SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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


                           Commission File No. 0-15116
                               Sigma Designs, Inc.
             (Exact name of Registrant as specified in its charter)

              California                              95-2848099
     (State or other jurisdiction of               (I.R.S. Employer
      incorporation or organization)             Identification Number)

 46501 Landing Parkway, Fremont, California             94538
  (Address of principal executive offices)            (Zip Code)


       Registrant's telephone number, including area code: (510) 770-0100
           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
requirement for the past 90 days. Yes  X    No
                                     ----     ----



Indicate by check mark if disclosure of delinquent  filers  pursuant to Rule 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.                          [X]



The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant  was  approximately  $38,147,312  as of  April 9,  1997  based on the
closing price of the Common Stock as reported on the Nasdaq  National Market for
that date.

There were 11,095,786 of the Registrant's Common Stock issued and outstanding on
April 9, 1997.


                       DOCUMENTS INCORPORATED BY REFERENCE


Certain  sections of Sigma Designs,  Inc.'s  definitive  Proxy Statement for the
1997 Annual Meeting of Shareholders to be held on June 6, 1997 are  incorporated
by reference in Part III of this Form 10-K to the extent stated herein.


<PAGE>

                                     PART I


ITEM 1.  BUSINESS

Overview
The following business section contains forward-looking  statements that involve
risks and  uncertainties.  The Company's actual results could differ  materially
from those anticipated in these forward-looking statements s 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.

Sigma Designs,  Inc.  ("Sigma" or the "Company")  designs,  manufactures  (using
subcontractors),   and  markets  multimedia   products  for  use  with  personal
computers.  The emergence of multimedia technology in the personal computer (PC)
market has dramatically  changed the way in which users interact with computers.
Multimedia  integrates  different elements,  such as sound and video, to enhance
the computing experience and deliver a heightened sense of realism.  Through its
REALmagic  product  line  incorporating  Moving  Picture  Experts  Group  (MPEG)
technology, Sigma Designs has become a leader in this emerging market.

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  (ISO)
standard  for  compression,   eliminated   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 compression  technique can store up to 74
minutes of full-motion video and audio.

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 an effort to complement its current technologies, the Company entered into an
agreement and plan of reorganization  (Agreement) with Active Design Corporation
in April 1996  under  which the  Company  was the  surviving  entity in a merger
transaction  accounted  for as a  pooling  of  interests.  Active  Design  was a
development   stage  company  with  primary   activity  in  the  development  of
semiconductor  chips for use in PC graphics  applications.  Under the Agreement,
Active Design  exchanged all of its outstanding  common and preferred stock into
approximately  1,124,000  shares of the  Company's  common  stock,  based on the
exchange ratio of one share of Active Design into .22 shares (exchange ratio) of
the Company's stock. The Company also assumed all 1,042,000  outstanding options
to  acquire  shares of  common  stock of Active  Design at the  exchange  ratio,
resulting in 229,240 options to acquire the Company's common stock.


The REALmagic MPEG Standard
Since its first  shipment in November  1993,  REALmagic  technology has received
widespread support from PC industry leaders,  software  developers,  and OEM and
retail customers.


         Partnership with PC Industry Leaders


         Sigma  has  received  endorsement  for its  REALmagic  technology  from
companies such as  Hewlett-Packard,  Hughes  Network  Systems,  IBM,  Microsoft,
Oracle  Corporation,  Novell,  Silicon  Graphics,  Starlight  Networks,  and Sun
Microsystems.  On the operating  system side REALmagic is supported by Microsoft
Windows 95 and IBM O/S 2. Additionally,  both Novell and Starlight Networks have
products that are compatible with REALmagic in a network environment.

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         Widespread Support from Software Developers



         Support for Sigma's  REALmagic  MPEG  standard has grown rapidly in the
software  development  community.  Three  years ago,  the Company  listed  fifty
authorized  REALmagic  software  developers;  by the end of fiscal 1996, Sigma's
roster of  developers  rose to more than 1,200,  including  Activision,  Tsunami
Media, Mindscape,  Time Warner, and Interplay. This widespread developer support
has led to the introduction of more than 500 off-the-shelf business applications
in the REALmagic format.

The REALmagic DOS MPEG Applications  Programming  Interface (API) has become the
industry standard for MPEG software development,  further evidence of widespread
support from the software development community.  With its robust functionality,
the REALmagic API is currently the preferred  technology  available for creating
fully interactive MPEG software titles.


         Support from OEMs


         In the U.S., Zenith Data Systems,  Zenon  Technology,  Inc., and PREMIO
Express,  the direct marketing arm of Compu Trend Systems,  Inc., have purchased
REALmagic   Maxima  boards  for   installation   inside  their  multimedia  PCs.
Additionally,  many VARs have taken  shipments of  REALmagic  boards for systems
targeted at vertical kiosk, business training, and presentation applications. In
the Far East where the  popularity  of karaoke and videoCD has made  REALmagic a
well received  product,  the  Company's  OEM customers  include NEC in Japan and
Hyundai in Korea.


         Acceptance by the Retail Channel


         In addition to international  distributors,  national U.S. distributors
such  as   Ingram   Micro,   Inc.   and  Tech   Data  are   carrying   REALmagic
products--further  evidence of the channel's  acceptance of and interest in MPEG
technology.


REALmagic Business Strategies
Sigma's  corporate  objective  is to continue  to be a leading  provider of MPEG
multimedia products that enable full-screen,  full-motion, TV-like quality video
on the standard desktop and the notebook PC. To accomplish this goal the Company
intends to promote widespread acceptance of REALmagic technology.  The key parts
of this strategy include:


         Encourage   Continued   Development  of  Software  Utilizing  REALmagic
Technology


         The  Company   continues  to  encourage   widespread   software   title
development by providing free technical  support and licensing its comprehensive
API free of charge to all  developers  who wish to publish  REALmagic-compatible
software titles.


         Win More OEM Partnerships and Further Penetrate the Retail Channel


         To establish REALmagic as a true standard, the Company will continue to
seek design wins with major PC manufacturers  worldwide,  in which the OEMs will
factory-install REALmagic boards or chipsets inside their multimedia PCs. On the
retail side, the Company's systems integration sales team will

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<PAGE>


continue to work with its network of national  distributors  and special VARs to
distribute its high-end REALmagic playback card. In Europe and Asia Pacific, the
Company will continue to expand its  relationship  with  distributors as well as
OEMs and VARs.  In  addition,  the  Company  will  seek to sell to  add-on  card
manufacturers who will, in turn, market to owners of 486 and Pentium PCs.


         Introduce New  Generations of REALmagic,  Offer  REALmagic  products at
         Competitive Prices, and Continually Reduce Product Costs



         A significant  aspect of the Company's  product  strategy is to include
the sale of REALmagic chipsets in its product line and continue developing newer
versions and  generations  of REALmagic  products,  including  chipsets for both
desktop  and  notebook  PCs.  The  general  direction  is to  continue  to offer
consumers  with  better-featured  and  lower-priced   products  over  time.  The
intention is to stay at least one step ahead of competition.


REALmagic Products
The Company offers a complete family of REALmagic products including:

o    REALmagic Maxima--An MPEG playback card designed to eliminate compatibility
     issues with graphics cards by using Analog Overlay  Technology.  The Maxima
     accelerates  MPEG video to a guaranteed 30 frames per second  playback rate
     with high-quality CD sound at resolutions of up to 1280 x 1024, which is in
     compliance  with the MPC3 industry  standard for MPEG video  playback.  The
     REALmagic drivers guarantee  compatibility with all interactive MPEG titles
     available today and all future titles that are OM-1 compatible.

o    REALmagic  Pro  Chipset--In   October  1995,  the  Company   announced  the
     availability  for sale of the REALmagic  Pro chipset.  This chipset has the
     following distinctive features:

     o   Very high quality MPEG  playback  through 16 million  color MPEG video;
         horizontal and vertical  bilinear  interpolation;  digital  brightness,
         contrast, and saturation adjustment

     o   The use of Sigma's REAL Overlay chip, enabling mixing MPEG video and PC
         graphics at resolutions up to 1600 x 1200 with an 85 Hz  non-interlaced
         refresh rate

     o   100% Windows 95 and MPC3 compliance

     o   100% OM-1 and REALmagic compatibility

     o   Direct interface for NTSC/PAL decoder to support TV tuner input

o    REALmagic   Explorer--In   November   1995,   the  Company   announced  the
     introduction of the REALmagic  Explorer  chipset.  This chipset puts MPEG-1
     digital  video  playback  in ZV port PC  cards  for the new  generation  of
     notebook  computers.  The main features of this chipset  include:
     o   MPEG-1 video  playback  with 16 million  colors
     o   MPEG-1  audio  layers  I and  II n 100%  REALmagic  and  OM-1  standard
         compatibility n MPC3 standard compliance
     o   Windows 95 Plug and Play

o    REALmagic64/GX  video and  graphics  accelerator  chip--In  July 1996,  the
     Company announced the introduction of this chip for the commercial and home
     desktop PC  market.  The  REALmagic  64/GX  includes  an  optimized  64-bit
     graphics accelerator engine, unique motion-video acceleration hardware, and
     a highly-tuned  memory interface.  This chip has the following  distinctive
     features:

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<PAGE>


     o   The 64-bit  architecture  supporting  REALmagic 64/GX yields 20% faster
         GUI acceleration than competitive products.

     o   The  video  engine  includes  a YUV to  RGB  color-space  converter  to
         accelerate  decompression  and a  hardware  scaler  to  provide  smooth
         horizontal and vertical scaling.

     o   DRAM support of 1 MB to 4 MB enables the  accelerator  to be integrated
         with machines at a variety of price/performance levels.

Marketing and Sales
Sigma Designs  currently  distributes its products through sales to national and
regional distributors,  VARs, and OEMs in the U.S. and throughout the world. The
company's U.S.  distributors  include Ingram Micro,  Inc. and Tech Data, and its
OEMs include Zenith Data Systems,  Zenon  Technology,  and PREMIO  Express.  The
Company's international distributors are strategically located in many countries
around the world.  Although  the  Company  was  profitable  throughout  all four
quarters of fiscal 1997, there can be no assurance that the Company will achieve
sufficient sales so as to maintain profitability in fiscal 1998.

The Company generally acquires and maintains  products for distribution  through
retail   channels  based  on  forecasts   rather  than  firm  purchase   orders.
Additionally,  the Company generally acquires for sale to its OEM customers only
after receiving  purchase orders from such customers,  which purchase orders are
typically  cancellable without substantial penalty from such OEM customers.  The
Company  currently  places  noncancellable  orders  to  purchase   semiconductor
products  from its  suppliers  on a twelve-  to  sixteen-week  lead time  basis.
Consequently,  if, as a result of  inaccurate  forecasts or  cancelled  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 the
Company's financial condition.


Research and Development
As of January 31, 1997,  the Company had a staff of 43 research and  development
personnel, which conducts all the Company's product development.  The Company is
focusing  its  development  efforts  primarily  on  MPEG  multimedia   products,
including  new and  improved  versions  of  REALmagic  MPEG  chipsets  and  cost
reduction processes.

To achieve and maintain technological  leadership,  the Company must continue to
make technological advancements in the areas of MPEG video and audio compression
and  decompression.  These  advancements  include  compatibility  with  emerging
standards and multiple  platforms,  improvements to the REALmagic  architecture,
and  enhancements  to the  REALmagic  API.  There can be no  assurance  that the
Company  will be able  to make  any  such  advancements  in the  REALmagic  MPEG
technology  of, if they are made,  that the Company  will be able to market such
advancements to maintain profitability and its technological leadership.

During fiscal 1997,  fiscal 1996,  and fiscal 1995,  the Company's  research and
development expenses were $ 4,688,000, $4,499,000, and $4,349,000, respectively.
The Company  plans to continue to devote  substantial  resources to research and
development of future generations of MPEG and other multimedia products.


Competition
The market for MPEG  multimedia  products is highly  competitive.  Although  the
Company does not believe  that any products  sold by a third party are in direct
competition with the REALmagic  decoding card 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.  The Company believes that many computer product  manufacturers  are
developing MPEG products that

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<PAGE>


will compete directly with REALmagic products in the near future.

The Company  believes that the principal  competitive  factors in the market for
MPEG  multimedia  hardware  products  include  time for market  for new  product
introductions, product performance,  compatibility to industry standards, price,
and marketing and distribution resources.  The Company believes that it competes
most favorably with respect to time to market, product performance, and price of
its REALmagic  products.  Moreover,  the Company believes that the acceptance of
the REALmagic API as an industry standard for software development could provide
a significant  competitive advantage for the Company.  However,  there can be no
assurance  that  the  Company's  lead  time  in  product  introduction  will  be
sustained.

Sales to  distributors  and  sometimes  even to OEMs 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 collection problems,  contributing to significant fluctuations in the
Company's operating results.


Licenses, Patents, and Trademarks
The  Company is seeking  patent  protection  for the basic  architecture  of the
REALmagic  Producer (the Company's video encoding  product),  as well as certain
software and hardware features in current and future versions of REALmagic.  The
Company  currently  has eight  pending  patent  applications  for its  REALmagic
technology.  Four  patents  have  been  issued to the  Company.  There can be no
assurance that more patents will be issued or that such patents, even if issued,
will provide adequate  protection for the Company's  competitive  position.  The
Company  also  attempts  to  protect  its trade  secrets  and other  proprietary
information  through  agreements  with customers,  suppliers,  and employees and
other  security  measures.  Although  the Company  intends to protect its rights
vigorously, there can be no assurance that these measures will be successful.


Manufacturing
To reduce overhead expenses,  along with capital and staffing requirements,  the
Company  currently  uses  third-party  contract  manufacturers  to  fulfill  its
manufacturing  needs.  All of the chips used by the Company to make its decoding
products are  manufactured  by outside  suppliers and  foundries.  Each of these
suppliers  is a sole  source of supply to the  Company of the  respective  chips
produced by such supplier.

The  Company's  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 have a  material  adverse  impact on the sales of the  Company's
products and, thus, on the Company's operating results.


Backlog
Since the Company's  customers  typically expect quick  deliveries,  the Company
seeks to ship products  within a few weeks of receipt of a purchase  order.  The
customer  may  reschedule  delivery  of products  or cancel the  purchase  order
entirely without significant  penalty.  Historically,  the Company's backlog has
not been  reflective of future sales.  The Company also expects that in the near
term, its backlog will continue to be not indicative of future sales.


Employees
As of January 31, 1997, the Company had 86 full-time employees,  including 43 in
research and development,  22 in marketing, sales, and support, 7 in operations,
and 14 in finance and administration.

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The Company's future success will depend, in part, on its ability to continue to
attract,   retain,   and  motivate  highly   qualified   technical,   marketing,
engineering,  and management  personnel,  who are in great demand. The Company's
employees are not represented by any collective bargaining unit, and the Company
has never  experienced a work stoppage.  The Company  believes that its employee
relations are satisfactory.


Certain Factors Affecting Business,  Operating Results,  and Financial Condition
In the interest of providing the Company's  shareholders and potential investors
with certain  Company  information,  including  management's  assessment  of the
Company's  future  potential,  certain  statements  set forth  herein  relate to
management's  future plans and  objectives or to the Company's  future  economic
performance. Such statements are "forward-looking statements" within the meaning
of Section 27 A(I) of the  Securities  Act of 1933,  as amended,  and in Section
21E(I) of the Securities Act of 1934, as amended.  Although any  forward-looking
statements  contained  herein  or  otherwise  expressed  by or on  behalf of the
Company are, to the  knowledge and in the judgment of the officers and directors
of the Company,  expected to prove true and to come to pass,  the Company is not
able to predict such events with absolute certainty.  Accordingly,  shareholders
and  potential   investors  are  hereby   cautioned   that  certain   events  or
circumstances  could  cause  actual  results  to differ  materially  from  those
projected or predicted. In addition, forward-looking statements are based on the
Company's knowledge and judgment as of the date hereof, and the Company does not
intend to update any  forward-looking  statements to reflect events occurring or
circumstances  existing  hereafter.  In  particular,  the Company  believes  the
following facts could affect forward-looking statements made herein or in future
written or oral  releases and by hindsight,  prove such  statements to be overly
optimistic and unachievable.


         History of Operating Losses
         The Company incurred significant losses in fiscal 1993, 1994, 1995, and
1996 and had substantial  negative cash flow in fiscal 1992,  1993,  1994, 1995,
and 1996. Since the introduction of the Company's REALmagic MPEG product line in
November 1993, the Company has invested  heavily in marketing and  technological
innovation  for its REALmagic  products.  As a result,  the Company  experienced
significant  losses  through  fiscal  1996.  Fiscal  1994,  1995,  and 1996 also
included significant losses associated with products other than those related to
the REALmagic  technology.  Since  inception,  the Company's  total  accumulated
deficit is $33,114,000. There can be no assurance that the Company will continue
to sell  its new  REALmagic  products  in  substantial  quantities  or  generate
significant  revenues  from such sales.  Although the Company was  profitable in
fiscal 1997, there can be no assurance that the Company will continue to achieve
profitable  operations  in any  future  fiscal  quarter  or fiscal  year or that
profitable  operations,  if achieved,  will be  sustainable.  See  "Management's
Discussion and Analysis of Financial Condition and Results of Operations."


         Marketing Risks
         The Company's ability to increase its sales, achieve profitability, and
maintain REALmagic as a PC industry multimedia standard depends substantially on
the  Company's  ability  to achieve a  sustained  high level of sales to new OEM
customers.  To date, the Company has successfully shipped its REALmagic products
to certain OEM customers,  including NEC and Toshiba in Japan, Hyundai in Korea,
and Zenon  Technology,  PREMIO Express,  and Zenith Data Systems in the U.S. The
Company has not executed  volume  purchase  agreements with any of the Company's
customers,  and these  customers  are not under any  obligation  to purchase any
minimum quantity of the Company's products.  Although the Company is continually
engaged  in  marketing  efforts  directed  to sales  of  REALmagic  products  to
additional U.S. and international OEMs and has achieved a number of design wins,
the Company has not achieved  bundling  agreements  with OEM customers to ensure
success of the REALmagic product line.  Moreover,  even if the Company continues
to achieve new design wins, there can be no assurance that PC manufacturers will
purchase the Company's products in substantial volumes.  Sales to any particular
OEM customer are

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subject to significant  variability  from quarter to quarter and to severe price
pressures by  competitors.  Based on its  experience  in the  personal  computer
industry,  the  Company  expects  that its actual  sales to OEM  customers  will
experience significant fluctuations,  and estimates of future sales with respect
to any particular customer or groups of customers are inherently uncertain.


The  Company's  ability to achieve  sustained  profitability  also  depends on a
substantial  increase  in sales  of  REALmagic  products  through  domestic  and
international  distributors for resale through retail channels.  In fiscal 1997,
Ingram Micro,  Inc. was the only customer to which sales  comprised  over 10% of
consolidated  revenue.  Sales to such  distributors  are  typically  subject  to
contractual  rights of inventory  rotation or price  protection.  Regardless  of
particular  contractual  rights,  however,  the failure of Ingram Micro, Inc. or
other distributors to achieve sustained sell-through of REALmagic products could
result in product returns or collection  problems,  contributing to fluctuations
in the  Company's  results of  operations.  There can be no  assurance  that the
Company will be successful in maintaining a significant market for its REALmagic
products.


         Dependence on Development of Software Titles by Third Parties
         The  Company  depends  on  third-party  content  developers  to create,
produce,  and market software titles that will operate in the REALmagic  format.
No   software    developer   is    contractually    obligated   to   produce   a
REALmagic-compatible  title. There can be no assurance that third-party software
developers will continue to produce a substantial  number of software titles, or
that  they  will  produce  enough  software  titles  to  develop  and  sustain a
significant market in REALmagic  products.  Moreover,  there can be no assurance
that any  individual  software  titles will be of high quality or that they will
achieve market  acceptance.  There can also be no assurance that current popular
software titles will be introduced in the REALmagic format.  Because the Company
has no control over the content of the titles  produced by software  developers,
the software  titles  developed may represent  only a limited number of software
categories and are likely to be of varying quality.

Currently,  more than 500 interactive MPEG off-the-shelf  business  applications
are available in the MPEG format.  The Company has licensed the REALmagic API to
over 1,200 software developers for development of REALmagic-compatible programs.
However,  the  number  of  software  titles  to be  developed  by such  software
companies  cannot be  predicted.  There can be no  assurance  that any  software
develop who  develops a  REALmagic-compatible  title will  actively  promote the
product or develop  follow-on titles.  Moreover,  there can be no assurance that
any published title will have the quality or price  characteristics  required to
be commercially  successful or that titles  compatible with the REALmagic format
will be allotted  retail shelf space.  Future sales of REALmagic  products  will
likely depend on retailers' carrying compatible software titles on the shelf.

To further  establish  the  Company's  technology  as a  standard,  the  Company
announced in October 1995 its strategic  direction of selling chipsets to add-on
card and computer  manufacturers.  The REALmagic Pro chipset became available in
January 1996. This chipset will enable other companies to manufacture  100% OM-1
and  REALmagic-compatible  MPEG  playback  cards  capable of playing the growing
number of MPEG software titles on the market. In addition, the Company announced
the REALmagic Explorer chipset in November 1995, which will enable OEM customers
to build type II ZVport-compatible PC cards for MPEG-1 video and audio playback,
bringing MPEG technology to notebook computers for the first time. In July 1996,
the Company entered the graphics market with announcement of its 2D VGA chip. In
December 1996, the Company announced a 2D/3D graphics chip. Any production delay
or failure to bring any of the  chipsets to market  could  adversely  affect the
Company's   market   position  by  limiting   chipset   acceptance  by  computer
manufacturers.


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         Technological Change
         The market for  multimedia  PC  products  is  characterized  by rapidly
changing  technology and user  preferences,  evolving formats for compression of
video and audio  data,  and  frequent  new  product  introductions.  Even though
REALmagic  products  and related  software  titles have  gained  initial  market
acceptance,  the  Company's  success will  depend,  among other  things,  on the
Company's ability to achieve and maintain technological leadership and to remain
competitive in terms of price and product performance.

To achieve and maintain technological  leadership,  the Company must continue to
make  technological  advancements  in the area of MPEG video and audio decoding.
These  advancements  include  compatibility with emerging standards and multiple
platforms,  improvements  to the  REALmagic  architecture,  enhancements  to the
REALmagic  API,  and the  achievement  of these  enhancements.  There  can be no
assurance  that the Company  will be able to make any such  advancements  to its
REALmagic  technology or that,  if such  advances are made,  the Company will be
able to achieve and maintain technological  leadership.  Any material failure of
the  Company or OEMs and  software  developers  to develop  or  incorporate  any
required  improvement  could  adversely  affect the continued  acceptance of the
Company's  technology and the  introduction and sale of future products based on
the  Company's   technology.   There  can  be  no  assurance  that  products  or
technologies  developed  by  others  will  not  render  obsolete  the  Company's
technology and the products based on the Company's technology.

To remain  competitive,  the Company must anticipate the needs of the market and
successfully  develop and introduce innovative new products in a timely fashion.
No assurance can be given that the Company will be able to successfully complete
the design of its 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,  contributing  to  fluctuations  in operating  results from quarter to
quarter. The introduction of new products also requires the Company to carefully
manage its inventory to avoid inventory obsolescence.  In addition, new products
typically  have  higher  initial  component  costs  than more  mature  products,
possibly resulting in downward pressures on the Company's gross margins.


         Competition
         The market for multimedia PC products is highly competitive.  While the
Company  does not  believe  that any  product  sold by a third party is directly
competitive  with  REALmagic  products  at  this  time in  terms  of  price  and
performance,  the  possibility  that other  companies  with more  experience and
financial  resources  may develop a  competitive  product may inhibit  continued
acceptance and future growth of REALmagic  technology.  REALmagic has earned its
position  as a leading  product  for the PC largely  because  of its  affordable
consumer price point.  Increased competition may be generated from several major
computer  product  manufacturers  that have developed  products and technologies
that could compete  directly with REALmagic  products on the PC platform.  These
include S3, Cirrus Logic, ATI,  Windbond,  and SGS Thompson.  Also, several OEMs
and microprocessor  companies possess  proprietary video compression  technology
that  may  compete  with   MPEG-based   products.   These  include  IBM,  Intel,
Mediamatics,  and ESS  Technology.  Most of  these  companies  have  substantial
experience  and expertise in audio,  video,  and  multimedia  technology  and in
producing and selling consumer products through retail distribution,  as well as
substantially greater engineering,  marketing,  and financial resources than the
Company.  Competitors of the Company may form cooperative  relationships,  which
could present formidable  competition to the Company.  There can be no assurance
that  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.

                                        8

<PAGE>


         Reliance on a Single Line of Products
         The Company's business strategy has been to focus on REALmagic products
by  investing  heavily in  PC-based  MPEG  technology.  In the fiscal year ended
January 31, 1997,  sales of multimedia  products  accounted for virtually all of
net sales.  A decline in market demand for multimedia  products would  adversely
affect the  Company's  operating  results.  The  Company's  present  reliance on
REALmagic  products is exacerbated by the fact that multimedia product sales are
concentrated  in the  personal  computer  industry.  A decline in demand for PCs
could have a material  adverse  effect on the  Company's  operating  results and
financial condition.


         Variability of Operating Results
         The  Company's  operating  results have  fluctuated in the past and may
continue to  fluctuate in the future due to a number of factors,  including  but
not limited to new  product  introductions  by the Company and its  competitors;
market acceptance of the Company's products by OEMs,  software  developers,  and
end users; the success of the Company's promotional programs; gains or losses of
significant customers;  reductions in selling prices; inventory obsolescence; an
interrupted or inadequate  supply of semiconductor  chips; the Company's ability
to protect its intellectual  property;  and loss of key personnel.  In addition,
sales to OEM customers are subject to  significant  variability  from quarter to
quarter,  depending  on OEMs'  timing  and  release  of  products  incorporating
REALmagic  technology,  experience  with  sell-through  of  such  products,  and
inventory levels.

The market for consumer  electronics  products is  characterized  by significant
seasonal swings in demand,  which typically peak in the fourth calendar  quarter
of each year.  Since the Company expects to derive a substantial  portion of its
revenues  from the sales of REALmagic  products in the future and the demand for
such products will depend in part on the emergence of digital video  technology,
the  Company's  revenues  may vary with the  availability  of and demand for DVD
titles.  Such 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 operating  results.  Based on the Company's  experience,  the
Company  believes that a substantial  portion of its 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 the Company's operating
results to be difficult to predict. The Company currently places  noncancellable
orders to purchase semiconductor products from its foundries on a long lead time
basis.  Consequently,  if,  as a result of  inaccurate  forecasts  or  cancelled
purchase  orders,  anticipated  sales and  shipments in any quarter do not occur
when expected,  inventory  levels could be  disproportionately  high,  requiring
significant working capital, negatively affecting operating results.


         Manufacturing Risks
         The REALmagic  multimedia card is composed of four VLSI chips,  each of
which is  presently  manufactured  by an  outside  supplier  or  foundry.  These
suppliers are Toshiba,  IBM, Analog Devices,  and Orbit  Semiconductor,  each of
which is a sole source  supplier to the Company of their  respective  chip.  The
Company  does not have  long-term  contracts  with such  suppliers  and conducts
business with its  suppliers on a written  purchase  order basis.  The Company's
reliance on independent suppliers involves several risks,  including 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.  Although  delays or  interruptions  have not
occurred  to  date,  an  delay  or  interruption  in  the  supply  of any of the
components  required  for  the  production  of  the  REALmagic  multimedia  card
currently  obtained from a single source could have a material adverse impact on
sales of REALmagic products by the Company and, thus, on the Company's business.

                                        9

<PAGE>

The  Company  must  provide  its  suppliers  with  sufficient  lead time to meet
forecasted  manufacturing  objectives.  Any  failure to properly  forecast  such
quantities  could materially  adversely affect the Company's  ability to produce
REALmagic products in sufficient quantities.  No assurance can be given that the
Company's forecasts regarding new product demand will be accurate,  particularly
since  the  Company  sells  REALmagic   products  on  a  purchase  order  basis.
Manufacturing the REALmagic  chipsets is a complex process,  and the Company may
experience short-term  difficulties in obtaining timely deliveries,  which could
affect the Company's ability to meet customer demand for its products.  Any such
delay in delivering products in the future could materially and adversely affect
the Company's operating results. In addition,  should any of the Company's major
suppliers be unable or unwilling to continue to  manufacture  the  Company's key
components in required  volumes,  the Company would have to identify and qualify
acceptable  additional  suppliers.  This qualification  process could take up to
three months or longer.  No assurances can be given that any additional  sources
of supply  could be in a position to satisfy  the  Company's  requirements  on a
timely basis.

In  the  past,  the  Company  has  experienced   production   delays  and  other
difficulties,  and the Company could experience  similar problems in the future.
In  addition,  there can be no assurance  that a product  defect will not escape
identification  at the  factory,  possibly  resulting  in  unanticipated  costs,
cancellations, or deferrals of purchase orders or costly recall of products from
customer sites.


         Dependence on Key Personnel
         The  Company's  future  success  depends in large part on the  continue
service of its key technical,  marketing, sales, and management personnel. Given
the complexity of REALmagic technology,  the Company is dependent on its ability
to retain and motivate highly skilled engineers involved in the ongoing hardware
and software  development  of REALmagic  products who will be required to refine
the existing  hardware  system and API and to introduce  enhancements  in future
applications.  The  multimedia PC industry is  characterized  by a high level of
employee mobility and aggressive  recruiting of skilled personnel.  There can be
no assurance that the Company's  current employees will continue to work for the
Company or that the Company  will be able to obtain the  services of  additional
personnel  necessary  for the Company's  growth.  The Company does not have "key
person" life insurance policies on any of its employees.


         Limited Intellectual Property Protection
         The  Company's  ability to compete  may be  affected  by its ability to
protect its proprietary  information.  The Company  currently holds four patents
covering the technology  underlying the REALmagic products,  and the Company has
filed certain  patent  applications  and is in the process of preparing  others.
There can be no assurance that any additional  patents for which the Company has
applied  will be issued  or that any  issued  patents  will  provide  meaningful
protection  of  its  product  innovations.  The  Company,  like  other  emerging
multimedia  companies,  relies  primarily  on trade  secrets  and  technological
know-how in the conduct of its business. In addition,  the Company is relying in
part on  copyright  law to  protect  its  proprietary  rights  with  respect  to
REALmagic technology.

The  electronics  industry is  characterized  by frequent  litigation  regarding
patent and  intellectual  property  rights.  Any such litigation could result in
significant  expense to the  Company  and divert  the  efforts of the  Company's
technical  and  management  personnel,  whether  or  not  the  outcome  of  such
litigation  is favorable to the  Company.  Moreover,  in the event of an adverse
result  in any  such  litigation,  the  Company  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.  There  can be no
assurance  that the Company would be successful in such  development or that any
such licenses  would be available on acceptable  terms,  if at all. In addition,
patent  disputes in the  electronics  industry  have often been settled  through
cross-licensing  arrangements.  Because  the  Company  does not yet have a large
portfolio  of issued  patents,  the Company may not be able to settle an alleged
patent infringement claim through a cross-licensing arrangement.

                                       10

<PAGE>

         Change in Business Plan

         The Company  altered its business plan with the  acquisition  of Active
Design and the elimination of all product lines other than multimedia  REALmagic
products.  As  a  result  of  the  change  in  business  strategy,  the  Company
experienced  significant  alteration  in the  its  number  and  organization  of
employees.  This  change  will  continue  to place a  substantial  strain on the
Company's management,  operational,  financial,  and accounting  resources.  The
Company must be evaluated in light of the costs,  delays, and other difficulties
frequently encountered in a rapidly changing business enterprise.

The  integration  of Active Design into the Company's  business is requiring the
Company to compete in a new market segment that is highly competitive. If larger
companies that possess  significantly  greater development resources and budgets
than the Company compete in this marker  segment,  the ability of the Company to
achieve  market  acceptance  for its products  could be materially and adversely
affected.  Additionally, there can be no assurance that the products expected to
be introduced in this market segment will be successfully  developed on time, or
free from  significant  errors or programming  errors,  or that the Company will
obtain  significant  purchase  orders for these  products.  If the Company  does
achieve a material market share, there can be no assurance that the Company will
be able to sustain or  increase  such market  share of that the Company  will be
able to maintain  acceptable gross margins for the products.  Failure to achieve
significant  commercial  revenues or profitability could have a material adverse
effect  on  the  Company's  business,   financial  condition,   and  results  of
operations.


         International Operations
         During the fiscal years ended January 31, 1997,  1996. and 1995,  sales
to international  customers accounted for approximately 72%, 63%, and 36% of the
Company's  net  sales,  respectively.  The  Company  anticipates  that  sales to
international customers, including sales of REALmagic products, will continue to
account for a  substantial  percentage  of net sales.  In addition,  some of the
foundries that manufacture the Company's  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,  the Company is 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 the Company's products in international  markets or
make it difficult for the Company to obtain price reductions from its foundries.
The Company  does not  currently  engage in any hedging  activities  to mitigate
exchange rate risks. To the extent that the Company  increases its  transactions
in foreign  currencies,  the Company's  results of operations could be adversely
affected by exchange rate fluctuations.


         Volatility of Stock Price
         The  market  of  the  Company's   Common  Stock  has  been  subject  to
significant  volatility,   which  is  expected  to  continue.  Factors  such  as
announcements  of  the  introduction  of new  products  by  the  Company  or its
competitors and market conditions in the technology, entertainment, and emerging
growth company sectors may have a significant  impact on the market price of the
Company's  Common Stock.  Further,  the stock market has experienced  volatility
that has  particularly  affected the market prices of equity  securities of many
high technology and development stage companies such as those in the electronics
industry.  Such volatility has often been unrelated or  disproportionate  to the
operating performance of such companies. These fluctuations,  as well as general
economic and market  conditions,  may  adversely  affect the price of the Common
Stock.


ITEM 2.  FACILITIES
The  Company  currently  leases  a  50,000  square  feet  facility  in  Fremont,
California that is used as the Company's headquarters.  The lease will expire in
March 1999. The Company believes that it has adequate  facilities to accommodate
the Company's operations in the near term.

                                       11

<PAGE>


ITEM 3.  LEGAL PROCEEDINGS


The Company is not  involved  in any legal  proceedings  that it  believes  will
materially  and  adversely   affect  its  financial   condition  or  results  of
operations.


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


Not applicable


EXECUTIVE OFFICERS OF THE COMPANY


The  executive  officers and directors of the Company and their ages as of April
1, 1997 are as follows:

     Name                   Age             Position
    -----                  ----             ---------
Thinh Q. Tran              43       Chairman of the Board, President, and
                                     Chief Executive Officer
Silvio Perich              48       Senior Vice President, Worldwide Sales
Jacques Martinella         41       Vice President, Engineering
Dan Chen                   47       Senior Vice President, Technology
Prem Talreja               43       Vice President, Marketing
Kit Tsui                   47       Director of Finance, Acting Chief Financial
                                     Officer, and Secretary
Julien Nguyen              39       Director
William J. Almon(1)(2)     63       Director
William Wang(1)(2)         33       Director
--------------------------------------------------------------------------------
(1)   Member of the Audit Committee
(2)   Member of the Compensation Committee

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

Mr. Perich joined the Company in September 1985 as Director, Sales. In September
1992, Mr. Perich became Senior Vice  President,  Worldwide Sales of the Company.
Mr.  Perich  was  a  co-founder  of  Costar   Incorporated,   a   manufacturer's
representative  organization  for high technology  products,  where he served as
partner from October 1979 to September 1985. From September 1979 until September
1985, Mr. Perich served in several sales  management  roles at Siliconix Inc., a
specialty semiconductor manufacturer. In addition, Mr. Perich was the founder of
Mondix Corporation,  an international sales management consultant firm, where he
served as President from December 1979 to October 1983.

Mr. Martinella joined the Company in May 1994 as Director, VLSI Engineering.  In
December 1995, Mr. Martinella became Vice President, Engineering. From June 1990
to April 1994, Mr. Martinella served in engineering and management  positions at
Weitek, a microchip manufacturer. In addition, Mr. Martinella was an engineer at
National  Semiconductor,  a semiconductor  manufacturer,  from June 1092 to June
1990.

Dr. Chen joined the  Company in June1996 as Senior Vice  President,  Technology.
From May 1995 to May 1996,  Dr. Chen was  President of Active  Design  Corp.,  a
private PC graphics  company.  From  August  1994 to My 1995,  Dr. Chen was Vice
President of ASIC  technology at Advance  Logic,  a custom chip design  company.
From May 1991 to August 1994,  Dr. Chen was Technical  Director in charge of the
Windows

                                       12

<PAGE>

graphics accelerator product line at Trident Microsystems, Inc., a graphics chip
design  company.  From  August  1985 to April  1991,  Dr.  Chen was a  Technical
Director at GM Hughes Electronics,  a defense electronics company.  From 1978 to
1985, Dr. Chen held various senior  engineering  positions at Mattel Electronics
and Xerox Corporation.

Mr. Talreja joined the Company in March 1996 as Vice President,  Marketing. From
June 1994 to February 1996, Mr. Talreja was Director,  Marketing of OPTi,  Inc.,
an ASIC design  company.  From April 1991 to May 1994, Mr. Talreja was Marketing
Manager of Cirrus Logic Inc., a  diversified  semiconductor  company.  From June
1988  to  March  1991,  Mr.  Talreja  was  Vice  President,  Marketing  of  Able
Communications,  a private telecommunications  company. From January 1984 to May
1988,  Mr.   Talreja  was  Marketing   Manager  of  Siemens   Semiconductor,   a
semiconductor  company. From January 1979 to April 1988, Mr. Talreja was Product
Marketing Manager of Inmos Corporation, an ASIC design company.

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

Mr. Nguyen has served as a Director since October 1993. Since November 1996, Mr.
Nguyen  has  served  as  Chairman   and  Chief   Executive   Officer  of  Novita
Communications,  Inc., a private Java  software  company.  From February 1995 to
October  1996,  he served as  Co-Chairman  and Chief  Technical  Officer  of the
Company.  From August 1993 until January 1995, he served as the 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 EMI. From
June 1991 to May 1992,  Mr.  Nguyen  served as the Chairman of Photon  Machines.
From 1986 to 1991,  Mr.  Nguyen  worked at Radius,  Inc.  as Director of Product
Development.

Mr. Almon has served as a Director of the company since April 1994. In May 1994,
he became 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.
From 1958 until 1987,  Mr.  Almon held  various  management  positions  with IBM
Corporation, most recently as Vice President, Low End Storage Products.
Mr. Almon also serves as a Director of Read Rite Corporation.

Mr. Wang became a Director of the Company in October 1995.  From January 1995 to
the  present,  Mr.  Wang has served as Chairman  of the Board,  Chief  Executive
Officer, and President of Diva Technology 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., a company
that acts as the international sales  representative for MAG Technology Co. 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.



                                       13

<PAGE>
                                     PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

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

                                              Fiscal 1997          Fiscal 1996
                                              -----------          ------------
                                            High       Low       High      Low
                                            ----       ---       ----      ----
First quarter ended April 30               11 5/8     8 1/16     7         4 1/2
Second quarter ended July 31               13 1/2     7 1/4      6 7/8     4 1/4
Third quarter ended October 31              9 7/8     7 1/4      6 5/8     4 3/8
Fourth quarter ended January 31            11 5/8     7 3/8      8 7/8     4 3/4

As of March 31, 1997, the Company had 265  shareholders  of record.  The Company
has not paid cash  dividends  on its common  stock and does not plan to pay cash
dividends to its shareholders in the near future.  The Company presently intends
to retain its earnings to finance the future growth of its business.

ITEM 6.  SELECTED FINANCIAL DATA
<TABLE>

The following table summarizes  certain selected financial data derived from the
audited  financial  statements for the years ended January 31, 1993, 1994, 1995,
1996, and 1997.
<CAPTION>

                        Selected Financial Five-Year Data



Year ended January
(In thousands, except           1997       1996        1995         1994       1993
 per share data                -------------------------------------------------------
and number of employees)

<S>                           <C>        <C>         <C>         <C>         <C>     
Net revenues                  $ 41,214   $ 26,374    $ 43,700    $ 34,989    $ 27,058

Net income (loss)                1,529    (14,708)     (8,773)    (29,546)     (7,166)

Net income (loss) per share       0.14      (1.88)      (1.20)      (5.15)      (1.37)

Working capital                 20,164     11,461      17,446      15,117      33,696

Total assets                    37,915     24,843      33,387      26,639      44,267

Shareholders' equity            21,017     12,581      18,721      16,499      37,788

Number of employees                 86         60         138         151         195

</TABLE>


                                       14

<PAGE>


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

RESULTS OF OPERATIONS

During the fiscal year ended  January 31,  1997,  the  Company  acquired  Active
Design  Corporation,  a development  stage company with primary  activity in the
development of  semiconductor  chips for use in PC graphics  applications.  This
acquisition complemented the Company's plan to focus on multimedia products. For
the fiscal year ended  January 31, 1997,  the  Company's net sales reached $41.2
million, up 56 percent from $26.4 million reported in fiscal 1996. This increase
in sales was  primarily  attributable  to  increased  sales of MPEG  boards  and
chipsets to OEMs,  in accordance  with the Company's  plans to focus on chipsets
and place more emphasis on OEM sales for the next  generation of its  MPEG-based
REALmagic  product  line.  Net income for the fiscal year ended January 31, 1997
was $1.5  million  as  compared  to a net loss of $14.7  million  from the prior
fiscal year.

SALES

The  following  table sets forth the  Company's net sales in each of its product
groups for the last three fiscal years:

 (In thousands)              Fiscal 1997   Fiscal 1996     Fiscal 1995
---------------------------------------------------------------------
Multimedia products:

     MPEG Boards          $     16,295   $     24,661   $     30,345
     Chipsets                   23,111             --             --
     Accessories                 1,026             --             --

Display systems                     --          1,554          7,887

CPU boards                          --             52          2,050

Other                              782            107          3,418
                        ---------------------------------------------
  TOTAL NET SALES         $     41,214   $     26,374   $     43,700
                        ---------------------------------------------



The multimedia  product group includes  chipsets for high  performance 2D and 3D
graphics  acceleration for PC manufacturers  and add-on card makers,  as well as
complete MPEG playback  solutions for both desktop and notebook  computers.  The
"other"  sales  category  consists  primarily  of sales of surplus and  obsolete
inventories,  sales of components to service centers,  and contract revenue. The
Company  completely  eliminated  its  non-multimedia  businesses in fiscal 1997,
including display systems and CPU boards.

The  Company's  net sales  increased 56 % in fiscal  1997,  as compared to a 40%
decrease in fiscal  1996.  The  increase  in sales in fiscal 1997 was  primarily
attributable  to the Company's  efforts to increase OEM sales.  The reduction of
sales in 1996 was primarily  attributable to the  elimination of  non-multimedia
product  lines  and the  Company's  transition  to the next  generation  of MPEG
products.

The  following  table sets forth the  Company's  sales by domestic  distribution
channels and international sales for each of the last three fiscal years:


                                       15
<PAGE>


(In thousands)                      Fiscal 1997     Fiscal 1996    Fiscal 1995
------------------------------------------------------------------------------
Domestic Sales
     Retail                        $      9,139   $      7,736   $     17,722
     OEMs                                 2,497          1,906         10,070
                                 ---------------------------------------------
     Total Domestic Sales                11,636          9,642         27,792
                                 ---------------------------------------------

International Sales
     Asia Pacific                        26,708         13,274         10,222
     Europe                               2,400          3,243          5,415
     Canada                                 470            215            271
                                 ---------------------------------------------
     Total International Sales           29,578         16,732         15,908
                                 ---------------------------------------------

                                 ---------------------------------------------
  TOTAL NET SALES                  $     41,214   $     26,374   $     43,700
                                 ---------------------------------------------


The percentages of the Company's net sales attributable to domestic retail sales
were 22% in  fiscal  1997,  29% in fiscal  1996,  and 41% in  fiscal  1995.  The
percentages of the Company's net sales  attributable  to domestic OEM sales were
6% in fiscal 1997, 7% in fiscal 1996, and 23% in fiscal 1995.  Although domestic
OEM sales  increased  in  absolute  dollars in fiscal  1997,  the  increase  was
negligible in terms of the Company's overall revenue increase,  which caused the
percentage  of domestic  OEM sales to  decrease  slightly  in fiscal  1997.  The
percentages of the Company's net sales attributable to international  sales were
72% in fiscal 1997,  63% in fiscal 1996, and 36% in fiscal 1995. In fiscal 1997,
the Company's international sales concentrated on three Asian countries--Taiwan,
Hong Kong,  and Japan.  Taiwan  accounted  for 42% of the Company's net sales in
fiscal 1997, Hong Kong accounted for 9%, and Japan accounted for 7%.

In fiscal 1997, domestic sales increased 21% over fiscal 1996, and international
sales  increased  almost 77%, with a significant  portion of the increase coming
from sales to overseas OEMs. The increase in international  sales was due to the
popularity of full-motion video in international markets,  resulting in a higher
product demand.

GROSS MARGIN

The Company's gross margin as a percentage of net sales was  approximately  36%,
3%, and 15% in fiscal 1997, 1996, and 1995, respectively.  The increase in gross
margin in fiscal 1997 was largely  attributable  to the higher  gross  margin in
multimedia chipset products. In fiscal 1997, the gross margin of MPEG boards and
chipsets was recorded at 30% and 47%, respectively.  The comparatively low gross
margin in fiscal 1996 and 1995 was  primarily  the result of inventory  reserves
and  write-offs  in  connection  with the  Company's  strategic  move  away from
non-multimedia  products and the  transition  to a new  generation of MPEG-based
products.  Excluding the impact of such reserves and  write-offs,  the Company's
annual  gross  margin was 36%,  26%,  and 23% in fiscal  1997,  1996,  and 1995,
respectively.  Although  the Company  attempts  to  minimize  the impact of such
product  transitions,  the market for the  Company's  products is  volatile  and
subject to the impact of changes in  technology  and other  competitive  factors
(see "Factors Affecting Future Operating Results") and, as a result, there is no
assurance that the Company will not have similar  reserves and write-offs in the
future.


                                       16
<PAGE>

OPERATING EXPENSES

Sales and marketing expenses decreased $2.4 million, or 30%, in fiscal 1997 over
fiscal 1996. The reduction was primarily due to (i) the elimination of SDIS, the
Company's  monitor  subsidiary in fiscal 1997;  (ii) a change in sales strategy,
emphasizing less retail  distribution and more chipset and OEM sales,  resulting
in a  reduction  in media  advertising  and  trade  show  expenses;  and (iii) a
reduction in software  development  to promote the use of customized  MPEG-based
products.  Sales and marketing expenses decreased $1.1 million, or 12% in fiscal
1996  over  fiscal  1995,  reflecting  a  more  focused  approach  to  marketing
concentrated on chipset and OEM sales.

Research and development expenses increased $189,000, or 4%, in fiscal 1997 over
fiscal 1996. The increase was largely due to research and  development  expenses
incurred in connection with the acquisition of Active Design Corporation and the
development  of graphics  chips.  Research and  development  expenses  increased
$150,000, or 3%, in fiscal 1996 over fiscal 1995. This increase was attributable
to a combination of the  elimination of display system  research and development
efforts  associated  with the display systems product line and the absorption of
R&D expenses in connection with the acquisition of Active Design Corporation.

The  Company's  general and  administration  expenses  in fiscal 1997  decreased
$1,221,000,  or 29%,  over fiscal 1996.  The decrease was  primarily  due to the
elimination of SDIS, the Company's display systems subsidiary,  and general cost
reduction  efforts by the Company.  The Company  completed  its  acquisition  of
Active  Design  Corporation  in  fiscal  1997,  which  resulted  in  a  $230,000
non-recurring merger expense charged to general and administration expenses. The
same expenses increased  $687,000,  or 20%, in fiscal 1996 over fiscal 1995. The
increase was largely  attributable to $1,500,000 of accounts receivable reserves
recorded in fiscal 1996 in connection  with the  write-down of certain assets of
SDIS to net realized value.

EARNINGS PER SHARE

The Company reported net income per share $0.14 in fiscal 1997, as compared to a
loss per share of $1.88 in fiscal 1996.  The turnaround was due to a combination
of higher sales,  improved gross margin,  and reduction in operating expenses as
the Company  continued to place its focus on chipset and OEM sales.  The loss of
$1.88 per  share in fiscal  1996 was  primarily  attributable  to a low level of
sales inadequate to cover operating expenses and reserves recorded in connection
with the  elimination of SDIS. In fiscal 1995,  the Company  reported a loss per
share of $1.20 due primarily to lower than expected sales,  reserves recorded by
the SDIS subsidiary,  increased marketing expenses to promote REALmagic products
worldwide,  and  significant  R&D  expenses  related  to the cost of  supporting
third-party  software  developers in their  development of  REALmagic-compatible
titles.

FINANCIAL CONDITION

The Company had cash,  cash  equivalents,  and  short-term  investments of $18.8
million at January 31, 1997,  compared  with $15.6  million at January 31, 1996.
This  increase  was  primarily  attributable  to $6.8  million (net of expenses)
raised from the  exercise of warrants  and the  exercise of options by employees
under the  Company's  ISO plans,  in addition to $4.4  million of cash  borrowed
under  bank  lines of  credit;  offset by net cash used for  operations  of $7.5
million.  The Company  also  experienced  significant  increases in its accounts
receivable  and  inventory  during  fiscal  1997,  largely due to a higher sales
volume and longer customer  payment terms common in the OEM market,  as compared
to revenue patterns in fiscal 1996.

The Company's  primary  sources of funds to date have been cash  generated  from
operations,  proceeds from common stock  issuances,  and bank  borrowings  under
lines of credit.  The  Company  believes  that its  current  reserve of cash and
equivalents and short-term  investments and the  availability of funds under its
existing cash and asset-based banking arrangements will be sufficient to satisfy
its cash needs for the next

                                       17

<PAGE>

twelve months. As of January 31, 1997, the Company had $10.8 million outstanding
under a $12 million bank line of credit that  expires in  September  1997 and is
collateralized  by funds on deposit in accounts  that have been  assigned to the
lender.  The Company  also has a $6 million bank line of credit  available  that
expires in September 1997 and is secured by the Company's  accounts  receivable,
inventories,  equipment,  and intangibles.  Beyond the next twelve-month period,
the  Company  believes  that  to the  extent  it does  not  generate  cash  from
operations,  it may have to raise  additional  capital  through either public or
private  offerings of its common stock or from additional bank financing.  There
is no assurance that such capital will be available to the Company.

FACTORS AFFECTING FUTURE OPERATING RESULTS

The  Company's  annual  and  quarterly  results  have in the past and may in the
future vary significantly due to a number of factors,  including but not limited
to new  product  introductions  by  the  Company  and  its  competitors;  market
acceptance  of the  Company's  products:  shifts  in  demand  for the  Company's
products; gains or losses of significant customers; reduction in selling prices;
inventory  obsolescence;  an interrupted or inadequate  supply of  semiconductor
chips; the Company's inability to protect its intellectual  property; or loss of
key personnel.  Any  unfavorable  change in the foregoing or other factors could
have a material adverse effect on the Company's business,  financial  condition,
and results of operations.

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Sigma's financial  statements,  the notes thereto, and the independent auditors'
report appear on pages F-1 through F-17 of this Annual Report on Form 10-K.

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

          Not Applicable

                                       18

<PAGE>


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The  information  required by this item  concerning  the Company's  directors is
incorporated  by  reference  from the  information  set  forth  in the  sections
entitled  "Election  of  Directors"  and "Other  Information"  contained  in the
Company's Proxy Statement relating to the 1997 Annual Meeting of Shareholders to
be filed with the Securities and Exchange  Commission  within 120 days after the
end of the Company's  fiscal year pursuant to General  Instruction  G(3) of Form
10-K  (the  "Proxy  Statement").  Certain  information  required  by  this  item
concerning the executive officers of the Company is incorporated by reference to
the information set forth in Part I of the Annual Report on 10-K.

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
"Management--Officer 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 "Management--Security Ownership of
Certain Beneficial Owners and Management" contained in the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required  by this item  regarding  certain  relationships  and
related transactions is incorporated by reference from the information set forth
in  the  section  entitled   "Management--Certain   Transactions" in  the  Proxy
Statement.


                                       19

<PAGE>


                                     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 report:                   Page

Independent Auditors' Report                                                F-1
Consolidated Balance Sheets as of January 31, 1997 and 1996                 F-2
Consolidated Statements of Operations for the years ended
January 31, 1997, 1996, and 1995                                            F-3
Consolidated Statements of Shareholders' Equity for the years
ended January 31, 1997, 1996, and 1995                                      F-4
Consolidated Statements of Cash Flows for the years ended
January 31, 1997, 1996, and 1995                                            F-5
Notes to Consolidated Financial Statements                                  F-6

2.  Financial Statement Schedules
The following financial statement schedule is filed as part
of this report:

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

A report on Form 8-K was filed on January 10, 1997,  announcing the resignation,
for personal health reasons, of Q. Binh Trinh, Vice President, Finance and Chief
Financial Officer.

(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.

                                       20

<PAGE>


                                   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 Fremont,  State of
California, on the 30th day of April 1997.

                                          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
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:

    Signature                        Title                            Date

/s/ Thinh Q. Tran        Chairman of the Board, President,       April 30, 1997
                         and Chief Executive Officer
                         (Principal Executive Officer)

/s/ Kit Tsui             Director of Finance, Acting Chief       April 30, 1997
                         Financial Officer and Secretary
                         (Principal Financial and Accounting
                         Officer)

/s/ Julien Nguyen        Director                                April 30, 1997

/s/ William J. Almon     Director                                April 30, 1997

/s/ William Wang         Director                                April 30, 1997



                                       21

<PAGE>


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,  1997  and  1996,  and the  related
consolidated  statements of operations  shareholders'  equity and cash flows for
each of the three years in the period ended  January 31,  1997.  Our audits also
included the  financial  statement  schedule  listed  in  Item  14.(a).2.  These
financial  statements and financial statement schedule are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,   the  financial   position  of  Sigma  Designs,   Inc.  and
subsidiaries  at January 31, 1997 and 1996, and the results of their  operations
and their cash flows for each of the three years in the period ended January 31,
1997 in conformity with generally accepted accounting  principles.  Also, in our
opinion,  such financial statement schedule,  when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.


DELOITTE & TOUCHE LLP

San Jose, California
February 28, 1997

                                      F-1

<PAGE>

CONSOLIDATED BALANCE SHEETS
January 31, 1997 and 1996 (dollars in thousands)               1997        1996
--------------------------------------------------------------------------------

ASSETS
Current Assets:
   Cash and equivalents                                    $  6,945    $  4,647
   Short-term investments                                    11,801      10,966
   Accounts receivable (net of allowances: 
     $892 in each year)                                      12,477       4,789
   Inventories - net                                          4,880       2,044
   Prepaid expenses and other assets                            581         760
                                                           --------    --------
      Total current assets                                   36,684      23,206

Equipment - net                                               1,098       1,497

Other assets                                                    133         140
                                                           --------    --------
Total                                                      $ 37,915    $ 24,843
                                                           ========    ========

LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities:
   Bank line of credit                                     $ 10,831    $  6,392
   Accounts payable                                           3,286       2,869
   Accrued liabilities                                        2,066       2,066
   Accrued facilities                                           302         418
   Current portion of capital lease                              35          --
                                                           --------    --------
      Total current liabilities                              16,520      11,745
                                                           --------    --------
Accrued facilities - long term                                  311         517

Capital Lease - long term                                        67

Commitments (Notes 9 and 10)

Shareholders equity:
   Preferred stock - no par value: 2,000,000 shares 
     authorized, no shares outstanding                           --          --
   Common stock - no par value: 20,000,000 shares 
     authorized, shares outstanding: 
      1997, 11,091,062; 1996, 9,847,921                      54,311      47,575
   Accumulated deficit                                      (33,114)    (34,769)
   Deferred stock compensation                                 (100)       (164)
   Shareholder note receivable                                  (80)        (80)
   Unrealized gain on securities available for sale              --          19
                                                           --------    --------
Shareholders equity                                          21,017      12,581
                                                           --------    --------
Total                                                      $ 37,915    $ 24,843
                                                           ========    ========

See notes to consolidated financial statements.

                                       F-2

<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended January 31, 1997, 1996, and 1995 
(dollars in thousands, except per share amounts)   1997        1996        1995
--------------------------------------------------------------------------------

Net Sales                                      $ 41,214    $ 26,374    $ 43,700
Costs and Expenses:
   Cost of sales                                 26,531      25,492      36,980
   Research and development                       4,688       4,499       4,349
   Sales and marketing                            5,541       7,952       9,022
   General and administrative                     2,987       4,208       3,521
   Restructuring charges (credit)                    --        (350)       (517)
                                               --------    --------    --------
      Total costs and expenses                   39,747      41,801      53,355
                                               --------    --------    --------
Income (loss) from operations                     1,467     (15,427)     (9,655)
   Interest income                                  594         449         474
   Interest expense                                (540)       (396)       (138)
   Gain (loss) from sale of investments              --         666         546
   Other income/expense                               8          --          --
                                               --------    --------    --------
Income (loss) before income taxes                 1,529     (14,708)     (8,773)
Provision for income taxes                           --          --          --
                                               --------    --------    --------
Net income (loss)                              $  1,529    $(14,708)   $ (8,773)
                                               ========    ========    ========
Net income (loss) per common share             $   0.14       (1.88)   $  (1.20)
                                               ========    ========    ========
Shares used in computation                       11,259       7,822       7,307
                                               ========    ========    ========


See notes to consolidated financial statements.

                                       F-3

<PAGE>

<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

<CAPTION>
                                                                                                                Unrealized
                                                                                                               Gain (Loss)
                                                                                    Deferred   Shareholder  on Securities
Years ended January 31, 1997, 1996 and 1995        Common Stock    Accumulated         Stock          Note      Available
(Dollars in thousands)                             Shares   Amount     Deficit  Compensation    Receivable       for Sale     Total
------------------------------------------------------------------------------------------------------------------------------------

<S>                                             <C>        <C>       <C>              <C>            <C>            <C>     <C>    
Balances, February 1, 1994                      6,228,060  $27,544   $(11,045)        $   --         $  --          $  --   $16,499
   Sale of common stock                         1,130,000   12,959         --             --            --             --    12,959
   Common stock issued under stock plans          121,883      242         --             --            --             --       242
   Payment to E-Motions, Inc. shareholders             --   (1,925)        --             --            --             --    (1,925)
   Buy-back of Docupoint minority interest             --       --       (218)            --            --             --      (218)
   Unrealized loss on
     securities available for sale                     --       --         --             --            --            (63)      (63)
   Net Loss                                            --       --     (8,773)            --            --             --    (8,773)
                                                ---------  -------   --------          -----          ----           ----   -------
Balances, January 31, 1995                      7,479,943   38,820    (20,036)            --            --            (63)   18,721
   Common stock issued under stock plans          549,655      411         --             --           (80)            --       331
   Conversion of subordinated notes
      and issuance of warrants                  1,134,323    6,276         --             --            --             --     6,276
   Adjustment of E-Motions, Inc. 
      purchase price                                   --       74         --             --            --             --        74
   Deferred stock compensation                         --      164         --           (164)           --             --        --
   Issuance of stock                              684,000    1,830        (25)            --            --             --     1,805
   Unrealized gain on securities
      available for sale                               --       --         --             --            --             82        82
Net Loss                                               --       --    (14,708)            --            --             --   (14,708)
                                                ---------  -------   --------          -----          ----           ----   -------
Balances, January 31, 1996                      9,847,921   47,575    (34,769)          (164)          (80)            19    12,581
   Common stock issued under stock plans          827,221    3,719         --             --            --             --     3,719
   Adjustment of E-Motions, Inc. 
      purchase price                                   --       21         --             --            --             --        21
   Exercise of warrants                           415,920    3,011         --             --            --             --     3,011
   Amortization of deferred stock 
      compensation                                     --      (15)        --             64            --             --        49
   Unrealized loss on securities
      available for sale                               --       --         --             --            --            (19)      (19)
   Active Design Corp. for the month ended
      February 29, 1996                                --       --        126             --            --             --       126
   Net Income                                          --       --      1,529             --            --             --     1,529
                                               ----------  -------   --------          -----          ----           ----   -------
Balances, January 31, 1997                     11,091,062  $54,311   $(33,114)         $(100)         $(80)          $ --   $21,017
                                               ==========  =======   ========          =====          ====           ====   =======
<FN>

See notes to consolidated financial statements 
</FN>
</TABLE>
                                       F-4

<PAGE>
<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended January 31, 1997, 1996, and 1995  (in thousands)             1997        1996        1995
------------------------------------------------------------------------------------------------------
<S>                                                                   <C>         <C>         <C>     
Cash flows from operating activities:
Net income (loss)                                                    $  1,529    $(14,708)   $ (8,773)
Active Design net loss for the one month ended February 29, 1996          126          --          --
   Adjustments to reconcile net loss to net cash provided by (used
      for) operating activities:
      Depreciation and amortization                                     1,054       1,346         774
      Gain from sale of investment                                         --        (666)       (205)
      Loss on disposal of assets                                           --          22          --
      Amortization of deferred stock compensation                          49          --          --
      Reduction in restructuring costs previously reported                 --        (350)       (517)
Changes in assets and liabilities:
   Accounts receivable                                                 (7,688)      7,169      (4,712)
   Inventories                                                         (2,836)      7,692         866
   Prepaid expenses and other                                            (130)        (76)        351
   Accounts payable                                                       417      (6,464)      5,126
   Accrued liabilities                                                    (22)       (243)     (1,793)
                                                                     --------    --------    --------
      Net cash used for operating activities                           (7,501)     (6,278)     (8,883)
                                                                     --------    --------    --------
Cash flows from investing activities:
   Purchases of short-term investments                                (11,801)    (10,947)    (10,472)
   Maturity of short-term investments                                  10,947       7,412       6,574
   Sales of long-term investments                                          --       1,560         844
   Equipment additions                                                   (345)       (786)       (721)
   Title development costs                                               (188)       (296)       (950)
   Other assets                                                             7          (1)       (305)
                                                                     --------    --------    --------
      Net cash used for investing activities                           (1,380)     (3,058)     (5,030)
                                                                     --------    --------    --------
Cash flows from financing activities:
   Bank lines of credit borrowings, net                                 4,439       4,682       1,710
   Common stock sold                                                    6,751       2,136      13,201
   Payment to E-Motions shareholders                                       --          --      (1,925)
   Proceeds from issuance of convertible debt and 
     warrants - net                                                        --       6,276          --
   Repayment of capital lease obligation                                  (11)         (3)         --
   Proceeds from shareholder advance                                       --          11          --
                                                                     --------    --------    --------
      Net cash provided by financing activities                        11,179      13,102      12,986
                                                                     --------    --------    --------
Increase (decrease) in cash and equivalents                             2,298       3,766        (927)
Cash and equivalents:
   Beginning of period                                               $  4,647    $    881    $  1,808
                                                                     --------    --------    --------
   End of period                                                     $  6,945    $  4,647    $    881
                                                                     ========    ========    ========
Cash paid for interest                                               $    511    $    388    $    136
                                                                     ========    ========    ========
Cash paid for income taxes                                           $     --    $      3    $     --
                                                                     ========    ========    ========
Noncash investing and financing activities:
   Equipment acquired under capital leases                           $    113    $     38    $     38
                                                                     ========    ========    ========
   Issuance of common stock for notes receivable                     $     --    $     80    $     --
                                                                     ========    ========    ========
   Accretion of redeemable preferred stock redemption value          $     --    $     25    $     --
                                                                     ========    ========    ========
   Deferred stock compensation                                       $     --    $    164    $     --
                                                                     ========    ========    ========
   Conversion of subordinated debt to common stock and 
     issuance of warrants                                            $     --    $  6,276    $     --
                                                                     ========    ========    ========
   Adjustment of E-Motions, Inc. purchase price                      $     21    $     74    $     --
                                                                     ========    ========    ========
<FN>
See notes to consolidated financial statements. 
</FN>
</TABLE>

                                       F-5

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For years ended January 31, 1997, 1996, and 1995

1.  DESCRIPTION  OF BUSINESS  

Sigma Designs, Inc. (the Company) develops,  manufactures and markets multimedia
computer  devices and  products.  The  Company has also been in the  business of
developing,  manufacturing and marketing  graphics boards,  display products and
other board-level products for use with IBM,  IBM-compatible and Apple Macintosh
personal  computers;  however,  at January 31, 1997,  substantially all business
activity  related to  multimedia  devices and  products.  The Company  sells its
products  to  computer  manufacturers  and to retail  chains,  distributors  and
value-added resellers.

2. SIGNIFICANT  ACCOUNTING  POLICIES

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

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

        Pervasiveness of Estimates - The preparation of financial  statements in
conformity with generally accepted accounting  principles 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.  Such estimates include accruals,  reserves and the
valuation  allowance on deferred tax assets.  Actual  results  could differ from
those estimates.

        Short-term  investments  represent government and corporate  obligations
with maturities at the date of acquisition of more than three months.  Effective
February  1,  1994,  the  Company  adopted  Statement  of  Financial  Accounting
Standards No. 115 (SFAS 115),  Accounting  for Certain  Investments  in Debt and
Equity  Securities.  Adoption of SFAS 115 had no material impact on the Companys
consolidated financial position or results of operations. Short-term investments
are carried as available for sale securities,  are reported at fair market value
and are  classified as current  assets as all  maturities are within one year as
follows (in thousands):

                                                        Market       Unrealized
January 31, 1997 (In thousands)            Cost          Value       Gain (Loss)
--------------------------------------------------------------------------------

Certificates of deposit                 $11,801        $11,801        $   --

Certificates  of deposit at  January  31,  1997  includes  $10,830,000  which is
restricted as to use because it is security for a bank line of credit (Note 8).


                                                       Market       Unrealized
January 31, 1996 (In thousands)           Cost          Value       Gain (Loss)
--------------------------------------------------------------------------------

Certificates of deposit                 $ 7,030        $ 7,030        $   --
Corporate obligations                     1,965          1,979        $   14
U.S. government obligations
 (primarily U.S. Treasury notes)          1,952          1,957             5
                                        -------        -------        ------
                                        $10,947        $10,966        $   19
                                        =======        =======        ======

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

        Title development costs represent  payments made to support the external
development of interactive MPEG compatible  software titles,  net of accumulated
amortization  and write downs to net  realizable  value.  Costs are  capitalized
after technological  feasibility is achieved.  The Company amortizes these costs
over the  shorter of 12 months  from the  introduction  of the title or pro rata
over  the  estimated  unit  sales  of  the  title.  The  Company  evaluates  the
recoverability of these costs based on the on-going viability of specific titles
and the  anticipated net realizable  value from related  product sales.  Amounts
determined  not to be  realizable  are expensed in the period of  determination.
Title   development   costs  of  $172,000  and  $481,000,   net  of  accumulated
amortization  of $51,000 and $91,000 were  included in prepaids and other assets
as of January 31, 1997 and 1996,  respectively.  Amortization expense related to
title  development  costs was $497,000 and $71,000 in the year ended January 31,
1997 and 1996, respectively.

        Investments  in 20% to 50% owned  companies  are accounted for using the
equity method.  Investments  in 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.

        Revenue  Recognition -  Sales are recognized  upon shipment.  Allowances
for sales returns,  price protection and warranty costs are recorded at the time
that sales are recognized.

        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.

        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 Companys cash and cash equivalents are on deposit

                                       F-6

<PAGE>

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  and  such  losses  have  been  within   management's
expectations.

        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.

        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 1, 1997,  January
27, 1996 and January 28, 1995, respectively. Fiscal 1997, 1996 and 1995 included
53, 52 and 52 weeks respectively.

        Net income (loss) per common and equivalent  share is computed using the
weighted average number of common shares outstanding and the dilutive effects of
options and other common stock  equivalents.  For the years in which there was a
net loss, common stock equivalents were not included in the calculation as their
impact would be anti-dilutive.

        Fair Value of Financial  Investments - In accordance with the provisions
of Statement of Financial  Accounting  Standards (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 or  equivalents  and the  short-term
investments as of January 31, 1997 approximate fair market value.

        Recently  Issued  Accounting  Standard - In February 1997, the Financial
Accounting Standard Board issued Statement of Financial Accounting Standards No.
128, Earnings per Share (SFAS 128). The Company is required to adopt SFAS 128 in
the fourth  quarter of fiscal 1998 and will  restate at that time  earnings  per
share (EPS) data for prior periods to conform with SFAS 128. Earlier application
is not permitted.

        SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation  of basic and  diluted  EPS.  Basic EPS  excludes  dilution  and is
computed by dividing net income available to common shareholders by the weighted
average of common shares  outstanding  for the period.  Diluted EPS reflects the
potential  dilution that could occur if  securities or other  contracts to issue
common stock were excercised or converted into common stock.

        If SFAS 128 had been in effect during the current and prior years, basic
EPS would have been $0.15 in the year ended  January 31, 1997 and would have not
been  significantly  different  for the years  ended  January 31, 1996 and 1995.
Diluted EPS under SFAS 128 would not have been significantly  different than EPS
currently reported for each of the years.

3. ACQUISITION  OF  ACTIVE  DESIGN CORP.

On May 3, 1996, the Company aquired Active Design Corporation (Active Design) in
a transaction  accounted for as a pooling of interests.  Active Design exchanged
all of its outstanding common and preferred stock into  approximately  1,124,000
shares of the Companys common stock, based on the exchange ratio of one share of
Active Design into .22 share (exchange  ratio) of the Company.  The Company also
assumed all 1,042,000  outstanding  options to acquire shares of common stock of
Active Design at the exchange ratio, resulting in 229,240 options to acquire the
Companys common stock.  Active Design was incorporated on May 17, 1995 and was a
development  stage  company  in the  business  of  developing  products  for the
multimedia  market.  As the  merger  has  been  accounted  for as a  pooling  of
interests,  the consolidated  financial statements have been restated to reflect
the combined  operations of the two companies.  As the Company and Active Design
had  different  year  ends  at the  time  of the  aquisition,  the  consolidated
statements  of  operations  combine the Companys year ended January 31, 1997 and
January 31, 1996 with Active  Designs year ended January 31, 1997 and the period
from May 17, 1995 (inception) through February 29, 1996, respectively.  From its
inception,  through the date of the  aquisition,  Active Design did not generate
any  revenues;  its net losses were  $463,000  and  $695,000 for the period from
February 1, 1996 through May 3, 1996 (the date of aquisition) and for the period
from May 17, 1995 (inception) through January 31, 1996, respectively.

        The following  table shows the effect on the results of  operations  for
the  years  presented  herein  prior  to the  acquisition  discussed  above  (in
thousands).

                                             Net Sales       Net Income (Loss)
--------------------------------------------------------------------------------
Year ended January 31, 1996:

Active Design (May 17, 1995 through
   February 29, 1996)                       $     --          $   (821)
Sigma Designs
   (year ended January 31, 1996)              26,374           (13,887)
                                            --------          --------
Combined                                    $ 26,374          $(14,708)
                                            ========          ========

Year ended January 31, 1997:
Active Design                               $     --          $   (463)
Sigma Designs (year ended
   January 31, 1997)                          41,214             1,992
                                            --------          --------
Combined                                    $ 41,214          $  1,529
                                            ========          ========

                                       F-7

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For years ended January 31, 1997, 1996, and 1995

4. RESTRUCTURING

In July 1993, the Company made a decision to discontinue  certain  manufacturing
operations  and  product  lines  and to focus  attention  on its new  multimedia
products.  As a result of this  decision,  the  Company  recorded  restructuring
charges  of  $13,654,000.  As a result  of the  finalization  of the  terms  and
circumstances related to subleasing the Companys excess facilities,  the Company
recorded a credit to the  restructuring  account  of  $517,000  in fiscal  1995.
During fiscal 1996, the Company recorded a credit to the  restructuring  account
of $350,000 as a result of signing a new sublease  agreement with more favorable
terms. The remaining accrual from this  restructuring is a facilities accrual of
approximately  $613,000  related to the excess of the Companys lease  commitment
over the expected sublease income for the term of the lease.

5. INVENTORIES
Inventories at January 31 consist of:

(In thousands)                                 1997       1996
--------------------------------------------------------------
Finished goods                              $ 1,937    $ 1,497
Work in process                               3,333      1,524
Raw materials                                 2,064      2,477
Less reserves                                (2,454)    (3,454)
                                            -------    -------
Inventory  net                              $ 4,880    $ 2,044
                                            =======    =======

6. EQUIPMENT
Equipment at January 31 consists of:

(In thousands)                                 1997       1996
--------------------------------------------------------------
Computers and equipment                     $ 2,608    $ 2,749
Furniture and fixtures                        1,542      1,306
Other                                           403        346
                                            -------    -------
Total                                         4,553      4,401
Accumulated depreciation and amortization    (3,455)    (2,904)
                                            -------    -------
Equipment net                               $ 1,098    $ 1,497
                                            =======    =======

7. ACCRUED  LIABILITIES
Accrued liabilities at January 31 consist of:

(In thousands)                                  1997      1996
--------------------------------------------------------------
Other accrued liabilities                     $1,623    $1,657
Accrued salary and benefits                      443       409
                                              ------    ------
Total                                         $2,066    $2,066
                                              ======    ======

8. BANK  LINES  OF  CREDIT

The Company has $10,830,760  outstanding at January 31, 1997 under a $12,000,000
bank line of credit that expires in September 1997,  bears interest at the banks
index rate  (4.250% at January 31,  1997) plus 2.5%,  and is secured by funds on
deposit in accounts which have been assigned to the lender. The Company also has
no amounts  outstanding  at January  31,  1997 under a  $6,000,000  bank line of
credit that expires in September  1997,  bears  interest at the banks prime rate
(8.5% at January  31,  1997) plus  1.25%,  is secured by the  Companys  accounts
receivable,  inventories,  equipment and intangibles, and restricts the Companys
ability to declare or pay dividends.

9. LEASES

The  Companys  primary  facility  is leased  under a  noncancelable  lease which
expires in March 1999. In addition,  the Company leases certain  equipment under
capital lease  arrangements.  Future minimum  annual  payments under capital and
operating leases are as follows:

Fiscal year                                    Capital              Operating
ending January 31:                              leases                 leases
--------------------------------------------------------------------------------
     1998                                         $ 44                $1,725
     1999                                           44                 1,318
     2000                                           26                    82
                                                  ----                ------
Total minimum lease payments                      $114                $3,125
Amount represents interest at a rate of 10.5%      (12)               ======
                                                  ----
Present value of minimum lease payments            102
Current portion                                    (35)
                                                  ----
Long-term portion                                 $ 67
                                                  ====

Approximately  $613,000 of the operating lease commitment is included in accrued
facilities  as of January 31,  1997.  Rent  expense was  $351,000,  $316,000 and
$344,000 for fiscal 1997, 1996 and 1995, respectively.

10. COMMITMENTS

The Company pays royalties for the right to sell certain  products under various
license agreements.  During the years ended January 31, 1997, 1996 and 1995, the
Company   recorded   royalty   expense  of  $742,000,   $643,000  and  $508,000,
respectively.

        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.

                                       F-8

<PAGE>

11. SHAREHOLDERS' EQUITY

Each share of common  stock  incorporates  a purchase  right which  entitles the
shareholder to buy, under certain  circumstances,  one newly issued share of the
Company's  common stock at an exercise price per share of $75. The rights become
exercisable  if a person or group  acquires 20% or more of the Company's  common
stock or announces a tender or exchange  offer for 30% or more of the  Company's
common stock under certain circumstances. In the event of certain merger or sale
transactions, each Right will then entitle the holder to acquire shares having a
value of twice the Right's  exercise price. The Company may redeem the Rights at
$.01 per Right prior to the earlier of the  expiration of the Rights on November
27, 1999 or at the time that 20% or more of the Company's  common stock has been
acquired by a person or group. Until the Rights become exercisable, they have no
dilutive effect on the earnings of the Company.

Stock  Option  Plan - The  Company's 1994 stock  option  plan  provides  for the
granting of options to purchase up to  2,400,000  shares of common  stock at the
fair market value on the date of grant.  Of this amount,  1,000,000  shares were
authorized  for  granting  by the Board of  Directors  during  fiscal year 1997.
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,  1997 expire six to ten years from date of
grant).

<TABLE>
A summary of stock option activity follows:
<CAPTION>
                                                                    Outstanding Options

                                                                                     Weighted average
                                                          Number of shares        excercise price per share
-----------------------------------------------------------------------------------------------------------
<S>                                                           <C>                            <C>  
Balances, February 1, 1994                                    1,044,731                      $3.58
   Granted                                                      910,000                       5.19
   Cancelled                                                   (200,939)                      6.23
   Exercised                                                   (110,451)                      1.65
                                                              ---------                      -----
                                                                                            
Balances, January 31, 1995 (470,514 exercisable at                                          
 a weighted-average price of $3.86)                           1,643,341                      $4.28
   Granted (weighted-average fair value of $6.07)             1,046,295                       3.55
   Cancelled                                                   (366,222)                      4.50
   Exercised                                                    (98,990)                      2.78
                                                              ---------                      -----
                                                                                            
Balances, January 31, 1996 (701,938 exercisable at                                          
 a weighted-average price of $4.17)                           2,224,424                      $3.97
   Granted (weighted-average fair value of $7.71)               326,000                       7.71
   Cancelled                                                   (144,509)                      4.78
   Exercised                                                   (813,536)                      4.21
                                                              ---------                      -----
                                                                                            
Balances, January 31, 1997                                    1,592,379                      $4.57
                                                              =========                      =====
</TABLE>
                                                                                
                                                                              
<TABLE>
At January 31, 1997,  options to purchase  441,362 shares were  exercisable  and
873,573 shares were available for future grant.

<CAPTION>
                         Options Outstanding      Options Exercisable
                         Number        Weighted   Weighted      Number          Weighted
       Range of      Outstanding at    Average    Average    Exercisable at      Average
       Exercise       January 31,     Remaining   Exercise    January 31,       Exercise
        Prices           1997            Life       Price        1997             Price
-----------------------------------------------------------------------------------------
<C>         <C>        <C>               <C>       <C>           <C>             <C>  
$ 0.0875  - 0.2272       207,342         8.55      $0.21          45,422         $0.17
  3.5000  - 5.5000     1,054,787         5.75       4.62         383,943          4.58
  5.6300  - 8.7500       330,250         9.28       7.12          11,997          6.18
------------------     ---------         ----      -----         -------         -----
$ 0.0875  - 8.7500     1,592,379         6.84      $4.57         441,362         $4.17
==================     =========         ====      =====         =======         =====
</TABLE>


                                      F-9
<PAGE>
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,
1997 as such issuances have been at the fair value of the Companys  common stock
at the date of grant.

        Statement of Financial  Accounting  Standards  No. 123,  Accounting  for
Stock-Based  Compensation,  (SFAS 123) 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  Companys  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 Companys
calculations  were made using the  Black-Scholes  option  pricing model with the
following weighted average  assumptions for the years ended January 31, 1997 and
1996,  respectively:  expected life, 13 and 9 months  following  vesting;  stock
volatility,  87% and 87%;  risk  free  interest  rates,  5.6% and  5.9%;  and no
dividends  during the expected  term. The Companys  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 1997 and 1996 had been amortized
to expense over the vesting  period of the awards,  pro forma net income  (loss)
would have been $347,000  ($0.03 per share) and  ($15,391,000)  ($1.97 per share
loss). 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 the years ended January 31, 1997 and
1996 are not  indicative  of  future  period  pro  forma  adjustments,  when the
calculation will apply to all applicable stock options.

Employee  Stock  Purchase Plan - The Company's 1986 Employee Stock Purchase Plan
provides  for  the  sale of up to  200,000  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 1997, 1996 and
1995,  13,685,  10,905 and 11,432  shares were  purchased at an average price of
$7.63, $5.15 and $5.35 per share, respectively.

Issuance of Common Stock and Warrants - On December 15, 1995, the Company issued
convertible  debt and warrants to purchase  415,921 shares of common stock at an
exercise  price of $7.62 per share for proceeds of  $6,276,000  (net of issuance
costs of $374,000).  All such debt was  converted to 1,134,323  shares of common
stock on the same day. In  addition,  the warrants  were fully  exercised in the
year ended  January 31, 1997 for total  proceeds of  $3,170,000  which have been
shown in the  statement of  shareholders  equity for the year ended  January 31,
1997 net of $159,000 of additional costs related to the original issuance of the
convertible debt and the warrant.

12. INCOME  TAXES

As a result of its net  operating  loss  carryforwards  and net losses in fiscal
1996 and 1995, the Company recorded no income tax provision for any of the years
presented.

        The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting  for Income Taxes (SFAS 109),  effective  at the  beginning of fiscal
1995. SFAS 109 uses an asset and liability approach to comprehensive interperiod
tax accounting.  The impact of  implementation  of SFAS 109 was not significant.

        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:

                                             January 31,
(In thousands)                            1997        1996
----------------------------------------------------------
Deferred tax assets:
  Net operating losses and tax
     credit carryforwards             $ 16,803    $ 16,521
  Reserves not currently deductible      2,177       2,410
  Capitalized R&D expenditures             195         682
  Disqualified disposition                 201          --
  Other                                    137         184
                                      --------    --------
                                        19,513      19,797
Deferred tax liabilities:
   Capitalized software and title
   development                             (69)       (209)
                                      --------    --------
                                        19,444      19,588
Valuation allowance                    (19,444)    (19,588)
                                      --------    --------
Net deferred taxes                    $     --    $     --
                                      ========    ========

                                      F-10
<PAGE>

        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  complementary  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, 1997
are as follows:

                                                       Expiration
(In thousands)                                              Years
-----------------------------------------------------------------

Net operating losses, Federal            $42,600        2006-2012
Net operating losses, State               19,800        1998-2000
Tax credits, Federal                         770        2006-2012
Tax credits, State                           430        2006-2012
                                       
        The Company's effective tax rate differs from the federal statutory rate
as follows:

(In thousands)                         1997       1996       1995
-----------------------------------------------------------------

Computed at 35%                     $   535    $(4,860)   $(3,070)
Valuation allowance                    (144)     5,014      3,166
Other                                  (391)      (154)       (96)
                                    -------    -------    -------
Total                               $  --      $    --    $    --
                                    =======    =======    =======

13. CUSTOMER AND GEOGRAPHIC INFORMATION

        One  domestic  customer  accounted  for 11%, 11% and 18% of net sales in
fiscal 1997,  1996 and 1995,  respectively.  In fiscal 1997,  two  international
customers accounted for 23% and 20% of net sales, respectively. No international
customers  accounted for more than 10% of net sales in fiscal 1996 and 1995. The
Company markets its products  internationally  through foreign  distributors and
OEMs. The following  table  represents a summary of domestic and export sales by
geographic region.


(In thousands)              1997          1996             1995
-----------------------------------------------------------------
Net sales:
   Domestic              $11,636       $  9,642         $ 27,792
   Export sales:
      Asia Pacific        26,708         13,274           10,222
      Europe               2,400          3,243            5,415
      Canada                 470            215              271
                         -------       --------         --------
Total                    $41,214       $ 26,374         $ 43,700
                         =======       ========         ========

        Taiwan  accounted  for 42% of net sales in fiscal 1997.  In fiscal 1996,
Taiwan  accounted for 11% of net sales,  Japan  accounted for 15%, and Hong Kong
accounted for 10%. In fiscal 1995, Japan accounted for 12% of net sales.

14. CONTINGENCY

        The Company is party to various claims against it. Although the ultimate
outcome of these matters is not presently determinable, management believes that
the  resolution  of all such pending  matters  will not have a material  adverse
effect on the Companys financial position or results of operations.

                                      F-11

<PAGE>
<TABLE>


           SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                 (IN THOUSANDS)

<CAPTION>

                                         BALANCE AT                       DEDUCTIONS:
                                        BEGINNING OF                      WRITE OFFS OF        BALANCE AT
CLASSIFICATION                              YEAR           ADDITIONS      ACCOUNTS(1)          END OF YEAR
--------------                         -------------       ---------      -------------        -----------
Allowance  for  returns  and
doubtful accounts, price protection,
and sales returns:

Year ended January 31,
<S>                                       <C>               <C>             <C>                  <C>      
1997                                      $  892,000        $ 165,000       $ 165,000            $ 892,000
1996                                       1,101,000          134,000         343,000              892,000
1995                                         885,000          351,000         135,000            1,101,000

Inventory reserves
Year ended January 31,
1997                                       $3,454,000           41,000       1,040,000           2,455,000
1996                                        5,620,000        5,588,000       7,754,000           3,454,000
1995                                        4,470,000        4,425,000       3,275,000           5,620,000
<FN>
(1) Amount written off, net of recoveries.
</FN>
</TABLE>






                                       S-1

<PAGE>
<TABLE>
                               INDEX TO EXHIBITS
<CAPTION>
                                                                                     SEQUENTIALLY
EXHIBIT                                                                                 NUMBERED
NUMBER                        DESCRIPTION                                                 PAGE
<S>            <C>                                                                   <C>
  3.1(1)       Restated Articles of Incorporation, as amended.

  3.2(2)       Bylaws of Registrant, as amended.

  4.1(1)       Article V of the Articles of Incorporation of Registrant 
               (see Exhibit 3.1).

 10.1(3)       Distribution Agreement dated September 10, 1985.

 10.2(4)       Registrant's 1986 Employee Stock Purchase Plan, as amended, and
               form of Subscription Agreement.

+10.3(2)       Distributor Agreement dated May 24, 1988 between Registrant and
               Micro D, Inc.

 10.4(5)       Lease dated October 31, 1990 between Registrant and Renco Investment
               Company.

 10.6(6)       Industrial Space Lease dated February 16, 1994 by and between the
               Registrant and Renco Bayside Investors.

 10.7(6)       Sublease dated February 16, 1994 by and between the Registrant and
               Media Vision Technology, Inc.

 10.8(7)       Registrant's 1994 Stock Plan and form of Stock Option Agreement.

 10.9(7)       Registrant's 1994 Director Stock Option Plan and form of Director
               Option Agreement.

 10.10(9)      Form of Subscription Agreement, by and between the Registrant and
               certain purchasers.

 10.11(10)     Agreement and Plan of Reorganization by and among the Registrant,
               Sigma Acquisition Corporation and Active Design Corp. dated as of
               April 23, 1996.

 23.1          Independent Auditors' Consent of Deloitte & Touche LLP.

 24.1          Power of Attorney (included on page 21).

 27            Financial Data Schedule.

<FN>
--------------------------------------------------------------------------------
(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-1 (No.  33-4131)  filed March 19, 1986,
      Amendment  No. 1 thereto  filed April 28, 1986 and Amendment No. 2 thereto
      filed May 15, 1986, which Registration  Statement became effective May 15,
      1986.
(4)   Incorporated  by reference to exhibit filed with the  Registrant's  Annual
      Report on Form 10-K for the fiscal year ended January 31, 1992.
(5)   Incorporated  by reference to exhibit filed with the  Registrant's  Annual
      Report on Form 10-K for the fiscal year ended January 31, 1991.
(6)   Incorporated  by reference to exhibit filed with the  Registrant's  Annual
      Report on Form 10-K for the fiscal year ended January 31, 1995.
(7)   Incorporated   by  reference  to  exhibit  filed  with  the   Registrant's
      Registration Statement on Form S-8 (No. 33-81914) filed July 25, 1994.
(8)   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.
(9)   Incorporated   by  reference  to  exhibit  filed  with  the   Registrant's
      Registration  Statement  on Form S-3 (No.  333-883)  filed on  February 2,
      1996,  Amendment  No. 1 thereto  filed  April 30,  1996,  Amendment  No. 2
      thereto filed May 14, 1996 and Amendment No. 3 thereto filed May 17, 1996.
(10)  Incorporated  by reference to exhibit filed with the  Registrant's  Annual
      Report on Form 10-K for the fiscal year ended January 31, 1996.

+     Pursuant to Rule 406(b) under the Securities Act,  confidential  treatment
      has been granted to portions of this exhibit,  which portions have deleted
      and filed separately with the Securities and Exchange Commission.
</FN>
</TABLE>