Sigma Designs currently distributes its products through sales to national and regional distributors, VARs and OEMs in the U.S. and throughout the world. Our U.S. distributor is Ingram Micro, Inc., and our OEMs include Sony, Philips, IBM, Toshiba, Samsung, Utobia, LungHwa Electronics Co., Ltd., Formosa Industrial Computing, Labway Corporation and others. Our international distributors are strategically located in many countries around the world.

We, generally maintain products for distribution through corporate markets based on forecasts rather than firm purchase orders. Additionally, we generally acquire products for sale to our OEM customers only after receiving purchase orders from such customers, which purchase orders are typically cancelable without substantial penalty from such OEM customers. We currently place noncancelable orders to purchase semiconductor products from our suppliers on a twelve- to sixteen- week lead time basis. Consequently, if, as a result of inaccurate forecasts or canceled purchase orders, anticipated sales and shipments in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, requiring significant working capital and resulting in severe pressure on our financial condition. One customer accounted for 26% of our net sales in fiscal 2000.

Sales to distributors are typically subject to contractual rights of inventory rotation and price protection. Regardless of particular contractual rights, the failure of one or more distributors or OEMs to achieve sustained sell-through of REALmagic products could result in product returns or delayed or uncollectable receivables, contributing to significant fluctuations in our operating results.

Research and Development

As of January 31, 2000, we had a staff of 45 research and development personnel. The research and development personnel conduct all of our product development with the assistance of a number of independent contractors and consultants. We are focusing our development efforts primarily on MPEG decoder products, including new and improved versions of REALmagic MPEG chipsets and cost reduction processes.

To achieve and maintain technological leadership, we must continue to make technological advancements in the areas of MPEG video and audio compression and decompression. These advancements include maintaining compatibility with emerging standards and multiple platforms, making improvements to the REALmagic architecture, and developing enhancements to the REALmagic Application Programming Interface (API).

We cannot assure you that we will be able to make any such advancements in the REALmagic MPEG technology or, if they are made, that we will be able to market such advancements to maintain profitability.

During fiscal 2000, 1999, and 1998, our research and development expenses were $6,397,000, $5,678,000, and $4,948,000, respectively. We plan to continue to devote substantial resources to research and development of future generations of MPEG and other multimedia products.

The market for MPEG decoder products is highly competitive. Companies such as C-Cube Microsystems have a high profile in the industry. Although we do not believe that any products sold by a third party are in direct competition with REALmagic decoding silicon in terms of price and performance, the possibility that other companies with more marketing and financial resources may develop a competitive product may inhibit the wide acceptance of REALmagic technology. We believe that many computer product manufacturers are developing MPEG products that will compete directly with REALmagic products in the near future.

We believe that the principal competitive factors in the market for MPEG decoder products include time to market for new product introductions, product performance, compatibility with industry standards, price, and marketing and distribution resources. We believe that we compete most favorably with respect to time to market, product performance and price of our REALmagic products.

We continually seek patent protection for certain software and hardware features in current and future versions of REALmagic. We currently have ten pending patent applications for our REALmagic technology. Ten patents have been issued to us. We cannot assure you that more patents will be issued or that such patents, even if issued, will provide adequate protection for Sigma's competitive position. We also attempt to protect our trade secrets and other proprietary information through agreements with customers, suppliers and employees and other security measures. Although we intend to protect our rights vigorously, we cannot assure you that these measures will be successful.

Manufacturing

To reduce overhead expenses, along with capital and staffing requirements, we currently use third-party contract manufacturers to fulfill all of our manufacturing needs, including chipset manufacture and board-level assembly. All of the chips used by us to develop our decoding products are manufactured by outside suppliers and foundries. Each of these suppliers is a sole source of supply to us of the respective chips produced by such supplier.

Our reliance on independent suppliers involves several risks, including the absence of adequate capacity and reduced control over delivery schedules, manufacturing yields and costs. Any delay or interruption in the supply of any of the components required for the production of REALmagic products could seriously harm our sales of products and, thus, our operating results.

Backlog

Since our customers typically expect quick deliveries, we seek to ship products within a few weeks of receipt of a purchase order. However, the customer may reschedule delivery of products or cancel the purchase order entirely without significant penalty. Historically, our backlog has not been reflective of future sales. We also expect that in the near term, our backlog will continue to be not indicative of future sales.

As of January 31, 2000, we had 93 full-time employees, including 45 in research and development, 24 in marketing, sales and support, 9 in operations, and 15 in finance and administration.

Our future success will depend, in part, on our ability to continue to attract, retain and motivate highly qualified technical, marketing, engineering and management personnel, who are in great demand. Our employees are not represented by any collective bargaining unit, and we have never experienced a work stoppage. We believe that our employee relations are satisfactory.

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

If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of our Common Stock could decline, and you may lose all or part of your investment.

We incurred significant operating losses in fiscal 1995, 1996 and 1998 and had negative cash flow in fiscal 1995 and 1998. Since our introduction of the REALmagic MPEG product line in November 1993, we have made significant investments in marketing and technological innovation for our REALmagic products. As a result of our investments, we experienced significant losses through fiscal 1996. Fiscal 1995, 1996 and 1998 also included significant losses associated with products other than those related to our REALmagic technology. Since our inception through January 31, 2000, our total accumulated deficit is $39,189,000. We cannot assure you that we will continue to sell our new REALmagic products in substantial quantities or generate significant revenues from those sales. We cannot assure you that we will not incur operating losses in any future fiscal quarter or fiscal year.

We have an Amended and Restated Business Loan Agreement with Silicon Valley Bank, dated October 31, 1999. Under the Agreement we gave two secured Promissory Notes in total principal amounts of $12 million and $6 million to Silicon Valley Bank, under which we may borrow as needed. Under the Agreement and the Notes, we are subject to a certain profitability covenant. Since July 1997, we have, on occasion, been in violation of the profitability covenant and have obtained waivers releasing us from our obligation to meet this covenant. We may need a waiver for the quarter ending April 30, 2000 or for future periods. We cannot assure you that Silicon Valley Bank will grant these waivers. If we do not meet this covenant, and if we do not obtain waivers, the loans may be in default. If we are in default, then the lender could accelerate payments on the Notes and we could suffer serious harm to our business, financial condition and prospects.

Our ability to increase sales, sustain profitability and maintain REALmagic as an industry digital video decoding standard depends substantially on our ability to achieve a sustained high level of sales to new Original Equipment Manufacturer ("OEM") customers. We have not executed volume purchase agreements with any of our customers. Our customers are not under any obligation to purchase any minimum quantity of our products. We have not achieved bundling agreements with many OEM customers to ensure the success of our REALmagic product line. Also, even if we achieve new design wins, we cannot assure you that manufacturers will purchase our products in substantial volumes. Sales to any particular OEM customer are subject to significant variability from quarter to quarter and to severe price pressures by competitors. In addition, 26% of our net sales were derived from one customer in fiscal 2000. Any reductions in those sales could seriously harm our business. Based on our experience in the industry, we expect that our actual sales to OEM customers will experience significant fluctuations. Also, estimates of future sales to any particular customer or groups of customers are inherently uncertain.

Our ability to sustain profitability also depends on a substantial increase in the sales of REALmagic products through domestic and international distributors for resale through corporate markets. Sales to such distributors are typically subject to contractual rights of inventory rotation or price protection. The failure of distributors to achieve sustained sell- through of REALmagic products could result in product returns or delayed or uncollectable receivables. This could contribute to fluctuations in our results of operations. We cannot assure you that we will be successful in obtaining or maintaining a significant market for our REALmagic products.

The market for multimedia PC products is characterized by the following:

• rapidly changing technology and user preferences;
  
• evolving formats for compression of video and audio data; and
  
• frequent new product introductions.

Our success depends, among other things, on our ability to achieve and maintain technological leadership and to remain competitive in terms of price and product performance.

To have technological leadership, we must continue to make technological advancements and research and development investments in the area of MPEG video and audio decoding. These advancements include the following:

• compatibility with emerging standards and multiple platforms;
  
• improvements to the REALmagic architecture; and
  
• enhancements to the REALmagic application programming interface.

We cannot assure you that we will be able to make these advancements to our REALmagic technology. If we do make these advances, we cannot assure you that we will be able to achieve and maintain technological leadership. Any material failure by us or OEMs and software developers to develop or incorporate any required improvement could adversely affect the continued acceptance of our technology and the introduction and sale of future products based on our technology. We cannot assure you that products or technologies developed by others will not render obsolete our technology and the products based on our technology.

To be competitive, we must anticipate the needs of the market and successfully develop and introduce innovative new products in a timely fashion. We cannot assure you that we will be able to successfully complete the design of our new products, have these products manufactured at acceptable manufacturing yields, or obtain significant purchase orders for these products. The introduction of new products may adversely affect sales of existing products and contribute to fluctuations in operating results from quarter to quarter. Our introduction of new products also requires that we carefully manage our inventory to avoid inventory obsolescence. In addition, new products, as opposed to more mature products, typically have higher initial component costs. This higher cost could result in downward pressures on our gross margins.

The market for multimedia products is highly competitive and is driven by faster processors provided by Intel Corporation and other companies. Intel processors have, in recent years, included increased graphics functionality. Other companies with more experience and financial resources may develop a competitive product that could inhibit future growth of our REALmagic technology. Increased competition may be generated from several major computer product manufacturers that have developed products and technologies that could compete directly with REALmagic products. These competitors include:

• SGS Thompson Microelectronics;
  
• C-Cube Microsystems;
  
• IBM Corporation;
  
• Zoran Corporation;
  
• LSI Logic;
  
• ESS Technology;
  
• ATI Technologies; and
  
• Optibase.

In addition, Intel computer CPU chips processors have become more powerful, such that video decoding could eventually be done in software. Most of our competitors have substantial experience and expertise in audio, video and multimedia technology and in producing and selling consumer products through retail distribution and OEM channels. These companies also have substantially greater engineering, marketing and financial resources than we have. Our competitors could form cooperative relationships that could present formidable competition to us. We cannot assure you that our REALmagic technology will achieve commercial success or that it will compete effectively against other interactive multimedia products, services and technologies that currently exist, are under development, or may be announced by competitors.

Our business strategy is, and has been, to focus on REALmagic products by investing heavily in MPEG technology. In the fiscal year ended January 31, 2000, sales of PC- DVD or video streaming decoding products accounted for virtually all of our net sales. A decline in market demand for digital video decoding products will seriously harm our operating results. In addition, one international customer accounted for 26%, 28%, and 39% of revenues in fiscal 2000, 1999, and 1998.

Our operating results have fluctuated in the past and may continue to fluctuate in the future. This fluctuation is due to a number of factors, including the following and others:

• our new product introductions and product introductions by our competitors;
  
• market acceptance of our products by OEMs, software developers and end users;
  
• the success of our promotional programs;
  
• gains or losses of our significant customers;
  
• reductions in selling prices;
  
• inventory obsolescence;
  
• an interrupted or inadequate supply of semiconductor chips;
  
• our ability to protect our intellectual property; and
  
• loss of our key personnel.

In addition, sales to OEM customers are subject to significant variability from quarter to quarter. This variability depends on OEMs' timing and release of products that incorporate our REALmagic technology, experience with sales of these products and inventory levels.

The market for consumer electronics products is characterized by significant seasonal swings in demand. Demand typically peaks in the fourth calendar quarter of each year. We expect to derive a substantial portion of our revenues from the sales of REALmagic products in the future. The demand for our products will depend in part on the success of digital video technology. In light of this, our revenues may vary with the availability of and demand for DVD titles. This demand may increase or decrease as a result of a number of factors that cannot be predicted, such as consumer preferences and product announcements by competitors.

Announcements of directly competing products will likely have a negative effect on our operating results. Based on our experience, we believe that a substantial portion of our shipments will occur in the third month of a quarter, with significant shipments completed in the latter part of the third month. This shipment pattern may cause our operating results to be difficult to predict. Currently, we place noncancellable orders to purchase semiconductor products from our foundries with a long lead time. If, there is a result of inaccurate forecasts or cancelled purchase orders, our anticipated sales and shipments in any quarter do not occur when expected, our inventory levels could be disproportionately high. This could require significant working capital and harm our operating results.

Our REALmagic products and components are presently manufactured by outside suppliers or foundries. We do not have long-term contracts with these suppliers. We conduct business with our suppliers on a written purchase order basis. Our reliance on independent suppliers subjects us to several risks. These risks include:

• the absence of adequate capacity;
  
• the unavailability of, or interruptions in access to, certain process technologies; and
  
• reduced control over delivery schedules, manufacturing yields and costs.

We obtain some of our components from a single source. In fiscal 2000 we experienced a delay and interruption from our source due to the earthquake in Taiwan in October 1999. We estimate that this event resulted in lost sales of about $2.5 million. Other delays or interruptions have not occurred to date, but any delay or interruption in the supply of any of the components required for the production of our REALmagic silicon or our REALmagic multimedia cards currently obtained from a single source could have a material adverse impact on our sales of REALmagic products, and on our business.

We must provide our suppliers with sufficient lead-time to meet our forecasted manufacturing objectives. Any failure to properly forecast such quantities could materially and adversely affect our ability to produce REALmagic products in sufficient quantities. We cannot assure you that our forecasts regarding new product demand will be accurate, particularly because we sell our REALmagic products on a purchase order basis. Manufacturing REALmagic chipsets is a complex process, and we may experience short-term difficulties in obtaining timely deliveries. This could affect our ability to meet customer demand for our products. Any such delay in delivering products in the future could materially and adversely affect our operating results. Also, should any of our major suppliers become unable or unwilling to continue to manufacture our key components in required volumes, we will have to identify and qualify acceptable additional suppliers. This qualification process could take up to three months or longer and additional sources of supply may not be in a position to satisfy our requirements on a timely basis.

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

Our future success depends in large part on the continued service of our key technical, marketing, sales and management personnel. Given the complexity of REALmagic technology, we are dependent on our ability to retain and motivate highly skilled engineers involved in the ongoing hardware and software development of REALmagic products. These engineers are required to refine the existing hardware system and application programming interface and to introduce enhancements in future applications. The multimedia PC industry is characterized by high employee mobility and aggressive recruiting of skilled personnel. Despite incentives we provide, our current employees may not continue to work for us, and if additional personnel were required for our operations, we may not able to obtain the services of additional personnel necessary for our growth.

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

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

During fiscal 2000, 1999, and 1998, sales to international customers accounted for approximately 67%, 72%, and 64% of our net sales, respectively. We anticipate that sales to international customers, including sales of REALmagic products, will continue to account for a substantial percentage of our net sales. Also, some of the foundries that manufacture our products and components are located in Asia. Overseas sales and purchases to date have been denominated in U.S. dollars.

Due to the concentration of international sales and the manufacturing capacity in Asia, we are subject to the risks of conducting business internationally. These risks include unexpected changes in regulatory requirements and fluctuations in the U.S. dollar that could increase the sales price in local currencies of our products in international markets, or make it difficult for the Company to obtain price reductions from its foundries. We do not currently engage in any hedging activities to reduce our exposure to exchange rate risks. If and when we engage in transactions in foreign currencies, our results of operations could be adversely affected by exchange rate fluctuations.

We derive a substantial portion of our revenues from sales to the Asia Pacific region. This region of the world is subject to increased levels of economic instability, and this instability could seriously harm our results of operations.

The market of our Common Stock has been subject to significant volatility. This volatility is expected to continue. The following factors, among others, may have a significant impact on the market price of our Common Stock:

• our announcement of the introduction of new products;
  
• our competitors' announcements of the introduction of new products; and
  
• market conditions in the technology, entertainment and emerging growth company sectors.

The stock market has experienced, and is currently experiencing, volatility that particularly affects the market prices of equity securities of many high technology and development stage companies, such as those in the electronics industry. This volatility is often unrelated or disproportionate to the operating performance of such companies. These fluctuations, as well as general economic and market conditions, could decrease the price of our Common Stock.

The executive officers and directors of the Company and their ages as of April 1, 2000 are as follows:

Mr. Tran, a founder of the Company, has served as President, Chief Executive Officer, and Chairman of the Board of Directors since February 1982. Prior to joining the Company, Mr. Tran was employed by Amdahl Corporation and Trilogy Systems Corporation, both of which were involved in the IBM-compatible mainframe computer market.

Mr. Perich joined the Company in September 1985 as Director, Sales. In September 1992, Mr. Perich became Senior Vice President, Worldwide Sales of the Company. Mr. Perich was a co-founder of Costar Incorporated, a manufacturer's representative organization for high technology products, where he served as partner from October 1979 to September 1985. From September 1972 until September 1979, Mr. Perich served in several sales management roles at Siliconix Inc, a specialty semiconductor manufacturer.

Mr. Martinella joined the Company in May 1994 as Director, VLSI Engineering. In December 1995, Mr. Martinella became Vice President, Engineering. From June 1990 to April 1994, Mr. Martinella served in engineering and management positions at Weitek, a microchip manufacturer. In addition, Mr. Martinella was an engineer at National Semiconductor, a semiconductor manufacturer, from June 1982 to June 1990.

Mr. Wong joined the Company in June 1998. as Vice President, Marketing. From 1995 to 1998 Mr. Wong served as Business Development Director at National Semiconductor Corporation. From 1993-1995 Mr. Wong served as Vice President of Marketing for Diamond Multimedia Systems. Prior to 1993, Mr. Wong held several senior marketing and sales management positions at Intel Corporation for 18 years. Mr. Wong resigned his position with Sigma Designs effective April 21, 2000.

Mr. Beck joined the Company in January 2000 as Chief Financial Officer. From 1996 through 1999 Mr. Beck served as Vice President of Finance and Administration at Augeo Software. From 1994 through 1996 Mr. Beck served as the Controller at Meta-Software. Prior to 1994, Mr. Beck held Chief Financial Officer or Vice President Finance positions at several technology companies. In addition, Mr. Beck is a Certified Public Accountant. Mr. Beck served as an Audit Supervisor at Ernst & Young and before that at KPMG Peat Marwick.

Ms. Tsui joined the Company in November 1982 as its Accounting Manager. Ms. Tsui was promoted to Director of Finance in February 1990, acting Chief Financial Officer and Secretary in December 1996 and to Chief Accounting Officer in January 2000.

Mr. Almon has served as Director of the Company since April 1994. Mr. Almon also serves as a Director of Read-Rite Corporation, Netfish Technologies Inc. and HDI Inc. Most recently, Mr. Almon served as Chairman of the Board of Internet Image, an internet software company that was merged with Intraware Inc. in October 1999. In May 1994, Mr. Almon founded and served as Chairman of the Board and Chief Executive Officer of StorMedia, Inc., a manufacturer of thin film disks. From December 1989 until February 1993, Mr. Almon served as President and Chief Executive Officer of Conner Peripherals, Inc., a manufacturer of computer disk drives and storage management devices. Prior to 1987, Mr. Almon spent 30 years with IBM Corporation, holding executive positions in both software and hardware management, most recently as Vice President, Low End Storage Products.

Mr. Wang became a Director of the Company in October 1995. From January 1995 to the present, Mr. Wang has served as Chairman of the Board, Chief Executive Officer, and President of Princeton Graphic Systems (a supplier of computer monitors) and has served since January 1996 as a Director of Diva LABS. From 1990 to April 1997, Mr. Wang served as Chairman of the Board and Chief Executive Officer of MAG Innovision Co., Inc., Ltd. of Taiwan, a supplier of computer monitors. From 1986 until 1990, Mr. Wang worked at Tatung Company of America in the Video Display Division.

The Company currently leases a 25,000 square foot facility in Milpitas, California that is used as the Company's headquarters. The lease will expire in September 2002. The Company also leases facilities for sales offices in Hong Kong and Shenzhen China, and for research and development near Paris, France. The Company believes that it has adequate facilities to accommodate the Company's operations in the near term.

ITEM 3. LEGAL PROCEEDINGS

In February 1998, two punitive class action complaints were filed against us in the United States District Court, Northern District Court of California, Romine, et al. v. Sigma Designs, Inc., et al., No. C-98-0537-TEC (N.D.Cal.) and Shah, et al. v. Sigma Designs, Inc., et al., No C-98-0582-MHP (N.D.Cal.). The federal court consolidated complaint alleges that Sigma Designs, Inc. and certain of its officers and former officers and/or directors, issued false or misleading statements regarding our business prospects during the period October 24, 1995 through February 13, 1997. The complaint does not specify the amount of damages sought by the plaintiffs. On October 8, 1999, we filed a motion to dismiss the consolidated complaint. In response to this motion, the plaintiffs agreed and filed a second amended complaint. On April 21, 2000, we filed a motion to dismiss the second amended complaint. The hearing on that motion is scheduled for June 26, 2000. We believe that we have meritorious defenses to the allegations made in the complaints and we intend to conduct a vigorous defense.

None.

Sigma Designs' Common Stock has been traded under the Nasdaq symbol "SIGM" since the Company's initial public offering on May 15, 1986. The table below sets forth the high and low closing prices in the Nasdaq Stock Market for the quarters indicated.

As of April 12, 2000, the Company had 229 shareholders of record. The Company has not paid cash dividends on its common stock and does not plan to pay cash dividends to its common shareholders in the near future. The Company was obligated to pay certain dividends on its outstanding preferred stock. In 2000, the Company paid $ 80,460 in dividends on such stock.

(In thousands, except per share data and number of employees)

Year ended January 31,       2000      1999      1998      1997      1996
-------------------------  --------  --------  --------  --------  --------
Net sales.............     $50,324   $43,540   $36,982   $41,214   $26,374

Net income (loss)
 available to
 common shareholders..       2,263    (2,690)   (5,648)    1,529   (14,708)

Diluted net income
 (loss) per share
 available to
 common shareholders..        0.13     (0.21)    (0.51)     0.14     (1.88)

Working capital.......      27,092    23,578    18,960    20,164    11,461

Total assets..........      44,751    44,220    38,329    37,915    24,843

Shareholders' equity..      28,403    24,771    20,312    21,017    12,581

Number of employees...          93        78        71        86        60

For the fiscal year ended January 31, 2000, the Company's financial results showed continued sales growth and gross margin improvement. The Company's net sales increased 16% to $50.3 million from $43.5 million reported for fiscal 1999. Gross profit improved to 31% compared to 28% for fiscal 1999. The Company reported net income available to common shareholders of $2,263,000 or $0.13 per share, diluted, for fiscal 2000 compared to a net loss available to common stockholders of $2,690,000, or $0.21 per share in fiscal 1999. Excluding the dividends on preferred stock, the Company had net income of $2,348,000 in fiscal 2000 as compared to a net loss of $151,000 in fiscal 1999.

While improvement was made in fiscal 2000, sales of the Company's products are affected by long cycles of new product deployment to both OEM customers and corporate markets, and price pressure in the PC market. The Company is also affected by a number of uncertainties: the continued weak economies in Asia, a potential shortage of silicon wafers from Taiwan suppliers as a consequence of the earthquake on September 21, 1999, and allocation of silicon wafers due to increasing demand from other electronic industries.

The following table shows certain items as a percentage of net sales, which are included in the Company's Consolidated Statement of Operations:

The multimedia products category includes MPEG encoding and decoding solutions for both desktop and notebook computers as well as for PC manufacturers and add-on card makers. The board level product line is targeted at OEM customers to address the DVD upgrade market and system integrators to address the computer-based training, kiosks, and corporate video-on-demand markets. The chipsets are targeted toward manufacturers and large volume OEM customers building interactive multimedia products for business and consumer markets. The "other" category includes CD titles, DVD ROM drives, video conferencing products, contract revenue, and set-top box products targeted at the emerging consumer internet information appliance market - a new market the Company entered in fiscal 2000.

The table below sets forth the Company's sales by market segment for each of the last three fiscal years:

The Company's net sales increased 16% in fiscal 2000 as compared to an 18% increase in fiscal 1999. The increase in sales in fiscal 2000 primarily reflected an increase in demand for the Company's proprietary DVD MPEG-2 boards and chipsets due to increased market acceptance of DVD technology. The Company's net sales in chipsets increased 17% and 40% respectively, in fiscal 2000 and fiscal 1999. The Company's board level products primarily consist of two market groups: intranet/internet video streaming and DVD MPEG-2 encoding and decoding applications. Video streaming board products accounted for 16% and 17% of the Company's net sales respectively, in fiscal 2000 and fiscal 1999. DVD board products accounted for 32% and 28% of the Company's net sales respectively, in fiscal 2000 and fiscal 1999.

The table below sets forth the Company's sales by geographic region for each of the last three fiscal years:

The Company's U.S. sales as a percentage of total net sales were 33% in fiscal 2000, 29% in fiscal 1999, and 36% in fiscal 1998. Total U.S. sales increased 33% to $16.5 million from $12.4 million in fiscal 1999. Total Asia sales as a percentage of total sales were 58% in fiscal 2000, 61% in fiscal 1999 and 56% in fiscal 1998. Total Asia sales increased 10% to $29.4 million in fiscal 2000 from $26.7 million in fiscal 1999. The Company's Asia sales were made predominantly to customers in Taiwan, Singapore and Hong Kong. In fiscal 2000, Taiwan and Singapore accounted for 30% and 16% of the Company's net sales respectively, as compared to fiscal 1999, in which Taiwan and Hong Kong accounted for 43% and 8% of the company's net sales respectively. In fiscal 2000 and 1999, one Taiwanese customer contributed 26% and 28% to the Company's total net sales, respectively. The overall increase in sales was primarily attributable to increasing sales of the Company's MPEG boards and chipsets to OEM customers and computer board manufacturers worldwide.

The Company's gross margin as a percentage of net sales was approximately 32% in fiscal 2000, 28% in fiscal 1999, and 23% in fiscal 1998. The increase in gross margin in fiscal 2000 was primary attributable to the increase in sale of chipsets which have a more favorable gross margin compared to all other products. The increased gross margin in fiscal 1999 was largely due to the comparatively low margin in fiscal 1998 primarily caused by an inventory charge of $1.7 million.

Sales and marketing expenses increased $418,000 or 10% in fiscal 2000 over fiscal 1999. The increase was largely due to the addition of business development staff, sales, and marketing-support related expenses in connection with our operation in China. The same expenses decreased $299,000, or 7%, in fiscal 1999 over fiscal 1998. The decrease was primarily due to a reduction in trade show and product sample expenses and the amount of commissions paid to outside sales representatives.

Research and development expenses increased $719,000 or 13% in fiscal 2000 over fiscal 1999 and $730,000, or 15% in fiscal 1999 over fiscal 1998. The increases in fiscal 2000 and 1999 were largely due to increases in technical development support, depreciation associated with research and development equipment, and engineering personnel expenses. The year-over-year increase in research and development expenses was primarily the result of the Company's continued efforts in the development of its proprietary DVD/MPEG-2 based products. In December 1999, the Company established an R & D center in France to enable the Company to recruit engineers and expand R & D activities from that region.

The Company's general and administrative expenses decreased $116,000 or 4% in fiscal 2000. The decrease was primary due to non-recurring professional fees associated with the settlement in fiscal 1999 from the California Franchise Tax Board for a claim previously filed by the Company. The same expenses decreased 42% or $2.2 million to $3.0 million during fiscal 1999 as compared to fiscal 1998. The significant reduction in general and administrative expenses was largely attributable to a charge of $1.9 million in accounts receivable reserves in connection with the write-off of assets associated with graphics products during fiscal 1998. Excluding the effect of the write-off, general and administrative expenses decreased by $281,000 in fiscal 1999 over fiscal 1998. The decrease was primarily due to less accounts receivable reserves and outside professional services as a result of the improvement of accounts receivable.

We had cash, cash equivalents, and short-term investments of $21.7 million at January 31, 2000 compared with $18.1 million at January 31, 1999. The increase of $3.6 million in cash and short-term investments during fiscal 2000 was primarily generated from operating activities and proceeds from common stock issuances. As of January 31, 2000, the Company had $12 million outstanding under a $12 million bank revolving line of credit that expires in October 2000 and is collateralized by funds on deposit in accounts that have been assigned to the lender. The Company also has a $6 million bank line of credit available that expires in October 2000 and is collateralized by the Company's accounts receivable, inventories, equipment, and intangibles. This asset-based line of credit had an outstanding balance of $41,000 direct borrowings, and $309,780 standby letter of credits to secure certain lease obligations.

Our primary sources of funds to date have been cash generated from operations, proceeds from preferred and common stock issuances, and bank borrowings under lines of credit. The Company believes that its current reserve of cash and equivalents, short-term investments and the availability of funds under its existing asset-based banking arrangements will be sufficient to meet anticipated working capital requirements and other cash needs for the reasonable foreseeable future. However, we may have to raise additional capital through either public or private offerings of our common or preferred stock or from additional bank financing prior to that time. There is no assurance that such capital will be available to us. The estimate of time our cash and other resources will last is a forward-looking statement that is subject to the risks and uncertainties set forth below, as well as other factors, and actual results may differ as a result of such factors.

The Company's annual and quarterly results have in the past and may in the future vary significantly due to a number of factors, including but not limited to new product introductions by the Company and its competitors; market acceptance of the technology embodied in the Company's products generally and the Company's products in particular; customer acceptance of the Company's products; shifts in demand for the technology embodied in the Company's products generally and the Company's products in particular and/or those of the Company's competitors; gains or losses of significant customers; reduction in average selling prices and gross margins, which may occur either gradually or precipitously; inventory obsolescence; write-downs of accounts receivable; an interrupted or inadequate supply of semiconductor chips or other materials-for example, our source of supply for silicon wafers was, and may to be continued in the near future, affected by the earthquake in Taiwan; the Company's inability to protect its intellectual property; loss of key personnel; technical problems in the development, ramp up, and manufacture of products causing shipping delays; and availability of third-party manufacturing capacity for production of certain of the Company's products. The Company derives a substantial portion of its revenues from sales to the Asia Pacific region, a region of the world that is subject to increased economic instability. There can be no assurance that such instability will not have a material adverse effect on the Company's future international sales. Any adverse change in the foregoing or other factors could have a material adverse effect on the Company's business, financial condition, and results of operations.

Due to the factors noted above, the Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends of future periods. Any shortfall in revenue or earnings could have an immediate and significant adverse effect on the trading price of the Company's common stock. Additionally, the Company may not learn of such shortfall until late in a fiscal quarter, which could result in even more immediate and adverse effect on the trading price of the Company's common stock. Further, the Company operates in a highly dynamic industry, which often results in volatility of the Company's common stock price.

In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Accounting," was issued which defines derivatives, requires all derivatives be carried at fair value, and provides for hedging accounting when certain conditions are met. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999, the Financial Accounting Standards Board issued Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133". Statement No. 137 amended the effective date of Statement 133 to all fiscal quarters of fiscal years beginning after June 15, 2000. Although the Company has not fully assessed the implications of this new statement, the Company does not believe adoption of this statement will have a material impact on the Company's financial statements.

The following discussion about the Company's market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company faces exposure to market risk from adverse movements in interest rates and foreign currency exchange rates, which could affect its operations and financial condition. The Company does not use derivative financial instruments for speculative purposes.

Interest Rate Sensitivity. At January 31, 2000, the Company held $6.2 million in short-term investments consisting of U.S. government and corporate debt securities with an average original maturity of less than one year. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. If market rates were to increase immediately and uniformly by 10 percent from levels at January 31, 2000, the fair market value of the short-term investments would decline by an immaterial amount. The Company generally expects to have the ability to hold its investments until maturity and therefore would not expect operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates for short-term investments.

At January 31, 2000, the Company had $12,000,000 outstanding under a $12,000,000 variable interest rate bank line of credit and $41,000 outstanding under a $6,000,000 variable interest rate bank line of credit. If short-term interest rates were to increase 10 percent, the increased interest expense associated with these arrangements would not have a material impact on the Company' net income and cash flows.

Foreign Currency Exchange Rate Sensitivity. The Hong Kong dollar and French franc are the financial currency in the Company's subsidiaries in Hong Kong and France. The Company does not currently enter into foreign exchange forward contracts to hedge certain balance sheet exposures and intercompany balances against future movements in foreign exchange rates. However, the Company does maintain cash balances denominated in the Hong Kong dollar and French franc. If foreign exchange rates were to weaken against the U.S. dollar immediately and uniformly by 10 percent from the exchange rate at January 31, 2000, the fair value of these foreign currency amounts would decline by an immaterial amount.

Sigma's financial statements, the notes thereto, and the independent auditors' report appear on pages F-1 through F-21 and S-1 of this Annual Report on Form 10-K.

Not applicable.

The information required by this item concerning the Company's directors and executive officers is incorporated by reference from the information set forth in the sections entitled "Election of Directors" and "Other Information" contained in the Company's Proxy Statement relating to the 2000 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year pursuant to General Instruction G(3) of Form 10-K (the "Proxy Statement"). Certain information required by this item concerning the executive officers of the Company is incorporated by reference to the information set forth in Part I of the Annual Report on 10-K.

The information required by this item regarding executive compensation is incorporated by reference from the information set forth in the sections entitled "Election of Directors-Compensation of Directors" and "Other Information-Executive Compensation" contained in the Proxy Statement.

The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference from the information set forth in the section entitled "Other Information-Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement.

Not applicable.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Milpitas, State of California, on the 28th day of April, 2000.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thinh Q. Tran and Kit Tsui, and each of them, jointly and severally, his true and lawful attorneys-in-fact, each with full power of substitution and resubstitution, for him in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do if personally present, hereby ratifying and confirming all that each said attorney-in-fact and agent, or his or her substitute or substitutes or any of them, may lawfully do or cause to be done by virtue hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS ANNUAL REPORT ON FORM 10-K HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:

To the Board of Directors and Shareholders of
Sigma Designs, Inc.:

We have audited the accompanying consolidated balance sheets of Sigma Designs, Inc. and subsidiaries as of January 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss) and cash flows for each of the three years in the period ended January 31, 2000. Our audits also include the financial statement schedule listed in Item 14(a)2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sigma Designs, Inc. and subsidiaries at January 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2000 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP

San Jose, California
February 28, 2000

SIGMA DESIGNS, INC.

CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2000 and 1999 (Dollars in thousands)

                                                               2000      1999
                                                             --------- ---------
ASSETS                                                                 
CURRENT  ASSETS:
  Cash and equivalents.......................................  $3,459    $2,946
  Short-term investments.....................................   6,198    15,112
  Accounts receivable (net of allowances
    of $414 and $3,306)......................................  13,053    13,648
  Inventories................................................   8,022    10,418
  Restricted cash............................................  12,000        --
  Prepaid expenses and other assets..........................     497       629
                                                             --------- ---------
           Total current assets                                43,229    42,753
EQUIPMENT  - Net.............................................   1,243     1,311
OTHER  ASSETS................................................     279       156
                                                             --------- ---------
TOTAL........................................................ $44,751   $44,220
                                                             ========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY                                   
CURRENT LIABILITIES:
  Bank line of credit........................................ $12,041   $13,716
  Accounts payable...........................................   2,277     4,109
  Accrued liabilities........................................   1,511     1,132
  Current portion of capital lease obligations...............     308       218
                                                             --------- ---------
           Total current liabilities.........................  16,137    19,175
                                                             --------- ---------
CAPITAL LEASE OBLIGATIONS....................................     211       274

COMMITMENTS AND CONTINGENCIES (Notes 9 and 12)

SHAREHOLDERS' EQUITY:
  Preferred stock - no par value:  2,000,000 shares
   authorized; shares outstanding: 2000, none; 1999, 1,900...     --      1,536
  Common stock - no par value:  20,000,000
   shares authorized; shares outstanding:
   2000, 16,220,780; 1999, 15,435,094........................  67,461    64,699
  Shareholder notes receivable...............................     (11)      (12)
  Accumulated other comprehensive income.....................     142        --
  Accumulated deficit........................................ (39,189)  (41,452)
                                                             --------- ---------
           Shareholders' equity                                28,403    24,771
                                                             --------- ---------
TOTAL........................................................ $44,751   $44,220
                                                             ========= =========

SIGMA DESIGNS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
(In thousands, except per share amounts)

                                            2000       1999       1998
                                         ---------- ---------- ---------- 
NET SALES...............................   $50,324    $43,540    $36,982

COSTS AND EXPENSES:
  Cost of sales.........................    34,481     31,259     28,296
  Research and development..............     6,397      5,678      4,948
  Sales and marketing...................     4,490      4,072      4,371
  General and administrative............     2,869      2,985      5,166
                                         ---------- ---------- ----------
           Total costs and expenses.....    48,237     43,994     42,781
                                         ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS                2,087       (454)    (5,799)
  Interest income.......................       929        935        820
  Interest expense......................      (770)      (946)      (927)
  Other income (expense), net...........       162         (7)         6
                                         ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES.......     2,408       (472)    (5,900)
(PROVISION FOR) BENEFIT FROM
  INCOME TAXES..........................       (60)       321        824
                                         ---------- ---------- ----------
NET INCOME (LOSS).......................     2,348       (151)    (5,076)
DIVIDENDS ON PREFERRED STOCK............        85      2,539        572
                                         ---------- ---------- ----------
NET INCOME (LOSS) AVAILABLE TO COMMON
  SHAREHOLDERS..........................    $2,263    ($2,690)   ($5,648)
                                         ========== ========== ==========
NET INCOME (LOSS) PER SHARE AVAILABLE
  TO COMMON SHAREHOLDERS:
  Basic.................................     $0.14     ($0.21)    ($0.51)
                                         ========== ========== ==========
  Diluted...............................     $0.13     ($0.21)    ($0.51)
                                         ========== ========== ==========
SHARES USED IN COMPUTATION:
  Basic.................................    15,728     12,899     11,012
                                         ========== ========== ==========
  Diluted...............................    17,704     12,899     11,012
                                         ========== ========== ==========

SIGMA DESIGNS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED JANUARY 31, 2000, 1999 AND 1998 (Dollars in thousands)

                                                                                          Accumu-
                                                                                           lated
                                                                                  Share-   Other                          Total
                                                                       Deferred   holder  Compre-                        Compre-
                                 Preferred Stock     Common Stock        Stock    Notes   hensive   Accumu-              hensive
                              ------------------ ---------------------  Compen-  Receiv-   Income    lated               Income
                               Shares   Amount     Shares     Amount    sation     able    (Loss)   Deficit     Total    (Loss)
                              -------- --------- ----------- --------- --------- -------- -------- ---------- --------- ---------
Balances, February 1, 1997..      --       $--   11,091,062   $54,311     ($100)    ($80)     $--   ($33,114)  $21,017

Net loss....................      --        --          --        --        --       --        --     (5,076)   (5,076)  ($5,076)
Unrealized gain on
  short-term investments....      --        --          --        --        --       --         3        --          3         3
                                                                                                                        ---------
Comprehensive loss..........                                                                                             ($5,073)
                                                                                                                        =========
Common stock issued under
  stock plans...............      --        --      150,220       239       --       --        --        --        239
Amortization of deferred
  stock compensation........      --        --          --        --         25      --        --        --         25
Cancellation of stock
  options...................      --        --          --        (75)       75      --        --        --        --
Issuance of Series A
  preferred stock, net of
  issuance costs of $368....   45,000     4,132      10,000        44       --       --        --        --      4,176
Accretion of discount for
  Series A preferred
  stock.....................      --        500         --        --        --       --        --       (500)      --
Conversion of Series A
  preferred stock...........  (18,450)   (1,917)    445,745     1,917       --       --        --        --        --
Dividends on Series A
  preferred stock...........      --        --          --        --        --       --        --        (72)      (72)
Cancellation of Active
  Designs shares............      --        --      (51,151)      (17)      --        17       --        --        --
                              -------- --------- ----------- --------- --------- -------- -------- ---------- ---------
Balances, January 31, 1998..   26,550     2,715  11,645,876    56,419       --       (63)       3    (38,762)   20,312

Net loss....................      --        --          --        --        --       --        --       (151)     (151)    ($151)
Unrealized loss on
  short-term investments....      --        --          --        --        --       --        (3)       --         (3)       (3)
                                                                                                                        ---------
Comprehensive loss..........                                                                                               ($154)
                                                                                                                        =========
Common stock issued under
  stock plans...............      --        --      111,057       237       --       --        --        --        237
Issuance of Series B
  preferred stock, net of
  issuance costs of $390....    5,000     4,610       5,000        18       --       --        --        --      4,628
Issuance of Series C
  preferred stock, and
  common stock warrants,
  net of issuance costs
  of $364...................    1,900     1,536         --        259       --       --        --        --      1,795
Conversion of Series A
  preferred stock...........  (24,550)   (2,489)  1,417,984     2,489       --       --        --        --        --
Conversion of Series B
  preferred stock...........   (3,400)   (3,143)  2,325,241     5,293       --       --        --     (2,150)      --
Repurchase of Series A
  preferred stock...........   (2,000)     (215)        --        --        --       --        --        --       (215)
Repurchase of Series B
  preferred stock...........   (1,600)   (1,478)        --        --        --       --        --       (322)   (1,800)
Dividends on Series A
  preferred stock...........      --        --          --        --        --       --        --        (63)      (63)
Dividends on Series C
  preferred stock...........      --        --          --        --        --       --        --         (4)       (4)
Cancellation of Active
  Designs shares............      --        --      (70,064)      (16)      --        16       --        --        --
Forgiveness of shareholder
  notes receivable..........      --        --          --        --        --        35       --        --         35
                              -------- --------- ----------- --------- --------- -------- -------- ---------- ---------
Balances, January 31, 1999..    1,900     1,536  15,435,094    64,699       --       (12)      --    (41,452)   24,771

Net income..................      --        --          --        --        --       --        --      2,348     2,348    $2,348
Unrealized gain on
  investments...............      --        --          --        --        --       --       142        --        142       142
                                                                                                                        ---------
Comprehensive income........                                                                                              $2,490
                                                                                                                        =========
Common stock issued under
  stock plans...............      --        --      418,570       987       --       --        --        --        987
Exercise of common stock
  warrants..................      --        --       40,000       207       --       --        --        --        207
Conversion of Series C
  preferred stock...........   (1,900)   (1,536)    330,416     1,536       --       --        --        --        --
Dividends on Series C
  preferred stock...........      --        --          --        --        --       --        --        (85)      (85)
Cancellation of Active
  Designs shares............      --        --       (3,300)       (1)      --         1       --        --        --
Tax benefit of employee
  stock transactions........      --        --          --         33       --       --        --        --         33
                              -------- --------- ----------- --------- --------- -------- -------- ---------- ---------
Balances, January 31, 2000..      --      $ --   16,220,780   $67,461     $ --      ($11)    $142   ($39,189)  $28,403
                              ======== ========= =========== ========= ========= ======== ======== ========== =========

SIGMA DESIGNS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2000, 1999 AND 1998 (In thousands)

                                                     2000      1999      1998
                                                   --------- --------- --------- 
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)...............................   $2,348     ($151)  ($5,076)
  Adjustments to reconcile net income (loss)
    to net cash provided by (used for)
    operating activities:
    Depreciation and amortization.................      720       571       519
    Forgiveness of shareholder notes receivable...       --        35        --
    Loss on disposal of assets....................       22        11        --
    Amortization of deferred stock compensation...       --        --        25
    Changes in assets and liabilities:
      Accounts receivable.........................      595    (1,253)       82
      Inventories.................................    2,396    (3,104)   (2,434)
      Prepaid expenses and other..................      165       (37)      (29)
      Accounts payable............................   (1,832)    1,095      (272)
      Accrued liabilities.........................      374      (409)   (1,160)
                                                   --------- --------- ---------
       Net cash provided by (used for)
         operating activities.....................    4,788    (3,242)   (8,345)
                                                   --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Fixed asset additions...........................     (466)      (34)     (553)
  Proceeds from sales of equipment................       36        50        --
  Purchases of short-term investments.............  (29,118)  (19,312)  (15,948)
  Maturity of short-term investments..............   38,009    20,148    11,801
  Other assets....................................       42       (17)       (6)
                                                   --------- --------- ---------
      Net cash provided by (used for)
        investing activities......................    8,503       835    (4,706)
                                                   --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Bank line of credit borrowings, net.............   (1,675)      400     2,485
  Increrase in restricted cash....................  (12,000)       --        --
  Proceeds from sale of common stock..............    1,194       237       239
  Proceeds from sale of preferred stock and
    warrants, net of issuance costs...............       --     6,423     4,176
  Dividends paid..................................      (80)      (93)      (23)
  Repurchase of preferred stock...................       --    (2,015)       --
  Repayment of capital lease obligations..........     (217)     (296)      (74)
                                                   --------- --------- ---------
      Net cash provided by financing activities...  (12,778)    4,656     6,803
                                                   --------- --------- ---------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.......      513     2,249    (6,248)

CASH AND EQUIVALENTS:
  Beginning of year...............................    2,946       697     6,945
                                                   --------- --------- ---------
  End of year.....................................   $3,459    $2,946      $697
                                                   ========= ========= =========

CASH PAID FOR INTEREST............................     $707      $880      $956
                                                   ========= ========= =========

CASH PAID FOR INCOME TAXES........................      $75      $ --      $ --
                                                   ========= ========= =========

NONCASH INVESTING AND FINANCING ACTIVITIES:
  Equipment acquired under capital leases.........     $244      $668       $92
                                                   ========= ========= =========

  Issuance costs for preferred stock paid in
    common stock..................................     $ --       $18      $ --
                                                   ========= ========= =========

  Accretion of discount for Series A preferred
    stock.........................................     $ --      $ --      $500
                                                   ========= ========= =========

  Adjustment of E-Motions, Inc. purchase price....     $ --      $ --      $ --
                                                   ========= ========= =========

  Dividends on Series A preferred stock...........     $ --       $14       $49
                                                   ========= ========= =========

  Dividends on Series B preferred stock...........     $ --    $2,150      $ --
                                                   ========= ========= =========

  Dividends on Series C preferred stock...........     $ --        $4      $ --
                                                   ========= ========= =========

  Conversion of Series A preferred stock into
    common stock..................................     $ --    $2,489    $1,917
                                                   ========= ========= =========

  Conversion of Series B preferred stock into
    common stock..................................     $ --    $3,143      $ --
                                                   ========= ========= =========

  Conversion of Series C preferred stock into
    common stock..................................   $1,536      $ --      $ --
                                                   ========= ========= =========

  Cancellation of notes receivable and related
    common stock..................................       $1       $16      $ --
                                                   ========= ========= =========

  Tax benefit of employee stock transactions......      $33      $ --      $ --
                                                   ========= ========= =========

  Conversion of investment in private equity
    securities into marketable equity securities..     $100      $ --      $ --
                                                   ========= ========= =========

SIGMA DESIGNS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2000, 1999 AND 1998

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

                                          Unrealized  Unrealized
                                           Loss on     Gain on
                                           Invest-     Invest-     Market
                                 Cost        ment        ment       Value
                               ---------  ----------  ----------  ---------
January 31, 2000:
  Corporate debt securities..     6,221        ($24)         $1      6,198
                               =========  ==========  ==========  =========

January 31, 1999:
  Certificates of deposit....   $12,155      $ --        $ --      $12,155
  Corporate debt securities..     2,957        --          --        2,957
                               ---------  ----------  ----------  ---------
Total........................   $15,112      $ --        $ --      $15,112
                               =========  ==========  ==========  =========

                                                        2000       1999
                                                     ---------- ----------
      Raw materials.................................    $3,797     $3,604
      Work in process...............................     1,985      3,086
      Finished goods................................     2,240      3,728
                                                     ---------- ----------
      Inventory - net...............................    $8,022    $10,418
                                                     ========== ==========

                                                        2000       1999
                                                     ---------- ----------
      Computers and equipment.......................    $3,602     $2,644
      Furniture and fixtures........................       542      1,279
      Other.........................................       327        409
                                                     ---------- ----------
      Total.........................................     4,471      4,332
      Accumulated depreciation and amortization.....    (3,228)    (3,021)
                                                     ---------- ----------
      Equipment - net...............................    $1,243     $1,311
                                                     ========== ==========

                                                        2000       1999   
                                                     ---------- ----------
      Accrued salary and benefits...................      $534       $499
      Other accrued liabilities.....................       977        633
                                                     ---------- ----------
      Total.........................................    $1,511     $1,132
                                                     ========== ==========

                                              Years Ended January 31,
                                         --------------------------------
                                            2000       1999       1998
                                         ---------- ---------- ---------- 
Numerator-
  Net income (loss) available to
    common shareholders, basic
    and diluted.........................    $2,263    ($2,690)   ($5,648)
                                         ---------- ---------- ----------
Denominator:
  Weighted average common shares
     outstanding........................    15,784     12,957     11,215
  Common shares outstanding subject
     to repurchase......................       (56)       (58)      (203)
                                         ---------- ---------- ----------
Shares used in computation, basic.......    15,728     12,899     11,012

Effect of dilutive securities:
  Common shares subject to repurchase...        56        --         --
  Stock options.........................     1,876        --         --
  Warrants..............................        44        --         --
                                         ---------- ---------- ----------
Shares used in computation, diluted.....    17,704     12,899     11,012
                                         ---------- ---------- ----------

Net income (loss) per share:
  Basic.................................     $0.14     ($0.21)    ($0.51)
                                         ========== ========== ==========

  Diluted...............................     $0.13     ($0.21)    ($0.51)
                                         ========== ========== ==========

                                              Years Ended January 31,
                                         --------------------------------
                                            2000       1999       1998
                                         ---------- ---------- ---------- 
Common shares subject to repurchase.....        --         58        203
Stock options...........................        --      3,019      2,275
Stock warrants..........................        --        209         64
Convertible preferred stock.............        --          2         27

                                                                     Weighted
                                                                     Average
                                                                     Exercise
                                                          Number      Price
                                                            of         Per
                                                          Shares      Share
                                                        ----------- ----------
      Balances, February 1, 1997 (441,362 exercisable
        at a weighted-average price of $4.17).........   1,592,379      $4.57

      Granted (weighted-average fair value of $1.37)
        (includes repricing of 1,167,779 options).....   2,235,779       2.38
      Canceled........................................  (1,441,776)      5.01
      Exercised.......................................    (111,554)      0.98
                                                        -----------
      Balances, January 31, 1998 (663,709 exercisable
        at a weighted-average price of $2.34).........   2,274,828       2.34

      Granted (weighted-average fair value of $1.32)..   1,124,000       2.07
      Canceled........................................    (303,709)      2.07
      Exercised.......................................     (65,224)      1.85
                                                        -----------
      Balances, January 31, 1999 (1,090,538
        exercisable at a weighted-average price
        of $2.36).....................................   3,029,895       2.25

      Granted (weighted-average fair value of $4.09)..     335,500       5.70
      Canceled........................................    (154,003)      2.40
      Exercised.......................................    (375,316)      2.23
                                                        -----------
      Balances, January 31, 2000......................   2,836,076      $2.65
                                                        =========== ==========

                             Options Outstanding          Options Exercisable
                      ---------------------------------- ----------------------

                        Number                             Number
                      Outstanding  Weighted    Weighted  Exercisable  Weighted
                          at        Average    Average       at       Average
  Range of Exercise   January 31,  Remaining   Exercise  January 31,  Exercise
       Prices            2000        Life       Price       2000       Price
--------------------- ----------- ----------- ---------- ----------- ----------
       $0.088              6,572        2.88     $0.088       6,572     $0.088
       $1.0000           418,959        8.75      1.000      73,141      1.000
   $2.310 - $3.060     2,059,843        7.49      2.480   1,256,655      2.410
   $3.810 - $5.190        46,702        7.36      5.020      21,402      4.890
   $5.750 - $6.380       304,000        9.71      5.760       2,500      6.380
                      -----------                        -----------
   $0.088 - $6.380     2,836,076        7.90     $2.250   1,360,270     $2.365
                      ===========                        ===========

                                              Years Ended January 31,
                                         --------------------------------
                                            2000       1999       1998
                                         ---------- ---------- ---------- 
  Net income (loss) available to
    common shareholders:
    As reported.........................    $2,263    ($2,690)   ($5,648)
                                         ========== ========== ==========

    Proforma............................    $1,279    ($3,993)   ($7,283)
                                         ========== ========== ==========

  Net income (loss) per share
    available to common shareholders:

    As reported:
      Basic.............................     $0.14     ($0.21)    ($0.51)
                                         ========== ========== ==========
      Diluted...........................     $0.13     ($0.21)    ($0.51)
                                         ========== ========== ==========

    Proforma:
      Basic.............................     $0.08     ($0.31)     $0.66
                                         ========== ========== ==========
      Diluted...........................     $0.07     ($0.31)    ($0.66)
                                         ========== ========== ==========

                                                               January 31,
                                                            -------------------
                                                              2000      1999
                                                            --------- --------- 
      Deferred tax assets:
        Net operating losses and tax credit carryforwards.   $19,131   $20,913
        Reserves not currently deductible.................     1,480     1,204
        Capitalized R&D expenditures......................       465       334
        Other.............................................       100       111
                                                            --------- ---------
                                                              21,176    22,562
      Valuation allowance.................................   (21,176)  (22,562)
                                                            --------- ---------
      Net deferred taxes..................................    $  --     $  --
                                                            ========= =========

                                           Amount
                                             (in          Expiration
                                          thousands)        Years
                                          ---------  --------------------
      Net operating losses, federal....    $46,638       2009 - 2018
      Net operating losses, state......     12,651       2000 - 2002
      Tax credits, federal.............      1,430       2006 - 2009
      Tax credits, state...............        200            -
      Net operating losses, foreign....      1,246            -

                                            2000       1999       1998
                                          ---------  ---------  ---------
                                                    (in thousands)       
      Computed at 35%...................      $842      ($165)   ($2,053)
      State taxes, expiration of net
        operating loss carryforwards....      $226        --         --
      Valuation allowance...............    (1,386)       446      1,895
      Other.............................       378       (281)       158
      Refund of state taxes from
        prior years.....................       --        (321)       --
      Benefit of net operating loss
        carryback refund................       --         --        (824)
                                          ---------  ---------  ---------
      Total.............................       $60      ($321)     ($824)
                                          =========  =========  =========

      Fiscal Year Ending                              Capital   Operating
        January 31,                                    Leases     Leases
      -------------------------------                ---------- ----------
           2001.....................................      $322       $332
           2002.....................................       192        359
           2003.....................................        53        239
                                                     ---------- ----------
      Total minimum lease payments..................       567       $930
      Amount representing interest at a rates                   ==========
        of 7.84% to 9.42%...........................       (48)
                                                     ----------
      Present value of minimum lease payments.......       519
      Current portion...............................      (308)
                                                     ----------
      Long-term portion.............................      $211
                                                     ==========

                                            2000       1999       1998
                                          ---------  ---------  ---------
Total net sales:
  Taiwan...............................    $15,021    $18,674    $14,564
  United States........................     16,535     12,389     13,349
  Hong Kong............................      2,754      3,659      3,497
  Singapore............................      8,208      3,384        626
  Europe...............................      4,114      3,926      2,429
  Rest of Asia/New Zealand.............      3,396        989      2,146
  Canada...............................        296        519        371
                                          ---------  ---------  ---------
Total net sales*.......................    $50,324    $43,540    $36,982
                                          =========  =========  =========

Long-lived assets:
  United States........................     $1,218     $1,288     $1,208
  Hong Kong............................          4         23         33
  Europe...............................         21         --         --
                                          ---------  ---------  ---------
Total long-lived assets................     $1,243     $1,311     $1,241
                                          =========  =========  =========

                                Balance                Deductions:    Balance
                                   at                     Write         at
                               Beginning                 Offs of      End of
       Classification           of Year     Additions  Accounts(1)     Year
----------------------------- ------------ ----------- ------------ -----------
Allowance for returns and
 doubtful accounts, price
 protection, and sales
 returns:
  Year ended January 31,
  2000......................   $3,306,000    $274,000   $3,166,000    $414,000
  1999......................    3,332,000     395,000      421,000   3,306,000
  1998......................      892,000   2,600,000      160,000   3,332,000

Inventory reserves:
  Year ended January 31,
  2000......................   $1,943,000  $1,350,000      $78,000  $3,215,000
  1999......................    3,792,000     655,000    2,504,000   1,943,000
  1998......................    2,455,000   1,753,000      416,000   3,792,000