**UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549**

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**FORM 10-K**

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(MARK ONE)

**[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended January 31, 2001**

**OR**

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

**FOR THE TRANSITION PERIOD FROM ___________ TO  _____________**

**Commission file number 000-15116**

**Sigma Designs, Inc.**
(Exact name of Registrant as Specified in its Charter)



|**California**                                                 | **94-2848099**                         
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

**355 Fairview WayMilpitas, California    95035**(Address of Principal Executive Offices including Zip Code)

**(408) 262-9003**(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

**Common Stock**(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [     ]

The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $37,674,984 as of April 23, 2001 based on the
closing price of the Common Stock as reported on The Nasdaq Stock Market for
that date. There were 16,309,517 shares of the Registrant's Common Stock issued
and outstanding on April 23, 2001.

DOCUMENTS INCORPORATED BY REFERENCE

Certain sections of Sigma Designs, Inc.'s definitive Proxy Statement for the
2001 Annual Meeting of Shareholders to be held on June 22, 2001 are
incorporated by reference in Part III of this Form 10-K to the extent
stated herein.







**Sigma Designs, Inc.
                        2001 ANNUAL REPORT ON FORM 10-K
                                TABLE OF CONTENTS**



|**PART I**                                                                                                | **Page No.**
|--------------------------------------------------------------------------------------------------------- | ------------
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|Item 1.   Business                                                                                        | **          
|                                                                                                          |             
|Item 2.   Facilities                                                                                      | **          
|                                                                                                          |             
|Item 3.   Legal Proceedings                                                                               | **          
|                                                                                                          |             
|Item 4.   Submission of Matters to a Vote of Security Holders                                             | **          
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|**PART II**                                                                                               | ****        
|                                                                                                          |             
|Item 5.   Market for the Registrant's Common Stock                                                        | **          
|                                                                                                          |             
|Item 6.   Selected Consolidated Financial Data                                                            | **          
|                                                                                                          |             
|Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations | **          
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|Item 7A.      Quantitative and Qualitative Disclosures About Market Risks                                 | **          
|                                                                                                          |             
|Item 8.   Consolidated Financial Statements and Supplementary Data                                        | **          
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|Item 9.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure  | **          
|                                                                                                          |             
|**PART III**                                                                                              | ****        
|                                                                                                          |             
|Item 10.  Directors and Executive Officers of the Company                                                 | **          
|                                                                                                          |             
|Item 11.  Executive Compensation                                                                          | **          
|                                                                                                          |             
|Item 12.  Security Ownership of Certain Beneficial Owners and Management                                  | **          
|                                                                                                          |             
|Item 13.  Certain  Relationships and Related Transactions                                                 | **          
|                                                                                                          |             
|**PART IV**                                                                                               | ****        
|                                                                                                          |             
|Item 14.  Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K                    | **          
|                                                                                                          |             
|Signatures                                                                                                | **          

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PART I

ITEM 1.	BUSINESS

This Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Certain Factors
Affecting Business, Operating Results, and Financial Condition" and elsewhere in
this Annual Report on Form 10-K. In this Annual Report on Form 10-K, the
"Company," "Sigma," "we," "us," and "our" refer to Sigma Designs, Inc.

Overview

Sigma Designs was incorporated as a California
corporation in 1982. We provide digital video decoding solutions for
applications in full-screen full-motion video streaming and Digital Versatile
Disk, or DVD, playback. We design, manufacture using subcontractors and market
digital video decoding products for use with personal computers and other
consumer information appliances. The emergence of digital video technology in
the personal computer, or PC, market has dramatically changed the way in which
users interact with computers. Digital video integrates different elements, such
as sound, video, and web browsing to enhance the computing experience and
deliver a heightened sense of realism. Our REALmagic product line incorporates
Moving Picture Experts Group, or MPEG, technology.

Prior to MPEG's introduction, video on personal computers
suffered from serious drawbacks. Motion pictures appeared jerky, and video was
confined to small window sizes. MPEG, a defined International Standards
Organization standard for video compression, eliminated many of those problems
and revolutionized multimedia on the PC platform. For the first time, MPEG users
could play back full-screen, full-motion video combined with stereo audio, even
from a standard CD-ROM. A single CD-ROM using the MPEG-1 compression technique
can store up to 74 minutes of full-motion video and audio. A single DVD-ROM
using MPEG-2 compression can store 2 hour of movies.

With MPEG technology, producers can create, and users can
enjoy an interactive, television-like experience on a desktop PC. The result is
a significant new visual impact, thereby opening possibilities for a wide range
of entertainment, education, training and business presentation applications. In
April 1997, we announced our entry into the DVD market. A key element of the DVD
specification is the use of MPEG-2 for digital video compression, a technology
in which Sigma has established expertise. Our REALmagic EM8400 silicon chip
solution is an extension of our MPEG expertise and provides a highly integrated
solution for PC-DVD and consumer information appliance markets.

Partnership with Industry Leaders for Streaming Video

We have built strategic partnerships to develop and
market network streaming video products with companies including ThirdSpace,
Microsoft Corporation, Infovalue, Minerva, Concurrent, Silicon Graphics, Inc.,
and Kasena.

Partnership with Set-Top Box Suppliers

With the introduction of our REALmagic EM8400 silicon, we
have established relationships with key suppliers to the emerging consumer
Internet information appliance, or set-top box manufacturers and suppliers.
These new set-top boxes support interactive capabilities and an Internet
connection viewable on your television set, thereby bringing the Internet into
the main television room in your home so that it can be more of a family
experience. The relationships we have established can be grouped into three
categories: graphical software, operating system software, and hardware
including set-top box designers, manufacturers, and component suppliers.

In the first category of graphical software, we have built
relationships with Liberate Technologies and its TV Navigator software,
Microsoft TV, and Stellar One's Connect TV system. In the second category of
operating system software, we support Wind River's VX Works, Microsoft's Windows
CE and NT, and Linux. In the third category of hardware, we have established
design wins and significant relationships with Fujitsu-Siemens and their Activy
set-top box, Acer and their CT 500, Kreatel and their Tonado 5-K consumer
gateway, and DTVro and their Personal TV set-top box. In addition, we work very
closely with CPU vendors National Semiconductor and Intel on a range of
reference designs.

Sigma Business Strategy

Our objective is to provide leading digital video
decoding solutions that enable full-screen, full-motion, best quality video in
commercial streaming applications and on internet set-top boxes, and consumer
DVD players. To accomplish this goal, we need to promote widespread acceptance
of REALmagic technology and solutions. The key parts of this strategy
include:

Win More Set-Top Box Partnerships

As previously noted, we are actively working with several
partners to promote use of our silicon solutions for video on demand and DVD
playback in set-top box applications. We will continue to nurture these
relationships in order to associate with the volume manufacturers of these set-
top boxes and enable more opportunities for uses of our silicon solutions. So
far, these relationships have focused on set-top box designs that provide
Internet connections via conventional dial up or Digital Subscriber Line, or
DSL, technology. We will also seek out new relationships with companies in the
cable and satellite broadcast markets in order to deploy our silicon solutions
in their markets.

Further Penetrate the Industry Market for Streaming
Video

Our systems integration sales team will continue to work
with our network of system integrators, national distributors, and special Value
Added Resellers, or VARs, to distribute our high-end REALmagic NetStream card.
This includes specific application identification and development in close
concert with our distribution channel. In Europe and Asia Pacific, we intend to
continue to expand our relationship with distributors as well as OEMs and VARs.
In addition, we will seek to sell silicon solutions to add-on card manufacturers
that provide their own streaming video products.

Introduce New Generations of Decoder Chipsets

A significant aspect of our product strategy is to
increase the sale of chipsets featuring our REALmagic Video Streaming Technology
while continuing to develop newer versions and generations of products,
including chipsets for PCs, set-top boxes, consumer DVD progressive players, and
HDTV applications. We seek to continue to offer consumers better-featured and
low-priced products over time.

REALmagic Products

We currently offer a complete family of REALmagic
products including:

- REALmagic NetStream
2000TV―In November 2000, we announced in a new addition to our
REALmagic NetStream family of hardware-based streaming video solutions. Our
NetStream 2000 TV is a PCI-based add-in card that provides high performance MPEG
1/MPEG 2 decoding and software drivers to play streaming video or DVD titles on
mainstream PCs with merged graphics and video overlay.
- REALmagic EM8400-In September 1999, we introduced
a new chip that sets the stage for our entry into consumer applications. Our
first MPEG-2 decoder to upconvert DVD video to progressive HDTV formats; the
EM8400 can be used for consumer home theater DVD players, streaming video client
applications, and Web DVD set-top boxes.
- REALmagic NetStream 2000-In September 1999, we
announced NetStream 2000, based on our EM8400 decoder silicon chip. This product
shipped in January 2000. A product in the NetStream family includes specialized
hardware and software developed specifically for delivering video to corporate
desktops, multiple dwelling units, hospitality markets, kiosks and
retailtainment, and can be used for both video on demand and broadcast video
playback. NetStream 2000 is an MPEG-2 playback card offering full plug and play
installation and compatibility with a broad range of third-party applications,
including video servers for video on demand, MPEG encoders for stored or real-
time playback, satellite delivery systems, streaming video playback systems and
scores of customizable interactive training titles.
- REALmagic DVR (Digital Video Recorder)-In April
1999, we announced REALmagic DVR for creating DVD titles. This product shipped
in January 2000. The REALmagic DVR is a packaged solution for authoring DVD
titles using your PC, a DVD-RAM drive, and DVD write-able media. The package
includes editing software that helps you set the flow and sequence of the video
content, authoring software that lets you add titles and interactive
capabilities, and our own DVD station software for playback. This product is a
low cost, high quality solution for corporate environments, educational
applications, and the so-called prosumer who want to author their own
DVDs.
- REALmagic
EM8300―
- REALmagic Hollywood Plus---In April 1997, we announced our entry into the DVD market. The
REALmagic Hollywood Plus MPEG-2 playback card turns a PC into a full-featured
DVD player that exploits many of the digital video and digital surround sound
capabilities of the DVD format and uncoming MPEG-2 interactive titles. The
REALmagic Hollywood Plus DVD/MPEG-2 playback card displays flicker-free video at
full-screen resolution, making video watching on a PC a new experience. Movies
can be either displayed on the PC monitor or on a large-screen TV. We even have
a remote control system that allows one to control the playback features of the
DVD station software included with the cards, via an infra-red communication
link.

REALmagic Reference Designs

We build REALmagic reference designs, which are end-user
prototype designs showing how our silicon solutions integrate into complex
consumer appliances. These reference designs serve several purposes, including
proof of concept to prospective customers, as well as an invaluable research and
development experience for our engineers who develop the integrated end
solution. This process always gives us ideas for what to incorporate into our
next generation solutions.

- REALmagic Set-Top Box Reference Design-In April 1999, we
announced our next-generation set-top box reference design, the STB 2000. This
unique convergence appliance represents a new wave of flexibility, performance,
and cost reduction that is intended to be made available through telcos, ISPs,
satellite providers, and system integrators that are deploying high bandwidth,
digital video-ready Internet services. Our design incorporates the two primary
functions our decoder silicon enables, that is, DVD playback and video on
demand.
- REALmagic Progressive DVD Player Reference Design-In
January 2000, we announced our progressive DVD player reference design. This new
progressive DVD player reference design is a low-cost solution for producing a
complete, standalone DVD player for both traditional interlaced televisions as
well as progressive scan output for HDTV and high definition
projects.

Marketing and Sales

We currently distribute our 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 Utobia,
Pacific Magtron, Lung Hwa Electronics Co., Ltd., Formosa Industrial Computing.
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 15% of our net revenues in fiscal 2001.

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, 2001, we had a staff of 51 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 2001, 2000, and 1999, our research and
development expenses were $7,384,000, $6,397,000, and $5,678,000 respectively.
We plan to continue to devote substantial resources to research and development
of future generations of MPEG and other multimedia products.

Competition

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.

Licenses, Patents and Trademarks

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. Fifteen 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 our 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

Employees

As of January 31, 2001, we had 98 full-time employees,
including 51 in research and development, 23 in marketing, sales and support, 8
in operations, and 16 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.

Certain Factors Affecting Business, Operating Results, and
Financial Condition

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

We incurred significant operating losses in fiscal 1995,
1996, 1998 and 2001 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. Fiscal 2001 included significant loss associated with the decline in
demand of our REALmagic products. Since our inception through January 31,
2001, our total accumulated deficit is $46,057,000. We cannot assure you that we
will be able to sell our 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.

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

We have an Amended and Restated Business Loan Agreement
with Silicon Valley Bank, dated October 31, 2000. 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 certain covenants that,
among other things, we are required to maintain tangible net worth plus
subordinated debt of at least $25,000,000, quarterly net income, and certain
financial ratios. Since July 1997, we have, on occasion, been in violation some
of the covenants and have obtained waivers releasing us from our obligation to
meet these covenants as of previous dates. We may need a waiver for the quarter ending April 30,
2001 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.

Marketing risks and volatility of OEM customer sales and
resale distribution may harm our business.

Our ability to increase sales, achieve 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
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, three of our customers accounted for 15%,
14% and 11% of our net sales, respectively, in fiscal 2001. 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 achieve 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. We recently faced sales returns from one of our
distributor in the amount of approximately $1.4 million and provided for a bad
debt allowance in the amount of approximately $2.2 million. 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.

Failure to keep pace with technological change will
seriously harm our business.

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. We recently had to write off our
inventory in the amount of approximately $1.9 million because of a decline in
demand for certain of our PC-related products. 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.

Our industry is highly competitive and we cannot assure
you that we will be able to effectively compete.
If we fail to compete effectively, our business will not be
financially viable.

The market for multimedia products is highly competitive
and is also influenced by imbedded processors provided by multiple companies.
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;
- IBM Corporation;
- Zoran Corporation;
- LSI Logic/C-Cube;
- ESS Technology;
- Broadcom;
- TriMedia Technologies.

In addition, Intel computer CPU chips processors have become
more powerful, such that video decoding could 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 net sales are dependent on market demand for
multimedia products. If demand for our products continues to decline, our
financial condition will be seriously harmed.

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, 2001, sales of PC-DVD or video streaming decoding
products accounted for virtually all of our net sales. If market demand for
digital video decoding products continues to decline, our financial condition
will be seriously harmed.
In addition, one customer based in Taiwan accounted for 14%, 26%, and 28% of our total revenues
in fiscal 2001, 2000 and 1999.  One customer based in Singapore accounted for 15%, 13% and 3%
of our total revenues in fiscal 2001, 2000 and 1999.  One customer based in Japan accounted for
11%, 2% and 1% of our total revenues in fiscal 2001, 2000 and 1999.

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

Our operating results have fluctuated in the past and may
continue to fluctuate in the future. 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;
- shifts in demand for technology embodied in our
products;
- reductions in selling prices;
- inventory obsolescence;
- write-downs of accounts receivable;
- an interrupted or inadequate supply of semiconductor
chips;
- our ability to protect our intellectual property;
and
- loss of our key personnel;
- technical problems causing shipping delays; and
- availability of third-party manufacturing
capcity.

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.

We face many risks because of our reliance heavy on
certain manufacturers and suppliers that could harm our business and financial
condition.

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.

Loss of key personnel could cause our business to
suffer.

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.

We face risks related to intellectual property rights.

Our ability to compete may be affected by our ability to
protect our proprietary information. We currently hold fifteen 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.

Our international operations are subject to certain
risks.

During fiscal 2001, 2000, and 1999, sales to
international customers accounted for approximately 65%, 67%, and 71% 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 total net revenues. 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 us 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.

Our stock price may be volatile.

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.

EXECUTIVE OFFICERS OF THE COMPANY

Our executive officers and directors and their ages as of
April 1, 2001 are as follows:



|Name                    | Age | Position                                                     
|----------------------- | --- | -------------------------------------------------------------
|Thinh Q. Tran           | 47  | Chairman of the Board, President, and Chief Executive
Officer
|Silvio Perich           | 52  | Senior Vice President, Worldwide Sales                       
|Jacques Martinella      | 45  | Vice President, Engineering                                  
|Kenneth Lowe            | 45  | Vice President, Business Development                         
|Kit Tsui                | 51  | Chief Financial Officer, and Secretary                       
|William J. Almon (1)(2) | 68  | Director                                                     
|William Wang (1)(2)     | 37  | Director                                                     
|Julien Nguyen (1)       | 44  | Director                                                     

_________________

1. Member of the Audit Committee
2. Member of the Compensation Committee

Mr. Tran, a founder of Sigma, has served as
President, Chief Executive Officer, and Chairman of the Board of Directors since
February 1982. Prior to joining Sigma, 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 Sigma in September 1985 as Director,
Sales. In September 1992, Mr. Perich became Senior Vice President,
Worldwide Sales. 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 Sigma 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. Lowe joined Sigma in May 2000 as Vice President,
Marketing. In December 2000, Mr. Lowe became Vice President, Business
Development. Prior to joining Sigma, Mr. Lowe served as the Director of
Multimedia Marketing for Cadence Design Systems. From 1996 to 1998, Mr. Lowe
served as the Vice President of Marketing for Chrontel. Prior to 1996, Mr. Lowe
held various marketing management positions Sierra Semiconductor, Datquest,
Personal CAD Systems, Performix and Gould-Biomation. In the late 1980's, Mr.
Lowe served as Product Marketing Director of Sigma.

Ms. Tsui joined Sigma 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, Chief Accounting
Officer in January 2000 and Chief Financial Officer in January 2001.

Mr. Almon has served as Director of Sigma 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 Sigma 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.

Mr. Julien Nguyen became a Director of Sigma in May, 2000.
Mr. Nguyen is a General Partner of Global Catayst Partners, a corporate venture fund.
Mr. Nguyen is the cofounder and Chairman of ezlogin.com. Prior to exlogin.com,
Mr. Nguyen founded Novita Communications and served as its CEO. From February
1995 to October 1996, Mr. Nguyen served as Co-Chairman and Chief Technical
Officer of Sigma. From August 1993 until January 1995, he served as Vice
President, Engineering and Chief Technical Officer of the Company. From May 1992
until October 1993, Mr. Nguyen was President and Chief Executive Officer of E-
Motions, which was acquired by the Company in 1993. Prior to founding E-Motions,
Mr. Nguyen worked at Radious Inc. as Director of Product Development and was in
charge of all product development for five years. Mr. Nguyen also serves on the
board of VM Labs.

ITEM 2.	FACILITIES

We currently lease a 25,000 square foot facility in
Milpitas, California that is used as our headquarters. The lease will expire in
September 2002. We also lease facilities for sales offices in Hong Kong and
Shenzhen China, and for research and development near Paris, France. We believe
that we have adequate facilities to accommodate our 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. On July 10, 2000, the court entered judgment in our favor, which became
final on July 27, 2000 when the plaintiffs determined not to appeal.

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

None.



PART II

ITEM 5.	MARKET FOR SIGMA DESIGNS' COMMON STOCK

Our Common Stock trades on the Nasdaq Stock Market's
Nasdaq National Market under the trading symbol "SIGM". The table below sets
forth the high and low sales prices per share of our Common Stock for the
periods indicated.

|                                | Fiscal 2001 | Fiscal 2000
|------------------------------- | ----------- | -----------
|                                | High        | Low        
|First quarter ended April 30    | 11 3/8      | 3 15/16    
|Second quarter ended July 31    | 7 1/8       | 3 1/2      
|Third quarter ended October 31  | 6 7/16      | 2 1/8      
|Fourth quarter ended January 31 | 3 31/32     | 1 1/32     

As of April 23, 2001, we had 229 shareholders of record. We
have never paid cash dividends on our common stock and we do not plan to pay
cash dividends to our common shareholders in the foreseeable future. We are
obligated to pay certain dividends on our outstanding preferred stock. In 2001,
we paid $ 8,000 in dividends on such stock.



ITEM 6.	SELECTED CONSOLIDATED FINANCIAL DATA

The following selected financial data is derived from our consolidated
financial statements. This data should be read in conjunction with our
consolidated financial statements and notes thereto, and with Management's
Discussion and Analysis of Financial Condition and Results of
Operations.

|                                                                     |                                       |          | Fiscal Year |          |         
|-------------------------------------------------------------------- | ------------------------------------- | -------- | ----------- | -------- | --------
|                                                                     | 2001                                  | 2000     | 1999        | 1998     | 1997    
|                                                                     | (In thousands, except per share data)
|Net Revenues                                                         | $ 29,476                              | $ 50,324 | $ 43,540    | $ 36,982 | $ 41,214
|Net income (loss) available to common
shareholders                   | (6,868)                               | 2,263    | (2,690)     | (5,648)  | 1,529   
|Diluted net income (loss) per share available to
common shareholders | (0.42)                                | 0.13     | (0.21)      | (0.51)   | 0.14    
|Working capital                                                      | 19,706                                | 27,092   | 23,578      | 18,960   | 20,164  
|Total assets                                                         | 38,334                                | 44,751   | 44,220      | 38,329   | 37,915  
|Shareholders' equity                                                 | 21,781                                | 28,403   | 24,771      | 20,312   | 21,017  







ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

YOU SHOULD READ THE FOLLOWING DISCUSSION IN
CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. THE
FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS, WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, ABOUT THE MARKETS IN WHICH WE OPERATE AND OUR BUSINESS AND
PROSPECTS, INCLUDING STATEMENTS ABOUT THE SUFFICIENCY OF OUR CURRENT RESERVE OF
CASH AND CASH EQUIVALENTS, OUR SHORT-TERM INVESTMENTS AND OUR BANK LINES OF
CREDIT TO MEET OUR WORKING CAPITAL REQUIREMENTS, AND THE EFFECT OF INTEREST RATE
CHANGES ON THE VALUE OF OUR SHORT-TERM INVESTMENTS, OUR BANK LINES OF CREDIT AND
OUR FOREIGN CURRENCY CASH BALANCES. THESE STATEMENTS ARE SUBJECT TO MANY RISKS
AND UNCERTAINTIES WHICH MAY RESULT IN DIFFERENT OR DISAPPOINTING FUTURE BUSINESS
AND FINANCIAL RESULTS. MANY OF THESE RISKS AND UNCERTAINTIES ARE DISCUSSED IN
THIS REPORT, INCLUDING UNDER "FACTORS AFFECTING FUTURE OPERATING RESULTS".

Results of Operations

For the fiscal year ended January 31, 2001, our net
revenues decreased 41% to $29.5 million from $50.3 million reported for fiscal
2000. This decrease in revenues was primarily attributable to the overall
decline in the markets for our products due to the general economic slowdown
during that period, the decline in demand for chipsets and boards in PC-DVD
applications due to the prevalence of DVD-enabling software provided as original
equipment in many PCs, delays in the deployment of video networking applications
for the corporate market, and delays in deployment of set-top-boxes for the
consumer internet information appliance market. Our revenues from sales of
chipsets and boards in PC-DVD applications, and sales from video networking
products for the corporate market represented a significant portion of our total
net revenues for fiscal 2001. The decline in demand for chipsets and boards in
PC-DVD applications and delays in the deployment of video networking
applications which utilize our products may continue. Should they continue, this
decline and these delays would continue to reduce our revenues and harm our
business. The decrease in net revenues from fiscal 2000 to fiscal 2001 was also
attributable to the deferral of recognition of certain revenues by us due to our
difficulty in estimating certain return levels, as well as collectibility issues
with our customers. We recorded sales returns of approximately $1.4 million due
to the inability of one of our distributors to sell through our products to its
customers in a reasonable period of time.

Net loss for the fiscal year ended January 31, 2001 was $6.9
million as compared to net income of $2.3 million for the prior fiscal year. The
net loss for fiscal 2001 was primarily caused by the decline in revenue from the
prior fiscal year. The net loss for fiscal 2001 included a charge of $1.9
million to write down certain PC-DVD and video networking related inventories
due to the decline in demand for those products, and a provision for bad debt
allowance in the amount of $2.2 million due to collectibility issues relating to
one of our customers and the non payment by another customer for customization
services that we provided.

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

|                                                   | Fiscal 2001 | Fiscal 2000 | Fiscal 1999
|-------------------------------------------------- | ----------- | ----------- | -----------
|Net revenues                                       | 100%        | 100%        | 100%       
|Cost of revenues                                   | 70%         | 69%         | 72%        
|Gross profit                                       | 30%         | 31%         | 28%        
|Operating expenses                                 |             |             |            
|Research and development                           | 25%         | 13%         | 13%        
|Sales and marketing                                | 14%         | 9%          | 9%         
|General and administrative                         | 15%         | 6%          | 7%         
|Other (income) expense                             | (1%)        | (1%)        | -          
|Benefit from income taxes                          | -           | -           | (1%)       
|Net income (loss)                                  | (23%)       | 5%          | -          
|Dividends on preferred stock                       | -           | (1%)        | (6%)       
|Net income (loss) available to common shareholders | (23%)       | 4%          | (6%)       

Net Revenues

The following table sets forth our net revenues in each
product group for the last three years:

|(Dollars in thousands) | Fiscal 2001 |     | Fiscal 2000 |     | Fiscal 1999 |    
|---------------------- | ----------- | --- | ----------- | --- | ----------- | ---
|Multimedia Products:   |             |     |             |     |             |    
|Boards                 | $13,575     | 46% | $22,940     | 46% | $19,592     | 45%
|Chipsets               | 12,936      | 44% | 25,831      | 51% | 22,066      | 51%
|Other                  | 2,965       | 10% | 1,553       | 3%  | 1,882       | 4% 
|TOTAL NET REVENUES     | $29,476     |     | $50,324     |     | $43,540     |    



The multimedia products category includes MPEG encoding and
decoding solutions for desktop computers as well as for PC manufacturers and
add-on card makers. Our board level product lines are 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. Our
chipsets are targeted toward manufacturers and large volume OEM customers
building interactive multimedia products for business and consumer markets. The
"other" category includes set-top-box products targeted at the consumer internet
information appliance market - a market which we entered in fiscal 2000, resale
of DVD ROM drives, and development revenues under agreements for the
customization of certain MPEG decoding chips, which totaled approximately $1.9
million in fiscal 2001. The costs related to development revenues were included
in research and development expenses.

The table below sets forth our revenues by market segment for
each of the last three fiscal years:

|(Dollars in thousands)             | Fiscal 2001 |     | Fiscal 2000 |     | Fiscal 1999 |    
|---------------------------------- | ----------- | --- | ----------- | --- | ----------- | ---
|Internet/intranet video networking | $ 7,566     | 26% | $ 8,200     | 16% | $ 7,611     | 17%
|PC-DVD upgrade                     | 6,745       | 23% | 15,836      | 32% | 11,956      | 28%
|Chipsets                           | 12,936      | 44% | 25,831      | 51% | 22,066      | 51%
|Other                              | 2,229       | 7%  | 457         | 1%  | 1,907       | 4% 
|TOTAL NET REVENUES                 | $29,476     |     | $50,324     |     | $43,540     |    

Our board level products primarily consist of two market
groups: intranet/internet video networking and PC-DVD encoding and decoding
applications. Video networking board products accounted for 26% of our net
revenues in fiscal 2001, 16% in fiscal 2000, and 17% in fiscal 1999. PC-DVD
board products accounted for 23% of our net revenues in fiscal 2001, 32% in
fiscal 2000, and 28% in fiscal 1999. Chipsets revenues accounted for 44% of our
net revenues in fiscal 2001, 51% in fiscal 2000, and 51% in fiscal 1999. Other
revenues accounted for 7% of our net revenues in fiscal 2001, 1% in fiscal 2000,
and 4% in fiscal 1999. Video networking board product revenue decreased 8% to
$7.6 million in fiscal 2001 from $8.2 million in fiscal 2000. PC-DVD board
product revenues decreased 57% to $6.7 million in fiscal 2001 from $15.8 million
in fiscal 2000. Chipsets revenue decreased 50% to $12.9 million in fiscal 2001
from $25.8 million in fiscal 2000. Other revenues increased 388% to $2.2 million
in fiscal 2001 from $0.5 million in fiscal 2000. The overall decrease in board
level products and chipsets was primarily attributable to the decline in demand
in the video networking application and in PC markets. The increase in other
revenue was primarily attributable to increased development revenues for certain
MPEG decoding chip customization, which totaled approximately $1.9 million.

The table below sets forth our revenues by geographic region
for each of the last three fiscal years:



|(Dollars in thousands) | Fiscal 2001 |     | Fiscal 2000 |     | Fiscal 1999 |    
|---------------------- | ----------- | --- | ----------- | --- | ----------- | ---
|United States          | $10,241     | 35% | $16,535     | 33% | $12,389     | 29%
|Asia                   | 17,326      | 59% | 29,142      | 58% | 26,571      | 61%
|Europe                 | 1,574       | 5%  | 4,114       | 8%  | 3,926       | 9% 
|Canada                 | 16          | 0%  | 296         | 1%  | 519         | 1% 
|Other regions          | 319         | 1%  | 237         | 0%  | 135         | 0% 
|TOTAL NET REVENUES     | $29,476     |     | $50,324     |     | $43,540     |    



Our U.S. revenues as a percentage of total net revenues were
35% in fiscal 2001, 33% in 2000, and 29% in fiscal 1999. Total U.S. revenues in
fiscal 2001 decreased 38% to $10.2 million, from $16.5 million in fiscal 2000.
Total Asia revenues as a percentage of total revenues were 59% in fiscal 2001,
58% in fiscal 2000 and 61% in fiscal 1999. Total Asia revenues in fiscal 2001
decreased 41% to $17.3 million in fiscal 2001, from $29.1 million in fiscal
2000. Our Asia revenues were derived predominantly from customers in Taiwan,
Singapore, and Japan. Revenues generated from Taiwan in fiscal 2001 accounted
for 19% of out total net revenues, as compared to 30% for fiscal 2000 and 43%
for fiscal 1999. Revenues generated from Singapore in fiscal 2001 accounted for
17% of our total net revenues, as compared to 16% for fiscal 2000 and 8% for
fiscal 1999. Revenues generated from Japan in fiscal 2001 accounted for 11% of
our total net revenues, as compared to 3% for fiscal 2000 and 1% for fiscal
1999. One customer based in Taiwan accounted for 14% of our total net revenues
in fiscal 2001, as compared to 26% in fiscal 2000 and 28% in fiscal 1999. One
customer based in Singapore accounted for 15% of our total net revenues in
fiscal 2001, as compared to 13% in fiscal 2000 and 3% in fiscal 1999. One
customer based in Japan accounted for 11% of our total net revenues in fiscal
2001, as compared to 2% in fiscal 2000 and 1% in fiscal 1999. The overall year
to year decrease in revenues from fiscal 2000 to fiscal 2001 was primarily
attributable to the global downturn in the PC market and the normal fluctuations
in the markets for our multimedia products due to deployment cycle variations
between projects. Revenues attributable to the one Taiwan customer primarily
represent chipsets, some of which have been resold by the customer to third
parties and others have been included in boards which we have purchased for
resale to other customers. In the fourth quarter of fiscal 2001, collectibility
of amounts due from the Taiwanese customer became uncertain as we were unable to
collect amounts owed under our contractual terms; accordingly, we began
recognizing revenues related to these sales after the customer has resold these
products to third parties and when collectibility is assured. These changed
circumstances, along with modifications to our agreements with this customer,
are expected to result in lower chipset revenues from this customer on an
ongoing basis.

Gross Margin

Our gross margin as a percentage of net revenues was
approximately 30% in fiscal 2001, 31% in fiscal 2000, and 28% in fiscal 1999.
Excluding development revenues of $1.9 million, the gross margin was
approximately 25% in fiscal 2001; this decrease was primarily attributable to
the increased provision for inventory write-downs. We may have
additional inventory write-downs in the future due to obsolete inventory. The
fiscal 2000 gross margin increase was a result of increased sales of chipsets,
which have a more favorable gross margin compared to our board products.

Operating Expenses

Sales and marketing expenses decreased $338,000 or 8% in
fiscal 2001 over fiscal 2000. This decrease was the results of a reduction of
business development group personnel, an elimination of outside public relation
services, and reduced sales commissions in connection with reduced revenues. The
same expenses increased $418,000, or 10%, in fiscal 2000 over fiscal 1999. The
increase was largely due to the addition of business development staff and
increased sales and marketing-support related expenses in connection with our
operations in Hong Kong and China. We believe that our sales and marketing
expenses will increase in future periods as we intend to increase headcount in
our sales and marketing organization and to expand our product marketing and
sales development.

Research and development expenses increased $987,000 or 15%
in fiscal 2001 over fiscal 2000 and $719,000, or 13% in fiscal 2000 over fiscal
1999. The increases in fiscal 2001 and 2000 were largely due to increases in
technical development support, the research and development center established
in France during the fourth quarter of fiscal 2000. We expect to continue our
efforts in the development of our proprietary MPEG based products, and research
and development expenses will likely increase accordingly year-over-year.

Our general and administrative expenses increased $1.6
million or 57% in fiscal 2001 from fiscal 2000. Excluding provision for bad debt
of approximately $1.9 million, general and administrative expenses decreased
$293,000 or 10% as compared to fiscal 2000. The decrease was largely due to the
refund by our insurance company of costs previously expensed related to a
shareholder lawsuit resolved in fiscal 2001 and reduction of legal expenses in
general. The same expense decreased $116,000 or 4% in fiscal 2000 compared to
fiscal 1999. The decrease was primarily due to non-recurring professional fees
associated with the settlement in fiscal 1999 from the California Franchise Tax
Board for a claim of certain tax benefits previously filed by us. We expect our
general and administrative expenses will increase relatively in future periods
due to the increasing cost of insurance, professional services and other
expenditures associated with our business.

Liquidity and Capital Resources

As of January 31, 2001, our principal sources of
liquidity included cash, cash equivalents, restricted cash, and short-term
investments of $22.3 million, an increase of $672,000 compared with $21.7
million at January 31, 2000. This increase resulted from operating activities
that generated cash of approximately $2.1 million, and from issuance of our
common stock under our stock option plan and employee stock purchase plan of
$334,000, which was partially offset by our payment of $364,000 for the
acquisition of fixed assets, repayment of capital lease obligations in the
amount of $382,000, and cash used for other investing activities totaling
approximately $1.0 million.

As of January 31, 2001, we had $12.0 million outstanding
under a $12.0 million bank revolving line of credit that expires in October 2001
and is collateralized by funds on deposit in accounts that have been assigned to
the lender. We also have a $6.0 million bank line of credit available that
expires in October 2001 and is collateralized by our accounts receivable,
inventories, equipment, and intangibles. This asset-based line of credit had an
outstanding balance $810,000 standby letter of credits to secure certain lease
obligations. This line of credit contains certain covenants that, among other
things, require us to maintain tangible net worth plus subordinated debt of at
least $25.0 million, quarterly net income, and certain financial ratios. At
January 31, 2001, we were not in compliance with some of these covenants and we
have obtained waivers releasing us from our obligation to meet these
covenants, as of that date; however, we will be required to be in compliance
with those covenants in the future.

Our primary sources of funds to date have been cash generated
from operations, proceeds from preferred and common stock issuances, capital
lease arrangements, and bank borrowings under lines of credit. We believe that
our current reserve of cash and equivalents, short-term investments and the
availability of funds under our existing asset-based banking arrangements will
be sufficient to meet anticipated working capital requirements and other cash
needs for the 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.

Factors Affecting Future Operating Results

Our 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 us and our competitors; market
acceptance of the technology embodied in our products generally and our products
in particular; customer acceptance of our products; shifts in demand for the
technology embodied in our products generally and our products in particular
and/or those of our 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 interruped,
and may continue to be interrupted in the future because of earthquakes in
Taiwan; our inability to protect our 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 our products. We derive a substantial
portion of our 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 our
future international revenues. Any adverse change in the foregoing or other
factors could have a material adverse effect on our business, financial
condition, and results of operations.

Due to the factors noted above, our 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 our common stock. Additionally, we 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 our common stock. Further, we operate in
a highly dynamic industry, which often results in volatility of our common stock
price.

Recent Accounting Pronouncements

In June 1998, SFAS 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. In June 1999, the Financial Accounting Standards
Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB No. 133". No. 137 amended the
effective date of SFAS No. 133 to all fiscal quarters of fiscal years beginning
after June 15, 2000. We have determined the adoption of this statement will not
have a materialimpact on our financial statements.



ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

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

Interest Rate Sensitivity. At January 31, 2001, we
held $4.9 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,
2001, the fair market value of the short-term investments would decline by an
immaterial amount. We generally expect to have the ability to hold our
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, 2001, we had $12,000,000 outstanding under a
$12,000,000 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 our net income and
cash flows.

Foreign Currency Exchange Rate Sensitivity. The Hong Kong dollar and
French franc are the financial currency in our subsidiaries in Hong Kong and
France. We do 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, we do 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, 2001, the fair value of these foreign
currency amounts would decline by an immaterial amount.



ITEM 8.	CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Sigma's consolidated financial statements, the notes thereto, and the
independent auditors' report appear on pages F-1 through F-20 and S-1 of this
Annual Report on Form 10-K.

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.





PART III

ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The information required by this item concerning our
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 our Proxy Statement relating to the 2001 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the end of our fiscal year pursuant to General Instruction
G(3) of Form 10-K (the "Proxy Statement"). Certain information required by this
item concerning our executive officers is incorporated by reference to the
information set forth in Part I of the Annual Report on 10-K.

ITEM 11.	EXECUTIVE COMPENSATION

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.

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

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.

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Please see the information set forth in the section
entitled "Transactions with Management" in our Proxy Statement, which we are
incorporating into this Form 10-K by reference.





PART IV

ITEM 14.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)

1.	Financial Statements

The following documents are filed as part of this Annual
Report on Form 10-K:



|                                                                                                                                     | Page
|------------------------------------------------------------------------------------------------------------------------------------ | ----
|Independent Auditors' Report                                                                                                         | F-1 
|Consolidated Balance Sheets as of January 31, 2001 and
2000                                                                          | F-2 
|Consolidated Statements of Operations for the years ended
January 31, 2001, 2000, and 1999                                           | F-3 
|Consolidated Statements of Shareholders' Equity and
Comprehensive Income (Loss) for the years ended January 31, 2001, 2000, and
1999 | F-4 
|Consolidated Statements of Cash Flows for the years ended
January 31, 2001, 2000 and 1999                                            | F-5 
|Notes to Consolidated Financial Statements                                                                                           | F-7 

2.	Financial Statements Schedules

The following financial statement schedule is filed as part
of this Annual Report on Form 10-K:



|Schedule II-Valuation and Qualifying Accounts and
Reserves | S-1
|---------------------------------------------------------- | ---

All other schedules have been omitted as they are not
required, not applicable, or the required information is otherwise
included.

(b)	Reports on Form 8-K

No reports on Form 8-K were filed during the fourth quarter
ended January 31, 2001.

(c)	Exhibits

The exhibits listed on the accompanying index to exhibits
immediately following the financial statement schedules are incorporated by
reference into this Annual Report on Form 10-K.

---

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 1st day of May 2001.

SIGMA DESIGNS, INC.

By: /s/ Thinh Q. Tran

Chairman of the Board,
	President, and Chief Executive Officer



POWER OF ATTORNEY

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:

|Signature                            | Title                                                                                       | Date       
|------------------------------------ | ------------------------------------------------------------------------------------------- | -----------
|                                     |                                                                                             |            
|/s/ Thinh Q. TranThinh Q. Tran       | Chairman of the Board, President, and Chief Executive Officer
(Principal Executive Officer) | May 1, 2001
|/s/ Kit TsuiKit Tsui                 | Chief Financial Officer and Secretary (Principal Accounting
Officer)                        | May 1, 2001
|/s/ William J. AlmonWilliam J. Almon | Director                                                                                    | May 1, 2001
|/s/ William WangWilliam Wang         | Director                                                                                    | May 1, 2001
|/s/ Julien NguyenJulien Nguyen       | Director                                                                                    | May 1, 2001

---



INDEPENDENT AUDITORS' REPORT



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, 2001 and 2000, 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, 2001. 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 auditing standards
generally accepted in the United States of America. 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, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended January 31, 2001 in conformity with accounting principles generally
accepted in the United States of America. 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
March 16, 2001

---

**SIGMA DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2001 and 2000 (Dollars in thousands)
2001       2000
                                                            ---------  ---------
ASSETS**
CURRENT  ASSETS:
  Cash and equivalents.................................... $   5,422  $   3,459
  Short-term investments..................................     4,907      6,198
  Accounts receivable (net of allowances of
    $2,124 in 2001, and $414 in 2000)......................     5,122     13,053
  Inventories.............................................     8,159      8,022
  Restricted cash.........................................    12,000     12,000
  Prepaid expenses and other assets.......................       296        497
                                                            ---------  ---------
           Total current assets                               35,906     43,229
EQUIPMENT  - Net..........................................     1,346      1,243
OTHER  ASSETS.............................................     1,082        279
                                                            ---------  ---------
TOTAL..................................................... $  38,334  $  44,751
                                                            =========  =========
**LIABILITIES AND SHAREHOLDERS' EQUITY**
CURRENT LIABILITIES:
  Bank line of credit..................................... $  12,000  $  12,041
  Accounts payable........................................     2,423      2,277
  Accrued liabilities.....................................     1,448      1,511
  Current portion of capital lease obligations............       329        308
                                                            ---------  ---------
           Total current liabilities......................    16,200     16,137
                                                            ---------  ---------
CAPITAL LEASE OBLIGATIONS.................................       349        211
Other - long term liabilities                                      4        --

COMMITMENTS AND CONTINGENCIES (Note 9)

SHAREHOLDERS' EQUITY:
  Common stock - no par value:  20,000,000
   shares authorized; shares outstanding:
   2001, 16,313,464; 2000, 16,220,780.....................    67,785     67,461
  Shareholder notes receivable............................        (1)       (11)
  Accumulated other comprehensive income..................        54        142
  Accumulated deficit.....................................   (46,057)   (39,189)
                                                            ---------  ---------
           Shareholders' equity                               21,781     28,403
                                                            ---------  ---------
TOTAL..................................................... $  38,334  $  44,751
                                                            =========  =========

See notes to consolidated financial statements.

---

**SIGMA DESIGNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
(In thousands, except per share amounts)
2001       2000       1999
                                          ---------  ---------  ---------**
NET REVENUES............................ $  29,476  $  50,324  $  43,540

COSTS AND EXPENSES:
  Cost of revenues......................    20,661     34,481     31,259
  Research and development..............     7,384      6,397      5,678
  Sales and marketing...................     4,152      4,490      4,072
  General and administrative............     4,511      2,869      2,985
                                          ---------  ---------  ---------
           Total costs and expenses.....    36,708     48,237     43,994
                                          ---------  ---------  ---------
INCOME (LOSS) FROM OPERATIONS               (7,232)     2,087       (454)
  Interest income.......................     1,355        929        935
  Interest expense......................      (936)      (770)      (946)
  Other income (expense), net...........       (53)       162         (7)
                                          ---------  ---------  ---------
INCOME (LOSS) BEFORE INCOME TAXES.......    (6,866)     2,408       (472)
(PROVISION FOR) BENEFIT FROM
  INCOME TAXES..........................        (2)       (60)       321
                                          ---------  ---------  ---------
NET INCOME (LOSS).......................    (6,868)     2,348       (151)
DIVIDENDS ON PREFERRED STOCK............       --          85      2,539
                                          ---------  ---------  ---------
NET INCOME (LOSS) AVAILABLE TO COMMON
  SHAREHOLDERS.......................... $  (6,868) $   2,263  $  (2,690)
                                          =========  =========  =========
NET INCOME (LOSS) PER SHARE AVAILABLE
  TO COMMON SHAREHOLDERS:
  Basic................................. $   (0.42) $    0.14  $   (0.21)
                                          =========  =========  =========
  Diluted............................... $   (0.42) $    0.13  $   (0.21)
                                          =========  =========  =========
SHARES USED IN COMPUTATION:
  Basic.................................    16,262     15,728     12,899
                                          =========  =========  =========
  Diluted...............................    16,262     17,704     12,899
                                          =========  =========  =========

See notes to consolidated financial statements.

---

**SIGMA DESIGNS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
(Dollars in thousands)
Accumu-
                                                                                     lated
                                                                           Share-    Other                           Total
                                                                           holder   Compre-                         Compre-
                                   Preferred Stock     Common Stock        Notes    hensive    Accumu-              hensive
                                ------------------ ---------------------  Receiv-    Income     lated                Income
                                 Shares    Amount    Shares      Amount     able     (Loss)    Deficit     Total     (Loss)
                                --------  -------- -----------  --------  --------  --------  ----------  --------  --------**
Balances, February 1, 1998.....  26,550  $  2,715  11,645,876  $ 56,419  $    (63) $      3  $  (38,762) $ 20,312

Net loss.......................     --        --          --        --        --        --         (151)     (151) $   (151)
Unrealized loss on
  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

Net loss.......................     --        --          --        --                           (6,868)   (6,868) $ (6,868)
Unrealized loss on investments.     --        --          --        --                 (114)                 (114)     (114)
Accumulated translation
  adjustment...................     --        --          --        --                   26                    26        26
                                                                                                                    --------
Comprehensive loss.............                                                                                    $ (6,956)
                                                                                                                    ========
Common stock issued under
  stock plans..................     --        --      131,684       308       --        --          --        308
Exercise of common stock
  warrants.....................     --        --        5,000        26       --        --          --         26
Cancellation of Active
  Designs shares...............     --        --      (44,000)      (10)       10       --          --        --
                                --------  -------- -----------  --------  --------  --------  ----------  --------
Balances, January 31, 2001.....     --   $    --   16,313,464  $ 67,785  $     (1) $     54  $  (46,057) $ 21,781
                                ========  ======== ===========  ========  ========  ========  ==========  ========

See notes to consolidated financial statements.

---

**SIGMA DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
(In thousands)

2001      2000      1999
                                                    --------  --------  --------**
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)............................... $ (6,868) $  2,348  $   (151)
  Adjustments to reconcile net income (loss)
    to net cash provided by (used for)
    operating activities:
    Depreciation and amortization.................      789       720       571
    Forgiveness of shareholder notes receivable...      --        --         35
    Loss on disposal of assets....................       13        22        11
    Other noncash expenses........................       51       --        --
    Changes in assets and liabilities:
      Accounts receivable.........................    7,931       595    (1,253)
      Inventories.................................     (137)    2,396    (3,104)
      Prepaid expenses and other..................      201       165       (37)
      Accounts payable............................      146    (1,832)    1,095
      Accrued liabilities and other...............      (59)      374      (409)
                                                    --------  --------  --------
       Net cash provided by (used for)
         operating activities.....................    2,067     4,788    (3,242)
                                                    --------  --------  --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Fixed asset additions...........................     (364)     (466)      (34)
  Proceeds from sales of equipment................      --         36        50
  Purchases of short-term investments.............  (37,636)  (29,118)  (19,312)
  Maturity of short-term investments..............   38,978    38,009    20,148
  Other assets....................................   (1,019)       42       (17)
                                                    --------  --------  --------
      Net cash provided by (used for)
        investing activities......................      (41)    8,503       835
                                                    --------  --------  --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Bank line of credit borrowings, net.............      (41)   (1,675)      400
  Increrase in restricted cash....................      --    (12,000)        --
  Proceeds from sale of common stock..............      334     1,194       237
  Proceeds from sale of preferred stock and
    warrants, net of issuance costs...............      --          --    6,423
  Dividends paid..................................      --        (80)      (93)
  Repurchase of preferred stock...................      --          --   (2,015)
  Repayment of capital lease obligations..........     (382)     (217)     (296)
                                                    --------  --------  --------
      Net cash provided by (used for)
        financing activities......................      (89)  (12,778)    4,656
                                                    --------  --------  --------

Effect of exchange rates changes on cash..........       26       --        --
                                                    --------  --------  --------
INCREASE IN CASH AND EQUIVALENTS..................    1,963       513     2,249

CASH AND EQUIVALENTS:
  Beginning of period.............................    3,459     2,946       697
                                                    --------  --------  --------
  End of period................................... $  5,422  $  3,459  $  2,946
                                                    ========  ========  ========

CASH PAID FOR INTEREST............................ $    916  $    707  $    880
                                                    ========  ========  ========

CASH PAID FOR INCOME TAXES........................ $      2  $     75  $    --
                                                    ========  ========  ========

NONCASH INVESTING AND FINANCING ACTIVITIES:
  Equipment acquired under capital leases......... $    541  $    244  $    668
                                                    ========  ========  ========

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

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

  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
                                                    ========  ========  ========

  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.................................. $     10  $      1  $     16
                                                    ========  ========  ========

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

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

See notes to consolidated financial statements.

---

SIGMA DESIGNS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999

1.	NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations - Sigma Designs, Inc. (the
Company) develops, manufactures and markets multimedia computer devices and
products. The Company sells its products to computer manufacturers,
distributors, value-added resellers and corporate customers.

Principles of Consolidation - The consolidated
financial statements include Sigma Designs, Inc. and subsidiaries. Intercompany
balances and transactions are eliminated.

Accounting Period - The Company's fiscal year ends
on the Saturday closest to January 31. For convenience, the financial
statements are shown as ending January 31, although the fiscal years ended
on February 3, 2001, January 29, 2000, and January 30, 1999,
respectively. Fiscal 2001 included 53 weeks, and fiscal 1999 and 1998 each
included 52 weeks.

Pervasiveness of Estimates - The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Concentration of Credit Risk - Financial
instruments which potentially subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents, short-term investments and
accounts receivable. The majority of the Company's cash and cash equivalents are
on deposit with one financial institution. The Company's short-term investments
are managed by a major domestic financial institution, in a portfolio with
defined investment objectives of competitive money market returns, high
liquidity and safety of capital. Its portfolio of short-term investments
typically include United States government obligations and corporate
obligations. From time to time, the Company also makes investments in
certificates of deposit with financial institutions, outside of its third-party
managed portfolio. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral for sales on credit. The
Company maintains reserves for potential credit losses.

Cash Equivalents - The Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.

Investments - The Company's short-term
investments represent debt securities which are stated at fair value. All short-
term investments are classified as available-for-sale. Any temporary difference
between an investment's cost and its market value is recorded as a separate
component of shareholders' equity until such gains and losses are realized.
Available-for-sale securities are classified in the balance sheet based on
management's current intended use for the securities. Gains and losses on the
sale of securities are computed using the specific identification
method.

Inventories are stated at the lower of cost
(first-in, first-out) or market.

Restricted Cash represents funds on deposit in
accounts which have been assigned to the Company's lender under a bank line of
credit (see note 6).

Investments in private equity securities of
less than 20% owned companies are accounted for using the cost method unless the
Company can exercise significant influence or the investee is economically
dependent upon the Company, in which case the equity method is used.

Equipment is stated at cost. Depreciation and
amortization are computed using the straight-line method based on the useful
lives of the assets (three to five years) or the lease term if shorter.

Long Lived Assets - The Company evaluates long-
lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.

Revenue Recognition - Revenues consist of
product and development revenue. Revenues from product sales to OEMs,
distributors and end users are generally recognized upon shipment to our
customers. Allowances for sales returns, price protection and warranty costs are
recorded at the time that sales are recognized. Revenues are deferred when the
Company cannot reasonably estimate the amount of returns or where collectibility
is not assured.

Revenues from product development agreements are recognized
using the percentage of completion method. Estimates are reviewed and revised
periodically throughout the lives of the contracts. Any revisions are recorded
in the accounting period in which the need for revisions became evident. The Company classifies
all development costs related to such agreements as research and development
expenses. Development revenues were $1,852,000, $60,000 and $173,000 for fiscal
2001, 2000 and 1999, respectively.

Research and development expenses include costs
and expenses associated with the design and development of new products. To the
extent that such costs include the development of computer software, they are
generally incurred prior to the establishment of the technological feasibility
of the related product that is under development. Accordingly, software costs
incurred after the establishment of technological feasibility have not been
material and therefore have been expensed. All other research and development is
expensed as incurred.

Income Taxes - Deferred income taxes are
provided for temporary differences between financial statement and income tax
reporting. Income taxes are accounted for under an asset and liability approach.
Deferred tax liabilities are recognized for future taxable amounts and deferred
tax assets are recognized for future deductions net of a valuation allowance to
reduce deferred tax assets to amounts that are more likely than not to be
realized.

Stock-Based Compensation - The Company accounts
for stock-based awards to employees using the intrinsic value method in
accordance with APB No. 25, "Accounting for Stock issued to Employees."

Foreign Currency - The functional currency of
the Company's foreign subsidiaries is the local currency of each country.
Accordingly, gains and losses from the translation of the financial statements
of the foreign subsidiaries are included in shareholders' equity. Transaction
gains and losses, which are included in the other income (expenses ) in the
accompanying consolidated statements of operations, have not been significant
for all years presented.

Net Income (Loss) per Share - Basic earnings
per share (EPS) excludes dilution and is computed by dividing net income by the
weighted average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common stock
(see Note 7).

Fair Value of Financial Instruments - In
accordance with the provisions of SFAS No. 107 "Disclosure About Fair Value
of Financial Instruments," which requires the disclosure of fair value
information about both on and off balance sheet financial instruments where it
is practicable to estimate the value, the Company has estimated the fair value
of its financial instruments. The Company believes that carrying amounts
reported in the balance sheet for cash and cash equivalents and investments as
of January 31, 2001 approximate fair market value.

Geographic Operating Information - SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related
Information," provides annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographical areas and major customers. The Company operates in one
reportable segment (Note 11).

Recently Issued Accounting Standards - In June
1998, SFAS 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. In June 1999, the Financial Accounting Standards Boards
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133". SFAS No.
137 amended the effective date of SFAS No. 133 to all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company has determined the adoption of
this statement will not have a material impact on the Company's financial
statements.

2.	INVESTMENTS

Short-term investments included the following securities
and gross unrealized losses and gains as of January 31, 2001 and 2000 (in
thousands). Fair values are based on quoted market prices obtained from the
Company's broker. All of the Company's short-term investments are classified as
available for sale, since the Company intends to sell them as needed for
operations.





|                          | Cost    | Unrealized Loss on Investment | Unrealized Gain on Investment | Market Value
|------------------------- | ------- | ----------------------------- | ----------------------------- | ------------
|January 31, 2001:         |         |                               |                               |             
|Corporate debt securities | $ 4,879 | $ 0                           | $ 28                          | $ 4,907     
|January 31, 2000:         |         |                               |                               |             
|Corporate debt securities | $ 6,221 | $(24)                         | $ 1                           | $ 6,198     



At January 31, 2000, other assets included the Company's
investment in publicly-traded common stock of Intraware, Inc., which was
recorded at a fair market value of approximately $216,000 (cost of approximately
$51,000). During fiscal 2001, the Company wrote-off this investment to other
income and expenses, as it was deemed to be permanently impaired.

3.	INVENTORIES

Inventories at January 31 consist of (in
thousands):



|                  | 2001    | 2000   
|----------------- | ------- | -------
|Raw materials     | $ 3,635 | $ 3,797
|Work in process   | 2,325   | 1,985  
|Finished goods    | 2,199   | 2,240  
|Inventories - net | $ 8,159 | $ 8,022

4. EQUIPMENT

Equipment at January 31 consists of (in
thousands):



|                                          | 2001    | 2000   
|----------------------------------------- | ------- | -------
|Computers and equipment                   | $ 4,299 | $3,602 
|Furniture and fixtures                    | 622     | 542    
|Other                                     | 101     | 327    
|Total                                     | 5,022   | $4,471 
|Accumulated depreciation and amortization | (3,676) | (3,228)
|Equipment - net                           | $ 1,346 | $ 1,243



At January 31, 2001 and 2000, equipment with a net book value
of $671,000 and $475,000 (net of accumulated amortization of $808,000 and
$463,000, respectively), has been leased under capital leases.

5. ACCRUED LIABILITIES

Accrued liabilities at January 31 consist of (in
thousands):



|                            | 2001    | 2000   
|--------------------------- | ------- | -------
|Accrued salary and benefits | $ 539   | $ 534  
|Other accrued liabilities   | 909     | 977    
|Total                       | $ 1,448 | $ 1,511



6.	BANK LINES OF CREDIT

The Company has $12,000,000 outstanding at January 31,
2001 under a $12,000,000 bank line of credit that expires in October 2001, bears
interest at the U.S. Treasury Bill rate (6.15% at January 31, 2001) plus 1%, and
is collateralized by funds on deposit in accounts which have been assigned to
the lender and included in the Company's Balance Sheet as of January 31, 2001 as
restricted cash.

The Company also has a $6,000,000 bank line of credit that
expires in October 2001, bears interest at the bank's prime rate (9% at January
31, 2001) plus 0.5%, is collateralized by the Company's accounts receivable,
inventories, equipment and intangibles. The Company has $810,000 of standby
letters of credit outstanding as of January 31, 2001 under the same bank line of
credit. Borrowings under this line of credit are generally limited to
60% to 90% of eligible accounts receivable (as defined).

The line of credit agreements contain certain covenants that, among other
things, require the Company to maintain tangible net worth plus subordinated
debt of at least $25,000,000, quarterly net income, and certain financial
ratios.  At January 31, 2001, the Company was not in compliance with some of
the covenants and subsequently obtained waivers releasing it from its
obligation to meet these covenants at January 31, 2001.

7.	SHAREHOLDERS' EQUITY

At January 31, 2001, warrants to purchase 64,285 shares of
the Company's common stock issued in connection with the issuance of
Series A nonvoting cumulative preferred stock are outstanding. The warrants
were exercisable at $5.16 per share beginning in January 1998 and expired in
fiscal 2001.

During fiscal 1999, the Company issued 5,000 shares of
Series B nonvoting convertible preferred stock for $1,000 per share and
warrants to purchase 50,000 shares of the Company's common stock. The warrants
are exercisable at $5.16 per share and expire on April 30, 2001.

During fiscal 1999, the Company issued 1,900 shares of
Series C nonvoting convertible preferred stock for $1,000 per share and
warrants to purchase 95,000 shares of the Company's common stock at $5.16 per
shares. In fiscal 2001 and 2000, warrants to purchase 5,000 and 40,000 shares of
the Company's common stock were exercised for proceeds of approximately $26,000
and $207,000 respectively. The unexercised warrants expired in fiscal 2001.

During fiscal 1999, holders of Series A preferred stock
converted 24,550 shares of preferred stock into 1,417,984 shares of common
stock. During fiscal 1999, holders of Series B preferred stock converted
3,400 shares of preferred stock into 2,325,241 shares of common stock resulting
in a deemed dividend of $2,150,000.

During fiscal 1999, the Company repurchased 2,000 shares of
Series A preferred stock with a carrying amount of $215,000 for $215,000.
During fiscal 1999, the Company repurchased 1,600 shares of Series B
preferred stock with a carrying amount of $1,478,000 for $1,800,000, resulting
in a deemed dividend of $322,000.

During fiscal 2000, holders of Series C preferred stock
converted 1,900 shares of preferred stock into 330,416 shares of common
stock.

Common Stock

The Company's common shareholders' rights agreement
expired in fiscal 2000.

The following is a reconciliation of the numerators and
denominators of the basic and diluted EPS computations for the periods presented
(in thousands, except per-share data):

`Years Ended January 31,
                                          --------------------- ---------
                                            2001       2000       1999
                                          ---------  ---------  --------- 
Numerator-
  Net income (loss) available to
    common shareholders, basic
    and diluted......................... $ ($6,868) $  $2,263  $ ($2,690)
                                          ---------  ---------  ---------
Denominator:
  Weighted average common shares
     outstanding........................    16,305     15,784     12,957
  Weighted average common shares
     outstanding subject to repurchase..       (43)       (56)       (58)
                                          ---------  ---------  ---------
Shares used in computation, basic.......    16,262     15,728     12,899

Effect of dilutive securities:
  Common shares subject to repurchase...       --          56        --
  Stock options.........................       --       1,876        --
  Warrants..............................       --          44        --
                                          ---------  ---------  ---------
Shares used in computation, diluted.....    16,262     17,704     12,899
                                          =========  =========  =========

Net income (loss) per share:
  Basic................................. $   (0.42) $    0.14  $   (0.21)
                                          =========  =========  =========
  Diluted............................... $   (0.42)      0.13      (0.21)
                                          =========  =========  =========`

The Company excluded certain potentially dilutive securities
in fiscal 2001 and 1999 from its dilutive EPS computation because either the
exercise price of the securities exceeded the average fair values of the
Company's common stock or the Company had net losses, and, therefore, these
securities were antidilutive.

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

`Years Ended January 31,
                                          --------------------- ---------
                                            2001       2000       1999
                                          ---------  ---------  --------- 
Common shares subject to repurchase.....         5        --          58
Stock options...........................     3,421        --       3,019
Stock warrants..........................        50        --         209
Convertible preferred stock.............       --         --           2`

Stock Option Plan

The Company's 1994 stock option plan provides for the granting of options
to purchase up to 4,400,000 shares of common stock at the fair market value on
the date of grant. Of this amount, 1,000,000 shares were authorized for grant by
the Board of Directors in fiscal 2000. Generally, options granted under the 1994
plan become exercisable over a five-year period and expire no more than ten
years from the date of grant (all options outstanding at January 31, 2001 expire
ten years from date of grant).

Stock option activity and balances are summarized as follow:

`Weighted
                                                                     Average
                                                                     Exercise
                                                          Number      Price
                                                            of         Per
                                                          Shares      Share
                                                        ----------- ----------
      Balances, February 1, 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 (1,360,270
        exercisable at a weighted-average price
        of $2.37).....................................   2,836,076       2.65
      Granted (weighted-average fair value of $2.59)..     960,500       3.57
      Canceled........................................    (278,855)      3.79
      Exercised.......................................     (96,540)      2.34
                                                        -----------
      Balances, January 31, 2001......................   3,421,181      $2.83
                                                        ===========`

At January 31, 2001, options to purchase 222,677 shares were available for
future grant.

`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           2001        Life       Price       2000       Price
-------------------- ----------- ----------- ---------- ----------- ----------
       $0.09              6,572        1.88      $0.09       6,572      $0.09
   $1.00 - $1.13        438,459        8.05      $1.02     135,808      $1.00
   $2.31 - $3.06      1,945,283        6.55      $2.46   1,482,300      $2.41
   $3.50 - $5.19        780,868        9.16      $3.83      41,900      $4.66
   $5.75 - $6.38        249,999        8.70      $5.77      66,756      $5.78
-------------------- ----------- ----------- ---------- ----------- ----------
   $0.09 - $6.38      3,421,181        7.48      $2.83   1,733,336      $2.48
==================== =========== =========== ========== =========== ==========`

The Company uses the intrinsic value method specified by Accounting
Principles Board Opinion No. 25 to calculate compensation expense
associated with issuing stock options and, accordingly, has recorded no such
expense through January 31, 2001 as such issuances have been at the fair value
of the Company's common stock at the date of grant.

SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires the disclosure of pro forma net income and earnings per share had
the Company adopted the fair value method as of the beginning of fiscal 1996.
Under SFAS 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The Company's calculations were made using
the Black-Scholes option pricing model with the following weighted average
assumptions for fiscal 2001, 2000 and 1999, respectively: expected life, 18, 19
and 14 months following vesting; stock volatility, 100%, 97% and 91%;
risk free interest rates, 4.84%, 5.5% and 5.7%; and no dividends during the
expected term. The Company's calculations are based on a multiple option
valuation approach and forfeitures are recognized as they occur. If the computed
fair values of awards in fiscal 2001, 2000 and 1999 had been amortized to
expense over the vesting period of the awards, pro forma net income (loss)
available to common shareholders would have been (in thousands, except per share
amounts):



|                                                              | 2001     | 2000   | 1999    
|------------------------------------------------------------- | -------- | ------ | --------
|Net income (loss) available to common shareholders:           |          |        |         
|As reported                                                   | $(6,868) | $2,263 | $(2,690)
|Proforma                                                      | $(8,317) | $1,279 | $(3,993)
|Net income (loss) per share available to common
shareholders: |          |        |         
|As reported:                                                  |          |        |         
|Basic                                                         | $(0.42)  | $0.14  | $(0.21) 
|Diluted                                                       | $(0.42)  | $0.13  | $(0.21) 
|Proforma:                                                     |          |        |         
|Basic                                                         | $(0.51)  | $0.08  | $(0.31) 
|Diluted                                                       | $(0.51)  | $0.07  | $(0.31) 

However, the impact of outstanding non-vested stock options
granted prior to February 1, 1995 has been excluded from the pro forma
calculation; accordingly, the pro forma adjustments for fiscal 2001, 2000
and 1999 are not indicative of future period pro forma adjustments, when
the calculation will apply to all applicable stock options.

The Company's 1986 Employee Stock Purchase Plan (1986 ESPP)
provides for the sale of up to 300,000 shares of common stock. Eligible
employees may authorize payroll deductions of up to 10% of their regular base
salaries to purchase common stock at 85% of the fair market value at the
beginning or end of each six-month offering period. During fiscal 2001, 2000 and
1999, 35,144, 43,254, and 45,833 shares were purchased at an average price of
$2.34, $3.45, and $2.50 per share, respectively. At January 31, 2001, all shares
authorized for issuance under 1986 ESPP had been issued.

8.	INCOME TAXES

As a result of net losses and net operating loss
carryforwards in fiscal 2001 and 2000, respectively, the Company has recorded no
material income tax provision for all years presented.

Deferred income taxes reflect the net tax effects of
(a) temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and (b) operating losses and tax credit carryforwards.

The tax effects of significant items comprising the Company's
deferred taxes are as follows (in thousands):

`January 31,
                                                            -------------------
                                                              2001      2000
                                                            --------- --------- 
      Deferred tax assets:
        Net operating losses and tax credit carryforwards..  $21,725   $19,131
        Reserves not currently deductible..................    2,311     1,480
        Capitalized research and development expenditures..      713       465
        Other..............................................       61       100
                                                            --------- ---------
                                                              24,810    21,176
      Valuation allowance..................................  (24,810)  (21,176)
                                                            --------- ---------
      Net deferred taxes...................................   $  --     $  --
                                                            ========= =========`

SFAS 109 requires that the tax benefit of net operating losses,
temporary differences and credit carryforwards be recorded as an asset to the
extent that management assesses that realization is "more likely than not."
Realization of the future tax benefits is dependent on the Company's ability to
generate sufficient taxable income within the carryforward period. Because of
the Company's recent history of operating losses, risks associated with its new
product introduction including the dependence on rapid acceptance of new
technology, the dependence on development of complimentary software by third
parties and other risks, such as technological change in the industry, short
product life cycles and reliance on a limited number of suppliers and
manufacturing contractors, management believes that recognition of the deferred
tax assets arising from the above-mentioned future tax benefits is currently not
appropriate and, accordingly, has provided a valuation allowance.

Net operating losses and tax credit carryforwards as of
January 31, 2001 are as follows (in thousands):

`Expiration
                                           Amount           Years
                                          ---------  --------------------
      Net operating losses, federal....    $49,595       2009 - 2020
      Net operating losses, state......      6,400       2001 - 2002
      Tax credits, federal.............      1,882       2006 - 2020
      Tax credits, state...............      1,329            -
      Net operating losses, foreign....      4,040            -`

Current federal and California tax laws include substantial restrictions on
the utilization of net operating losses and tax credits in the event of an
"ownership change" of a corporation.  Accordingly, the Company's ability to
utilize net operating loss and tax credit carryforwards may be limited as a
result of such ownership change.  Such a limitation could result in the
expiration of carryforwards before they are utilized.

The effective tax rate of the Company's provision for (benefit from) income
taxes differs from the federal statutory rate as follows (in thousands):

`2001       2000       1999
                                          ---------  ---------  ---------
                                                                         
      Computed at 35%...................   ($2,402)      $842      ($165)
      State taxes, expiration of net
        operating loss carryforwards....        $1       $226        --
      Valuation allowance...............     2,550     (1,386)       446
      Other.............................      (147)       378       (281)
      Refund of state taxes from
        prior years.....................       --         --        (321)
                                          ---------  ---------  ---------
      Total.............................        $2        $60      ($321)
                                          =========  =========  =========`

9. COMMITMENTS AND  LEASES

Leases - The Company's primary facilities are leased under a
noncancelable lease which expires in September 2002. In addition, the Company
leases certain equipment under capital lease arrangements. Future minimum annual
payments under capital and operating leases are as follows(in
thousands):

`Fiscal Year Ending                              Capital   Operating
        January 31,                                    Leases     Leases
      -------------------------------                ---------- ----------
           2002.....................................      $384       $359
           2003.....................................       264        239
           2004.....................................       119        --
                                                     ---------- ----------
      Total minimum lease payments..................       767       $598
      Amount representing interest at a rates                   ==========
        of 7.84% to 10.32%..........................       (89)
                                                     ----------
      Present value of minimum lease payments.......       678
      Current portion...............................      (329)
                                                     ----------
      Long-term portion.............................      $349
                                                     ==========`

Rent expense was $482,000, $448,000, and $235,000 for fiscal 2001, 2000 and
1999, respectively.

Royalties - The Company pays royalties for the
right to sell certain products under various license agreements. During fiscal
2001, 2000 and 1999, the Company recorded royalty expense of $491,000, $732,000,
and $405,000, respectively.

Benefit Plan - The Company sponsors a 401(k)
savings plan in which most employees are eligible to participate. The Plan
commenced in fiscal 1994. The Company is not obligated to make contributions to
the plan and no contributions have been made by the Company.

10.	MAJOR CUSTOMERS

No domestic customer accounted for more than 10% of net
revenues in fiscal 2001 and 2000. During fiscal 2001, three international
customers accounted for 15%, 14% and 11% of net revenues, respectively. During
fiscal 2000, two international customers accounted for 26% and 13% of net
revenues, respectively. During fiscal 1999, one international customer accounted
for 28% of net revenues.

11.  COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss), which is displayed in the
Consolidated Statements of Changes in Shareholders' Equity, represents net
income (loss) available to common shareholders plus the results of certain
shareholders' equity changes not reflected in the Consolidated Statements of
Operations.

The components of accumulated other comprehensive income
(loss) are as follows (in thousands):

`Total
                                                               Accumulated
                                                   Unrealized     Other
                                      Accumulated   Holding    Comprehensive
                                      Translation    Gains/      Income/
                                      Adjustment    (Losses)     (Loss)
                                      -----------  ----------  -----------
Beginning Balance, February 1, 1998. $       --   $        3  $         3
Current Year Change.................         --           (3)          (3)
                                      -----------  ----------  -----------
Ending Balance, January 31, 1999....         --          --           --
Current Year Change.................         --          142          142
                                      -----------  ----------  -----------
Ending Balance, January 31, 2000....         --          142          142
Current Year Change.................          26        (114)         (88)
                                      -----------  ----------  -----------
Ending Balance, January 31, 2001.... $        26  $       28  $        54
                                      ===========  ==========  ===========`

12.	SEGMENT AND GEOGRAPHICAL INFORMATION

As discussed in Note 1, the Company follows the
requirements of SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." The Company's operating segments consist of its
geographically based entities in the United States, Hong Kong and France. All
such operating entities segments have similar economic characteristics, as
defined in SFAS No. 131, and accordingly, the Company operates in one
reportable segment: the development, manufacturing and marketing of multimedia
computer devices and products.

For the years ended January 31, 2001, 2000 and 1999, the
Company recorded sales to customers throughout the United States and Canada,
Taiwan, Hong Kong, Singapore, Japan; Germany, Belgium, Denmark, Finland, The
Netherlands, Norway, Sweden, The United Kingdom, France, Italy, Spain
(collectively referred to as "Europe"); Korea, China, Thailand, New Zealand,
Turkey, Israel and South Africa (collectively "Rest of Asia/New Zealand/Other
Region").

The following table summaries total net revenues and long-lived assets
attributed to significant countries as of and for the fiscal years ended January
31 (in thousands):

`2001       2000       1999
                                          ---------  ---------  ---------
Total net revenues:
  United States........................    $10,241    $16,535    $12,389
  Taiwan...............................      5,469     15,021     18,674
  Singapore............................      4,933      8,208      3,384
  Japan................................      3,330      1,375        390
  Hong Kong............................      2,916      2,754      3,659
  Europe...............................      1,574      4,114      3,926
  Rest of Asia/New Zealand.............        997      2,021        599
  Canada...............................         16        296        519
                                          ---------  ---------  ---------
Total net revenues*....................    $29,476    $50,324    $43,540
                                          =========  =========  =========

Long-lived assets:
  United States........................     $1,331     $1,218     $1,288
  Hong Kong............................        --           4         23
  France...............................         15         21        --
                                          ---------  ---------  ---------
Total long-lived assets................     $1,346     $1,243     $1,311
                                          =========  =========  =========`

* Net revenues are attributed to countries based on invoicing location of customer.

13. SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED)

The follow table presents unaudited quarterly financial
information for each of the Company's last eight quarters (in thousands, except
per share data).

Statement of Operations Data (unaudited):

`First     Second    Third     Fourth
                                         Quarter   Quarter   Quarter   Quarter
                                         --------  --------  --------  --------
Year ended January 31, 2001:

Net revenues........................... $ 10,401  $ 10,663  $  5,479  $  2,933
Income (loss) from operations..........      101       419      (795)   (6,958)
Net income (loss) available to common
  shareholders.........................      189       482      (665)   (6,874)
Net income (loss) per share available
  to common shareholders:
  Basic................................ $   0.01  $   0.03  $  (0.04) $  (0.42)
  Diluted.............................. $   0.01  $   0.03  $  (0.04) $  (0.42)

Year ended January 31, 2000:

Net revenues........................... $ 13,783  $ 14,134  $ 11,283  $ 11,124
Income from operations.................      571       691       429       396
Net income available to common
  shareholders.........................      512       673       451       627
Net income per share available to
  common shareholders:
  Basic................................ $   0.03  $   0.04  $   0.03  $   0.04
  Diluted.............................. $   0.03  $   0.04  $   0.03  $   0.03`

---

SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES



|Classification                                                                    | Balance at Beginning of Year | Additions   | Deductions:
Write-Offs of Accounts (1) | Balance at
End
of Year
|--------------------------------------------------------------------------------- | ---------------------------- | ----------- | -------------------------------------- | ----------------------
|                                                                                  |                              |             |                                        |                       
|Allowance for returns and doubtful accounts, price protection,
and sales returns: |                              |             |                                        |                       
|Year ended January 31,                                                            |                              |             |                                        |                       
|2001                                                                              | $ 414,000                    | $2, 152,000 | $ 442,000                              | $2,124,000            
|2000                                                                              | 3,306,000                    | 274,000     | 3,166,000                              | 414,000               
|1999                                                                              | 3,332,000                    | 395,000     | 421,000                                | 3,306,000             
|Inventory reserves:                                                               |                              |             |                                        |                       
|Year ended January 31,                                                            |                              |             |                                        |                       
|2001                                                                              | $3,215,000                   | $1,941,000  | $1,065,000                             | $4,091,000            
|2000                                                                              | 1,943,000                    | 1,350,000   | 78,000                                 | 3,215,000             
|1999                                                                              | 3,792,000                    | 655,000     | 2,504,000                              | 1,943,000             

_________________

(1)	Amount written off, net of recoveries.

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INDEX TO EXHIBITS



|EXHIBIT NUMBER | DESCRIPTION                                                                                                                                        
|-------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|2.1(6)         | Agreement and Plan of Reorganization by and among the
Registrant, Sigma Acquisition Corporation and Active Design Corp. dated as of
April 23, 1996.
|3.1(1)         | Restated Articles of Incorporation, as amended dated as of June
1, 1998.                                                                           
|3.2(7)         | Certificate of Determination of Preferences of Series A
Preferred Stock dated as of June 13, 1997                                                  
|3.3(8)         | Certificate of Determination of Preferences of Series B
Preferred Stock dated as of January 30, 1998.                                              
|3.4(9)         | Certificate of Determination of Preferences of Series C
Preferred Stock dated as of January 20, 1999.                                              
|3.5(2)         | Bylaws of Registrant, as amended, dated as of April 14,
1999.                                                                                      
|4.1(9)         | Form of Subscription Agreement by and between the Company and
the purchasers of the  C Preferred Stock and warrants.                               
|4.2(9)         | Form of Registration Rights Agreement by and between the Company
and the purchasers of the C Preferred Stock and warrants.                         
|4.3(9)         | Form of Stock Purchase Warrant.                                                                                                                    
|10.2(3)        | Registrant's 1986 Employee Stock Purchase Plan, as amended, and
form of Subscription Agreement.                                                    
|10.6 (11)      | Sublease between the Registrant and Sun Microsystems, Inc. for
the Company's headquarter at 355 Fairview Way, Milpitas, CA 95035.                  
|10.7(4)        | Registrant's 1994 Stock Plan and form of Stock Option
Agreement.                                                                                   
|10.8(5)        | Registrant's 1994 Director Stock Option Plan and form of
Director Option Agreement.                                                                
|10.9(10)       | Registrant's 1995 Business Loan Agreement with Silicon Valley
Bank, as amended.                                                                    
|23.1           | Independent Auditors' Consent.                                                                                                                     
|24.1           | Power of Attorney (See page 22).                                                                                                                   

(1)	Incorporated by reference to exhibit filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended January 31,
1988.

(2)	Incorporated by reference to exhibit filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31, 1989.

(3)	Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-8 (No. 333-61549) filed
August 14, 1998.

(4)	Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-8 (No. 33-81914) filed July 25, 1994.

(5)	Incorporated by reference to exhibit filed with the
Registrant's Registration Statement on Form S-3 (No. 33-74308) filed on January
28, 1994, Amendment No. 1 thereto filed February 24, 1994, Amendment No. 2
thereto filed March 3, 1994, Amendment No. 3 thereto filed March 4, 1994 and
Amendment No. 4 thereto filed March 8, 1994.

(6)	Incorporated by reference to exhibit filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended January 31,
1996.

(7)	Incorporated by reference to exhibit filed with the
Registrant's Registration Statement on Form S-3 (No. 333-33147) filed
on August 7, 1997.

(8)	Incorporated by reference to exhibit filed with the
Registrant's Registration Statement on Form S-3 (No. 333-47835) filed
on March 12, 1998.

(9)	Incorporated by reference to exhibit filed with the
Registrant's Registration Statement on Form S-3 (No. 333-48023) filed
on April 30, 1999.

(10)	Incorporated by reference to exhibit filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31,
1998.

(11)	Incorporated by reference to exhibit filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31, 1999.





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