SIGMA DESIGNS INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion in conjunction with our consolidated financial statements and related notes. Except for historical information, the following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In some cases, you can identify forward-looking statements by terms such as "may," "might," "will," "objective," "intend," "should," "could," "can," "would," "expect," "believe," "estimate," "predict," "potential," "plan," or the negative of these terms, and similar expressions intended to identify forward-looking statements. These forward-looking statements, include, but are not limited to, statements about our capital resources and needs, including the adequacy of our current cash reserves, revenue, our expectations that our operating expenses will increase in absolute dollars as our revenue grows and our expectations that our gross margin will vary from period to period. These forward-looking statements 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 Part I, Item 1A "Risk Factors" in this Form 10-K as well as other information found in the documents we file from time to time with the Securities and Exchange Commission. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-K. Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made.

Overview Our goal is to be a leader in connected media platforms for use in home entertainment and control. We focus on integrated chipset solutions that serve as the foundation for some of the world's leading internet protocol television, or IPTV, set-top boxes, connected media players, residential gateways and home control systems. We have four chipset product lines: media processor products, home networking products, video image processor and encoder products and home control and energy management automation products. We sell our products into four primary markets: IPTV media processor, connected home, connected media player, and the prosumer and industrial audio/video markets. We also sell a small amount of our chipsets into other markets, such as the digital signage, high definition television, or HDTV, projection TV and PC-based add-in markets, which we refer to as our other market. We believe our software suite is a key differentiator within each of our target markets. Our software suite provides a foundation for our customers to develop their products that incorporate our chipsets.

Our chipset products and target markets We consider all of our semiconductor products to be chipsets because each of our products are comprised of multiple semiconductors. We believe our chipsets enable our customers to efficiently bring consumer multimedia devices to market. We design our highly integrated products to significantly improve performance, lower power consumption and reduce cost.

We sell our chipsets into each of our four primary target markets. For fiscal 2012, 2011 and 2010, we derived nearly all of our net revenue from sales of our chipset products.

28-------------------------------------------------------------------------------- Our four primary target markets are the IPTV media processor market, the connected home market, the connected media player market and the prosumer and industrial audio/video market. Because of our focus on these target markets, we separately report revenues that we derive from sales into each of these target markets. The IPTV media processor market consists primarily of telecommunication carriers that deploy IPTV set-top boxes for delivering video services over a DSL network. We serve this market primarily with our media processor products. The connected home market consists of communication devices that use a standard protocol to connect equipment inside the home and stream IP-based video and audio, VoIP, or data through wired or wireless connectivity. We target the connected home market with our wired home networking products and our wireless home control and energy management automation products. The connected media player market consists primarily of digital media adapters, or DMAs, portable media devices, and wireless streaming PC to TV devices that perform playback of digital media. We target this market with our media processor products. The prosumer and industrial audio/video market consists of studio quality audio/video receivers and monitors, video conferencing, digital projectors and medical video monitors. We target this market with our video image processor and video encoder product line. We also sell products into other markets, such as the digital signage, high definition television, or HDTV, projection TV and PC-based add-in markets, which we refer to as our other market. We derive minor revenue from sales of our products into these other markets.

Characteristics of Our Business We do not enter into long-term commitment contracts with our customers and generate substantially all of our net revenue based on customer purchase orders.

We forecast demand for our products based not only on our assessment of the requirements of our direct customers, but also on the anticipated requirements of the telecommunications carriers that our direct customers serve. We work with both our direct customers and these carriers to address the market demands and the necessary specifications for our technologies. However, our failure to accurately forecast demand can lead to product shortages that can impede production by our customers and harm our relationship with these customers or lead to excess inventory, which could negatively impact our gross margins in a particular period. During the year ending January 28, 2012, we recorded provisions for excess inventory of $9.0 million primarily due to a large end customer's transition to a next generation product sold by one of our competitors.

Many of our target markets are characterized by intense price competition. The semiconductor industry is highly competitive and, as a result, we expect our average selling prices to decline over time. On occasion, we have reduced our prices for individual customer volume orders as part of our strategy to obtain a competitive position in our target markets. The willingness of customers to design our chipsets into their products depends to a significant extent upon our ability to sell our products at competitive prices. If we are unable to reduce our costs sufficiently to offset any declines in product selling prices or are unable to introduce more advanced products with higher gross margins in a timely manner, we could see declines in our market share or gross margins. We expect our gross margins will vary from period to period due to changes in our average selling prices and average costs, volume order discounts, mix of product sales, amount of development revenue and provisions for inventory excess and obsolescence.

Critical Accounting Policies and Estimates Management's discussion and analysis of financial condition and results of operations are based on our consolidated financial statements which have been prepared in accordance with United States generally accepted accounting principles or GAAP. The preparation of consolidated financial statements and related disclosures requires us to make judgments that affect the reported amounts and disclosures of the assets and liabilities at the date of the consolidated financial statements and also revenue and expenses during the period reported. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Management bases its estimates and judgments on historical experience, market trends and other factors that are believed to be reasonable under the circumstances. These estimates form the basis for judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from what we anticipate and different assumptions or estimates about the future could change our reported results. We believe the critical accounting policies as disclosed in Note 1 to the consolidated financial statements for the year ended January 28, 2012, reflect the more significant judgments and estimates used in preparation of our consolidated financial statements.

29 -------------------------------------------------------------------------------- Revenue recognition: We derive our revenue primarily from sales of our products, which we refer to as chipsets, which consist of highly integrated semiconductors and embedded software that enables real-time processing of digital video and audio content. We do not deliver software as a separate product in connection with product sales. We recognize revenue for product sales when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured.

Valuation of inventories: Inventories are stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or market value. We evaluate our inventories for excess quantities and obsolescence on a quarterly basis. This evaluation includes analysis of historical and estimated future unit sales by product as well as product purchase commitments that are not cancelable. We develop our demand forecasts based, in part, on discussions with our customers about their forecasted supply needs. However, our customers usually only provide us with firm purchase commitments for the current period and not our entire forecasted period. Additionally, our sales and marketing personnel provide estimates of future sales to prospective customers based on actual and expected design wins. A provision is recorded for inventories in excess of estimated future demand. In addition, we write off inventories that are obsolete. Obsolescence is determined from several factors, including competitiveness of product offerings, market conditions and product life cycles. Provisions for excess and obsolete inventory are charged to cost of revenue. At the time of the loss recognition, a new, lower-cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. If this lower-cost inventory is subsequently sold, we will realize higher gross margins for those products.

Inventory write-downs inherently involve assumptions and judgments as to amount of future sales and selling prices. During the year ended January 28, 2012, we recorded a $9.0 million provision for excess inventory. Although we believe that the assumptions we use in estimating inventory write-downs are reasonable, significant future changes in these assumptions could produce a significantly different result. There can be no assurances that future events and changing market conditions will not result in significant inventory write-downs.

Business combinations: We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, as well as in-process research and development, or IPR&D, based on their estimated fair values. Such valuations require us to make significant estimates and assumptions, especially with respect to intangible assets. The significant purchased intangible assets recorded by us include customer relationships, developed technology, IPR&D and trademarks.

We base our valuation of identifiable intangible assets on methods known as the income approach and the cost approach. The income approach attempts to value an asset by estimating the present value of the future economic benefits it is expected to produce. These benefits can include earnings, cost savings, tax deductions and disposition proceeds from the asset. An indication of value may be developed in this approach by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation over the asset's holding period, and the risks associated with realizing the cash flows in the amounts and at the times projected. The discount rate selected is typically based on rates of return available from alternative investments of similar type and quality as of the valuation date. The most commonly employed income approach to valuation is the discounted cash flow analysis. The market approach attempts to value an asset by examining observable market values for similar assets. Sales and offering prices for comparable assets are adjusted to reflect differences between the asset being valued and the comparable assets, such as, location, time and terms of sale, utility and physical characteristics. When applied to the valuation of equity, the analysis may include consideration of the financial condition and operating performance of the company being valued relative to those of publicly traded companies or to those of companies acquired in a single transaction, which operate in the same or similar lines of business.

Critical estimates and assumptions used in valuing these assets include but are not limited to: future expected cash flows from acquired products, customer relationships and acquired developed technologies and patents; expected costs to develop IPR&D into commercially viable products, calculation of the weighted average cost of capital and expected cash flows from completed projects; assumptions regarding brand awareness and market position, and assumptions about the period of time the brand will continue to be used in our product portfolio; and assumptions about discount rates. The estimated fair values are based upon assumptions that we believe to be reasonable but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

Goodwill and long-lived assets: Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. The amounts and useful lives assigned to finite lived intangible assets acquired, other than goodwill, impact the amount and timing of future amortization.

30 -------------------------------------------------------------------------------- We review goodwill and intangible assets with indefinite lives for impairment annually, as of the last day of our fiscal year, and whenever events or changes in circumstances indicate the carrying value may not be recoverable. This review involves a two-step process. The first step requires identifying the reporting units and comparing the fair value of each reporting unit to its net book value, including goodwill. We have identified that we operate one reporting unit and the fair value of our operating unit is determined to be equal to our market capitalization as determined through quoted market prices, adjusted for a reasonable control premium. We estimate the control premium based on a review of acquisitions of comparable semiconductor companies that were completed during the last four years. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The second step of the process is performed if a potential impairment exists, and it involves determining the difference between the fair value of our reporting unit's net assets other than goodwill to the fair value of the reporting unit and, if the difference is less than the net book value of goodwill, impairment exists and is recorded.

We assess the carrying value of long-lived assets, including purchased intangible assets, whenever events or changes in circumstances, such as a change in technology, indicate that the carrying value of these assets may not be recoverable. An impairment loss would be recognized when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposal is less than its carrying amount.

During the third quarter of fiscal 2012, we concluded that an interim review of the carrying value of our goodwill and indefinite-lived intangible assets should be performed due to continued reductions in our profitability, sales forecasts and market capitalization. In performing this review, we used both the income and the market valuation methodologies. In applying the income approach, we developed a forecast of the discounted cash flows expected to be generated by our operating unit and in applying the market approach, we utilized the current value of our publically traded common stock adjusted for a control premium. The result of this review showed that the fair value of our reporting unit was less than its net book value and therefore indicated a possible impairment. Therefore, we performed the second step of the analysis by allocating the fair value of our reporting unit to all of its assets and liabilities on a fair value basis to determine the amount of the impairment. This analysis resulted in a goodwill impairment charge of $45.1 million and an impairment charge for our indefinite-lived in-process research and development intangible assets of $11.1 million.

During the third quarter of fiscal 2012, we performed a review of the recoverability of our acquired intangible assets due to continued reductions in our profitability and sales forecasts, and negative cash flows from operations. In performing this review, we developed a forecast of the total undiscounted cash flow expected to be generated by each acquired intangible asset group and compared the result to the carrying value. The results of this review indicated that two of these intangible asset groups, consisting primarily of certain developed technology and customer relationship intangibles related to our CopperGate acquisition, were not fully recoverable. Therefore, we performed the second step of the analysis by developing a discounted cash flow analysis for each of the individual identifiable assets in these two groups to determine the amount of impairment. Our analysis resulted in an intangible asset impairment charge of $55.1 million for fiscal 2012.

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include forecasts of revenue and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and a determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable at that time, however, actual future results may differ from those estimates. Future competitive, market and economic conditions could negatively impact key assumptions including our market capitalization, actual control premiums or the carrying value of our net assets, which could require us to realize an additional impairment of our intangible assets.

Income taxes: Income taxes are accounted for under an asset and liability approach. Deferred income taxes reflect the net tax effects of any temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes, and any operating losses and tax credit carry-forwards. Deferred tax liabilities are recognized for future taxable amounts and deferred tax assets are recognized for future deductions, net of any valuation allowance, to reduce deferred tax assets to amounts that are considered more likely than not to be realized.

The 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.

31 -------------------------------------------------------------------------------- Software, equipment and leasehold improvements: Software, equipment and leasehold improvements are stated at cost. Software includes intellectual property that we purchase for incorporation into our product designs. We begin amortizing such intellectual property at the time that we begin shipment of the associated products into which it is incorporated. We amortize the intellectual property over the estimated useful life of the associated products, which is generally two to three years. Depreciation and amortization for other software, equipment and leasehold improvements is computed using the straight-line method based on the useful lives of the assets (one to five years) or the remaining lease term if shorter. Any allowance for leasehold improvements received from the landlord for improvements to our facilities is amortized using the straight-line method over the lesser of the remaining lease term or the useful life of the leasehold improvements. Repairs and maintenance costs are expensed as incurred.

Stock-based compensation: We estimate the fair value of stock-based payment awards on the date of grant utilizing an option-pricing model, which is impacted by our common stock price as well as a change in assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected common stock price volatility over the term of the option awards, as well as the projected employee option exercise behaviors (expected period between stock option vesting date and stock option exercise date). Option-pricing models have been developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Employee stock options have certain characteristics that are significantly different from traded options, and changes in the subjective assumptions can materially affect the estimated fair value. In our opinion, the existing Black-Scholes option-pricing model may not provide an accurate measure of the fair value of employee stock options. Although the fair value of employee stock options is determined using an option-pricing model, the determined fair value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Valuation of marketable securities: Our marketable securities primarily include certificates of deposit, corporate commercial paper, corporate bonds, money market funds and US agency discount notes. Short-term marketable securities represent highly liquid instruments with a remaining maturity date at acquisition date of greater than 90 days but less than one year and are stated at fair value. Long-term marketable securities represent securities with contractual maturities greater than one year from the date of acquisition. Our marketable securities are classified as available-for-sale because the sale of such securities may be required prior to maturity. The difference between amortized cost (cost adjusted for amortization of premiums and accretion of discounts, which is recognized as an adjustment to interest income) and fair value, representing unrealized holding gains or losses, are recorded separately as a component of accumulated other comprehensive income within shareholders' equity. Any gains and losses on the sale of marketable securities are determined on a specific identification basis.

We monitor all of our marketable securities for impairment and if these securities are reported to have a decline in fair value, use significant judgment to identify events or circumstances that would likely have a significant adverse effect on the future value of each investment including: (i) the nature of the investment; (ii) the cause and duration of any impairment; (iii) the financial condition and future prospects of the issuer; (iv) for securities with a reported decline in fair value, our ability to hold the security for a period of time sufficient to allow for any anticipated recovery of fair value; (v) the extent to which fair value may differ from cost; and (vi) a comparison of the income generated by the securities compared to alternative investments. We recognize an impairment charge if a decline in the fair value of our marketable securities is judged to be other-than-temporary.

Accounts receivable: We defer recognition of revenue and the related receivable when we cannot estimate whether collectability is reasonably assured at the time products and services are delivered to our customer. We also provide allowances for bad debt and sales returns. In establishing our allowance for bad debt, we review the customer's payment history and information regarding their credit worthiness. In establishing our allowance for sales returns, we make estimates of potential future returns of products for which revenue has been recognized in the current period, including analyzing historical returns, current economic trends and changes in customer demand and acceptance of our products. In fiscal 2012, 2011 and 2010 we recorded provisions for sales returns, discounts and bad debt in the total amounts of $0.1 million, $0.3 million, and $0.5 million, respectively. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, or future product returns increased, additional allowances may be required.

Results of Operations The following table is derived from our consolidated statements of operations and sets forth our historical operating results as a percentage of net revenue for each of the fiscal years indicated (in thousands, except percentages): Fiscal Years Ended January 28, January January 2012 % of Net revenue 29, 2011 % of Net revenue 30, 2010 % of Net revenue Net revenue $ 182,617 100 % $ 286,915 100 % $ 206,083 100 % Cost of revenue 105,241 58 % 146,271 51 % 114,381 56 % Gross profit 77,376 42 % 140,644 49 % 91,702 44 % Operating expenses: Research and development 86,517 47 % 77,270 27 % 52,644 25 % Sales and marketing 34,467 18 % 31,712 11 % 17,617 9 % General and administrative 20,829 11 % 18,745 7 % 18,240 9 % Impairment of goodwill 45,108 25 % - - - - Impairment of intangible assets 66,170 36 % - - - - Total operating expenses 253,091 137 % 127,727 45 % 88,501 43 % Income (loss) from operations (175,715 ) (95 %) 12,917 4 % 3,201 1 % Interest and other income, net 2,704 1 % 2,183 1 % 1,906 1 % Impairment of investment - - (5,203 ) (2 %) - - Income (loss) before income taxes (173,011 ) (94 %) 9,897 3 % 5,107 2 % Provision for (benefit from) income taxes (4,966 ) (3 %) 750 0 % 2,652 1 % Net income (loss) $ (168,045 ) (91 %) $ 9,147 3 % $ 2,455 1 % 32--------------------------------------------------------------------------------Net revenue Our net revenue for fiscal 2012 decreased $104.3 million, or 36%, compared to fiscal 2011. The decrease was primarily due to a 21% decrease in units shipped and a 19% decline in average selling price per chipset, or ASP. The decrease in units shipped was comprised primarily of a 44% decline for our media processor products and a 16% decline for our home networking products. The decrease in ASPs was primarily due to the increase, as a percentage of net revenue, of sales of our home networking and home control and energy management automation products and newer generation media processor products compared to sales of our older generation media processor products because ASPs for our home connectivity home automation and control products and newer generation media processor products are lower than our older generation media processor products. The decrease in units shipped was primarily due to competitive factors, the timing of new product introductions at telecommunications service providers and other consumer electronics companies and inventory levels at contract manufacturers who manufacture equipment incorporating our products. We expect our revenue to fluctuate in future periods based on each of these factors.

Our net revenue for fiscal 2011 increased $80.8 million, or 39%, compared to fiscal 2010. This increase in revenue for fiscal 2011 was primarily due to a 100% increase in units shipped partially offset by a 30% decrease in ASPs. The increase in units shipped for fiscal 2011 was primarily the result of shipments of our home networking products, the majority of which we added to our product line in the fourth quarter of fiscal 2010, and increased shipments of our prosumer and industrial audio/video products, or VXP, due to increased orders from our existing customers in the VXP market. The decline in ASP for fiscal 2011 was primarily the result of shipments of our home networking products which have lower ASPs than our media processor and VXP products.

Net revenue by target market We sell our products into four primary target markets, which are the IPTV media processor market, connected home market, connected media player market and prosumer and industrial audio/video market. We also sell a small amount of our chipsets into other markets, such as the digital signage, high definition television, or HDTV, projection TV and PC-based add-in markets, which we refer to as our other market.

The following table sets forth our net revenue by target market and the percentage of net revenue represented by our product sales to each target market (in thousands, except percentages): Fiscal Years Ended January January January 28, 2012 % of Net revenue 29, 2011 % of Net revenue 30, 2010 % of Net revenue Connected home $ 79,357 43 % $ 94,785 33 % $ 18,512 9 % IPTV media processor 62,441 34 % 137,281 48 % 134,856 65 % Connected media player 27,988 15 % 39,627 14 % 44,636 22 % Prosumer and industrial audio/video 12,079 7 % 15,035 5 % 7,221 4 % Other 752 1 % 187 * 858 * Net revenue $ 182,617 100 % $ 286,915 100 % $ 206,083 100 % * The percentage of net revenue is less than one percent.

Connected home market: For fiscal 2012, net revenue from sales of our products into the connected home market decreased $15.4 million, or 16%, compared to fiscal 2011 as a result of decreases of 11% in ASP and 6% in units shipped. The decrease in ASP was primarily the result of transitions to our newer generation lower ASP products and also certain customers achieving cumulative volume pricing discounts on purchases of our older generation products. The decrease in units shipped was the result of a decrease in demand from contract manufacturers who manufacture equipment incorporating our products for deployment by telecommunications providers due to their management of their inventory levels.

33 --------------------------------------------------------------------------------Our revenue from the connected home market as a percentage of our total net revenue for fiscal 2012 increased 10% compared to fiscal 2011. The increase was primarily the result of the overall decrease in units shipped into the IPTV media processor market relative to shipments into the connected home market.

We expect our revenue from the connected home market to fluctuate in future periods based on the timing of our and our customer's new product introductions and adoption of our products that are based on both new and existing technologies such as HPAV, G.hn and Z-Wave. Additionally, our revenues will also fluctuate due to competitive factors and changes in inventory levels at contract manufacturers who manufacture equipment incorporating our products for deployment by telecommunication providers.

For fiscal 2011, net revenue from sales of our products into the connected home market increased $76.3 million, or 412%, compared to fiscal 2010. This increase was primarily the result of our acquisition of CopperGate in the fourth quarter of fiscal 2010. For the same reason, our percentage of net revenue from sales into the connected home market increased by 24% as a percentage of our total net revenue for fiscal 2011.

IPTV media processor market: For fiscal 2012, net revenue from sales of our products into the IPTV media processor market decreased $74.8 million, or 55%, compared to fiscal 2011. This decrease was primarily attributable to a decline of 55% in units shipped as a result of reduced demand for our chipsets in the IPTV media processor market as a result of competitive factors in connection with product transitions at telecommunications service providers to the next generation IPTV media processor solutions.

Our revenue from the IPTV media processor market as a percentage of our total net revenue for fiscal 2012 decreased 14% compared to fiscal 2011, primarily as a result of the decrease in demand for our chipsets in the IPTV media processor market. We expect our revenue from the IPTV media processor market to fluctuate in future periods as this revenue is dependent on IPTV service deployments by telecommunication service providers, adoption of our newer and future generations of our technology, changes in inventory levels at the contract manufacturers that supply them and competitive market pressures. Additionally, due to decreases in the ASPs of our newer generation products relative to our older generation products, we must increase unit shipments of our products substantially in order to increase our revenue. We do not expect an increase in our revenue from the IPTV media processor market until at least the second half of fiscal 2013.

For fiscal 2011, net revenue from sales of our chipsets, primarily our SMP8630 and SMP8650 chipset series, into the IPTV media processor market increased $2.4 million, or 2%, from fiscal 2010. This increase was attributable to improved demand in our IPTV market that was partially offset by declining average selling prices due to certain customers achieving cumulative volume pricing discounts on purchases of our products. Our revenue from the IPTV market as a percentage of our total net revenue for fiscal 2011 decreased 17% compared to fiscal 2010 as a result of the increase in net revenue from the connected home market.

Connected media player market: For fiscal 2012, net revenue from sales of our products into the connected media player market decreased $11.6 million, or 29%, compared to fiscal 2011, as a result of decreases of 16% in units shipped and 16% in ASP. The decrease in units shipped was primarily due to competitive factors. The decrease in ASP was primarily due to certain customers achieving cumulative volume pricing discounts on purchases of our older generation products and also transitions to our newer generation lower ASP products.

Our revenue from the connected media player market as a percentage of our total net revenue for fiscal 2012 increased 1% compared to fiscal 2011 primarily as a result of the overall decrease in units shipped into the IPTV media processor market. We expect our revenue from the connected media player market to fluctuate in future periods primarily due to the timing and nature of new product introductions by consumer electronics companies that incorporate our products and their transition to our newer generation products. Additionally, due to decreases in the ASPs of our newer generation products relative to our older generation products, we must increase unit shipments of our products substantially in order to increase our revenue.

For fiscal 2011, net revenue from sales of our products to the connected media player market decreased $5.0 million, or 11%, compared to fiscal 2010. This decrease was primarily attributable to a decrease in ASP for sales of our chipsets to customers who incorporate our chipsets into digital media adapters as these customers achieved cumulative volume pricing discounts on purchases of our products. Our revenue from the connected media player market as a percentage of our total net revenue for fiscal 2011 decreased 8% compared to fiscal 2010, primarily as a result of the increase in revenue from our connected home market.

34 -------------------------------------------------------------------------------- Prosumer and industrial audio/video market: For fiscal 2012, net revenue from sales of our products into the prosumer and industrial audio/video market decreased $3.0 million, or 20%, compared to fiscal 2011. The decrease was attributable to both a decrease in ASP and a decrease in units shipped. The decrease in units shipped was primarily due to lower demand from our customers who manufacture high-end audio/video prosumer electronics and video conferencing products. The decrease in ASP was primarily due to a shift in product mix to our lower ASP next generation products. Our revenue from sales into the prosumer and industrial audio/video market as a percentage of total net revenue for fiscal 2012 increased 2% compared to fiscal 2011. We expect our revenue from the prosumer and industrial audio/video market to fluctuate based on our ability to obtain design wins in our customers' newer generation products, broad economic trends affecting business spending on video conferencing and high end audio/video products and also discretionary consumer spending.

For fiscal 2011, net revenue from sales of our products into the prosumer and industrial audio/video market increased $7.8 million, or 108%, compared to fiscal 2010. The increase was attributable to an increase in units shipped primarily due to strengthening demand from our existing customers and our continued effort to expand into this market. Our revenue from sales into the prosumer and industrial audio/video market as a percentage of total net revenue for fiscal 2011 increased 1% compared to fiscal 2010.

Other markets: Our other markets consist of HDTV, PC add-in boards, development contracts, services and other ancillary markets. The revenue derived from our other markets was not a significant portion of our total net revenue.

Net revenue by product group Our primary product group consists of our chipsets. Our chipsets are targeted toward manufacturers and large volume designer and manufacturer customers building products for the IPTV, connected home, connected media player and prosumer and industrial audio/video consumer electronic markets. Sales of our chipsets accounted for approximately 99%, 100% and 99% of our net revenue for fiscal 2012, 2011 and 2010, respectively.

We derive a minor portion of our revenue from other products and services, including software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories. The revenue derived from other products and services was not a significant portion of our total net revenue.

Net revenue by geographic region The following table sets forth net revenue for each geographic region based on the ship-to location of customers (in thousands, except percentages): Fiscal Years Ended January January January 28, 2012 % of Net revenue 29, 2011 % of Net revenue 30, 2010 % of Net revenue Asia $ 166,583 91 % $ 266,065 93 % $ 184,135 89 % North America 8,982 5 % 13,454 5 % 6,045 3 % Europe 5,718 3 % 7,101 2 % 15,875 8 % Other regions 1,334 1 % 295 * 28 * Net revenue $ 182,617 100 % $ 286,915 100 % $ 206,083 100 % * The percentage of net revenue is less than one percent.

Asia: Our net revenue in absolute dollars from Asia decreased $99.5 million, or 37%, for fiscal 2012 compared to fiscal 2011. Our net revenue from Asia decreased 2% as a percentage of our total net revenue for fiscal 2012 compared to fiscal 2011. The decrease in net revenue from Asia in absolute dollars was primarily attributable to lower demand for our chipset solutions for the IPTV media processor, connected home and connected media player markets. As a percentage of total net revenue by country in the Asia region, China, including Hong Kong, represented 77% in fiscal 2012 and 81% in fiscal 2011.

Our net revenue in absolute dollars from Asia increased $81.9 million, or 44%, for fiscal 2011 compared to fiscal 2010. Our net revenue from Asia increased 4% as a percentage of our total net revenue for fiscal 2011 compared to fiscal 2010. The increases in net revenue from Asia in both absolute dollars and as a percentage of our total net revenue were primarily attributable to an increase in revenue from China which resulted primarily from the increase in shipments of our home connectivity products as a result of our CopperGate acquisition in the fourth quarter of fiscal 2010.

North America: Our net revenue in absolute dollars from North America decreased $4.5 million, or 33%, for fiscal 2012 compared to fiscal 2011. This decrease was primarily due to lower demand in North America for our chipset solutions across all of our target markets. For fiscal 2012 and 2011, our net revenue generated outside North America was 95% of our net revenue for both periods. The overall trend has been for companies located in North America who incorporate our products into their finished products to move their production orders to large designers and manufacturers located in the Asia region. We expect our revenue from North America in any given year to fluctuate depending on whether our customers place their orders locally or through overseas manufacturers who incorporate our products into their finished products.

35 -------------------------------------------------------------------------------- Our net revenue in absolute dollars from North America increased $7.4 million, or 123%, for fiscal 2011 compared to fiscal 2010. Our net revenue from North America increased 2% as a percentage of our total net revenue for fiscal 2011 compared to fiscal 2010. The increases in our net revenue from North America in both absolute dollars and as a percentage of our total net revenue were primarily attributable to increased demand in North America for our chipset solutions for our Z-Wave and VXP products.

Europe: Our net revenue in absolute dollars from Europe decreased $1.4 million, or 19%, for fiscal 2012 compared to fiscal 2011. This decrease was primarily due to changes in location of the contract manufacturers used by our customers. Our net revenue from Europe increased 1% as a percentage of our total net revenue for fiscal 2012 compared to fiscal 2011.

Our net revenue in absolute dollars from Europe decreased $8.8 million, or 55%, for fiscal 2011 compared to fiscal 2010. The majority of the decrease in our net revenue from Europe in absolute dollars was attributable to certain European customers moving their production to Asia and, to a lesser extent, a decline in demand for our products from a customer located in Europe. Our net revenue from Europe decreased 6% as a percentage of our total net revenue for fiscal 2011 compared to fiscal 2010. The decrease in our net revenue from Europe as a percentage of our total net revenue was primarily attributable to an increase in revenue from Asia which resulted primarily from the increase in shipments of our home connectivity products as a result of our CopperGate acquisition in the fourth quarter of fiscal 2010.

Major Customers The following table sets forth the major direct customers that accounted for 10% or more of our net revenue: Fiscal Years Ended Customer January 28, 2012 January 29, 2011 January 30, 2010 Gemtek 22 % 23 % 12 % Motorola 17 % 24 % 21 % Gross profit and Gross margin The following table sets forth gross profit and gross margin (in thousands, except percentages): Fiscal Years Ended January 28, % January % January 30, 2012 change 29, 2011 change 2010 Gross profit $ 77,376 (45 )% $ 140,644 53 % $ 91,702 Gross margin 42 % 49 % 44 % The $63.3 million decrease in gross profit and 7 percentage point decrease in gross margin for fiscal 2012 compared to fiscal 2011 were primarily due to a 19% decline in our ASP and 21% decrease in units shipped, which was partially offset by an 8% decline in average cost per chipset, or ACU. The decrease in ASP was primarily due to the increase, as a percentage of total net revenue, of sales of our home networking and home control and energy management automation products and our new generation media processor products compared to sales of our older generation media processor products which had higher ASPs. The decrease in units shipped was primarily due to competitive factors and the timing of new product introductions at telecommunications service providers and other consumer electronics companies. The decrease in ACU was primarily due to the same reasons noted for our ASP decline and were partially offset by an increased percentage of fixed costs per unit due to the 21% decrease in units shipped. Fixed costs include such items as depreciation and amortization and compensation costs for operations. The decrease in gross profit was also impacted by a $9.0 million provision recorded for excess inventory primarily in connection with our SMP8634 and SMP8656 series die bank during fiscal 2012 compared to $0.5 million recorded in fiscal 2011. The provision for the SMP8634 was $5.8 million and was triggered mainly by notification to us by a certain large volume customer that it would not order any substantial quantity of this product in the future as it had completed its transition to a next generation product sold by one of our competitors. The total provision for the SMP8656 was $2.2 million for fiscal 2012 out of which $1.8 million was triggered by target customers shifting focus of their designs to a different version of our product during the second quarter. We also recorded provisions for $0.8 million of other excess and obsolete products during fiscal 2012. During fiscal 2012 we sold, scrapped or otherwise disposed of approximately $0.8 million of inventory that had been previously written-down.

36 -------------------------------------------------------------------------------- The $48.9 million increase in gross profit and 5 percentage point increase in gross margin for fiscal 2011 compared to fiscal 2010 were primarily due to a 40% decline in our ACU during fiscal 2011 which was partially offset by a 30% decline in our ASP. The decline in our ACU was primarily due to the increase in units shipped for our home connectivity products, which have a lower average cost than our media processor and VXP products, and a $4.8 million reduction in the mark-up on inventories purchased through our acquisitions of CopperGate and Zensys as the majority of the inventory was sold during fiscal 2010. The improvement in our ACU was partially offset by an increase in our operations overhead costs of $6.1 million for fiscal 2011 compared to fiscal 2010 due to a $5.7 million increase in amortization of acquired intangibles primarily as a result of our acquisition of CopperGate in the fourth quarter of fiscal 2010. The decline in ASP was primarily due to the addition of our home connectivity product line which has a lower ASP than our media processor product line. During fiscal 2011 and 2010 we sold, scrapped or otherwise disposed of approximately $0.9 million and $0.5 million, respectively, of inventory that had been previously written-down.

Operating expenses The following table sets forth operating expenses and percent changes in operating expenses (in thousands, except percentages): Fiscal Years Ended January % January % January 30, 28, 2012 change 29, 2011 change 2010 Research and development expense $ 86,517 12 % $ 77,270 47 % $ 52,644 Sales and marketing expense 34,467 9 % 31,712 80 % 17,617 General and administrative expense 20,829 11 % 18,745 3 % 18,240 Impairment of goodwill 45,108 - % - - - Impairment of intangible assets 66,170 - % - - - Total operating expenses $ 253,091 98 % $ 127,727 44 % $ 88,501 Research and development expense Research and development expense consists of compensation and benefits including variable compensation expense such as profit sharing; development and design costs which include mask, prototyping, testing and subcontracting costs; depreciation and amortization which includes engineering design tools and equipment costs; stock-based compensation expense; and other expenses which include costs for facilities and travel.

The following tables set forth details of research and development expense for fiscal 2012, 2011 and 2010 (in thousands, except percentages): Fiscal Years Ended January 28, January 29, Increase 2012 % of Net Revenue 2011 % of Net Revenue (Decrease) % Change Compensation and benefits $ 49,819 27 % $ 46,036 16 % $ 3,783 8 % Development and design costs 13,676 7 % 11,478 4 % 2,198 19 % Depreciation and amortization 9,962 5 % 7,112 3 % 2,850 40 % Stock-based compensation 6,277 4 % 6,745 2 % (468 ) (7 %) Other 6,783 4 % 5,899 2 % 884 15 % Total research and development expense $ 86,517 47 % $ 77,270 27 % $ 9,247 12 % Fiscal Years Ended January 29, January 30, 2011 % of Net Revenue 2010 % of Net Revenue Increase % Change Compensation and benefits $ 46,036 16 % $ 31,600 15 % $ 14,436 46 % Development and design costs 11,478 4 % 6,533 3 % 4,945 76 % Depreciation and amortization 7,112 3 % 5,429 3 % 1,683 31 % Stock-based compensation 6,745 2 % 5,334 3 % 1,411 26 % Other 5,899 2 % 3,748 2 % 2,151 57 % Total research and development expense $ 77,270 27 % $ 52,644 26 % $ 24,626 47 % 37-------------------------------------------------------------------------------- For fiscal 2012 compared to fiscal 2011, compensation and benefits increased primarily due to an increase in headcount to support increased new product development activity as well as salary increases. The increase in development and design costs and depreciation and amortization were also to support increased new product development activity. Other expenses increased primarily due to facilities related costs, hiring costs and travel related expenses in connection with increased headcount to support increased new product development activity.

For fiscal 2011 compared to fiscal 2010, compensation and benefits and stock-based compensation increased primarily due to an overall increase in headcount, including personnel added by our acquisition of CopperGate in the fourth quarter of fiscal 2010. The increase in development and design costs and depreciation and amortization expenses was to support increased new product development activity. Other expenses increased primarily due to our addition of a facility in Israel as a result of our acquisition of CopperGate.

Sales and marketing expense Sales and marketing expense consists primarily of compensation and benefits costs, including commissions to our direct sales force, stock-based compensation expense, trade shows, travel and entertainment expenses and external commissions.

The following tables set forth details of sales and marketing expense for fiscal 2012, 2011, and 2010 (in thousands, except percentages): Fiscal Years Ended January 28, January 29, Increase % 2012 % of Net Revenue 2011 % of Net Revenue (Decrease) Change Compensation and benefits $ 15,748 9 % $ 13,666 5 % $ 2,082 15 % Depreciation and amortization 6,771 4 % 8,210 3 % (1,439 ) (18 %) Trade shows, travel and entertainment 3,412 2 % 3,005 1 % 407 14 % Stock-based compensation 2,137 1 % 2,094 1 % 43 2 % External commissions 1,189 * 1,531 * (342 ) (22 %) Other 5,210 3 % 3,206 1 % 2,004 63 % Total sales and marketing expense $ 34,467 19 % $ 31,712 11 % $ 2,755 9 % Fiscal Years Ended January 29, January 30, Increase % 2011 % of Net Revenue 2010 % of Net Revenue (Decrease) Change Compensation and benefits $ 13,666 5 % $ 8,163 4 % $ 5,503 67 % Depreciation and amortization 8,210 3 % 2,247 1 % 5,963 265 % Trade shows, travel and entertainment 3,005 1 % 1,808 1 % 1,197 66 % Stock-based compensation 2,094 1 % 1,861 1 % 233 13 % External commissions 1,531 * 1,536 1 % (5 ) - Other 3,206 1 % 2,002 1 % 1,204 60 % Total sales and marketing expense $ 31,712 11 % $ 17,617 9 % $ 14,095 80 % * The percentage of net revenue is less than one percent.

For fiscal 2012 compared to fiscal 2011, compensation and benefits increased primarily due to an increase in headcount to support new product introduction and promotion as well as salary increases for existing employees. Depreciation and amortization decreased primarily due to lower amortization of acquired intangible assets as a result of related acquired intangible assets impairment charges recorded in our third quarter of fiscal 2012. Trade shows, travel and entertainment expenses increased primarily due to increased participation in trade shows to introduce and promote our new products. External commissions decreased due to lower net revenue for our products sold through external sales representatives. Other expenses increased primarily due to a $2.0 million estimated penalty recorded in the fourth quarter of fiscal 2012 in connection with a failure to comply with a third party technology licensor's custodial and reporting requirements. In the future we may incur such penalties if we continue to be found not to be in compliance with the terms of the applicable license contracts of this licensor or other licensors and we could be subject to revocation of the applicable license or other penalties.

38 -------------------------------------------------------------------------------- For fiscal 2011 compared to fiscal 2010, compensation and benefits and stock-based compensation increased primarily due to an overall increase in headcount, including personnel added through our acquisition of CopperGate in the fourth quarter of fiscal 2010. The increase in depreciation and amortization was primarily due to amortization of acquired intangibles associated with the CopperGate acquisition. Trade shows, travel and entertainment expenses increased as a result of our increased participation in trade shows primarily as a result of our added product lines. External commissions fluctuated due to changes in net revenues for products sold through external sales representatives. Other expenses increased primarily due to our additional facility in Israel as a result of our acquisition of CopperGate.

General and administrative expense General and administrative expense consists primarily of compensation and benefits costs, stock-based compensation expense, legal, accounting and other professional fees and facilities expenses.

The following tables set forth details of general and administrative expense for fiscal 2012, 2011, and 2010 (in thousands, except percentages): Fiscal Years Ended January 28, January 29, Increase % 2012 % of Net Revenue 2011 % of Net Revenue (Decrease) Change Compensation and benefits $ 8,415 5 % $ 7,227 3 % $ 1,188 16 % Legal and accounting fees 3,657 2 % 3,638 1 % 19 1 % Stock-based compensation 3,133 2 % 3,178 1 % (45 ) (1 %) Outside service fees 560 * 643 * (83 ) (13 %) Facilities and IT infrastructure 2,481 1 % 1,582 1 % 899 57 % Other 2,583 1 % 2,477 1 % 106 4 % Total general and administrative expense $ 20,829 11 % $ 18,745 7 % $ 2,084 11 % Fiscal Years Ended January 29, January 30, Increase % 2011 % of Net Revenue 2010 % of Net Revenue (Decrease) Change Compensation and benefits $ 7,227 3 % $ 5,209 3 % $ 2,018 39 % Legal and accounting fees 3,638 1 % 5,145 2 % (1,507 ) (29 %) Stock-based compensation 3,178 1 % 1,240 1 % 1,938 156 % Outside service fees 643 * 3,598 2 % (2,955 ) (82 %) Facilities and IT infrastructure 1,582 1 % 1,088 * 494 45 % Other 2,477 1 % 1,960 1 % 517 26 % Total general and administrative expense $ 18,745 7 % $ 18,240 9 % $ 505 3 % * The percentage of net revenue is less than one percent For fiscal 2012 compared to fiscal 2011, compensation and benefits increased due to an overall increase in headcount and salary increases. Outside services decreased due to a reduction in spending for recruiting. Facilities and IT infrastructure costs increased due to increased investments to update and support our worldwide systems and to support the increased headcount.

For fiscal 2011 compared to fiscal 2010, compensation and benefits and stock-based compensation increased primarily due to an overall increase in headcount, primarily for personnel added through our acquisition of CopperGate in the fourth quarter of fiscal 2010. The decreases in legal and accounting fees and outside services are primarily due to legal, accounting and consulting fees related to the acquisition of CopperGate during fiscal 2010. Other expenses increased primarily due to our acquisition of CopperGate.

Goodwill and indefinite-lived intangible assets impairment As of October 29, 2011, we concluded that an interim review of the carrying value of our goodwill and indefinite-lived intangible assets should be performed due to continued reductions in our profitability, sales forecasts and market capitalization. As a result, we recognized a goodwill impairment charge of $45.1 million and an impairment charge for our indefinite-lived in-process research and development intangible assets of $11.1 million during the third quarter of fiscal 2012.

39--------------------------------------------------------------------------------Impairment and amortization of intangible assets During the third quarter of fiscal 2012, we performed a review of the carrying value of our acquired intangible assets due to continued reductions in our profitability and sales forecasts, and negative cash flows from operations. As a result, we recognized an intangible asset impairment charge of $55.1 million.

We classify our expense from the amortization of acquired developed technology of $9.6 million, $10.3 million, and $4.6 million for fiscal 2012, 2011 and 2010, respectively, as cost of revenue. We classify our amortization expense for acquired customer relationships and trademarks of $6.5 million, $8.0 million and $2.1 million for fiscal 2012, 2011 and 2010, respectively, as sales and marketing expense. As of January 28, 2012, the unamortized balance from acquired intangible assets was $29.4 million, which we intend to amortize to future periods based on the remaining estimated useful life of each acquired intangible asset. If we purchase additional intangible assets in the future, our cost of revenue or other operating expenses may increase from the amortization of those assets.

Acquired intangible assets subject to amortization were as follows as of January 28, 2012 (in thousands, except for years): January 28, 2012 Weighted Accumulated average Amortization remaining and Effect of amortization Currency period Gross Value Impairment Translation Net Value (years) Developed technology $ 75,827 $ (24,614 ) $ (28,455 ) $ 22,758 4.7 Customer relationships 51,174 (30,486 ) (14,966 ) 5,722 4.8 Trademarks 2,677 - (1,805 ) 872 6.6 Non-compete agreements 1,400 - (1,400 ) - - 131,078 (55,100 ) (46,626 ) 29,352 4.8In-process research and development 11,070 (11,070 ) - - - $ 142,148 $ (66,170 ) $ (46,626 ) $ 29,352 Stock-based compensation expense The following table sets forth stock-based compensation expense that is included in each functional line item in the consolidated statements of operations (in thousands): Fiscal Years Ended January 28, January 29, January 30, 2012 2011 2010 Cost of revenue $ 478 $ 560 $ 358 Research and development 6,277 6,745 5,334 Selling and marketing 2,137 2,094 1,861 General and administrative 3,133 3,178 1,240 Total stock-based compensation expense $ 12,025 $ 12,577 $ 8,793 The expensing of employee stock-based payment awards will continue to have an adverse impact on our results of operations. As of January 28, 2012, the unrecorded stock-based compensation balance related to stock options, restricted stock awards, and restricted stock units outstanding excluding estimated forfeitures was $19.7 million, $1.8 million and $3.4 million, respectively, which will be recognized over an estimated weighted average amortization period of 3.0 years, 3.4 years and 3.8 years, respectively. The amortization period is based on the expected vesting term of the awards. The decrease in stock-based compensation expense for fiscal 2012 compared to fiscal 2011 was primarily due to stock options that became fully vested during the year, partially offset by an increase in awards for newly hired and existing employees compared to the prior fiscal year. 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 any acquisitions.

40--------------------------------------------------------------------------------Interest and other income, net The following table sets forth our net interest and other income and related percentage change (in thousands, except percentages): Fiscal Years Ended January 28, % January 29, % January 30, 2012 change 2011 change 2010 Interest and other income, net $ 2,704 24 % $ 2,183 15 % $ 1,906 Interest and other income primarily consists of interest income from marketable securities, income from refundable research and development credits, gains or losses on foreign exchange transactions, gains or losses on sales of marketable securities and gains or losses on currency hedging activities. The increase of $0.5 million, or 24%, in fiscal 2012 compared to fiscal 2011 was primarily due to foreign currency fluctuations. The increase of $0.3 million, or 15%, in fiscal 2011 compared to fiscal 2010 was primarily due to foreign exchange gains.

Impairment of investment During our second quarter of fiscal 2011, we recorded an impairment charge of $5.2 million against strategic investments we made in a privately held, venture capital funded technology company. This impairment charge represents $2.0 million to fully write down the carrying value of our preferred stock investment and $3.2 million to fully reserve the convertible note and accrued interest receivable from this company due to our expected inability to collect it. There was no impairment of investments in fiscal 2012 or fiscal 2010.

Provision for (benefit from) income taxes We recorded a benefit from income taxes of $5.0 million in fiscal 2012 and provisions for income taxes of $0.8 million and $2.7 million in fiscal 2011 and 2010, respectively. The fiscal 2012, 2011 and 2010 effective tax rates were approximately (3)%, 8% and 52%, respectively. Our fiscal 2012 effective tax rate differs from the federal statutory rate of 35% primarily because our net loss for fiscal 2012 was either in a foreign tax jurisdiction with a zero tax rate where no tax benefit could be realized or in jurisdictions where the losses were not deductible for tax purposes. Our fiscal 2011 effective tax rate differs from the federal statutory rate of 35% primarily due to the foreign tax differential benefit resulting from the nature of our international operations of $3.5 million and the federal research and development tax credits of $1.2 million that became available during the last quarter of the fiscal year. Our fiscal 2010 effective tax rate differs from the federal statutory rate of 35% primarily due to our international operations, which resulted in a foreign tax differential benefit of $3.0 million and the offsetting effect of $3.8 million from writing off the California deferred tax assets due to our assessment that it is not more likely than not to be realized in the future.

We benefit from tax incentives granted by local tax authorities in certain foreign jurisdictions. The Economic Development Board of Singapore granted development and expansion incentives to our wholly-owned subsidiary in Singapore in 2008 for a period of four years ending March 1, 2012 contingent on meeting specified requirements. Our Singapore subsidiary can qualify for an additional six years of development and expansion incentives if additional requirements are met. Absent such tax incentives, the corporate income tax rate in Singapore would have been 17% for fiscal 2012. The impact of this tax holiday was to increase net income by approximately $2.0 million or $0.06 per diluted share in fiscal 2012, $6.7 million or $0.21 per diluted share in fiscal 2011, $7.0 million or $0.25 per diluted share in fiscal 2010. To date we have not complied with all of the operating conditions required by the tax incentives, and we could lose the related tax benefits prospectively and could be required to refund potentially material tax benefits previously realized by us with respect to that incentive, subject to negotiation with the Singapore authorities. As a result of the tax incentives, if we are able to renegotiate and comply with modified operating conditions, we expect the income from our operations to be subject to relatively lower income taxes than would otherwise be the case under ordinary income tax rules.

Liquidity and Capital Resources The following table sets forth the cash and cash equivalents and short-term marketable securities as of January 28, 2012 and January 29, 2011 (in thousands): January 28, January 29, 2012 2011 Cash and cash equivalents $ 44,283 $ 72,732 Short-term marketable securities 42,134 47,482 $ 86,417 $ 120,214 As of January 28, 2012, our principal sources of liquidity consisted of cash and cash equivalents and short-term marketable securities of $86.4 million, which represents a decrease of $33.8 million from $120.2 million at January 29, 2011. The decrease in cash and cash equivalents and short-term marketable securities was primarily the result of $14.2 million in purchases of software, equipment and leasehold improvements, $5.0 million of cash paid in connection with an acquisition, $4.7 million for net purchases of long-term marketable securities, $2.5 million for the purchase of a long-term note receivable, $2.1 million in purchases of long-term investments and $12.1 million cash used in operating activities. These outflows of cash, cash equivalents and short-term marketable securities were partially offset by $5.4 million in net proceeds from the sale of our common stock through our employee stock purchase plan and stock option plans and $1.9 million excess tax benefit on stock-based compensation.

As of January 28, 2012, we held $62.0 million of long-term marketable securities. Although these marketable securities have maturities of greater than one year, we hold them as available-for-sale and may access these funds prior to their contractual maturities.

41--------------------------------------------------------------------------------The following table sets forth the primary net cash inflows and outflows for fiscal 2012, 2011 and 2010 (in thousands): Fiscal Years Ended January 28, January 29, January 30, 2012 2011 2010 Net cash provided by (used in): Operating activities $ (12,146 ) $ 41,872 $ 51,931 Investing activities (23,441 ) (58,429 ) (64,557 ) Financing activities 7,315 7,563 3,420 Effect of foreign exchange rate changes on cash and cash equivalents (177 ) (221 ) 308 Net decrease in cash and cash equivalents $ (28,449 ) $ (9,215 ) $ (8,898 ) Cash flows from operating activities Net cash used in operating activities of $12.1 million for fiscal 2012 was primarily due to a net loss of $168.0 million and decreases of $8.0 million in accounts payable and $4.1 million in accrued liabilities. These amounts were partially offset by non-cash adjustments to the net loss of $150.6 million and decreases of $10.1 million in accounts receivable and $7.0 million in inventory. Non-cash adjustments to net loss consisted primarily of $111.3 million in impairment of goodwill and intangible assets, $29.0 million in depreciation and amortization expense, $12.0 million in stock-based compensation expense, a benefit of $10.2 million from deferred income taxes and $9.0 million in provision for excess and obsolete inventory.

Accounts receivable and inventories decreased as a result of lower revenue which resulted in lower billings to customers and lower inventory purchases from suppliers. Inventories also decreased due to the $9.0 million provision for excess inventory primarily as a result of product transitions by customers. Our annual average day's sales outstanding increased to 57 days at January 28, 2012 compared to 45 days at January 29, 2011, primarily due to timing of shipments and customer mix. Accounts payable decreased primarily due to the timing of payment for inventory purchases. Accrued liabilities decreased primarily due to a decrease of $2.7 million in accrued rebates as a result of payments made and lower revenue which led to less new rebate accruals, and a decrease of $1.7 million as a result of payouts of the CopperGate acquisition contingent bonus pool. These decreases in accrued liabilities were partially offset by an increase of $2.2 million in accrued license fees as a result of purchases of software licenses and design tools and a $2.0 million increase in accrued taxes payable primarily for Sigma Designs Israel, S.D.I. Limited for which estimated tax payments were not yet made.

Net cash provided by operating activities of $41.9 million for fiscal 2011 was primarily due to net income of $9.1 million, non-cash expenses of $41.7 million, which includes an investment impairment charge of $5.2 million, a $4.7 million increase in accounts payable, a $4.5 million decrease in accounts receivable, and a $2.5 million increase in accrued liabilities and other long-term liabilities. These amounts were partially offset by a $20.0 million increase in inventories and a $0.6 million increase in prepaid expenses and other current assets and other non-current assets. Non-cash adjustments to net income included consisted primarily of $27.7 million for depreciation and amortization, $12.6 million for stock-based compensation expense, $5.2 million for an investment impairment charge and a benefit of $4.8 million for deferred income taxes.

The increase in inventories was the result of an increase in our die bank and finished goods as a result of an easing in supply of wafers and an increase in our die bank for our newer generation products to meet forecasted demand. Despite the increase in inventories, our annualized rate of inventory turns increased to 5.2 times per year for fiscal 2011 compared to 4.2 times per year for fiscal 2010 as a result of the overall increase in shipments in fiscal 2011. The increase in accounts payable was primarily due to the timing of payment for inventories. The decrease in accounts receivable was primarily the result of decreased product shipments and timing of billings in the fourth quarter of fiscal 2011 compared to the fourth quarter of fiscal 2010. Our annual average day's sales outstanding increased to 45 days at January 29, 2011 compared to 44 days at January 30, 2010, primarily due to timing of shipments and customer mix.

Net cash provided by operating activities of $51.9 million for fiscal 2010 was primarily due to net income of $2.5 million, non-cash expenses of $21.9 million, a $27.1 million decrease in inventories, a $1.2 million decrease in prepaid expenses, current assets and other non-current assets and a $3.0 million increase in accounts payable. These amounts were partially offset by a $3.2 million increase in accounts receivable and a $0.6 million decrease in accrued and other long-term liabilities. Non-cash expenses included in net income in fiscal 2010 consisted primarily of $13.2 million in depreciation and amortization and $8.8 million in stock-based compensation expense. The decrease in inventories was the result of successful efforts to reduce the level of our die bank and a significant increase in demand in the fourth fiscal quarter of 2010 which resulted in an increase in our annualized rate of inventory turns to 4.2 for fiscal 2010 compared to 3.5 for fiscal 2009. The increase in accounts payable was primarily due to the timing of payment for inventories. The increase in accounts receivable was primarily the result of increased billings due to increased product shipments during the fourth quarter of fiscal 2010 compared to the fourth quarter of fiscal 2009. Our annual average day's sales outstanding improved to 44 days at January 30, 2010 compared to 57 days at January 31, 2009, primarily due to timing of shipments and customer mix.

42 -------------------------------------------------------------------------------- Cash flows from our operating activities will continue to fluctuate based upon our ability to grow net revenues while managing the timing of payments to us from customers and to vendors from us, the timing of inventory purchases and subsequent manufacture and sale of our products.

Cash flows from investing activities Net cash used in investing activities of $23.4 million for fiscal 2012 was primarily due to purchases of software, equipment and leasehold improvements of $14.2 million, cash paid in connection with an acquisition of $5.0 million, purchases of notes receivable for $2.5 million and purchases of long-term investments for $2.1 million.

Net cash used in investing activities of $58.4 million for fiscal 2011 was primarily due to net purchases of marketable securities of $40.2 million, purchases of software, equipment and leasehold improvements of $14.7 million, purchases of long-term investments of $2.3 million and a purchase of notes receivable of $1.2 million.

Net cash used in investing activities of $64.6 million for fiscal 2010 was primarily due to net cash paid of $89.1 million in connection with the acquisition of CopperGate, purchases of software, equipment and leasehold improvements of $7.5 million, an investment of $3.0 million in a convertible note receivable of a privately-held technology company, $1.5 million of private equity investments and $0.5 million of cash restricted for our foreign exchange hedging transactions. These usages of cash in investing activities were partially offset by net sales and maturities of long-term marketable securities of $37.0 million.

Cash flows from financing activities Net cash provided by financing activities of $7.3 million in fiscal 2012 was due to $5.4 million of proceeds from exercises of employee stock options and employee stock purchases and $1.9 million of excess tax benefit from stock-based compensation.

Net cash provided by financing activities of $7.6 million in fiscal 2011 was due to $5.2 million of proceeds from exercises of employee stock options and employee stock purchases and $2.3 million of excess tax benefit from stock-based compensation.

Net cash provided by financing activities of $3.4 million in fiscal 2010 was due to $2.8 million of proceeds from exercises of employee stock options and employee stock purchases and $0.6 million of excess tax benefit from stock-based compensation.

While we generated cash from operations for fiscal 2011 and 2010, we consumed cash in operations during fiscal 2012 and it is likely that our operations will consume additional cash in future periods. Based on our current anticipated cash needs, we believe that our current balances of cash, cash equivalents and short-term marketable securities will be sufficient to meet our anticipated working capital requirements, obligations, capital expenditures, strategic investments and other cash needs for at least the next twelve months. However, it is possible that we may need to raise additional funds to finance our activities during or beyond the next 12 months and our future capital requirements may vary significantly from those currently planned. Our cash, cash equivalent and marketable security balances will continue to fluctuate based upon our ability to grow revenue, the timing of payments to us from customers and to vendors from us and the timing of inventory purchases and subsequent manufacture and sale of our products. From time to time, we may also increase our long-term investments, which will cause our marketable securities balances to decrease.

As of January 28, 2012, $25.7 million of the $150.2 million of our cash, cash equivalents, restricted cash and marketable securities was held by our foreign subsidiaries. Approximately $21.4 million of these funds are directly or indirectly owed to the U.S. based parent organization by our foreign subsidiaries to settle intercompany loans. If the remaining amount of $4.3 million of these funds is needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S.

operations. We are not aware of any trends, demands or uncertainties as a result of this policy that are reasonably likely to have a material effect on our business, as a whole or that may be relevant to our financial flexibility.

43 -------------------------------------------------------------------------------- Our marketable securities include primarily corporate bonds, money market funds and US agency discount notes. We monitor all of our marketable securities for impairment and if these securities are reported to have had a decline in fair value, we may need to use significant judgment to identify events or circumstances that would likely have a significant adverse effect on the future value of each investment including: (i) the nature of the investment; (ii) the cause and duration of any impairment; (iii) the financial condition and near term prospects of the issuer; (iv) for securities with a reported decline in fair value, our ability to hold the security for a period of time sufficient to allow for any anticipated recovery of fair value; (v) the extent to which fair value may differ from cost; and (vi) a comparison of the income generated by the securities compared to alternative investments. We would recognize an impairment charge if a decline in the fair value of our marketable securities is judged to be other-than-temporary.

Contractual Obligations and Commitments We generally do not have guaranteed price or quantity commitments from any of our suppliers. Additionally, we generally acquire products for sale to our customers based on purchase orders received as well as forecasts from such customers. Purchase orders with delivery dates greater than twelve weeks are typically cancelable without penalty to our customers. We currently place non-cancelable orders to purchase semiconductor wafers, other materials and finished goods from our suppliers on an eight to sixteen week lead-time basis.

The following table sets forth the amounts of payments due under specified contractual obligations as of January 28, 2012 (in thousands): Payments Due by Period Fiscal 2014 Fiscal 2016 Fiscal 2018 and Contractual Obligations Fiscal 2013 - 2015 - 2017 thereafter Total Operating leases $ 3,054 $ 2,357 $ 1,493 $ 618 $ 7,522 Non-cancelable purchase orders 11,514 - - - 11,514 $ 14,568 $ 2,357 $ 1,493 $ 618 $ 19,036 Off-balance sheet arrangements In the ordinary course of business, we have investments in privately held companies, which we review annually to determine if they should be accounted for as variable interest entities. For the year ended January 28, 2012, we evaluated our investments in these privately held companies and concluded that we are not the primary beneficiary of any variable interest from investment entities. As a result, we account for these investments on a cost basis and do not consolidate the activity of these investee entities. Certain events can require a reassessment of our investments in privately held companies to determine if they meet the criteria for variable interest entities and to determine which stakeholders in such entities will be the primary beneficiary. In the event of a reassessment, we may be required to make additional disclosures or consolidate these entities in future periods.

As of January 28, 2012, we had no off-balance sheet arrangements.

Recent Accounting Pronouncements See Note 1, "Recent Accounting Pronouncements," of the Notes to consolidated financial statements of this Form 10-K included in Item 8 of this report.

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