MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         The following discussion and analysis of our financial condition and results of operations should be read together with "Selected Historical Consolidated Financial Data" and our historical consolidated financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to, those set forth under "Risk Factors" and elsewhere in this prospectus.

Overview

        We are a leading fabless provider of highly integrated system-on-chip, or SoC, solutions that are used to deliver multimedia entertainment throughout the home. Our SoC solutions combine our semiconductors and software and are a critical component of multiple high-growth, consumer applications that process digital video and audio content, including IPTV, high definition DVD players, HDTVs, and portable media players. Our semiconductors provide high definition digital video decoding for multiple compression standards, graphics acceleration, audio decoding, a CPU and display control. Our software provides control of media processing and system security management. Together, our semiconductors and software form a complete SoC solution that we believe provides our customers with a foundation to quickly develop feature-rich consumer entertainment products. We believe we are the leading provider of digital media processor SoCs for set-top boxes in the IPTV market and a leading provider of such SoCs for the high definition DVD player market, in terms of units shipped.

        Our primary target markets are the IPTV, the high definition DVD and other media players and the HDTV markets. The IPTV market consists of consumer and commercial products that distribute and receive streaming video using internet protocol, or IP. The high definition DVD and other media players market consists primarily of set-top boxes and portable media products that perform playback of digital media stored on optical or hard disk formats. Our products support the two operating standards upon which high definition DVD players are based, Blu-ray and HD-DVD. The HDTV product market consists of digital television sets offering high definition capability. We also sell products into other markets such as the PC-based add-in market. Although we no longer specifically target them, we continue to derive revenues from sales of our products into these markets.

        Our primary product group consists of our SoC solutions. To a much lesser extent, we provide other products, such as customized development boards. For the six months ended August 4, 2007 and fiscal year 2007, we derived 96% and 95%, respectively, of our total net revenues from our SoC solutions. Our SoC solutions consist of highly integrated semiconductors and software that process digital video and audio content. Our net revenues from sales of our SoC solutions increased $58.8 million, or 208%, from fiscal year 2007 compared to fiscal year 2006. This increase in our SoCs sales in fiscal year 2007 was in part attributable to many of our customers commercially launching products incorporating our SoCs after successful initial trials. We began volume shipments in January 2006 of our SMP8630 series, which is our latest SoC solution for these markets. This product series represented 60% of our net revenues in fiscal year 2007 and 3% of our net revenues in fiscal year 2006. We believe our success with the SMP8630 series product demonstrates our success in the recently emerging IPTV and high definition DVD player markets. As a result of increased customer adoption, our net revenues increased from $33.3 million in fiscal year 2006 to $91.2 million in fiscal year 2007, representing growth of over 170%.

        We do not enter into long-term commitment contracts with our customers and receive substantially all of our net revenues based on 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

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requirements of the telecommunications carriers that our 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.

        Many of our target markets are characterized by intense price competition. In addition, the semiconductor industry is highly competitive and, as a result, we expect our average selling prices to decline over time. To date, we have not experienced significant competitive pricing pressures with respect to our SoC solutions in our primary target markets. However, 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 SoCs 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 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, volume order discounts, mix of product sales, our costs, the extent of development fees, changes in estimated useful lives of production testing equipment and provisions for inventory obsolescence.

        We expect our revenues from the IPTV, the high definition DVD and other media players and the HDTV markets to grow with increasing demand in these markets. Our revenues derived from the IPTV market may fluctuate in future periods, as these revenues are based on telecommunications service providers IPTV service deployments, the timing of which are uncertain. We expect our operating expenses will increase in absolute dollars as our revenues grow.

Restatement of Consolidated Financial Statements

        We currently have ineffective internal control over financial reporting and disclosure controls and procedures. 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. Our material weaknesses, most recently identified as of February 3, 2007, are discussed in more detail below. We have not completed the remediation of any of these material weaknesses. These weaknesses result in more than a remote likelihood that a material misstatement of our annual or interim financial statements would not be prevented or detected. Although we have initiated corrective actions that we believe will help remediate our material weaknesses, we likely will not have sufficient time to implement our remediation plans before testing our internal control over financial reporting for our current fiscal year that will end February 2, 2008.

        In April 2007, we restated our consolidated balance sheet as of January 28, 2006 and the related consolidated statements of operations, shareholders' equity and cash flows for each of fiscal years 2005 and 2006 as a result of an internal stock option investigation commenced by the Audit Committee of our Board of Directors, or Audit Committee, and other errors identified as a result of the audit of the fiscal year 2007, and the re-audit of the fiscal years 2005 and 2006. This restatement is more fully described in Note 2, "Restatement of Consolidated Financial Statements," to our audited consolidated financial statements included elsewhere in this prospectus. The restatement of financial information for our fiscal years 2003 and 2004 and our unaudited condensed consolidated financial statements for the three months ended April 29, 2006 are included in this prospectus under the section titled "Selected Historical Consolidated Financial Data." The restatement of our consolidated financial statements was completed in April 2007.

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Background/Stock Option Investigation

        We previously disclosed, on July 26, 2006, that the Audit Committee of our Board had commenced an internal investigation, assisted by outside legal counsel and accounting experts, of our practices related to historical stock option grants. During the investigation, the Audit Committee reviewed stock option grants to officers, directors and employees from 1997 to 2006, or the Review Period, encompassing approximately 1,000 grants on 41 different grant dates. On September 21, 2006, we announced that certain of the actual measurement dates for prior option grants may differ from the recorded measurement dates.

        The Audit Committee concluded its investigation in April 2007. Its investigation found that nearly all of the stock option grants for new hires, as well as for promotion and retention, were approved by the use of unanimous written consents, or UWCs, of our Board, rather than at a Board meeting. Our Audit Committee found that the company's process resulted in grant dates on the UWCs being routinely established before the receipt of fully-signed UWCs authorizing such grants. Our Audit Committee also found that due to these and other deficiencies in the administration of our stock option plans, a number of options grants between 1997 and 2006 were misdated.

        Our Audit Committee has concluded that the stock option grant process, including the UWC process described above, reflected management's lack of appreciation of the legal and accounting standards of the stock option grant process and the erroneous belief that dates other than the stated grant date were, at best, administrative in nature and not governing. Based on the quarterly low price points of the option grants, and absent any objective documentation to the contrary, our Audit Committee has also speculated that the ultimate selection of the grant dates stated on the UWCs may have benefited from limited hindsight, but it did not find any conclusive evidence to this effect. The Audit Committee did not find any evidence of intent to deceive or to destroy or alter documents or to obstruct or impede the investigation in any way.

        As a result of the review, our Audit Committee recommended the prompt hiring of a chief financial officer with extensive public company experience and knowledge of generally accepted accounting principles knowledge. We hired a new chief financial officer in February 2007. We hired our current chief financial officer, Thomas E. Gay III, on May 21, 2007. Our Audit Committee also recommended the following changes to the process by which we grant stock options, which we have commenced implementing:

1.

Require approval of all option grants at a Board meeting and that UWCs no longer be used.



2.

Improvement in internal controls over financial reporting:



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revise stock option documentation and create appropriate controls for annual, new hire and promotion option grant preparation, presentation for approval, entry into stock option database, and notification to employees;



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adopt a specific internal control that all internal approvals for stock option grants be obtained prior to presentation to the Compensation Committee or Board action; and



•

develop an annual plan for issuance of options together with guidelines for the number and types of stock option awards that are offered to the different salary grades, which shall be reviewed and approved annually by our Compensation Committee after or in connection with the Board's approval of the annual business plan.



3.

Training. Under the direction of our chief financial officer, we will establish cross-functional training for personnel in all areas associated with the stock option granting process:



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The training will cover (a) stock option and other equity award programs and related improvements to equity compensation controls, processes and procedures, (b) accounting

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implications of equity award grants, and (c) legal and tax implications of equity award grants.

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We will require that all personnel responsible for stock option administration participate in training at least annually, including (a) our chief executive officer and all direct reports, (b) finance department members, (c) human resources department members, (d) stock administration department members, and (e) all new employees involved in the above-listed functions or roles.

        Related to the special investigation and financial statement restatements, we incurred approximately $3.2 million in costs for legal fees, external audit firm fees and external consulting fees.

Accounting Considerations—Share-Based Compensation

        We originally accounted for all employee, officer and director stock option grants as fixed grants under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), using a measurement date of the recorded grant date. We issued all grants with an exercise price equal to the fair market value of our common stock on the recorded grant date, and therefore originally recorded no share-based compensation expense.

        As a result of the findings of the investigation conducted by our Audit Committee and our own further review of our stock option granting practices, we determined that, although fixed accounting under APB 25 was appropriate, the measurement dates for certain stock option grants differed from the recorded grant dates for such grants. In some instances, we were only able to locate sufficient evidence to identify the measurement date described in APB 25, the first date on which both the number of shares that an individual employee was entitled to receive and the exercise price were known, within a range of possible dates. As a result, we developed a methodology to establish the revised measurement date as our estimate of the first date on which both the number of shares that an individual employee was entitled to receive and the exercise price were known with finality. Using the methodology described below, we concluded that it was appropriate to revise the measurement dates for these grants based upon our findings, and we refer to these revised measurement dates as the Deemed Measurement Dates.

        We calculated share-based compensation expense under APB 25 based upon the intrinsic value as of the Deemed Measurement Dates of stock option awards determined to be "fixed" under APB 25 and the vesting provisions of the underlying options. We calculated the intrinsic value on the Deemed Measurement Date as the closing price of our common stock on such date as reported on the Nasdaq National Market, now the Nasdaq Global Market, less the exercise price per share of common stock as stated in the underlying stock option agreement, multiplied by the number of shares subject to such stock option award. We recognized these amounts as compensation expense over the vesting period of the underlying options, which was generally five years.

        The methodology developed by one of our advisors and used by us, with such advisor's assistance, to determine the Deemed Measurement Dates associated with prior stock option grants was as follows:

         New Hire Non-Officer Employee Stock Options Effective January 2006 —Effective January 2006, we amended our practice of granting options to new hire non-officer employees to grant all such options at the end of the quarter in which the employee was hired. Accordingly, we determined the Deemed Measurement Date for each of these grants to be the last business day of the quarter of the employee's quarter of hire, because it was determined to be the first date when the number of shares and the price of each grant were known with finality.

         All Other Stock Options —We determined the Deemed Measurement Dates for all stock option grants other than those described above to be either the Approval Date or the Communication Date for the stock option grant. The Approval Date was used in each case that it was reliably determined,

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and the Communication Date was used in those cases where the Approval Date could not be determined or was determined to be unreliable.

        The "Approval Date" for the stock option was the date set forth in executed minutes or a fully-executed consent of the board of directors or stock option committee, provided that (a) documentary evidence existed that the allocation of shares had been finalized on such date, and (b) the Communication Date for the stock option was within 30 days of the Approval Date.

        The "Communication Date" for the stock option was the date we determined the key terms of the option (both the number of shares and the exercise price) to be initially communicated to the optionee. In the absence of specific documentary evidence of initial communication, we generally determined the Communication Date to be the earliest of: (a) the date the employee record was added to the stock option database application, or the Record Add Date; (b) the optionee manual signature date on the stock option agreement, or the Stock Option Agreement Date; and (c) for officers and directors, the date that a Form 3 or 4 was filed with the SEC with respect to the grant, or the Form 3 or 4 Date. However, if we determined that the earliest date was the Record Add Date, and if the Stock Option Agreement Date was more than 30 days after the Record Add Date, then we determined the Communication Date to be the earlier of the Stock Option Agreement Date or the Form 3 or 4 Date.

        When applying this methodology to groups of grants, we generally determined the Communication Date for the group to be the latest Record Add Date, the earliest Stock Option Agreement Date, as we determined that, under our stock option grant process, the terms of stock options were generally communicated concurrently to each member of the group. We excluded a limited number of options, or Outliers, from the determination of the latest Record Add Date and the earliest Stock Option Agreement Date for a group of grants when, based upon available evidence, we considered the Outlier dates as not reliable as to the date that the terms of the stock option grants were communicated to the group.

        We determined that variable accounting under APB 25, which is required in situations when the terms of option grants are modified subsequent to the date that all granting actions are complete, was not applicable for any of the grants during the Review Period.

        The methodology described above, and the determination of which stock option grants should be considered Outliers, as described above, involves judgment. We believe that the judgments applied are consistent with the provisions of the appropriate accounting pronouncements and the letter from the Office of the Chief Accountant of the SEC to the Financial Executives International and the American Institute of Certified Public Accountants dated September 19, 2006.

        As stated above, using this methodology, we recorded an aggregate charge for stock compensation related adjustments of $16.2 million relating to the Review Period. If we had consistently used the Record Add Date as the Deemed Measurement Date for all grants in which the recorded grant date could not be relied upon (and excluded Outliers, consistent with the application of our methodology), the aggregate pre-tax share-based compensation charges relating to the Review Period would have been approximately $16.8 million. Alternatively, if we would have used the highest or lowest trading prices of our common stock between the last date of documentary approval evidence, which was otherwise deemed unreliable, generally because the date of all approvals could not be verified before the Deemed Measurement Date and the measurement date, since a measurement date could have occurred on any date between those two dates, the aggregate pre-tax share-based compensation charges relating to the same periods would have been $15.4 million if we had used the lowest price and $17.5 million if we had used the highest price.

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Restatement Adjustments

        Our restated consolidated financial statements, which are included elsewhere in this prospectus, incorporate share-based compensation expense and related payroll taxes, penalties and interest expenses. The restatement adjustments resulted in a $16.4 million increase in our accumulated deficit as of April 29, 2006. This amount included a reduction of our consolidated net income of approximately $2.0 million and $3.4 million for the fiscal years 2005 and 2006, respectively, and $0.8 million for the quarter ended April 29, 2006. The total restatement impact for periods through January 31, 2004 of $10.2 million was reflected as a prior period adjustment to accumulated deficit as of that date.

        The restatement adjustments reduced our originally reported diluted earnings per share by $0.09 and $0.15 for fiscal years 2005 and 2006, respectively.

        The table below presents the impact of the individual restatement adjustments, which are explained in further detail following the table:

         Share-Based Compensation —These adjustments result from our determination that the initially recorded measurement dates of option grants during the Review Period could not be relied upon, based upon the Audit Committee's investigation and our subsequent reviews and analyses. For substantially all such option grants, there was correspondence or other evidence that indicated that not all required corporate approvals had been obtained as of the initially recorded measurement date. We adopted a methodology to remeasure these option grants to a revised measurement date, as described below, and accounted for these grants as fixed awards under Accounting Principles Board Opinion (APB) No. 25 Accounting for Stock Issued to Employees , or APB 25.

         Accelerated vesting and extended exercisability —These adjustments were made as a result of the acceleration of stock option vesting upon termination and the extension of the exercisability of certain options held by a few employees.

         Payroll taxes, interest and penalties —In connection with the share-based compensation adjustments, we determined that certain options previously classified as Incentive Stock Options, or ISOs, under the Internal Revenue Code, were determined to have been granted with an exercise price below the fair market value of our stock on the revised measurement date. Under Code tax regulations, ISOs may not be granted with an exercise price less than the fair market value on the date of grant, and therefore these grants might not qualify for ISO tax treatment. We refer to these stock options as the Affected ISOs. The potential disqualification of ISO status exposes us to additional payroll-related withholding

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taxes on the exercise of options granted to U.S. employees, and penalties and interest for failing to properly withhold taxes on exercise of those options. As of August 4, 2007, we have recorded a net liability of approximately $3.9 million in connection with the potential disqualification of ISO tax treatment for option awards. In May 2007, the IRS began an employment tax audit for our fiscal year 2004 and 2005. We have also requested that fiscal year 2006 be included in this audit cycle. In August 2007, the IRS began an income tax audit for our fiscal year 2005. The focus of the IRS employment tax audit relates to tax issues connected to our granting stock options with 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. The IRS has not yet proposed any tax deficiency, interest or penalty amounts in respect of this audit. We recorded the payroll tax, interest and penalty expenses in the periods in which the underlying stock options were exercised. Then, in subsequent periods in which the liabilities were legally extinguished due to expiration of the statutes of limitations, the expenses were reversed, and recognized as a reduction in the related functional expense category in our consolidated statements of operations.

        Because virtually all holders of options issued by us were not involved in or aware of the incorrect pricing of the Affected ISOs, we took certain actions and are considering possible additional actions to address the impact of certain adverse tax consequences on such holder, including those consequences arising from Code Section 409A that may result from the exercise price of stock options being less than the fair market value of our common stock on the Deemed Measurement Date. Code Section 409A, and, as applicable, similar tax laws in California and other states, imposes penalty taxes on our employees holding stock options granted with an exercise price lower than the fair market value on the date of grant that vest after December 31, 2004, which we refer to as the 409A Affected Options. The IRS has issued transition rules under Code Section 409A that allows for a correction, or cure, for 409A Affected Options. In December 2006, we entered into agreements with each of our executive officers to amend the 409A Affected Options held by such persons to limit the period of exercisability to a defined calendar year. Accordingly, our executive officers must exercise 409A Affected Options within specified timeframes or the portion of these options not exercised within such timeframes expire.

        Further, on May 15, 2007, we filed a Tender Offer Statement on Schedule TO with the SEC and commenced an offer, which we refer to as 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: (a) 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; (b) subject to federal income tax in the United States; and (c) holding Section 409A Affected Options grants that were unvested as of December 31, 2004. Our executive officers and directors were not eligible to participate in the Offer. Options that were eligible for amendment under the Offer are referred to below as Eligible Options.

        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.

        We received election forms from eligible employees agreeing to amend and increase to fair value the exercise price with respect to approximately 1.2 million shares underlying Eligible Options. Under the terms of the Offer, we will make cash payments in January 2008 totaling approximately $2.4 million

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to the individuals who have amended their Eligible Options, which amount was fully accrued in the second quarter of our 2008 fiscal year.

        For those employees who exercised a 409A Affected Option during 2006, we participated in the IRS and California Franchise Tax Board, or FTB, settlement programs they have developed to allow employers to pay certain taxes on behalf of employees to settle potential tax liabilities resulting from the exercise of these 409A Affected Options during 2006. In connection with our participation in these programs, we paid an aggregate of approximately $0.3 million to the IRS and FTB. During the second quarter of fiscal year 2008 we also approved bonuses of an aggregate of approximately $0.2 million payable to these affected employees to compensate them for additional income tax imposed on them as a result of the payments we made on their behalf to the IRS and FTB.

         Income tax benefit (provision) —Because of the potential impact of the measurement date changes on the qualified status of Affected ISOs, we have determined that all Affected ISOs might not be qualified as ISOs under IRS regulations, and therefore should be accounted for as if they were Nonstatutory Stock Options under the IRC, or NSOs, for income tax accounting purposes. However, we recorded no income tax benefit associated with share-based compensation and related charges because of valuation allowances provided against the resulting deferred tax assets, as we believe that sufficient doubt exists that we will be able to realize the value of those assets.

Other Accounting Adjustments

        In addition to the share-based compensation adjustments described above, we also made certain other adjustments to our previously-reported net income (loss):

•

As discussed in Note 2 to our audited consolidated financial statements included elsewhere in this prospectus, during our fiscal year 2007 audit, we determined that incorrect measurement dates were used to value stock options exchanged with the employees previously with Blue7 upon our acquisition of Blue7. As a result, the increase in purchase price of $0.7 million was recorded as an increase to both goodwill and future share-based compensation expense as of the date of acquisition. This compensation expense is amortized to our consolidated statement of operations over the remaining vesting period of the related options. For the first quarter of fiscal year 2007, we recorded incremental share-based compensation expense of $40,000.



•

As also discussed in Note 2 to our audited consolidated financial statements included elsewhere in this prospectus, during our fiscal year 2007 audit, we determined that the collection of our French research and development tax credit was reasonably assured and, therefore, should have been accounted for using the accrual method, whereas such credits were previously recorded upon the receipt of cash. As a result, we restated our previously-reported operating results for fiscal years 2001 through 2006 to record aggregate income of $0.2 million in Interest and other income.



•

Additionally, as discussed in Note 2 to our audited consolidated financial statements included elsewhere in this prospectus, for fiscal year 2005 and prior years we accrued and expensed estimated audit and tax professional fees ratably during the fiscal year prior to such services being actually performed. As a result, we restated fiscal years 2003 through 2006 to reflect the expensing of such audit and tax professional fees as the services were performed. The restatement for this element resulted in increases (decreases) in general and administrative expenses of zero, $0.2 million, and ($0.1 million) for each of fiscal years 2007, 2006, and 2005, respectively.



•

As discussed in Note 2 to our audited consolidated financial statements included elsewhere in this prospectus, during our fiscal year 2007 audit, we restated our previously-reported

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operating results for fiscal years 2001 through 2006 to record certain adjustments to previously-provided income taxes. These adjustments amounted to an aggregate increase in income tax provision and income taxes payable of $0.3 million to reflect income taxes related to our foreign subsidiaries.

•

During our fiscal year 2007 audit, we restated our previously-reported operating results for the first quarter of fiscal year 2007 to record an increase to our warranty reserve and warranty expense of $27,000.

        In addition to the above adjustments, reclassifications have been made to prior year balances to conform to the current year presentation.

Related Proceedings

        Several derivative actions related to the stock option grants were filed against certain of our current and former directors and officers. These cases are discussed under the section titled "Business—Legal Proceedings."

        As we disclosed on July 26, 2006, the SEC commenced an informal inquiry into our stock option grant practices. We are cooperating with the SEC and intend to continue to do so.

The Nasdaq Global Market

        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.

Evaluation of Controls and Procedures

        As discussed above, during 2006, a review related to our historical stock option granting practices was conducted 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 share-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 year 2007.

        In connection with the filing of our Form 10-Q for the three months ended August 4, 2007, we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, 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. 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 August 4, 2007 because we have not completed the remediation of the material weaknesses discussed below. Our management concluded, and our independent registered public accounting firm,

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Armanino McKenna LLP rendered an opinion concurring with managements' conclusion, that we did not maintain effective controls as of February 3, 2007 because of 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, which are 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,

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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;



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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;



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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;



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



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

•

As discussed above, 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 share-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 above, during our fiscal year 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 year 2007 to record an increase to the purchase price and related deferred share-based compensation expense.

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        Our restated annual and interim financial statements correct the errors related to accounting for share-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 research and development 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 increased the likelihood that misappropriation of assets and 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;



•

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



•

inadequate approvals for payment of invoices and wire transfers.

        We also carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was most recently performed as of August 4, 2007, the last day of our second fiscal quarter. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of August 4, 2007, because we had not completed the remediation of our material weaknesses discussed above.

        As of the date of this prospectus, we have not completed the remediation and testing 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 chief financial officer in the second quarter of fiscal year 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;

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•

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 likely will not have sufficient time to implement our remediation plan before testing our internal control over financial reporting for our current fiscal year that will end February 2, 2008.

        In August 2007, we filed an amendment to our annual report on Form 10-K for fiscal year 2007, in order to correct certain clerical errors in our financial statements and financial statement footnotes.

Critical Accounting Policies and Estimates

        Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues generated and expenses incurred during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including, but not limited to, those related to:

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revenue recognition;



•

accounts receivable;



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inventories;



•

share-based compensation;



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goodwill and purchased intangible assets;



•

deferred tax assets;



•

litigation and settlement costs; and



•

income taxes.

        Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

         Revenue recognition —We derive revenues primarily from three principal sources: product sales; product development contracts; and service contracts. We generally recognize revenues for product sales and service contracts in accordance with Staff Accounting Bulletin, or SAB, No. 104, "Revenue Recognition," under which revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or service has been rendered, the fee is fixed and determinable, and collectibility is reasonably assured.

        Revenues from product sales to our customers are generally recognized upon shipment, as our shipping terms are FOB shipping point, except that revenues are deferred when management cannot reasonably estimate the amount of returns or where collectibility is not assured. In those situations,

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revenue is recognized when collection subsequently becomes probable and returns are estimable, which generally occurs upon resale by our customers. Allowances for sales returns and warranty costs are recorded at the time that revenues are recognized.

        Product development agreements typically require that we provide customized software to support customer-specific designs, accordingly this revenue is accounted for under the AICPA Statement of Position, or SOP, 97-2. We offer post-contract customer support, or PCS, on a contractual basis for additional fees, which is typically a one year term. In instances where software is bundled with the PCS, vendor specific objective evidence does not exist to allocate the total fee to each element of the arrangement that has not been delivered and, therefore, revenue and related costs are deferred until all elements, except PCS are delivered. The total fee is then recognized ratably over the PCS term (typically one year) after the software is delivered. We classify development costs related to product development agreements as cost of revenues. Product development revenues were approximately $0.6 million, $1.2 million and $1.0 million, for fiscal years 2007, 2006, and 2005, respectively.

        Revenues from service contracts consist of fees for providing engineering support services, and are recognized ratably over the contract term. Expenses related to support service revenues are included in cost of sales. Support service revenues were $0.3 million, $0.2 million and $0.3 million for fiscal years 2007, 2006, and 2005 respectively.

         Accounts receivable —During industry downturns, certain of our customers may have difficulty with their cash flows. Certain customers, typically those with whom we have long-term relationships, may delay their payments by 40 to 60 days beyond the original terms. We review the ability of our customers to pay the account receivable they incur with us. We defer recognition of revenue and the related receivable when we cannot reasonably estimate whether collectibility is reasonably assured at the time products and services are delivered to our customer. We provide an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These estimated allowances are periodically reviewed, analyzing the customer's payment history and information regarding credit worthiness. In establishing our sales return allowance, we must make estimates of potential future product returns related to current period product revenue, including analyzing historical returns, current economic trends, and changes in customer demand and acceptance of our products. In fiscal years 2007, 2006 and 2005, we recorded a provision for bad debt allowance and sales returns in the total amount of $30,000, $31,000 and $0.6 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.

         Inventories —We monitor our inventory levels in light of product development changes and market expectations. We may be required to take additional charges for quantities in excess of demand, cost in excess of market value and product age. Our analysis may take into consideration historical usage, expected demand, anticipated sales price, new product development schedules, the effect new products might have on the sales of existing products, product age, customer design activity, customer concentration and other factors. These forecasts require us to estimate our ability to see demand for current and future products and compare those estimates with our current inventory levels and inventory purchase commitments. Our forecasts for our inventory may differ from actual inventory use.

         Share-based compensation —Effective January 29, 2006, the start of our fiscal year 2007, we adopted Statement of Financial Accounting Standards No. 123(R), or SFAS 123(R), using the modified prospective method and, therefore, have not revised prior periods' results for the adoption of this accounting statement. SFAS 123(R) requires all share-based payments to be measured based on the award's fair value on the date of grant, and is recognized as expense ratably over the requisite service period. We currently use the Black-Scholes option pricing model to estimate the fair value of our share-based payments. The Black-Scholes option pricing model is based on a number of assumptions, including expected volatility, expected forfeiture rates, expected life, risk-free interest rate and expected

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dividends. If the assumptions change, share-based compensation may differ significantly from what we have recorded in the past.

        For fiscal years 2006 and prior, share-based compensation was determined under Accounting Principles Board Opinion, or APB, No. 25 Accounting for Stock Issued to Employees , or APB 25, whereby the difference between the value on the recorded grant date and on the respective measurement date, including payroll taxes, interest and penalties, is recorded. In connection with our restatement of the fiscal year 2006 and prior consolidated financial statements, we have applied judgment in choosing whether to revise measurement dates for prior option grants. Information regarding the restatement, including ranges of possible additional share-based compensation expense if other measurement dates had been selected for certain grants, is set forth in Note 2 to our audited consolidated financial statements included elsewhere in this prospectus.

         Goodwill and purchased intangible assets— We record goodwill as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the estimated net tangible and intangible assets acquired. The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization.

        In accordance with Statement of Financial Accounting Standards No. 142, or SFAS 142, "Goodwill and Other Intangible Assets," we review 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 estimated 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. The estimates we have used for evaluating Goodwill and Other Intangible Assets are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used, we could incur impairment charges.

        SFAS 142 also requires that intangible assets with definite lives be amortized over their estimated useful life and periodically reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, or 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 seven years and noncompete agreements are amortized over the contractual period (currently three 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.

         Deferred tax assets —We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We assess on a quarterly basis whether it is more likely than not that we will be able to realize our deferred tax assets in the future in excess of the net recorded amount. In the event we were to determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would provide an income tax benefit that would increase income in the period such determination was

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made. Currently, we record a full valuation allowance against our net deferred tax assets due to the high uncertainty of our ability to realize these assets.

         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, 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.

         Income taxes —As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves using an asset and liability approach whereby deferred tax assets and liabilities are recorded for differences in the financial reporting bases and tax bases of our assets and liabilities. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities. In addition, we evaluate on a quarterly basis our deferred tax assets to ascertain whether it is more likely than not that the deferred tax assets will be realized.

        On July 13, 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109," or 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 beginning of our fiscal year 2008. 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 reduce our effective tax rate, and $2.0 million of unrecognized benefits that would increase our deferred tax assets. During the six months ended August 4, 2007, there were no material changes to these amounts.

        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 aggregate amount of interest and penalty recognized in the statement of operations and statement of financial position was $36,000 as of February 3, 2007. During the six months ended August 4, 2007, there were no material changes to these amounts.

        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

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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 United States and various states and foreign jurisdictions. The French taxing authority is currently auditing the research and development tax credit that we claimed from fiscal year 2001 through the 2005 fiscal year. In addition, the IRS has commenced an employee payroll tax audit for our fiscal years 2004 and 2005 and an income tax audit for our fiscal year 2005. 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.

Comparison of Six Months Ended August 4, 2007 and July 29, 2006

Net Revenues

        Net revenues for the six months ended August 4, 2007 increased $43.6 million, or 125%, as compared to the corresponding period in the prior fiscal year. The increase in net revenues for the six months ended August 4, 2007 was primarily attributable to increased sales into the IPTV market and the high definition DVD and other media players market.

Net revenues by target market

        We sell our products into three primary markets, which are the IPTV market, the high definition DVD and other media players market and the HDTV market. We also sell our products, to a lesser extent, into several other markets, such as the PC-based add-in market, which we refer to collectively as our other market. The following table sets forth our net revenues by market and the percentage of

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total net revenues represented by our product sales to each market for the six months ended August 4, 2007 and July 29, 2006:

        IPTV.     The increase of $34.5 million, or 158%, in net revenues from sales into the IPTV market for the six months ended August 4, 2007 as compared to the corresponding period in the prior fiscal year was in part attributable to our customers in the IPTV market commercially launching their products incorporating our SoCs, primarily our SMP8630 SoC series. Our net revenues from the IPTV market as a percentage of our total net revenues for the six months ended August 4, 2007 as compared to the corresponding period in the prior fiscal year increased 10% primarily due to expansion of the IPTV market and increased sales to existing clients as well as sales to new clients.

        High definition DVD and other media players.     The increase of $7.2 million, or 66%, in net revenues from the high definition DVD and other media players market for the six months ended August 4, 2007 as compared to the corresponding period in the prior fiscal year was primarily attributable to increased sales volume of our customers' products incorporating our SoCs, including an increase in Blu-ray and digital media adapter applications. Although our net revenues in absolute dollars from sales into the high definition DVD and other media players market increased, our net revenues from sales into this market as a percentage of our total net revenues for the six months ended August 4, 2007 as compared to the corresponding period in the prior fiscal year decreased 8% primarily as a result of a disproportionate increase in the sales of our SoCs into the IPTV market during this six-month period.

        HDTV.     We experienced an increase in demand for our HDTV applications in the six months ended August 4, 2007, compared to the same period in the prior fiscal year, which resulted in an increase in net revenues from sales into the HDTV market of $2.2 million for the six months ended August 4, 2007 as compared to the corresponding period in the prior fiscal year. Our net revenues from sales into the HDTV market as a percentage of our total net revenues for the six months ended August 4, 2007 as compared to the corresponding period in the prior fiscal year increased 2% as a result of a disproportionate increase in the sales of our SoCs into this market compared to the increase in sales of our SoCs into the IPTV market.

        Other.     Our other markets consists of PC add-ins and other ancillary markets. The decrease of $0.2 million, or 15%, in the net revenues from sales to our other markets for the six months ended August 4, 2007 as compared to the corresponding period in the prior fiscal year was primarily due to a decrease in unit sales of PC add-in board products in the first six months of fiscal year 2008. We expect our revenues from sales to these other markets to continue to decline due to generally declining demand in these markets.

Net revenues by product group

        Our primary product group consists of our SoC solutions. To a lesser extent we derive revenues from other products and services. The following table sets forth our net revenues in each of our major

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product groups and the percentage of total net revenues represented by each product group, for the six months ended August 4, 2007 and July 29, 2006:

        SoCs.     Our SoCs are targeted toward manufacturers and large volume designer and manufacturer customers building products for the IPTV, high definition DVD and other media players and HDTV consumer electronic markets. The increase of $43.1 million, or 132%, in net revenues from SoCs for the six months ended August 4, 2007 as compared to the corresponding period in the prior fiscal year was due primarily to an increase of $41.0 million for the six months ended August 4, 2007 in sales of our SoCs into newer generation IPTV products and high definition DVD players.

        Other.     We derive revenues from other products and services, including engineer support services for both hardware and software, engineering development for customization of SoCs and other accessories. The increase of $0.5 million for the six months ended August 4, 2007, was due primarily to an increase in sales of our engineering development kits related to our SoCs and an increase in support services as a result of our increased SoC sales, partially offset by a decrease in sales of our board products as a result of decreased demand.

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 six months ended August 4, 2007 and July 29, 2006:

        Asia.     Our net revenues from Asia increased $31.1 million, or 182%, in the six months ended August 4, 2007 as compared to the corresponding period in the prior fiscal year. Our net revenues in Asia represented 61% of our total net revenues for the six months ended August 4, 2007 as compared to 49% in the corresponding period from the prior fiscal year. The significant increase in net revenues from Asia in both absolute dollars and as a percentage of our total net revenues was due primarily to our customers' successful initial product trials and commercial launches of their products incorporating our SoCs. Also, companies who incorporate our products in their finished goods and are located in other regions continued to move their production orders to large designers and manufacturers located in the Asia region, which has led to a further shifting of our revenues from other regions into the Asia region, as many of our direct customers are large designers and manufacturers located in Asia. We also continued to experience large volume orders from two distributors located in Asia.

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        Our net revenues from the Asia region for the six months ended August 4, 2007 and July 29, 2006 as a percentage of our total net revenues were as follows:

*

Less than 1% of our total net revenues.

        Europe.     Our net revenues from Europe increased $13.5 million, or 115%, for the six months ended August 4, 2007 as compared to the corresponding period in the prior fiscal year. This increase in our net revenues from Europe was primarily attributable to major deployments by our European customers using our IPTV SoCs in their finished goods. 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.

        North America.     Our net revenues from North America decreased $1.0 million, or 16%, for the six months ended August 4, 2007 as compared to the corresponding period in the prior fiscal year. The decrease was primarily attributable to companies located in North America who incorporate our products in their finished goods continuing to move their production orders to large designers and manufacturers located in the Asia region, which has led to a further shifting of our revenues from North America into the Asia region, partially offset by volume orders received from a new customer and existing customers located in North America for our SoC solutions for the IPTV 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.

        For the six months ended August 4, 2007, our net revenues generated outside North America were 94% of our total net revenues as compared to 83% for the corresponding period in the prior fiscal year.

*

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

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Gross Profit and Gross Margin

        Our gross profit for the six months ended August 4, 2007 was $40.1 million, representing a gross margin of 51%, as compared to $16.4 million, representing a gross margin of 47%, for the corresponding period of the prior fiscal year. The increase in gross profit and gross margin during the six months ended August 4, 2007 was primarily related to the increased sales volume of our SoCs and reduction of our production costs due to the volume purchasing discount we received from our manufacturer.