You should read the following discussion in conjunction with our unaudited condensed consolidated financial statements and related notes in this Form 10-Q and our Form 10-K previously filed with the Securities and Exchange Commission. Except for historical information, the following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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, anticipated seasonality associated with our DTV business 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 II, Item 1A "Risk Factors" in this Form 10-Q as well as other information found in the documents we file from time to time with the Securities and Exchange Commission. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-Q. 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 intelligent 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 consumer and business products, including televisions, set-top boxes and video networking products. We now have two primary business units that are responsible for driving business within our target markets through a common sales force. Our home Multimedia primarily system-on-chip (SoC) offerings for video entertainment applications. Our Home Connectivity business develops and markets primarily network controllers' offerings for video entertainment and home control applications.

Our chipset products and target markets

Products

Media Processor SoCs

Our media processor SoC product line consists of a range of functionally similar platforms that are based on highly integrated chips, embedded software, and hardware reference designs. These highly integrated chips typically include all the functions required to create a complete system solution with only the addition of memory. The integrated functions include applications processing (CPU), graphics processing (GPU), media processing (audio and video decoding/encoding), display processing, security management, memory control, and peripheral interfaces. Our embedded software suite provides an operating environment and coordinates the real-time processing of digital video and audio content, is readily customizable by our customers and is interoperable with multiple standard operating systems. Our reference system designs provide a hardware implementation of the circuit board, access to our embedded software suite, and sometimes provide a prototypical end-use product example for customer evaluation and use. We believe our SoC products deliver industry-leading performance in video decoding, picture quality, and software breadth, and this value proposition is why manufacturers select Sigma products.

Our SoCs are generally configured for a specific market segments, either digital television (DTV) or set-top box (STB), the latter of which includes related products such as connected media players. The primary difference between these devices is the interfaces they support. SoCs created for the DTV market offer HDMI plus analog encoded video as inputs and result in output to flat panel interfaces. SoCs created for the STB market offer Ethernet and other broadcast interfaces inputs and result in output to HDMI plus analog encoded video. Core components are therefore shared across these products while their configured hardware/software platforms and support are offered separately.

Home Networking Controllers

Our home networking product line consists of wired home networking controller chipsets that are designed to provide connectivity solutions between various home entertainment products and incoming video streams. We believe these connectivity solutions provide consumers additional connection choices with greater flexibility and allow system integrators and service providers an opportunity to reduce their time and cost of home networking installations. Our home networking solutions are based on the HomePNA (HPNA), HomePlug AV (HPAV), and G.hn standards. HPNA and HPAV are two of the current leading technology standards used for transferring internet protocol, or IP, content across coaxial cables, phone lines and power lines. G.hn is the next generation ITU standard ratified in 2010 to create a unified global standard across coaxial cables, phone lines and power lines. Products based on these technologies enable service providers such as telecommunication carriers, cable operators and satellite providers to deliver high definition television services (HDTV) and other media-rich applications throughout the home. To date, we have not generated significant revenue from our products based on HPAV or G.hn technologies.

Home Control and Energy Management Automation

Our home control and energy management automation product line consists of our wireless Z-Wave chipsets. These chipsets enable consumers to enjoy advanced home control and energy management automation functionality, such as home security, environmental and energy control and monitoring, within both new and existing homes. These devices consist of wireless transceiver devices along with a mesh networking protocol. Our Z-Wave chipsets utilize a low-bitrate, low-power; low-cost RF communication technology that provides an interoperable connected home security, monitoring and automation solution. These Z-Wave chipsets and the protocol they use to communicate commands have been built-into an ecosystem of over 700 certified products, mostly intelligent appliances for use within the home.

Other Products

We also offer certain legacy products that are sold into prosumer and other industrial applications. These products include our VXP brand video image processor chipsets and our video encoder chipsets. Our VXP chipsets are standalone high performance semiconductors that provide studio-quality video output or input for professional, prosumer and consumer applications and address applications including audio/video receivers, broadcast studios, digital cinema, digital signage, front-projection home theatre televisions, HDTV, medical imaging and video conferencing systems. Our video encoder chipsets are designed to capture video for visual telephony between set-top boxes, connected media players, VoIP devices, video conferencing TVs and video surveillance devices. These products account for a minor portion of Sigma's revenue.

Markets

Digital Television Market

We target the digital television market with our media processor SoC products. Specifically, we are focused on providing leading edge solutions for next generation Internet-enabled digital televisions or "SmartTV". These solutions include our enhanced picture quality, our frame-rate conversion chips, and our Internet-access software suite. We believe the SmartTV market will continue its strong growth and over time, incorporate much of the set-top box functionality. Additionally, we also sell selected legacy products into older television applications, such as analog TV and PC/TV products.

Set-top Box Market

We target the set-top box market with our media processor SoC products, our network controller products, and our home control products. Currently, our STB sales are primarily to set-top box OEMs (such as Motorola, Pace, Samsung, Tatung, and Netgem) that in turn sell to Telco network operators that deploy IPTV set-top boxes for delivering video services over a DSL network. We are a leading provider of high definition digital media processors for set-top boxes in the IPTV media processor market in terms of units shipped. Driven by market trends, we have also begun to market hybrid solutions (IP + broadcast) for use by Cable and Satellite network operators as well.

IPTV set-top boxes incorporating our media processors are deployed by telecommunications carriers globally including carriers in Asia, Europe and North America, such as AT&T, Deutsche Telekom, and SFR. We work with these carriers and set-top box providers as well as with systems software providers, such as Microsoft and various Linux providers, to design solutions that address carriers' specific requirements regarding features and performance.

Connected Media Player Market

We target the connected media player (CMP) market with our media processor SoC products. The connected media player market consists primarily of digital media adapters, or DMAs, portable media devices and wireless display devices that perform playback of digital media. Our media processors SoCs are used by consumer electronics providers, such as Iomega, Netgear and Western Digital in applications such as DMAs and other connected media player devices.

Video Networking Markets

We target gateways, routers, and other network equipment with our network controller products. This 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 connectivity. Our home networking products are currently used in residential gateways, optical network terminals, multiple-dwelling unit, or MDU, masters and network adapters by leading OEMs, such as Actiontec, Cisco Systems, Pace and Motorola.

Home Control Market

We target the home control market with our unique Z-Wave wireless product line. This market consists of a wide range of intelligent consumer appliances and home controllers that use wireless connectivity and control protocols to enable remote control of energy, security, and convenience features. Our Z-Wave devices are used in consumer products such as thermostats, light switches and door locks. These consumer products are designed by leading industry participants such as Danfoss, Ingersoll-Rand (Schlage and Trane), Leviton and Cooper Wiring.

Other Markets

We also sell products into other markets, such as Prosumer, digital signage, projection TV and PC-based add-in markets, which we refer to as our other markets. The prosumer market consists of studio quality audio/video receivers and monitors, video conferencing, digital projectors and medical video monitors. 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 ended 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.

Our business is substantially dependent upon being designed into set-top boxes of large telecommunications carriers. If we are not designed into a particular generation of set-top boxes for our large target end customers, our operating results can be materially and adversely affected. We must spend a considerable amount of resources to compete for these design wins and the failure to obtain a design win for a particular generation of set-top boxes, and in particular for our large target end customers, means we likely would not recover a substantial portion of our expenses in competing for these design wins. However, if we do obtain these design wins, it is often the case that our end customer and direct customer will continue to incorporate our chipset solutions for that generation of set-top boxes. The set-top box industry is cyclical due to product transitions from generation to generation. Each generation typically incorporates emerging technologies, and so we must expend a considerable amount of research and development resources in order to compete in each of these cycles. Our failure to obtain a design win in a particular generation does not mean we necessarily will be unable to obtain a design win in the next generation. For example, our sales in the IPTV media processor market decreased in the past four fiscal quarters as a result of our inability to obtain certain design wins for our last generation of chipset solutions. However, we are in the process of competing for the next generation of set-top boxes, and we believe our chipset solutions contain features and prices that compete favorably with competitive offerings.

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.

Our business is subject to seasonality as a result of selling a number of our semiconductor products to customers who manufacture products for the consumer electronics market. We expect to experience lower sales in our first and/or fourth fiscal quarters and higher sales in our second and/or third fiscal quarters as a result of the seasonality of demand associated with the consumer electronics markets. For example, we expect that our DTV business may experience seasonality typical of the consumer electronics markets, resulting in slower DTV sales in the first and fourth quarter of each calendar year and strongest DTV sales in the third calendar quarter. As a result of the seasonality in our business, our operating results may vary significantly from quarter to quarter.

Restructuring Plan

On October 31, 2012, we announced a restructuring plan, which we are in the early stages of implementing. Our restructuring plan includes targeted reductions in labor costs through headcount reduction and other related actions and targeted reductions in other operating expenses such as consulting, travel and subletting excess office space. We also plan to migrate to lower cost manufacturing components and processes. We expect to execute the restructuring plan in several phases and already completed the initial phase, which consisted of headcount reduction in our North American operations and the implementation of expense management measures across worldwide operations. For the three months ended October 27, 2012, we recognized a charge of $0.8 million in connection with our restructuring activities. We anticipate we will incur additional restructuring charges in future periods as we continue to implement our plan.

Critical Accounting Policies and Estimates

Management's discussion and analysis of financial condition and results of operations are based on our unaudited condensed consolidated financial statements which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts and disclosures of the assets and liabilities at the date of the unaudited condensed 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. Management believes the critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended January 28, 2012 reflect the more significant judgments and estimates used in preparation of our annual and interim financial statements except for the updated policies below.

Reclassifications: Certain prior fiscal year balances have been reclassified to conform to the current fiscal year presentation. In the first quarter of fiscal 2013, we concluded that it was appropriate to reclassify our purchased intellectual property, or IP, that is incorporated into our products, from software, equipment and leasehold improvements to intangible assets. The reclassification has no effect on previously reported Condensed Consolidated Statements of Operations for any period and does not affect previously reported cash flows from operations or from financing activities in the Condensed Consolidated Statements of Cash Flows. For comparability purposes, the corresponding gross assets and accumulated amortization of $22.0 million and $5.9 million, respectively, have been reclassified as of January 28, 2012. Such reclassifications had no effect on previously reported results of operations or retained earnings.

Restructuring charges: As discussed above, we announced a restructuring plan in October 2012 and began to execute the first phase under this plan. In the third quarter of fiscal 2013 we communicated a plan of termination to some employees. As a result, for the three months ended October 27, 2012, we recognized a charge of $0.8 million, of which $0.6 million related to research and development activities and $0.2 million related sales and marketing activities.

Software, equipment and leasehold improvements: Software, equipment and leasehold improvements are stated at cost. Depreciation and amortization for software, equipment and leasehold improvements are 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.

Long-lived assets: The amounts and useful lives assigned to finite-lived intangible assets acquired, other than goodwill, impact the amount and timing of future amortization. Long-lived assets include 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. 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.

Results of Operations

The following table is derived from our unaudited condensed consolidated
financial statements and sets forth our historical operating results as a
percentage of net revenue for each of the periods indicated (in thousands,
except percentages):

                                            Three months ended                                                   Nine months ended
                       October 27,       % of Net        October 29,       % of Net        October 27,       % of Net         October 29,       % of Net
                          2012            Revenue           2011            Revenue           2012            Revenue            2011            Revenue

Net revenue           $      63,905             100 %   $      39,725             100 %   $     172,414             100 %    $     147,051             100 %
Cost of revenue              38,423              60 %          21,723              55 %          95,257              55 %           86,263              59 %
Gross profit                 25,482              40 %          18,002              45 %          77,157              45 %           60,788              41 %

Operating expenses
Research and
development                  26,741              42 %          21,633              54 %          76,505              44 %           65,034              44 %
Sales and marketing          12,774              20 %           8,545              22 %          27,457              16 %           25,475              17 %
General and
administrative                6,007              10 %           4,828              12 %          21,874              13 %           15,460              11 %
Restructuring                   821               1 %               -               *               821               1 %                -               *
Goodwill impairment               -               *            45,108             114 %               -               *             45,108              31 %
Intangible assets
impairment                        -               *            66,170             166 %               -               *             66,170              45 %
Gain on acquisition               -               *                 -               *            (1,417 )            -1 %                -               *
Total operating
expenses                     46,343              73 %         146,284             368 %         125,240              73 %          217,247             148 %
Loss from
operations                  (20,861 )           -33 %        (128,282 )          -323 %         (48,083 )           -28 %         (156,459 )          -106 %

Interest and other
income, net                     299               1 %             542               1 %           1,032               1 %            2,095               1 %

Loss before
provision for
(benefit from)
income taxes                (20,562 )           -32 %        (127,740 )          -322 %         (47,051 )           -27 %         (154,364 )          -105 %

Provision for
(benefit from)
income taxes                 18,889              30 %          (6,165 )           -16 %          19,520              12 %           (5,157 )            -4 %

Net loss              $     (39,451 )           -62 %   $    (121,575 )          -306 %   $     (66,571 )           -39 %    $    (149,207 )          -101 %

* The percentage of net revenue is less than one percent.

Net revenue

Our net revenue for the three months ended October 27, 2012 increased $24.2 million, or 61%, compared to the corresponding period in the prior fiscal year. Net revenue benefited $27.8 million from the addition of the DTV product line, resulting from our acquisition of certain assets from Trident Microsystems in the second quarter of fiscal 2013. Excluding DTV, our net revenue for the three months ended October 27, 2012 decreased $3.7 million, or 9%, compared to the corresponding period in the prior fiscal year. The net revenue decrease was primarily attributable to decreases in sales in the IPTV media processor and connected media player markets of $4.4 million and $6.4 million, respectively, partially offset by increases in the home networking market and license revenue from our home control and energy management technology of $5.3 million and $2.4 million, respectively.

Our net revenue for the nine months ended October 27, 2012 increased $25.4 million, or 17%, compared to the corresponding period in the prior fiscal year. Net revenue benefited $54.4 million from the addition of the DTV product line, resulting from our acquisition of certain assets from Trident Microsystems in the second quarter of fiscal 2013. Excluding DTV, our net revenue for the nine months ended October 27, 2012 decreased $29.0 million, or 20%, compared to the corresponding period in the prior fiscal year. The net revenue decrease was primarily attributable to decreases in sales in the IPTV media processor, connected media player and prosumer and digital audio/video markets of $24.6 million, $14.9 million, and $1.4 million respectively, partially offset by an increase in sales to the home networking market and license revenue from our home control and energy management technology of $8.0 million and $3.8 million, respectively.

Net revenue by target market

We sell our products into six primary target markets, which are the DTV market, home networking market, IPTV media processor market, home control and energy management market, prosumer and industrial audio/video market and connected media player market. We also sell a small amount of our chipsets into other markets, such as the digital signage, 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):

                                          Three months ended                                                   Nine months ended
                     October 27,       % of Net        October 29,       % of Net        October 27,       % of Net        October 29,       % of Net
                        2012            Revenue           2011            Revenue           2012            Revenue           2011            Revenue

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