introduce new products with higher average selling prices, our gross margins will decline.

Operating Expenses.

The following table sets forth our operating expenses and the related percentage of total net revenues for the first quarter of fiscal 2008 and 2007 (in thousands):

	Three months ended
	May 5, 2007		% of total net revenues		April 29, 2006		% of total net revenues
Research and development expenses	$	6,089		17%	$	5,227		35%
Sales and marketing expenses		2,232		6%		1,779		12%
General and administrative expenses		4,249		12%		1,954		13%
	$	12,570		35%	$	8,960		61%

Research and Development Expenses. Research and development expenses increased by $0.9 million, or 16%, during the three months ended May 5, 2007 as compared with the corresponding period of the prior year. This increase resulted primarily from an increase in wages and compensation expenses of $0.3 million associated with research and development personnel and an increase in operating expenses of $0.6 million associated with the acquired Blue7 operations. Stock-based compensation expense attributed to our research and development personnel for the three months ended May 5, 2007 was $0.7 million compared to $0.6 million for the same period in the prior year. We expect that our research and development expenses will continue to increase in absolute dollars in the near term.

Sales and Marketing Expenses. Sales and marketing expenses increased by $0.5 million, or 25%, during the three months ended May 5, 2007 as compared with the corresponding period of the prior year. This increase was due primarily to an increase of $0.3 million in salary and wages associated with our sales and marketing personnel, an increase of sales commissions of $0.1 million, offset by a decrease of $0.2 million in advertising and promotion expenses. Stock-based compensation expense attributed to our sales and marketing personnel for the three months ended May 5, 2007 was $0.2 million compared to the $0.2 million for the same period in the prior year. We expect that our sales and marketing expenses will increase in the following quarters of fiscal 2008 as our revenues continue to grow.

General and Administrative Expenses. General and administrative expenses increased by $2.3 million, or 117%, during the three months ended May 5, 2007 as compared with the corresponding period of the prior year. This increase was primarily a result of an increase of $1.8 million in outside professional services, mostly related to the review of our historical stock option granting practices and the audit of our fiscal 2007 financial statements and the re-audits of our fiscal 2006 and 2005 financial statements, and $0.5 million increase in salaries and wages and related benefits. Stock-based compensation expense attributed to our general and administrative personnel for the three months ended May 5, 2007 was $0.3 million compared to the $0.3 million for the same period in the prior year. Other than approximately $1.5 million of the non-recurring professional services charges incurred in the current quarter related to the review of our historical stock option granting practices and re-audits of our financial statements in previous years, we expect our general and administrative expenses to increase in future periods in absolute dollars due to our continuing efforts to comply with the Sarbanes-Oxley Act of 2002, an increase of headcounts and expenses incurred for the new facility and other expenditures associated with our business.

Stock-based compensation expenses. The following table presents the total stock-based compensation expense that is included in each functional line item in the consolidated statements of operations for the first three months of fiscal 2008 and 2007 (in thousands):

	Three Months Ended
	May 5, 2007		April 29, 2006
			(Restated)
Cost of revenues	$	88	$	94
Research and development expenses		685		595
Sales and marketing expenses		208		202
General and administrative expenses		345		300
Total stock-based compensation	$	1,326	$	1,191

Accounting for employee stock options grants will continue to have an adverse impact on our results of operations. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards to employees or assume unvested equity awards in connection with acquisitions.

Other income. Our other income primarily consisted of interest income from short-term investments offset by interest expense for a bank loan. For the three months ended May 5, 2007, we recovered $31,000 from our long-term investment which was fully written off in fiscal 2007.

Provision for Income Tax. Our provision for income taxes consisted primarily of federal alternative minimum income taxes, state income taxes and foreign income taxes on our foreign subsidiaries.

On July 13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in any entity’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes” and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.

We have adopted the accounting policy that interest recognized in accordance with Paragraph 15 of FIN48 and penalty recognized in accordance with Paragraph 16 of FIN 48 are classified as part of our income taxes. The total amount of interest and penalty recognized in the statement of operations and statement of financial position were $36, 000 as of February 4, 2007.

LIQUIDITY AND CAPITAL RESOURCES

As of May 5, 2007, our principal sources of liquidity consist of cash, cash equivalents and marketable securities of $34.3 million, which represents an increase of $1.1 million compared with $33.2 million at February 3, 2007.

For the three months ended May 5, 2007, the increase in cash, cash equivalents and marketable securities of $1.1 million from the beginning of the 2008 fiscal year was the result of net cash provided by financing activities from the sale of common stock of $1.6 million offset by approximately $0.3 million of cash used in operations and $0.2 million of capital expenditures.

For the three months ended April 29, 2006, the decrease in cash, cash equivalents and marketable securities of $2.3 million from the beginning of the 2007 fiscal year resulted primarily from cash used for operations.

We do not have guaranteed price or quantity commitments with any of our suppliers.

Tender Offer to Amend the Exercise Price of Certain Options

Credit Facilities

On August 12, 2005, we entered into a Loan and Security Agreement (the “Loan Agreement”) with United Commercial Bank (the “Bank”). The Loan Agreement provides for a maximum borrowing amount of approximately $15.5 million across three credit facilities consisting of two 2-year Lines of Credit and a 30-month Term Loan of $0.5 million.

The Lines of Credit are used to fund daily operating cash needs. During the ordinary course of business, the use of the Lines of Credit is driven by collection and disbursement activities. Our daily cash needs generally follow a predictable pattern that parallels its payroll cycles, which drive, as necessary, short term borrowing requirements. We will continue to maintain our cash reserve and increase our short term borrowing to finance other business activities as required.

The first 2-year Line of Credit allows us to borrow up to 80% of our accounts receivable to a maximum of $15 million and, has a floating interest rate of the Wall Street Journal Prime Rate plus 0.25% per annum. The second 2-year Line of Credit allows us to borrow up to $5 million as long as (1) unrestricted cash at the Bank exceeds $10 million, (2) the credit limit of the first 2-year Line of Credit is utilized and (3) the total outstanding balances under both 2-year Lines of Credit cannot exceed $15 million at any one time. The second 2-year Line of Credit has a floating interest rate of the Wall Street Journal Prime Rate plus 0.25% per annum. Our obligations under the Loan Agreement are secured by substantially all of our assets, including our intellectual property. Both Lines of Credit expire and are payable in full on August 12, 2007. At our option, the loans under the Loan Agreement can be repaid without premium or penalty. As of May 5, 2007, we had no outstanding balance under either of our 2-year Lines of Credit, and had availability to draw drown approximately $9.5 million.

Under the Loan Agreement, we are subject to certain financial covenants. As of May 5, 2007, we were in compliance with all of the covenants contained in the Loan Agreement.

Purchase Commitments

We currently place non-cancelable orders to purchase semiconductor products from our suppliers on an eight to twelve week lead-time basis. As of May 5, 2007, the total amount of outstanding non-cancelable purchase orders was approximately $3.7 million.

Leases

On April 10, 2006, we entered into a sublease agreement to rent approximately 2,500 square feet of a facility from a start-up company founded by a member of our board of directors. This is a month-to-month operating lease with base rent of $4,000 plus proportionate share of operating costs commencing April 1, 2006. This sublease will expire in September 2007.

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

The following table sets forth the amounts (in thousands) of payments due under specified contractual obligations as of February 3, 2007.

Contractual Obligations:	Payments Due by Period
	1 year or less		1 - 3 years		3 - 5 years		5 years or more		Total
Operating Leases	$	910	$	1,285	$	1,423	$	—	$	3,618
Term Loan		188		—		—		—		188
Non-cancelable purchase orders		3,670		—		—		—		3,670
	$	4,768	$	1,285	$	1,423	$	—	$	7,476

Our primary sources of funds to date have been proceeds from common stock issuances, and borrowings under bank lines of credit. In certain periods, cash generated from operations has also been a source of funds. It is possible that our operations will consume cash in future periods. Based on our currently anticipated cash needs, we believe that our current reserve of cash and cash equivalents will be sufficient to meet our primary uses of cash, which include our anticipated working capital requirements, obligations, capital expenditures, strategic investments, and other cash needs for at least the next twelve months. In addition, we believe that we will be able to comply with or make modifications to the current covenants under our existing asset-based banking agreements, and to renew those lines of credit upon their expiration, in order to maintain the availability of funds under these agreements.

OFF-BALANCE SHEET ARRANGEMENTS

As of May 5, 2007, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We face exposure to market risk from adverse movements in interest rates and foreign currency exchange rates, which could impact our operations and financial condition. We do not use derivative financial instruments for speculative purposes.

Interest Rate Sensitivity. As of May 5, 2007, we held approximately $8.6 million of short-term investments generally consisting of the U.S. government and corporate debt securities with an average original maturity of less than one year. If short-term interest rates were to decrease 10%, the decreased interest income associated with these short-term investments would not have a material impact on our net income (loss) and cash flows.

As of May 5, 2007, we had borrowings outstanding of $0.2 million under a term loan agreement for financing equipment for research and development, and no borrowings outstanding under the first two-year bank line of credit with variable interest rate. If short-term interest rates were to increase 10%, the increased interest expense associated with these arrangements would not have a material impact on our net income (loss) and cash flows.

Foreign Currency Exchange Rate Sensitivity. The Hong Kong dollar and Euro are the financial currencies of our subsidiaries in Hong Kong and France, respectively. We do not currently enter into foreign exchange forward contracts to hedge certain balance sheet exposures and inter-company balances against future movements in foreign exchange rates. However, we do maintain cash balances denominated in the Hong Kong dollar and Euro. If foreign exchange rates were to weaken against the U.S. dollar immediately and uniformly by 10% from the exchange rate at May 5, 2007 the fair value of these foreign currency amounts would decline by an immaterial amount.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (SEC) rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

As discussed in Note 3 in Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K filed with the SEC on April 20, 2007, during 2006, a review related to our historical stock option granting practices was carried out by our Audit Committee. As a result of the review, we reached a conclusion that incorrect measurement dates were used for financial accounting purposes for certain stock option grants made in prior periods. Therefore, we have recorded additional non-cash stock-based compensation expense and related tax effects with regard to past stock option grants, substantially all of which relate to options granted between February 1, 1997 and July 29, 2006. As a result, we announced in September 2006 that previously issued financial statements could no longer be relied upon. We restated previously filed annual financial statements and our quarterly financial statements of fiscal 2007.

In connection with the preparation of this Form 10-Q, 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 such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. This evaluation was retrospective and conducted as of May 5, 2007, the last day of the fiscal quarter covered by this Form 10-Q. Based upon that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective as of May 5, 2007 because we have not completed the remediation of the material weaknesses discussed in Item 9A of our Annual Report on Form 10-K for the year ended February 3, 2007 (“2007 Form 10-K”). As discussed in more detail in our 2007 Form 10-K, as of February 3, 2007, our management concluded that we did not maintain effective controls over the following:

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

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

•

As discussed in Note 2 in Notes to the Consolidated Financial Statements of the 2007 Form 10-K, during 2006, an internal review related to our historical stock option granting practices was carried out by our Audit Committee. As a result of the review, we reached a conclusion that incorrect measurement dates were used for financial accounting purposes for certain stock option grants made in prior periods. Therefore, we recorded in prior fiscal years additional non-cash stock-based compensation expense and related tax effects with regard to past stock option grants, substantially all of which relate to options granted between February 1, 1997 and July 29, 2006; and

•

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

We restated previously filed annual and interim financial statements in the 2007 Form 10-K to correct the errors related to accounting for stock-based compensation.

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

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

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

•

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

•

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

•

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

As of May 5, 2007, we had not completed the remediation of any of these material weaknesses.

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

•

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

•

Adopt administration, supervision, and review controls over stock based compensation;

•

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

•

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

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

Attached as exhibits to this report are certifications of our CEO and CFO, which are required in accordance with Rule 13a-14 of Securities Exchange Act of 1934, as amended. This Item 4 discussion includes information concerning the controls and controls evaluation referred to in the certifications and those certifications should be read in conjunction with this Item 4 for a more complete understanding of the topics presented.

There was no change in our internal control over financial reporting that occurred during the quarter ended May 5, 2007 that had a material affect or is reasonably likely to have a material effect on our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A: RISK FACTORS

You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones facing Sigma Designs. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

If any of the following risks actually occur, our business, results of operations and financial condition could suffer significantly.

The matters related to the review of our historical stock option granting practices and the restatement of our prior financial statements may result in additional litigation, regulatory proceedings and government enforcement actions, which could harm our business, financial condition, results of operations and cash flows.

Our historical stock option granting practices and the restatement of our prior financial statements, which we completed in our Form 10-K for the fiscal year ended February 3, 2007, have exposed us to greater risks associated with litigation, regulatory proceedings and government enforcement actions. For more information regarding our current litigation and related inquiries, please see Part II, Item 1- “Legal Proceedings” as well as the other risk factors related to litigation set forth in this section. We have provided the results of our internal review and investigation of our stock option practices to the Securities and Exchange Commission, or SEC, and in that regard we have responded to informal requests for documents and additional information. We intend to continue to cooperate with the SEC and any other governmental agency which may become involved in this matter. We cannot give any assurance regarding the outcomes from litigation, regulatory proceedings or government enforcement actions relating to our past stock option practices. The resolution of these matters will be time consuming, expensive, and may distract management from the conduct of our business. Furthermore, if we are subject to adverse findings in litigation, regulatory proceedings or government enforcement actions, we could be required to pay damages or penalties or have other remedies imposed, which could harm our business, financial condition, results of operations and cash flows.

In addition, while we believe that we have made appropriate judgments in determining the correct measurement dates for our stock option grants, the SEC may disagree with the manner in which we accounted for and reported, or not reported, the corresponding financial impact. Accordingly, there is a risk that we may have to further restate our prior financial statements, amend prior filings with the SEC, or take other actions not currently contemplated.

As a result of our internal review of our historical stock option granting practices, we were unable to timely file our periodic reports with the SEC during fiscal year 2007. We were also subject to delisting proceedings in front of the NASDAQ Listing Qualifications Staff. After we filed all of our outstanding periodic reports with the SEC in late April 2007, we received a NASDAQ Listing Qualifications Staff letter stating that the NASDAQ Listing Qualifications Staff determined that we had demonstrated compliance with all NASDAQ Marketplace Rules. Accordingly, our securities will continue to be listed on The NASDAQ Global Market. However, if the SEC disagrees with the manner in which we have accounted for and reported, or not reported, the financial impact of past stock option grants, there could be further delays in filing subsequent SEC reports or other actions that might result in the delisting of our common stock from The NASDAQ Global Market.

If we are unable to successfully address the material weaknesses in our internal control over financial reporting or otherwise maintain effective internal control over financial reporting, our ability to report our financial results on a timely and accurate basis may be adversely affected, which in turn could cause the market price of our common stock to decline.

We have had ongoing material weaknesses in our internal control over financial reporting since the fiscal period ended January 31, 2005, the first year in which we were required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002. In September 2006, we announced that our historical financial statements should no longer be relied upon as a result of our preliminary determination of an internal review relating to our practices in administering stock option grants. We had been unable to report in a timely manner our financial results for the past three quarterly periods of fiscal 2007 as a result of a voluntary review of our stock option grant practices. We continue to have material weaknesses in our internal control over financial reporting, which resulted in ineffective internal controls over financial reporting, as further described in Item 4, Report of Management on Internal Control over Financial Reporting and in Item 9A of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 20, 2007.

Effective controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed and the market price of our common stock could decline. We have initiated corrective actions, which we believe will help remediate each of these material weaknesses. However, we cannot be certain that these measures will result in our ability to maintain adequate controls over our financial processes and reporting in the future. If these actions are not successful in addressing these material weaknesses or if we identify additional material weaknesses in the future, our ability to report our financial results on a timely and accurate basis may be adversely affected. In addition, if we cannot establish effective internal control over financial reporting and disclosure controls and procedures, investors may lose confidence in our reported financial information, which could cause the market price of our common stock to decline.

Our operating results are subject to significant fluctuations due to many factors and any of these factors could adversely affect our stock price.

Our operating results have fluctuated in the past and may continue to fluctuate in the future due to a number of factors, including but not limited to:

•	new product introductions by us and our competitors;

•	changes in our pricing models and product sales mix;

•	unexpected reductions in unit sales, average selling prices and gross margins, particularly if they occur precipitously;

•	expenses related to our remediation efforts and compliance with Section 404 of the Sarbanes-Oxley Act of 2002;

•	expenses related to implementing and maintaining a new enterprise resource management system and other information technologies;

•	the level of acceptance of our products by our OEM customers, and acceptance of our OEM customers’ products by their end user customers;

•	shifts in demand for the technology embodied in our products and those of our competitors;

•	the loss of one or more significant customers;

•	the timing of, and potential unexpected delays in, our customer orders and product shipments;

•	inventory obsolescence;

•	write-downs of accounts receivable;

•	an interrupted or inadequate supply of semiconductor chips or other materials included in our products;

•	technical problems in the development, ramp up, and manufacturing of products, which could cause shipping delays;

•	availability of third-party manufacturing capacity for production of certain products;

•	the impact of potential economic instability in the Asia-Pacific region; and

•	continuing impact and expenses related to our stock option review and its resolution

Our business is highly dependent on the expansion of young and rapidly evolving segments of the consumer electronics market.

Our business is highly dependent on developing segments of the consumer electronics market, which market segments include IP video set-top boxes, connected media players, and high definition televisions. We expect the majority of our revenues for the foreseeable future to come from the sale of chipsets for use in emerging consumer applications. Our ability to sustain and increase revenues is in large part dependent on the continued growth of these young and rapidly evolving market segments, whose future is largely uncertain. Many factors could impede or interfere with the expansion of these consumer market segments, including consumer demand in these segments, general economic conditions, other competing consumer electronic products, delays in the deployment of telecommunications video services and insufficient interest in new technology innovations. In addition, even if these consumer market segments expand, manufacturers of products in these segments may not choose to utilize our products in their products, but rather the products of our competitors. Moreover, market acceptance of the products of manufacturers that do utilize our products may not occur as expected. In any such case, our business would likely be harmed.

The average selling prices of our products have historically decreased rapidly and will likely do so in the future, which could harm our revenues and gross margins.

Our markets are characterized by intense price competition. The willingness of customers to design our chips into their products depends to a significant extent upon our ability to sell our products at competitive prices. In the past, we have had to reduce our prices significantly to meet customer requirements. We expect the average selling prices of our products to decline significantly over the life of each product as the markets for our products mature, new technologies emerge, and competition increases. If we are unable to reduce our costs sufficiently to offset declines in product prices or are unable to introduce more advanced products with higher margins in a timely manner, we could see declines in our market share or gross margins.

We depend on a limited number of significant customers, and any reduction, delay or cancellation of an order from these significant customers or the loss of any of these customers could cause our revenues to decline.

For the three months ended May 5, 2007, Uniquest accounted for 22% of our revenues, Scientific Atlanta accounted for 15% of revenues and Freebox accounted for 12% of our revenues. Our dependence on a few major customers will likely continue. The reduction, delay or cancellations of orders from major customers or the loss of a major customer could cause our revenues to decline and harm our business, financial condition and results of operations. In addition, any difficulty in the collection of receivables from key customers could harm our business.

Our sales to OEM customers involve a number of risks, including price pressures, which could harm our revenues and cause our operating results to fluctuate significantly.

Our ability to increase sales and achieve continued profitability depends substantially on our ability to maintain a high level of sales to our OEM customers. Our OEM customers are not under any obligation to purchase a minimum quantity of our products. Also, even if we achieve new design wins with OEM customers, these manufacturers may not purchase our products in sufficient volumes to recoup our development costs. Sales to any particular OEM customer fluctuate significantly from quarter to quarter and are subject to severe price pressures as a result of our competitors. Any reduction in sales to OEM customers could seriously harm our business. We expect that our sales to OEM customers will continue to experience significant fluctuations, which will cause our operating results to fluctuate as well.

Our industry is highly competitive, and we may not be able to compete effectively. If we fail to compete effectively, our market share and revenues could decline.

The markets in which we operate are extremely competitive and are characterized by rapid technological change, continuously evolving customer requirements and declining average selling prices. We may not be able to compete successfully against current or potential competitors. If we do not compete successfully, our market share and revenues could decline.

We compete with large semiconductor manufacturers and designers. Most of our competitors have substantial experience and expertise in audio, video and multimedia technology and in producing and selling consumer products through retail distribution and OEM channels. These companies also have substantially greater engineering, marketing and financial resources than we have. Our competitors could form cooperative relationships that could present formidable competition to us. We cannot assure you that our technology will continue to achieve commercial success or that it will compete effectively against other interactive multimedia products, services and technologies that currently exist, are under development, or may be announced by competitors.

We have a history of operating losses and we could sustain future losses. We cannot assure you that we will continue to be profitable and if we lose money, our business may not be financially viable.

We have incurred significant operating losses in certain past fiscal periods, including in fiscal year 2006. In recent years, we made significant investments in our development efforts. We may not recognize the benefits of these investments. We were profitable for the three months ended May 5, 2007. However, we may not continue to be profitable. We may incur operating losses in future quarterly periods or fiscal years, which in turn could cause the price of our common stock to decline.

If we do not successfully anticipate market needs and develop products and product enhancements that meet those needs, or if those products do not gain market acceptance, we may not be able to compete effectively and our ability to generate revenues will suffer.

We cannot guarantee that we will be able to anticipate future market needs or be able to develop new products or product enhancements to meet such needs or to meet them in a timely manner. If we fail to anticipate the market requirements or to develop new products or product enhancements to meet those needs, such failure could substantially decrease market acceptance and sales of our present and future products, which would significantly harm our business and financial results. Even if we are able to anticipate, develop and commercially introduce new products and enhancements, our new products or enhancements may not achieve widespread market acceptance. Any failure of our products to achieve market acceptance could adversely affect our business and financial results.

We are a party to lawsuits, which are costly to investigate and defend and, if determined adversely to us, could require us to pay damages, any or all of which could harm our business and financial condition.

We and certain of our current and former officers and current and former members of our board of directors are subject to various lawsuits. For example, the SEC has inquired regarding our stock option pricing practices, and we have been served with lawsuits related to the alleged backdating of stock options and other related matters, a description of which can be found above in Part II, Item 1 — Legal Proceedings. There can be no assurance that these or any actions that have been or may be brought against us will be resolved in our favor. Regardless of whether they are resolved in our favor, these lawsuits are, and any future lawsuits to which we may become a party will likely be, expensive and time consuming to investigate, defend and/or resolve. Such costs of investigation and defense, as well as any losses resulting from these claims, could significantly increase our expenses and adversely affect our profitability and cash flow.

If we fail to adequately evolve our financial and managerial control and reporting systems and processes, our ability to manage and grow our business will be negatively affected.

Our ability to successfully offer our products and implement our business plan in a rapidly evolving market depends upon an effective planning and management process. We will need to continue to improve our financial and managerial control and our reporting systems and procedures in order to manage our business effectively in the future. If we fail to continue to implement improved systems and processes, our ability to manage our business and results of operations may be negatively affected.

Our ability to develop, market and sell products could be harmed if we are unable to retain or hire key personnel.

Our future success depends upon our ability to recruit and retain the services of key executive, engineering, sales, marketing, finance and accounting, and support personnel. The supply of highly qualified individuals, in particular engineers in very specialized technical areas, or sales people specializing in the semiconductor industry, is limited and competition for such individuals is intense. None of our officers or key employees is bound by an employment agreement for any specific term. The loss of the services of any of our key employees, the inability to attract or retain key personnel in the future or delays in hiring required personnel, particularly engineers and sales people, and the complexity and time involved in replacing or training new employees, could delay the development and introduction of new products, and negatively impact our ability to market, sell or support our products.

If we fail to achieve initial design wins for our products, we may lose the opportunity for sales for a significant period of time to customers and be unable to recoup our investments in our products.

We expend considerable resources in order to achieve design wins for our products, especially our new products and product enhancements. Once a customer designs a semiconductor into a product, it is likely to continue to use the same semiconductor or enhanced versions of that semiconductor from the same supplier across a number of similar and successor products for a lengthy period of time due to the significant costs associated with qualifying a new supplier and potentially redesigning the product to incorporate a different semiconductor. If we fail to achieve an initial design win in a customer’s qualification process, we may lose the opportunity for significant sales to that customer for a number of its products and for a lengthy period of time. This may cause us to be unable to recoup our investments in our products, which would harm our business.

Our sales cycle can be lengthy, which could result in uncertainty and delays in generating revenue.

Because our products are based on constantly evolving technologies, we have experienced a lengthy sales cycle for some of our chipsets, particularly those designed for set-top box applications for the IPTV market. Our sales cycle typically ranges from nine to twelve months. We may experience a delay between the time we increase expenditures for research and development, sales and marketing efforts and inventory and the time we generate revenue, if any, from these expenditures. In addition, because we do not have long-term commitments from our customers, we must repeat our sales process on a continual basis even for current customers looking to purchase a new product. As a result, our business could be harmed if a customer reduces or delays its orders, chooses not to release products incorporating our semiconductors or elects not to purchase a new product or product enhancements from us.

The timing of our customer orders and product shipments can adversely affect our operating results and stock price.

Our quarterly revenues and operating results depend upon the volume and timing of customer orders received during a given quarter and the percentage of each order that we are able to ship and recognize as revenues during each quarter, each of which is extremely difficult to forecast. The majority of our orders in a given quarter historically have been shipped in the last months of that quarter. This trend is likely to continue, and any failure or delay in the closing of orders during the last part of a quarter would adversely affect our operating results. Further, to the extent we receive orders late in any given quarter, we may be unable to ship products to fill those orders during the same quarter in which we received the corresponding order, which would have an adverse impact on our operating results for that quarter.

We are dependent on sole source and limited source suppliers for several key components, which makes us susceptible to shortages or price fluctuations in our supply chain and we may face increased challenges in supply chain management in the future.

With the current demand for electronic products, component shortages are possible and the predictability of the availability of such components may be limited. Growth in our business and the economy is likely to create greater pressures on us and our suppliers to accurately project overall component demand and to establish optimal component levels. If shortages or delays persist, the price of these components may increase, or the components may not be available at all. We may not be able to secure enough components at reasonable prices or of acceptable quality to build new products in a timely manner and our revenues and gross margins could suffer until other sources can be developed. We currently purchase finished wafers from a single source. The development of alternate sources for finished wafers could take at least several quarters and the qualification process could be difficult and costly. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules. In the event of a component shortage or supply interruption from these suppliers, we may not be able to develop alternate or second sources in a timely manner. If, as a result, we are unable to buy these components in quantities sufficient to meet our requirements on a timely basis, we will not be able to deliver product to our customers, which would seriously impact present and future sales, which would, in turn, adversely affect our business. In addition, the development, licensing or acquisition of new products in the future may increase the complexity of supply chain management. Failure to effectively manage the supply of key components and products would adversely affect our business.

In the past, we have experienced production delays and other difficulties, and we could experience similar problems in the future. Our products might also contain defects that escape identification at the factory. This could result in unanticipated costs, cancellations, deferrals of purchase orders, or costly recall of products from customer sites.

We are dependent on contract manufacturers with whom we do not have long-term supply contracts, and changes to those relationships, expected or unexpected, may result in delays or disruptions that could cause us to lose revenue and damage our customer relationships.

We depend primarily on independent contract manufacturers, each of whom is a third party manufacturer for numerous companies, to manufacture our products. Although we have contracts with our contract manufacturers, those contracts do not require them to manufacture our products on a long-term basis in any specific quantity or at any specific price. In addition, it is time consuming and costly to qualify and implement additional contract manufacturer relationships. Therefore, if we should fail to effectively manage our contract manufacturer relationships or if one or more of them should experience delays, disruptions or quality control problems in our manufacturing operations, or if we had to change or add additional contract manufacturers or contract manufacturing sites, our ability to ship products to our customers could be delayed. Also, the addition of manufacturing locations or contract manufacturers would increase the complexity of our supply chain management. Moreover, a substantial portion of our manufacturing is performed in Asian countries and is therefore subject to risks associated with doing business in these countries. Each of these factors could adversely affect our business and financial results.

We are required to expense equity compensation given to our employees, which has reduced our reported earnings, will significantly harm our operating results in future periods and may reduce our stock price and our ability to effectively utilize equity compensation to attract and retain employees.

We historically have used stock options as a significant component of our employee compensation program in order to align employees’ interests with the interests of our shareholders, encourage employee retention, and provide competitive compensation packages. The Financial Accounting Standards Board has adopted changes that require companies to record a charge to earnings for employee stock option grants and other equity incentives. We adopted this standard effective January 29, 2006. By causing us to record significantly increased compensation costs, such accounting changes have reduced, and will continue to reduce, our reported earnings, will significantly harm our operating results in future periods, and may require us to reduce the availability and amount of equity incentives provided to employees, which may make it more difficult for us to attract, retain and motivate key personnel. Moreover, if securities analysts, institutional investors and other investors adopt financial models that include stock option expense in their primary analysis of our financial results, our stock price could decline as a result of reliance on these models with higher expense calculations. Each of these results could materially and adversely affect our business.

We are subject to risks arising from our international operations.

We derive substantially all of our revenues from our international operations, and we plan to continue expanding our business in international markets in the future. As a result of our international operations, we are affected by economic, regulatory and political conditions in foreign countries, including the imposition of government controls, changes or limitations in trade protection laws, unfavorable changes in tax treaties or laws, natural disasters, labor unrest, earnings expatriation restrictions, misappropriation of intellectual property, acts of terrorism and continued unrest in many regions and other factors, which could have a material impact on our international revenues and operations. In particular, in some countries we may experience reduced intellectual property protection. Our results of operations could also be adversely affected by exchange rate fluctuations, which could increase the sales price in local currencies of our products in international markets. Overseas sales and purchases to date have been denominated in U.S. dollars. We do not currently engage in any hedging activities to reduce our exposure to exchange rate risks. Moreover, local laws and customs in many countries differ significantly from those in the United States. In many foreign countries, particularly in those with developing economies, it is common for others to engage in business practices that are prohibited by our internal policies and procedures or United States regulations applicable to us. Our employees, contractors and agents may take actions in violation of these internal policies and procedures or United States regulations applicable to us. Violations of laws or key control policies by our employees, contractors or agents could result in financial reporting problems, fines, penalties, or prohibition on the importation or exportation of our products and could have a material adverse effect on our business.

Due to the global nature of our operations, economic or social conditions or changes in a particular country or region could adversely affect our sales or increase our costs and expenses, which could have a material adverse impact on our financial condition.

We conduct significant sales and customer support operations directly to our OEM customers and indirectly through our distributors in countries throughout the world and also depend on the operations of our contract manufacturers and suppliers that are primarily located outside of the United States. Accordingly, our future results could be materially adversely affected by a variety of uncontrollable and changing factors including, among others, political or social unrest, natural disasters, epidemic disease, war, or economic instability in a specific country or region, trade protection measures and other regulatory requirements which may affect our ability to import or export our products from various countries, service provider and government spending patterns affected by political considerations and difficulties in staffing and managing international operations. Any or all of these factors could have a material adverse impact on our revenue, costs, expenses, results of operations and financial condition.

We may engage in investments in and acquisitions of other businesses and technologies, which could divert management’s attention and prove difficult to integrate with our existing business and technology.

We continue to consider investments in and acquisitions of other businesses, technologies or products, to improve our market position, broaden our technological capabilities and expand our product offerings. For example, we completed the acquisition of Blue7 Communications in February 2006. However, we may not be able to acquire, or successfully identify, the companies, products or technologies that would enhance our business. Once we identify a strategic opportunity, the process to consummate a transaction could divert management’s attention from the operation of our business causing our financial results to decline.

If we are able to acquire companies, products or technologies, we could experience difficulties in integrating them. Integrating acquired businesses involves a number of risks, including but not limited to:

•

potential disruption of our ongoing business;

•

unexpected costs or incurring unknown liabilities;

•

diversion of management resources from other business concerns;

•

inability to retain employees of the acquired businesses;

•

difficulties relating to integrating the operations and personnel of the acquired businesses;

•

adverse effects on the existing customer relationships of acquired companies;

•

adverse effects associated with entering into markets and acquiring technologies in areas in which we have little experience; and

•

acquired intangible assets becoming impaired as a result of technological advancements, or worse-than-expected performance of the acquired company.

If we are unable to successfully integrate the businesses we acquire, our operating results could be harmed.

Changes in our tax rates will affect our future results.

Our future effective tax rates will be favorably or unfavorably affected by the absolute amount and future geographic distribution of our pre-tax income, our ability to take advantage of the available tax planning strategies and our ability to utilize our net operating loss carryforwards. These net operating loss carryforwards may be used to offset future taxable income and thereby reduce our income taxes otherwise payable. Our use of the net operating loss carryforwards and credit carryforwards is limited by the annual limitations as described in the Internal Revenue Code of 1986, as amended (the “Code”). Our plans for continued international expansion may further limit our ability to utilize our net operating loss carryforwards as our net income increases. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. The outcomes of these examinations, if they occur, could harm our net income and financial condition.

Our ability to raise capital in the future may be limited and our failure to raise capital when needed could prevent us from executing our growth strategy.

We believe that our existing cash and cash equivalents, short-term investments and long-term investments will be sufficient to meet our anticipated cash needs for at least the next 12 months. The timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including:

•

market acceptance of our products;

•

the need to adapt to changing technologies and technical requirements;

•

the existence of opportunities for expansion; and

•

access to and availability of sufficient management, technical, marketing and financial personnel.

If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities or obtain debt financing. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased expenses and could result in covenants that would restrict our operations. We have not made arrangements to obtain additional financing and there is no assurance that financing, if required, will be available in amounts or on terms acceptable to us, if at all.

Changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse unexpected fluctuations and affect our reported results of operations.

Financial accounting standards in the United States are constantly under review and may be changed from time to time. We are required to apply these changes when adopted. Once implemented, these changes could result in material fluctuations in our financial results of operations and the way in which such results of operations are reported. Similarly, we are subject to taxation in the United States and a number of foreign jurisdictions. Rates of taxation, definitions of income, exclusions from income, and other tax policies are subject to change over time. Changes in tax laws in a jurisdiction in which we have reporting obligations could have a material impact on our results of operations.

Our business is subject to seasonality, which is likely to cause our revenues to fluctuate.

Our business is subject to seasonality as a result of our target markets. We sell a significant number of our semiconductors into the consumer market. Our customers who manufacture products for the consumer market experience seasonality in the sales of their products, which in turn may affect the timing and volume of orders for our semiconductors. Because the consumer market into which we sell our products is characterized by this seasonality, our operating results may vary significantly from quarter to quarter.

Due to the cyclical nature of the semiconductor industry, our operating results may fluctuate significantly, which could adversely affect the market price of our common stock.

The semiconductor industry is highly cyclical and subject to rapid change and evolving industry standards and, from time to time, has experienced significant downturns. These downturns are characterized by decreases in product demand, excess customer inventories and accelerated erosion of prices. These factors have caused and could cause substantial fluctuations in our net revenue and in our operating results. Any downturns in the semiconductor industry may be severe and prolonged, and any failure of this industry to fully recover from downturns could harm our business. The semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to ship products. Accordingly, our operating results have varied and may vary significantly as a result of the general conditions in the semiconductor industry, which could cause our stock price to decline.

We rely upon patents, trademarks, copyrights and trade secrets to protect our proprietary rights and if these rights are not sufficiently protected, it could harm our ability to compete and to generate revenues.

Our ability to compete may be affected by our ability to protect our proprietary information. We currently hold 30 patents and these patents will expire within the next 5 to 22 years. These patents cover the technology underlying our products. We have filed certain patent applications and are in the process of preparing others. We cannot assure you that any additional patents for which we have applied will be issued or that any issued patents will provide meaningful protection of our product innovations. Like other multimedia companies, we rely primarily on trade secrets and technological know-how in the conduct of our business. We also rely, in part, on copyright law to protect our proprietary rights with respect to our REALmagic^® technology. We use measures such as confidentiality agreements to protect our intellectual property. These methods of protecting our intellectual property may not be sufficient.

We may face intellectual property claims that could be costly to defend and result in our loss of significant rights.

The semiconductor and electronics industry is characterized by frequent litigation regarding patent and intellectual property rights. Any such litigation could result in significant expense to us and divert the efforts of our technical and management personnel. In the event of an adverse result in any such litigation, we could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology that is the subject of the litigation, and we may not be successful in such development or in obtaining such licenses on acceptable terms, if at all. In addition, patent disputes in the electronics industry have often been settled through cross-licensing arrangements. Because we do not yet have a large portfolio of issued patents, we may not be able to settle an alleged patent infringement claim through a cross licensing arrangement.

Our stock price has demonstrated volatility and overall declines, and continued volatility in the stock market may cause further fluctuations or decline in our stock price.

The market for our common stock has been subject to significant volatility, which is expected to continue. For example, during the three months ended May 5, 2007, the closing sale price of our common stock on The NASDAQ Global Market ranged from a low of $23.12 on April 30, 2007 to a high of $32.57 on March 22, 2007. In addition, the stock market, in general, has experienced, and is currently experiencing, volatility that particularly affects the market prices of equity securities of many high technology companies, such as those in the electronics and semiconductor industries. This volatility is often unrelated or disproportionate to the operating performance of such companies. These fluctuations, as well as general economic and market conditions, could cause the market price of our common stock to decline.

If we fail to comply with or obtain waivers for covenants under our loan obligations, our financial condition could be harmed.

We have two lines of credit with United Commercial Bank, expiring in August 2007, which allow for borrowings of up to an aggregate of $15.0 million. As of May 5, 2007, we had no outstanding indebtedness under these loans. During August 2005, we also entered into a 30-month term loan for $0.5 million, which was used to purchase equipment for research and development. As of May 5, 2007, we had $0.2 million of outstanding indebtedness under this loan. We are subject to certain financial covenants under the lines of credit and the term loan. We have on occasion, including the quarter ended April 30, 2005, been in violation of some of the covenants and in all cases; we have obtained waivers releasing us from our obligations to meet those covenants as of previous dates. It is possible that we may need such a waiver for future non-compliance and we cannot assure you that our bank will grant these waivers. If we do not meet these covenants and cannot obtain waivers, the lender could accelerate payments of any amounts due under the lines of credit and the term loan. To the extent we had borrowed amounts under these lines of credit and term loan and were required to repay them on an accelerated basis, it could substantially weaken our financial condition. If we do not have sufficient funds available to make full payment on the lines of credit and the term loan when required, the bank could foreclose on our accounts receivable, inventories, general intangibles such as patents and trademarks, equipment and tangible assets that collateralize the notes, which would harm our business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) Exhibits

The following exhibits are filed herewith:

10.1	Offer letter dated May 16, 2007 between the Company and Thomas E. Gay III.

31.1	Certification of the President and Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

31.2	Certification of the Chief Financial Officer and Secretary pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

32.1	Certificate of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

32.2	Certificate of Chief Financial Officer and Secretary pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

(1)

The certificates contained in Exhibits 32.1 and 32.2 are not deemed “file” for purposes of Section 18 of the Securities and Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof irrespective of any general incorporation by reference language contained in any such filing, except to the extent that the registration specifically incorporates it by reference.

SIGNATURES

Pursuant to the requirement 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.

	SIGMA DESIGNS, INC.
Date: June 14, 2007
	By:	/s/ Thinh Q. Tran
		Thinh Q. Tran

		Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)

	By:	/s/ Thomas E. Gay III
		Thomas E. Gay III

		Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

EXHIBIT INDEX

10.1	Offer letter dated May 16, 2007 between the Company and Thomas E. Gay III.

31.1	Certification of the President and Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

31.2	Certification of the Chief Financial Officer and Secretary pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

32.1	Certificate of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

32.2	Certificate of Chief Financial Officer and Secretary pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

(1)